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Mr. HORN. And as you know the tradition, the subcommittees of the House Government Reform and Oversight Committee do swear in all witnesses for hearings, and I would ask each of you who will be testifying to stand and raise your right hands for the oath.

[Witnesses sworn.]

Mr. HORN. All of the five witnesses have affirmed, and the clerk will note that. And as you also know, since you are regulars, our practice is to include your written testimony in the hearing record after each of you is introduced, and we would appreciate having you orally summarize your written statement in 10 minutes or so. We are not going to hold you rigidly to that, we want you to feel you have made the case, and I am not going to be offended if you go over. But on the other hand, we do want to get the show on the road so there can be questioning.

We have a vote under way now. So we are going to recess this committee. Now that you are sworn in, you can tell the truth to each other and we will recess for about 15 minutes and reassemble here, by the time we get over and vote, at roughly 5 minutes of 11.

[Recess.]

Mr. HORN. Let's come to order. The ranking member has arrived and she would like her statement put in the record, and we are delighted to do it.

[The prepared statement of Hon. Carolyn B. Maloney follows:)

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Thank you Mr Chairman for holding this important hearing. I share your concern with the financial management of the federal government. It is a fundamental issue which must be addressed in these times of ever-greater budgetary restraint. The Chief Financial Officer Act of 1990 and the Government Management Reform Act of 1994 will help improve financial managernen in the federal government and it is important that we continue vigorous oversight to ensure proper and timely implementation

One of the requirements of the 1990 CFO Act is that the General Accounting Office audit the Principal Financial Statements of the IRS, The report for fiscal year 1995 is very troubling, as was the report for fiscal year 1994 which we examined at an earlier hearing of this subcommittee last March. In fact, in each of the four years of audits of the IRS beginning with fiscal 1992, the GAO has been unable to render an opinion. If this situation is allowed to continue, it calls into question the ability of the executive branch to meet the rapidly approaching requirements for government-wide audits beginning in fiscal 1997,

So there is a sense of deja vu surrounding today's testimony. Given the short time frame involved since we last examined this problem, I suspect that the answer to the question posed by the Chairman in giving a title to this hearing --"Has there Been Any Improvement?"--is “Not a whole lot". However, I would point out that even though the problems are serious, they still take time to solve I understand the IRS has a more vigorous action plan which they will describe for us today

I look forward to both the GAO's presentation and the IRS/Treasury response. The GAO reports that it was unable to complete its audit for FY 1995 because of multiple shortcomings in the accounting practices at the IRS. Perhaps most worrying is the fact that the total revenue collected, $1.4 trillion, could not be reconciled to the accounts maintained in IRS master file. Also, the amounts of taxes collected for various purposes, such as social security, income and excise taxes, could not be substantiated.

(over)

PRINTIO ON RECYCLED PAPER

The IRS claims to be on the move toward significant improvement on these and many other accounting deficiencies. The subcommittee is eager to learn about this progress..

I am also concerned with problems the GAO has found with the IRS’s Accounts Receivable. These represent money owed to the federal government -- namely to the taxpayerwhich have not been collected. I have a long-standing interest in this issue, and have worked with Chairman Horn in successfully enacting legislation on the collection of non-tax delinquencies. That will certainly be a subject for future hearings by this subcommittee.

I look forward to hearing our distinguished witnesses, and I thank the Chairman for his continuing vigilance on these issues.

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Mr. HORN. So Mr. Dodaro, please begin. This is the first time I have ever been in this hearing room and I think I need a Hubbell telescope to see you down there. But I will say the podium is terrific, you can spread out, it is the only sensible podium, but this is strange, to be charitable.

So proceed, Gene. STATEMENT OF GENE L. DODARO, ASSISTANT COMPTROLLER

GENERAL, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY DIANE GUENSBERG AND GREGORY HOLLOWAY, GENERAL ACCOUNTING OFFICE

Mr. DODARO. Good morning, Mr. Chairman. We are pleased to be here today to talk about the progress IRS is making in addressing its financial management problems.

Mr. HORN. Excuse me, I might, for the record, say we now have a quorum. Go ahead.

Mr. DODARO. Good morning, Congresswoman Maloney, it is nice to see you again.

Mrs. MALONEY. Good morning. It is good to see you again.

Mr. DODARO. We are pleased to be here today to give you a status report on IRS' actions to correct its financial management problems.

As you pointed out in your opening statement, we have been auditing the IRS since fiscal year 1992 and I might point out that those audits have covered two different sets of financial statements to account for IRS. One is the administrative operations of the Internal Revenue Service, which are about $8 billion that IRS gets in appropriated funds to carry out its various activities. And then there is another set of financial statements that cover IRS custodial responsibilities for the Government to collect the $1.3 to $1.4 trillion in revenue on behalf of the Federal Government.

Now, in the administrative statements, those covering the $8 billion that IRS uses to manage its own operations, it is in that area that we have seen the greatest progress so far. When we started back in 1992 there were several different administrative systems, accounting systems, that they had in place. They had problems even with controls over payroll operations.

Since then they have replaced those systems with one administrative accounting system that we think is good and an effort to better account for their funds. They have also worked with the National Finance Center at the Department of Agriculture to transfer their payroll functions there. So as a result, in the last year we were able to substantiate that about $5 billion of their $8 billion in appropriations that go for payroll were valid.

We have two remaining problems on the administrative area that need to be addressed. One is in documenting the receipt and acceptance of goods and services, particularly those services that IRS procures from the Government Printing Office, for example, all the tax forms that are mailed out, as well as rent and other activities that involve transactions among Federal agencies. There are difficulties capturing that accurately.

Second, as you pointed out, reconciling their cash accounts with the Treasury Department. In both of these areas, based on our suggestions and discussions with the IRS, they have brought in some outside contract support to help. We are monitoring their activities closely and I would hope in the next year we can see some progress on those two areas. So I think in the administrative accounting area for IRS' appropriation we are beginning to see some progress in that area.

Now, on the revenue side, I think that is a different story. The revenue responsibilities, collection responsibilities, are enormous. There are deep problems with the accounting systems over there in terms of their capability to keep track of this. But part of the problem is rooted in how tax receipts come into the Treasury Department and IRS in terms of their not being adequately distinguished. About 80 percent of the taxes are collected from businesses and they send in lump sums, which include income tax, Social Security taxes, and they are not really designated by type of tax at the point of collection, and this creates a massive reconciliation problem for the IRS. Now, they should be able to do this but their current systems do not permit that. Also, in the accounts receivable area, as you pointed out, we have had trouble substantiating the balances there. Again, there are not good detailed subsidiary records that distinguish valid accounts receivable from other compliance assessments that IRS has levied on people as a means to try to get them to pay their taxes, so there is no sorting out of what is valid, what is not, and what is collectible.

We have worked with them to come up with a good statistical sampling approach in the short run to take some of these accounts and to accurately assess and come up with a good figure so the Congress and others know how much delinquent taxes there are and, more importantly, how much is really collectible in the long

Now, we have worked with the IRS and they have developed some short-term fixes in this revenue accounting area, but the longer term fixes are going to be dependent upon their ability to put in place new and enhanced accounting and information systems, and this is a very important issue.

This is an area we have some concern about the Service's ability in. As we talked to this committee about in March, IRS' ability in their tax system modernization effort to develop systems is not at an adequate level yet. As you recall, I mentioned that they were considered to be a level I organization in terms of their ability to develop software, which was not a level commensurate with the task that they had. We made about a dozen recommendations in that area. They are beginning to put in place the right processes and tools, but it is going to take a while before they are able to move up.

As you recall, level I meant that the system-development efforts were at the very initial level, and that was distinguished by ad hoc and oftentimes chaotic development, which means that some of the systems that they develop work well, many others do not. They need to get to a process where they can produce that on an acceptable basis.

Their ability to develop their tax system modernization capabilities is very much an integral part of their ability to fix their financial management problems as well.

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