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