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 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. |