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Musick could more specifically speak to that, 4 years is a lot of time. Having worked in the private sector, if you wait 4 years to make those kind of transitions, in a lot of businesses, you could be out of business.

Chairman STEVENS. Ms. Lau, back to you, I note in the last paragraph, you talk about the joint project with the Chief Inspector's Office in assessing the IRS role as executive agent for the Department's digital telecommunications system.

Ms. LAU. Yes.

Chairman STEVENS. Are we going to have similar problems with regard to that system that we are having with TSM?

Ms. LAU. Yes. We are in the process of conducting that review and it is too soon to make any conclusions about what we are finding on that.

Chairman STEVENS. You say you are focusing there on financial management issues also, right?

Ms. LAU. Yes. There are

Chairman STEVENS. Financial management issues, such as inventory valuation and revenue and expense recognition

Ms. LAU. And physical inventory.

Chairman STEVENS [continuing]. That directly affects the IRS financial statements.

Ms. LAU. That is right.

Chairman STEVENS. They are interrelated, this digital telecommunications system review and the problems that are coming out of TSM, is that right?

Ms. LAU. Yes, it is possible that they will shed some light on some of the same issues.

Chairman STEVENS. Do you have a time line for that assessment that you are making with the Chief Inspector's Office?

Ms. LAU. I do not have that with me right now but I would be happy to provide that for you.

Chairman STEVENS. Your time line. What is the time frame for you and the Inspector

Ms. LAU. I understand. I would be happy to provide that for the record.

[The information provided by Ms. Lau follows:]

LETTER FROM MS. LAU

DEPARTMENT OF THE TREASURY

July 31, 1996

THE HONORABLE TED STEVENS

Chairman, Committee on Governmental Affairs

U.S. Senate

Washington, D.C.

DEAR MR. CHAIRMAN: At a hearing before your Committee on June 6, 1996, you requested additional information regarding Office of Inspector General (OIG) work at the Internal Revenue Service (IRS). The following information summarizes the OIG completed and ongoing audit work at IRS.

First, you asked about the status of IRS' corrective actions on our recommendations for certifying and accrediting two automated information systems. In our March 29, 1996 report titled, Progress in Implementing the Integrated Data Retrieval System (IDRS) Security Action Plan, we reported that (1) the Universal Access enhancement to the IDRS was implemented prior to receiving certification and accreditation, and (2) the Electronic Audit Research Log system had been operating without certification or accreditation since its inception in November 1993. Accordingly, we made the following recommendations to correct the problems:

• Taxpayer Services needs to better comply with IRS' certification procedures. In this regard, it needs to submit the required documentation to the Quality Assurance Division verifying compliance with the corrective actions.

• Taxpayer Services should also ensure that the incomplete corrective action regarding audit trail requirements in both host and remote service centers is undertaken.

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Quality Assurance Division officials should follow-up and receive verification of their recommended corrective actions to ensure implementation has occurred.

Taxpayer Services should establish a policy requiring unconditional certification prior to accrediting new automated information systems.

• Electronic Audit Research Log System officials need to complete all required procedures for system certification and accreditation as quickly as possible. As of July 8, 1996, IRS reported to us that it had successfully completed all of the corrective actions for implementing our recommendations on Universal IDRS Access, and that it had submitted the documentation necessary for certifying the System to the Quality Assurance Division. Additionally, IRS reported that the Quality Assurance Division had granted unconditional certification to the electronic Audit Research Log System in June 1996.

Second, you asked about the status of our joint assignment with the IRS Office of the Chief Inspector concerning the Treasury Digital Telecommunications System, for which IRS is the Executive Agent. All of the field work for this assignment has been completed and we are now preparing the draft report. Our plans are to provide the draft report to IRS and departmental management for their review and comment in late July 1996. We intend to issue the final report in late August or early September 1996, after we receive management's comments and incorporate them into the report.

I trust you will find this information useful. Please contact me, or a member of your staff may contact Maurice S. Moody, Director, Financial Audit Division, if you have any questions or need additional information.

Sincerely,

Chairman STEVENS. Thank you very much.

VALERIE LAU
Inspector General

Are there any implications in the GAO's review of this problem that I have not discussed with you, Mr. Holloway? I am trying to get through this report. I enjoyed your personal reference to the overall problem, but I am trying to get very specific in details with regard to what we are going to get out of these reviews you are making of the IRS systems. What is the next thing you are going to do with regard to this study?

Mr. HOLLOWAY. I think the next steps, as I have alluded to on a couple of occasions, is that our goal is that we have to work as hard as we can with them to get some of this stuff implemented. We believe that it is just imperative that this stuff gets fixed and it is not an insurmountable problem. So our next goal is to improve and perfect the action plan, to come up with what you talked about, which is a timetable for corrective action, what the specific actions are, and when they are going to get done. That is what IRS's senior management is asking for.

That is what Congress must insist upon. I think it is something that just has to happen so that we can give you something that you can then look at and say, did they get it done? If they did not, you deal with it. If they did, you applaud them and you keep charging to the next problem.

So our goal is to get it down to specific action items that have to be done, that when completed, these problems will go away and

you all will have reliable financial information to make informed decisions from. That is what we are spending every minute on.

Chairman STEVENS. I am looking at the various differences in total revenues collected, for instance, the discrepancies between IRS master files and Treasury data. You say for fiscal year 1994, for example, some of the largest reported amounts in IRS financial statements for which IRS had insufficient support were $615 billion in individual taxes collected. This was $10.8 billion more than what was recorded in the master file. There was $433 billion in Social Security taxes collected. This was $5 billion less than what was recorded in the master file. And there was $148 billion in corporate taxes. This was $6.6 billion more than was recorded in the master file.

Thus, the IRS did not know and we cannot determine if the amounts were correct. The discrepancies also further reduce our confidence in the accuracy of the amount of total revenues collected. That is not exactly reassuring that we are making much progress.

Mr. HOLLOWAY. Let me just offer to you a couple of things that we are trying to do. One of the things we are doing is getting the total-most of the receipts that the IRS collects, or essentially all of them, go through the Federal Reserve banking system. We are getting independent information from the Federal Reserve to try to identify an amount that was collected for a given fiscal year to be able to compare IRS's internal analysis of its detailed transactions to ascertain whether or not their efforts in lifting the information from their master file are complete and include all of the receipts that were collected for taxes.

As they develop their interim system, we are looking at the structure of that system and making recommendations to them on how we think it should be modified to start addressing these problems. At the Department of Treasury, there is a tax collection system that is being put in place, and I believe the acronym is EFPTS, or something to that effect.

Ms. LONG. EFTPS.

Mr. HOLLOWAY. But what it is designed to do, or what that system has the capacity to do, if it is fully implemented, is to try to identify taxes by recipient, which is one of the problems that you are alluding to, that hopefully will at some point be tracked back to IRS's master file system where there is a correlation between what is in the master file and what is at the summary record level. I do not want to give you the impression that nothing is being done, but some of these things take an enormous amount of time. You are talking about a system that is processing hundreds of millions of transactions, and I agree with you, it has to be done, but these are not easy things to do.

Chairman STEVENS. My problem is that I read too many things that you report. [Laughter.]

You said, for instance, on page 13, "The importance of having credible financial information for these purposes is underscored by the magnitude of IRS's inventory of uncollected assessments and by IRS's problems in collecting tax receivables, which we have monitored since 1990 as part of our high-risk program."

You go on page 12 to say, and this is about accounts receivable, "[The] financial statements cannot be relied on to accurately disclose the amount of taxes owed to the government or the portion of that amount which is collectible. This is not a new program, as we first identified IRS' accounts receivable accounting and reporting problems in fiscal year 1992 and again in each subsequent fiscal year's financial audit." You have a similar statement with regard to much of IRS's uncollected assessments is uncollectible. IRS reported uncollected assessments as of September 30 as $200 billion. It is composed of compliance assessments which are not yet but may become accounts receivable and financial receivables which are valid accounts receivable.

I come to the conclusion that those of us who are trying to work on this problem of balancing the budget cannot rely on the fact that the amount that is reported to us is collectible as far as accounts receivable. What are we going to do about that? You have been reporting to us now each year for 6 years that this system is not working, and now you are saying, well, hopefully, they recognize they have a problem.

Mr. HOLLOWAY. Do not misunderstand me. By no means do I want to suggest that I am making an excuse for why some of this stuff is not corrected, because I share your concern that had these problems been worked with an effort to resolve them and turn them around 6 years ago, I think the fact that they are not 6 years later suggests the need for some other actions to be taken, and I think some of those actions are now being taken.

I cannot explain to you why all of the closure has not come to all of these things or how long it is going to take, but I can tell you that, again, you are talking about a massive system that has been in place for several years that they are trying to modify to facilitate, more accurately accounting for this stuff.

I go back to the point I made in my opening statement, which is you have to keep in mind that you have an agency that, prior to the late 1980s and early 1990s, was never looked at and was never required to report this information and have it audited. What they are discovering is that their systems were not designed to facilitate that type of reporting.

The IRS was basically a tax return manufacturing plant. They brought them in, they processed them, they sent refunds out, and there was never a question of who owes us how much at what given point of time and the requirement to provide that information in a reliable way. Now that is on the table and they have to revisit and reengineer that process. You are talking about going back into dated software languages and antiquated computer systems and it is the old adage of, do you put new wiring in old wiring bags? It is a difficult thing to do when you are mixing and matching, and that is the challenge that they have.

What is the right time frame? I have to leave that to the computer expert types. What I can assure you, though, is that the advantage of having an audit and requiring an annual audit is you are going to get a real-time assessment on the progress or the lack thereof to allow you to make a decision as to whether or not it is acceptable, and if it is not, to find alternatives.

Chairman STEVENS. You point out in your testimony on page 25 that you reported to us last year that, "IRS was researching $13 million in net differences that consisted of $661 million in increases and $674 million in decreases. The figures do not represent all of the differences that existed at the time. Until the reconciliation is completed, IRS does not know and we could not determine that the Fund Balance account for administrative operations reported on IRS' financial statements are accurate and reliable, whether improper payments may have occurred, the financial statement impact or what other problems may become evident if these accounts were properly reconciled."

What runs through my mind is what would happen to a small business person in my State if they ended up with the same thing with an IRS auditor sitting in front of them.

Mr. HOLLOWAY. They would be in a world of trouble.

Chairman STEVENS. And you are the IRS auditor, and very frankly, we seem to be a little blasé about these differences. It is 6 years since you first reported that to us. You have been involved in this how many years, Ms. Lau?

Ms. LAU. Just about a year and a half.

Chairman STEVENS. But there has been an Inspector General longer than that, has there not?

Ms. LAU. Since 1989, a statutory Inspector General at the Department of the Treasury.

Chairman STEVENS. I suggest to you that we are going to have to find some way to close this loop. I still do not have a time line for corrective action. That is what I want to get. I want to get from you a time line. When are we going to lay down a marker and say, IRS has to meet the requirements they impose on every individual in this country by a certain date? That seems to be reasonable.

Mr. HOLLOWAY. I think that is extremely reasonable, and that is, in fact, exactly what we are working with them to do and hopefully we will have within the next couple of months. IRS did an initial action plan that attempted to do that. We are in the process of working with them to modify and enhance that action plan, to come up with specific deliverables and time tables, because I share your concern.

I certainly do not want to leave here with you feeling like we view it as blase because we think it is crucial. I believe

Chairman STEVENS. I am not saying you are agreeing. I think the system is blasé about the fact that it is so vague and there are so many problems and who can blame any one individual, and so why not let it go. But if an individual was sitting on the other side with the IRS looking at them, they would either figure it out and prove what the situation was or face an arbitrary decision by the IRS and an assertion of taxes owed

Mr. HOLLOWAY. That is correct.

Chairman STEVENS [continuing]. Based upon a failure of the individual taxpayer's system to provide the correct information, right?

Mr. HOLLOWAY. You are 100 percent correct.

Chairman STEVENS. Somehow, we have to put this shoe on them the same way, is my opinion.

Mr. HOLLOWAY. I totally agree with you.

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