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lem I will make sure they won't process any of their funds that they have been authorized to use until we get it resolved.

Mr. HORN. That helps get their attention.

Mr. MUSICK. I have noticed that money always helps.

Mr. HORN. I have used that method myself on some occasions. You have heard the GAO testimony when I asked them, OK, if you went in there, what would you guys do, and gals? So what did you think, were they on target there?

Mr. MUSICK. I think they are on target and, to be very candid, within the IRS I think we have done some of those things. About 3 or 4 months ago we had an executive conference. The Commissioner asked me to get up and speak about the financial audit. I told them some of the problems we were having and how we needed their help throughout all these districts to make sure that people are following the rules and not to be real creative in what they were doing and just, again, comply with the existing rules.

Second, we are taking a look at the systems. I think, as I mentioned to you and as GÃO said, we have come a long way, I think, on the administrative side. We need to see what we can do with the revenue side. The revenue system that was designed to ensure cash gets to the bank and transactions are posted to the master file, that works. The other two pieces we are trying to do is to figure out to find out our financial position and try to track data on a transaction-by-transaction basis.

What we just started to look into was is that we have the equivalent of a standard general ledger, or the standard general ledger, on our administrative system, can we use that or something like that to post these transactions? What that would mean is that we would probably be running two systems for a while until we could figure a way to marry those together. So I think we have taken care of that.

The last point, I think, with GAO's help this last 6 months, the Department's help, and a lot of work of people within the Internal Revenue Service, we have a detailed action plan and we have put that together, and I know that the committee has asked for it and I brought at least one copy here I can leave with. It tells the status of where we are. It talks about what we are going to do to get there, and it also identifies what we are planning to do for the remaining recommendations that are open, also. That is on a data base that we update monthly and track that on a monthly basis. Mr. HORN. Let me pursue that a little more, because Mr. Dodaro and Mr. Holloway, in their comments, in essence, said one of the problems is that the CFO in IRS has responsibility over the administrative accounts but not the revenue accounts. Now, how much of a problem is that?

Mr. MUSICK. Well, my personal opinion is that right now I do not see that as a problem, because, as I mentioned earlier, I have a very good working relationship with the folks that are in the revenue accounting. I think the difficulty is when you get into this and you look at 10 service centers with thousands of people, it is just not revenue accounting that is going on, it is the processing of those returns and that paper.

In my own head I have not figured out a way to separate that from-the revenue piece away from the processing piece. So what

we have done in the CFO area, we have set up a small group to work with the revenue people to try to figure out what we need to do to meet the requirements of the financial audit and the CFO Act, but allow them the opportunity to continue to process things for tax administration.

Mr. HORN. How you monitor revenue-you obviously check it in, in terms of the check has arrived. Do you deposit it as fast as you can in the Treasury depository so it is earning interest for the Government and that kind of thing?

Mr. MUSICK. That is right.

Mr. HORN. Now, what is missing here that a corporation, which also has revenue coming in, does that we are not doing and seem to have difficulty doing? Have you served in the corporate world at all?

Mr. MUSICK. I have served a little bit and I did some financial audits like 25 years ago, but I think the biggest thing is that people are complying with a tax law. They are not selling a product. I do not have a day-to-day business going on with you as a supplier of my products. Therefore, do I need a subsidiary ledger to figure out how much you as a supplier either I owe or you owe me on a day-to-day basis?

Our master file is set up by taxpayer and we know what those amounts are that are owed and we can track the data coming in. I think that is the same problem we are having with accounts receivable. We assess based on people not complying with the tax laws. We have to do a lot of work after that to determine if that is truly an accounts receivable and they owe us money. Sometimes they do and sometimes they do not, and that is the difficulty that we had, is taking this large number that is an inventory of assessments and trying to get it down to an accounting term of an accounts receivable, what is really owed out of that. So you are starting with an inventory and getting down.

A corporation knows, when they sell a product, you owe them either a product or a service, and it is a little bit different. I think that is probably what I would see as the main distinction. And how we adjust that and how we adapt our systems to that, I will tell you, is very difficult. We have very complex systems and that is what has taken us so much time.

Mr. HORN. What about a bank that is collecting on a mortgage? Is there some similarity there to what you are doing?

Mr. MUSICK. The similarity is that I have signed a contract and a mortgage. They lent me money and I have to pay that money back, the same as a credit card lends me money, except they give me a piece of plastic and I charge on it and I pay that money back on a periodic basis, usually monthly.

You know, we deal with people maybe once a year and that is when they file their returns.

Mr. HORN. But with a bank you log it—or any institution that has got a loan out-you log it in and you deposit it and you know how much more you are going to get the next month.

Mr. MUSICK. Yes, and we do that and it goes into the master file. The difficulty is we bundle all these transactions up and summarize them and post them to the accounting system. What we do not

have is the system does not track each detailed transaction going through the process. It tracks them in lumps.

Mr. HORN. Well, OK, so that is where part of the problem is.
Mr. MUSICK. That is part of the problem.

Mr. HORN. So give me an idea of some of those transaction points in the process that normal accounting in a corporation would pick up and you are not picking them up because they are apparently going through in groups of checks? They are not individual?

Mr. MUSICK. Well, they are going through a summary data. I think a corporation would have an individual account for everybody and they would track every one of those transactions. Our master file does that, but the accounting system that controls that does not link back to it on a detailed basis.

If we had a company with five of us in this room that you were collecting money from me and I owed you money as a corporation, that would probably come through and each transaction would individually be posted. We do that. The accounting system would probably pick that up, also.

What we do is lump all that stuff together to make sure it gets through the pipeline which we call our tax processing, and it does post individually but we track it at a summary level. So after it is posted, I cannot take and say, OK, this block of numbers relates to this one transaction in the master file.

Mr. HORN. What are the cost implications and the time implications if you took a check from a taxpayer and you had to account for that throughout the system from one point to the other? I mean, if that is what you are saying we do in the private sector, generally, we account for that movement along.

Mr. MUSICK. Yes, and that is what we are trying to do on an individual transaction basis. We do do it on a summary basis, by which I mean 100 of these are lumped together.

Mr. HORN. What is the cost and whatnot if you did it on an individual basis? I realize there is the American people is what you are talking about as a customer

Mr. MUSICK. Right.

Mr. HORN [continuing]. Or the American homeowner or renter, or whatever.

So you know, how do we get do we ever get to solve this problem, given the accounting standards?

Mr. MUSICK. Yes, we can solve the problem. I think we have
Mr. HORN. How do we solve it?

Mr. MUSICK. Well, I think if you can picture that we have multiple systems that do this collection and they go through a number of other systems to get to the posting of the master file, what we have been doing, what we did in 1995 and we plan for 1996 at the end of the fiscal year, 99 percent of the transactions are sitting, probably, in the master file and have been posted.

So we have determined extracts that we can pull all that detail out, and we are doing that now so that we can provide it to GAO so that they can do the audit. We also have that detail in a way that we can now summarize the data any way we need to.

The other piece of that would be is instead of just doing an extract, we would pull that data and figure out a way to post it as

the Government standards require, with a Government standard general ledger, on a transaction-by-transaction basis.

The solution that we are trying to look at is that we are doing that on our appropriated funds, is there a way to take that system, or pieces of that system, and move it over and do it on our revenue that we collect.

Mr. HORN. In terms of looking for fraud, when that check comes in to one of your processing centers, once it gets deposited in the Treasury, you do not have to worry about that check any more, right?

Mr. MUSICK. Cash goes into the Treasury.

Mr. HORN. The cash goes in the Treasury, it is safely there, the check is filed-I don't know, what do you do with those checks anyhow? Do you keep them or do you burn them, photograph them, or what?

Mr. MUSICK. I never thought about. I don't think we

Mr. HORN. It goes back essentially to the bank?

Mr. MUSICK. Yes.

Mr. HORN. I am just curious. Is there any danger in the process you are using now of fraud occurring and you cannot find it, where somebody just creams something off the account somehow, and have you had any of those cases?

Mr. MUSICK. I am not aware of any of those cases in my tenure as the CFO. I am not aware of that. Over the last year and a half I have not heard of any of those cases. There is fraud detection that goes on as it relates to tax administration, and that is always going on, but I am not aware of anything internally where there has been any fraud identified.

Mr. HORN. OK, in terms of the payment transaction process you are not aware of any fraud?

Mr. MUSICK. Not at this point.

Mr. HORN. So you are saying it can only occur in IRS in the tax administration part. Now, how does that work?

Mr. MUSICK. Well, that is what I have been explaining, the tax administration part. Either the cash is deposited in the bank, depending on the type of payment it is-it is usually from a corporation for a Federal tax deposit which would include excise taxes, Social Security taxes-that goes directly to a bank and they collect that for us and that goes to the Treasury Department. The paperwork comes in and it gets processed through the system and the organization gets credit for it when it is posted to the master file account.

Some checks will come into the service centers at the end of the year for tax payments or estimated payments during the year and those would get processed. Those are reconciled on a nightly basis and resolved every night. Any issues resolved at night the taxpayer gets credit and the deposits are made directly to the bank.

The other thing is that we have been moving to try to use lockboxes, where the taxpayer would send checks directly to a lockbox, and so only you would be getting the paperwork to process the transaction through the service center.

So there are controls in place to ensure that the cash is there and to ensure that the taxpayer is getting credit. The difficulty, as I have tried to say, is that some of this is done at a summary level

and try to get the detailed transactions so that we can get the statements audited is what has been the difficulty.

Mr. HORN. Have you ever had cases where the taxpayer says, "Wait a minute, I sent my check in and it has not cleared my bank." What do we do in those cases?

Mr. MUSICK. I could get that answer for you. I don't know, because I don't have direct responsibility over the tax administration, but there is a series of controls in place like any organization has. I can tell you that we would resolve that.

I would sit here and be the first one to tell you that we don't post everything to the taxpayer's account accurately and I am sure we make mistakes, but one of the best controls you have is the taxpayer, who will come back in and say IRS has made a mistake and fix it. And those errors are corrected as soon as they are found and determined to be found.

Mr. HORN. Staff is interested in this one. What is the reason that there are differences between what employers report on their 941 reports and what is collected by the IRS?

Mr. MUSICK. Again, I would have to look into that, but the issue would be is that the employer-we have an FTD coupon right now, we are hoping to automate that process, where the employer would pay a certain amount and they could check the box off. That cash comes in and that cash is posted to their account. Then we get their return, which is the assessed amount, and that comes in and we match those up. I would have to look in to find out individual reasons, but possibly they did not estimate correctly might be an issue, or they just did not pay, they did not file the return, it could be a number of reasons, I guess, but I could get you more specifics on that.

Mr. HORN. Because we are talking, really, Social Security and excise taxes here.

Mr. MUSICK. Yes, excise taxes, Social Security taxes, those types of things.

Mr. HORN. I take it GAO feels that there are differences between, say, the private sector and IRS on how that might be handled?

Mr. MUSICK. There are, and one of the issues is that the law states that we turn over to the Social Security the assessed amount which is on the return. Now, the way I work that in my mind is that an employer makes deposits, and say they don't deposit enough cash, we would still turn over what was the assessed amount. That goes into our queue of our accounts receivable and that has to be worked like any other tax receivable.

Mr. HORN. And you would then bill them or what? Or you just assess them when their tax form is finally filed?

Mr. MUSICK. Probably assess them, send them a notice, try to find out what the problem is. There is a whole series that I would have to get you the answer for, what we go through for each type of a transaction.

Mr. HORN. As I understand it, the Treasury transfers the funds based on what the employer reports to the trust funds?

Mr. MUSICK. That is right.

Mr. HORN. And you are saying that is a little dubious sometimes as to whether that is the appropriate amount to be filed? But some

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