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Opening Statement

Stephen Horn "Internal Revenue Services Financial Management: Has There Been

Any Improvement?"
September 19, 1996

A quorum being present, the Subcommittee on Government

Management, Information and Technology will come to order. This

morning we are holding an oversight hearing to assess the Internal

Revenue Service's ability to improve its financial management systems

so that it can receive an unqualified opinion from its auditors on its

financial statements.

On November 14, 1995, this Subcommittee held a hearing on

financial management systems. At that session, the Subcommittee

received testimony from a witness, the Controller, Office of Federal

Financial Management, Office of Management and Budget, who told of

a question asked of the Chief Financial Officer of the Internal Revenue

Service: “Why are these IRS financial statements so terrible?

The

response to which was ‘Because they were never designed to be

audited.' This colloquy gave rise to a column by the humorist Dave

Barry in which he talked about not paying his taxes this year because his

tax return was never designed to be audited.

If the agency that impacts the lives of most Americans cannot get

its financial house in order, it diminishes both its credibility and the

taxpaying citizens' voluntary compliance with tax laws. This state of

affairs is intolerable in an agency that expects every American family to

justify its own financial status.

The hearing this morning is a follow-up to the Subcommittee's

March 6th hearing on the Internal Revenue Service's inability to produce

reliable financial information in its financial statements. To put it

simply, the problem is that the Internal Revenue Service reports amounts

for revenues, tax refunds, and other categories of financial information

on its financial statements; however, these amounts do not stand up to

independent verification. When auditors review the IRS statements and

look at the underlying records, their testing and recalculations of

amounts results in totals that are not the same as the totals that the IRS is

claiming as correct.

Auditors refer to this as being unable to give an opinion on the

financial statements. Auditors have been unable to express an opinion

on the reliability of the IRS's financial statements for any of the four

fiscal years from 1992 through 1995.

The auditors found five significant problems that remain

uncorrected, and until they are corrected, will prevent them from giving

an opinion on the IRS's financial statements in the future.

First, the amount of total revenue of $1.4 trillion, which the IRS

reports for fiscal year 1995, and the amount of tax refunds, which the

IRS reports as $122 billion for fiscal year 1995, cannot be verified.

Second, the amounts reports for various types of taxes collected,

Social Security, income, and excise taxes, for example, cannot be

substantiated. The amounts reported by employers are transferred from

the Treasury general fund whether or not those amounts have actually

been collected, so the trust funds are not adversely affected, but

transferring money from the general fund to make up deficiencies means

that other obligations of the Government are not being properly met.

Third, the reliability of reported estimates for fiscal year 1995 of

$113 billion for valid accounts receivable and of $46 billion for

collectible accounts receivable cannot be determined.

Fourth, much of the $3 billion the IRS reports in nonpayroll

expenses cannot be verified. Sometimes the IRS produces records from

the wrong year when it is asked by the auditors to produce supporting

documentation. Can you imagine what the IRS would say to you during

an audit if you tried that?

Fifth, the amounts the IRS reported as appropriations available for

expenditure for operations cannot be reconciled with Treasury records.

The IRS has never successfully reconciled hundreds of millions of

dollars in differences. When an auditor is doing an audit and notices

differences of this magnitude never being reconciled, it is often an

indication that there may be fraud going on. The IRS assures us that that

is not the case, but how can they be sure that there is no fraud if they

cannot reconcile these amounts? If not, fraud, then perhaps these

differences mask expenditures for purposes other than the stated purpose

of the appropriations?

What does the fact that the IRS asks us to accept at face value

amounts that cannot be verified mean in the whole scheme of things?

It has repercussions beyond the service itself. The Government

Management Reform Act requires that, starting this year and annually

thereafter, Executive Branch departments must produce financial

statements, have them audited, and get a clean opinion, that is, a

verification that they have accurately reported their financial position

and the results of their activities. The following year, an audited

Government-wide financial statement is required. The IRS's financial

information is a very important part of the Department of the Treasury's

financial statement and of the Government-wide financial statement.

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The revenue component, which the auditors cannot verify as

correct, represents 90 percent of the total available to the Government.

There is much at stake here if we are to have reliable information about

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