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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
the money we have available to fulfil our obligations to the American
In reports issued since fiscal 1992, the General Accounting Office
has issued fifty-nine recommendations that if acted on would improve its
record keeping and information systems. Today we will hear how the
IRS is planning to act on these recommendations, and when they will be
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 failure to
reconcile fund balances, that have increased the risk of fraud and
diminished the reliability of the information provided to Congress and
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 O. App, Deputy Chief Financial Officer, Department of the
Anthony Musick, Chief Financial Officer of the Internal Revenue
We thank you all for joining us and look forward to your
Subcommittees of the House Government Reform and Oversight
Committee swear in all witnesses for hearings. I ask each of you who
will be testifying to stand and raise your right hand for the oath.