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our action plan. We plan to hold follow-up meetings with GAO to ensure that the

FY1996 audit stays on schedule and that issues raised are resolved promptly.

We believe it is very important to work closely with the auditors, whether they are

the GAO, the IG, or a public accounting firm. As I have stated, we have not been

standing still. Over the past four fiscal years, GAO has been unable to attest to the

amounts reported on the IRS financial statements; however, in fiscal year 1992 we had

eight separate administrative systems that didn't talk to each other, the revenue system

flows had not been totally documented, and we did not have a definition of accounts

receivable. We now have five basic issues we are working on with the GAO -- I will

address each of these later in my testimony.

To better understand what we are doing to comply with the CFO Act, it is

important to keep in mind that the Service has two sets of financial statements: (1)

administrative and (2) custodial; and has two separate financial processes to track

funds: the administrative system that handles our appropriated funds and our revenue

system that tracks tax collections. To recognize the distinction between these two

systems is important to understand the GAO's audit findings and what we are doing to

improve both systems to comply with the CFO Act.

Improvements in Administrative Accounting

We are very proud of the significant improvements we have made in our

administrative accounting system. Just five years ago, we had eight separate systems

that were not linked to each other. Now we have a single corporate data base for our

approximately $7 billion in appropriated funds. This system provides an integrated,

auditable, comprehensive accounting and budgeting system that fully complies with the

Joint Financial Management Improvement Program (JFMIP) core requirements,

including the U. S. Standard General Ledger (SGL), and other government-wide

standards that apply to automated financial systems. It collects, processes, maintains,

transmits, and reports data about financial events; supports financial planning and

budgeting activities; accumulates and reports cost information; and supports the

preparation of financial statements. In addition, in the last several years we have made

other measurable improvements. For instance:

As stated, we implemented our integrated financial system. We also transferred payroll to the National Finance Center, and integrated other administrative systems to capture data at the source and transmit this data electronically to our corporate financial database.

Our travel vouchers have been automated nationwide. The traveler keys the
travel information into the system, certifies the electronic voucher, and sends it to
the supervisor. Once the supervisor approves the voucher, the traveler will
receive payment in 5 to 7 days. Over 80% of our travel vouchers were
processed this way in FY 1995.

We implemented commitment accounting procedures, so that we will have timely information about how money is being spent and so that we can manage our expenditures more carefully.

We linked the procurement system with the administrative accounting system to enable obligations to be transferred electronically.

Since the first audit in 1992, I believe we have made significant improvements,

resulting in GAO's FY1994 and FY1995 audit reports focussing on just two

administrative accounting issues -- failure to reconcile our accounts with Treasury and

the lack of receipt and acceptance documentation for some non-payroll payments to

other Federal agencies, such as rent payments to GSA and printing payments to GPO.

The overriding problem with both cash reconciliation and receipt and acceptance

relates to interagency payments. We are currently reviewing this process to determine

the issues that we have to address and identify those that may be Government wide;

therefore, the solution may require the assistance of GSA and GPO, as well as other

Federal agencies.

We have reconciled our cash balances to Treasury's records through FY1995

and we are current on our FY1996 reconciliations. Furthermore, we will ensure that

these balances are reconciled on a monthly basis. However, we still have transactions

in a budget clearing account and in suspense accounts that will be resolved during our

year-end processing.

Accounting for the Revenue that the IRS Collects

The Revenue Accounting Control System (RACS), which was implemented

during 1984, was not designed to provide the detailed information required by the CFO

Act for financial statement presentation. It also does not use the Standard General

Ledger because it was designed in 1984 to ensure that cash is deposited in the bank

and that the transactions are properly posted to a taxpayer's account. It does this very

well. However, we also believe that the system meets all the Treasury Financial

Manual reporting requirements and provides data to meet the Federal Accounting

Standards Advisory Board (FASAB) reporting requirements.

Most of the problems raised by GAO concern the substantiating of data with the

revenue collected. Because summary data is posted to RACS, it could not be

reconciled on a transaction-by-transaction basis with our Master file accounts.

While we can and do reconcile gross amounts collected, we have been unable to

give GAO auditors the information that they would like to have to tie individual

transactions to their sources. Because the revenue system was not designed to

provide financial position data and does not track to detailed transactions, our challenge

is to augment our revenue accounting information to meet the requirements of the CFO

Act.

For the FY1995 audit in cooperation with the GAO, we began the extensive

analysis and documentation of all revenue transaction flows and source documentation.

Detailed flowcharts were prepared to document revenue flows between RACS and

supporting feeder systems. Site visits were made with the GAO to all service centers to

validate these flowcharts and further document, as necessary, detailed transaction

flows that were unique to a service center. The results of this process provide a solid

foundation for the auditors and us to better understand our processes and assist us in

developing data extracts to meet audit requirements.

In 1995, the IRS also greatly refined its process to generate detailed transaction

data from the Master file. This same process will be used in preparing our FY1996

financial statements, even as we continue to build on our experience and to refine our

program extracts.

In June 1996, the Service implemented the Interim Revenue Accounting Control System (IRACS) nationwide to replace RACS. Through this effort, our primary focus

was limited to moving the existing software to a new platform and making minor

modifications to the programming. This was not intended to address the financial

issues.

IRACS connects the database located at our Detroit Computing Center with our

10 service centers. The system:

improves balancing routines and validity checks;

provides additional information on-line;

retains three years' worth of data instead of the one month that was

retained in RACS; and

interacts electronically with, and extracts data from, other tax processing

systems.

Finally, the Service is currently considering various avenues to provide detailed

transactions and to move toward implementing the Standard General Ledger for

revenue transactions. As an example, we are discussing the potential of using the SGL

purchased for the administrative system to capture detailed transactions from the

Master file and map that data to the revenue general ledger. This would allow us to

meet the requirement for an SGL in the revenue system and give us the detail

necessary to support a large percentage of our custodial financial statement

information. However, this will also give rise to other issues such as reconciling the

data in the revenue system with the general ledger. In this effort, the Service would

then move forward to incorporate the need for controlling transactions with the need for

financial reporting

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