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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

people.

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 fully implemented.

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

others.

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

Treasury.

Anthony Musick, Chief Financial Officer of the Internal Revenue

Service.

We thank you all for joining us and look forward to your

testimony.

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.

[Administer Oath]

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