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Washington, DC. The subcommittee met, pursuant to notice, at 10:35 a.m., in room 210, Cannon House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding.

Present: Representatives Horn, Maloney, and Davis.

Staff present: J. Russell George, staff director; Anna Miller, professional staff member; Erik Anderson, clerk; and Liza Mientus, Matt Pinkus, and Mark Stephenson, minority professional staff members.

Mr. HORN. 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 the Office of Federal Financial Management and 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?" was the question, 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 tax-paying citizens' voluntary compliance with the tax laws.

This state of affairs is intolerable in an agency that expects every American family to justify its own financial status. And as was noted by my colleagues, Mr. Traficant and Mr. Hefley, on the floor this morning, the burden of proof is on the citizen when it comes with the IRS, not on IRS. That is certainly one thing that needs to be changed.

The hearing this morning is a followup 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, 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 result 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 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 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 moneys 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 non-payroll 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 or me or anybody 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 Internal Revenue Service 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 this is not the case.

But how they can 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, the executive branch departments must produce financial statements, have them audited, get a clean opinion, and that is a verification that they have been accurately reported, their financial position, and the results of their activities.

The following year, fiscal 1997, an audited governmentwide financial statement is required. The IRS financial information is a very important part of the Department of the Treasury's financial statement and of the governmentwide 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 the money we have available to fulfill our obligations to the American people. In reports issued since fiscal year 1992 the General Accounting Office has issued 59 recommendations that, if acted on, would improve the recordkeeping and information systems of the IRS.

Today, we will hear how the IRS is planning to act on these recommendations and when they will be fully implemented. Today, we will review the IRS plans for improvement in developing accurate financial information and adequate internal controls that will ensure that errors are either prevented or detected quickly.

We will also assess the ability of the Internal Revenue Service's information system to produce reliable information. This includes the weaknesses in internal control policies and procedures, such as the failure to reconcile fund balances that have increased the risk of fraud and diminished the reliability of the information provided to Congress and to others.

Today's hearing includes several witnesses commenting on the IRS' financial management problems. Appearing today are Gene L. Dodaro, Assistant Comptroller General, Accounting and Information Management Division, General Accounting Office, Steven 0. App, Deputy Chief Financial Officer, Department of the Treasury, and Anthony Musick, Chief Financial Officer of the Internal Revenue Service. We thank you all for joining us; we look forward to your testimony.

[The prepared statement of Hon. Stephen Horn follows:)

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