See comment 2.

audits. When the GAO began auditing our financial statements in 1992, we were not working with systems designed to provide data in accordance with the CFO Act. Our revenue and administrative accounting systems were desiged many years ago to complement our processing systems.

Since the CFO Act became effective, we have made significant improvements in our financial management systems and now have a new administrative accounting system. As the GAO noted in the most recent audit report, however, there are still two areas of concem: reconciling our administrative cash accounts with Treasury and the receipt and acceptance documentation for some non-payroll payments, such as rent payments to the General Services Administration and printing payments to the Government Printing Office. We expect to have these issues resolved this year. We are also working on short-term solutions and long-term redesigns that will modemize our revenue accounting system and ensure that it provides information that is needed for the financial statement audit. In addition, we have an action plan which addresses the 59 recommendations that the GAO made as a result of the financial statement audits; 17 have been completed and the remaining are actively being addressed in cooperation with the GAO.

For example, in June, the CFO met for three days with GAO representatives to review the FY1995 audit of the financial statements and plan for the FY1996 audit. Representatives from the CFO organization, Taxpayer Service, Information Systems, Treasury IG, Treasury DCFO and the GAO discussed two broad issues: the administrative statements and the custodial or revenue-related statements. A detailed action plan for each set of statements was jointly agreed to. We will hold follow-up meetings with your office to ensure that the FY1996 audit stays on schedule and that issues raised are resolved promptly.

One final point concems the perceived relationship between the financial statement audits and the quality of tax administration. I and my IRS colleagues are quite concerned that the IRS has not "passed" its financial audit, and we are working diligently to get an unqualified opinion. But it is important to understand, as is explained in your draft report, that the GAO is unable to reconcile amounts reported in the financial statements to the detailed accounting records. It does not mean that the money the IRS is supposed to be collecting or spending has simply disappeared or somehow been misappropriated. This has not occurred. Nor does it mean that we are doing a poor job of tax administration.

Appendix I

Comments From the Internal Revenue
Service

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Mr. Gene L. Dodaro

As the collector of over 90 per cent of the nation's revenues, we fully understand that we have a special obligation to taxpayers to be accountable for each tax dollar we collect and spend. The IRS has strong systems and controls to ensure that taxpayers' individual accounts are accurate. These systems work. Any complex system will produce some errors, and ours does, but we make great efforts to detect and correct them promptly. Our real challenge is to alter these systems to provide the necessary data to meet the financial requirements of the CFO Act. This is where we are focusing our efforts to improve financial management.

Sincerely,

Margant M. Richardon

Margaret Milner Richardson

In accordance with 31 U.S.C. section 720, I am writing you concerning actions by the Internal Revenue Service (IRS) in response to the recommendations contained in the enclosed report by the General Accounting Office (GAO) entitled Tax Administration: IRS Could Do More To Verify Taxpayer Identities (GGD-95-148, August 30, 1995).

The GAO report contains several recommendations geared to addressing the processing and posting of tax returns in which the primary filer does not provide a social security number (SSN) or provides a name and social security number that do not match. Our June 21, 1995, response to GAO on the draft of this report is included in the final report on page 13. We agree with the report recommendations. Listed below are the comments regarding the recommendations:

RECOMMENDATION: Finalize the CP54B Notice in time for use during the 1996 tax-filing season.

RESPONSE: We agree. The revised CP54B Notice has been reviewed and approved by the Acting Director, Corporate Systems Division for an operational date of January 19, 1996. (See enclosed copy of the response to the Request for Information Services (RIS) TPS-5-0114.)

RECOMMENDATION: Apply the revised documentation requirements to
taxpayers who filed tax returns that were posted to the Individual Master File
(IMF) invalid segment before 1995 and whose accounts now have a permanent
refund release code.

RESPONSE: We agree. RIS INT-5-0008 has been approved and assigned to
Information Systems for development of the IRS Individual Taxpayer
Identification Number (ITIN) System. In that RIS, the Assistant Commissioner
(Taxpayer Services) requested that all inactive accounts on the invalid

The Honorable Ted Stevens

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segment be removed, effective January 1, 1996, as is currently done on the valid segment of the Master File.

The Assistant Commissioner (Taxpayer Services) staff has coordinated and drafted another RIS to affect the reversal of the permanent refund release code on the pre-1995 IMF invalid segment accounts. This request will freeze all returns filed with an invalid SSN during the 1996 filing season. The CP54B will be issued to taxpayers to solicit verification and justification for the invalid account condition.

If you have any questions, please do not hesitate to contact me or Anne Raffaelli, National Director for Legislative Affairs, at 622-3720.

Enclosures (2)
As stated

Sincerely,

Deggy Richardon

Margaret Milner Richardson