GAO

United States

General Accounting Office
Washington, D.C. 20548

Comptroller General

of the United States

B-261816

To the Commissioner of Internal Revenue

In accordance with the Chief Financial Officers (CFO) Act of 1990, the Internal Revenue Service (IRS) prepared the accompanying Principal Financial Statements for the fiscal years ended September 30, 1995 and 1994. In our attempt to audit these principal financial statements for fiscal year 1995, we found the following.

We are unable to give an opinion on the fiscal year 1995 Principal
Financial Statements of the IRS because of the limitations on the scope of
our work, which are discussed below. Thus, the Principal Financial
Statements may be unreliable.

Material weaknesses in internal controls resulted in ineffective controls
over safeguarding assets from material loss, assuring material compliance
with laws governing the use of budget authority and with other relevant
laws and regulations, and assuring that there were no material
misstatements in the Principal Financial Statements.

• We are unable to report on compliance with laws and regulations because of limitations on the scope of our work.

The following five financial management problems, which have
undermined our ability to attest to the reliability of IRS' financial
statements for the past 4 fiscal years, provide the basis for these
conclusions.1

One, the amounts of total revenue ($1.4 trillion) and tax refunds
($122 billion) cannot be verified or reconciled to accounting records
maintained for individual taxpayers in the aggregate.

Two, the amounts reported for various types of taxes collected (social
security, income, and excise taxes, for example) cannot be substantiated.
Three, the reliability of reported estimates of $113 billion for valid
accounts receivable and $46 billion for collectible accounts receivable
cannot be determined.

Four, a significant portion of IRS' reported $3 billion in nonpayroll
operating expenses cannot be verified.

Five, the amounts IRS reported as appropriations available for expenditure
for operations cannot be reconciled fully with Treasury's central
accounting records showing these amounts, and hundreds of millions of
dollars in differences have been identified.

'See Financial Audit: Examination of IRS' Fiscal Year 1994 Financial Statements (GAO/AIMD-95-141,
August 4, 1995); Financial Audit: Examination of IRS' Fiscal Year 1993 Financial Statements
(GAO/AIMD-94-120, June 15, 1994); and Financial Audit: Examination of IRS' Fiscal Year 1992
Financial Statements (GAO/AIMD-93-2, June 30, 1993).

IRS worked toward the goal of resolving these issues in time for our fiscal year 1995 financial statement audit. Progress was made, but many of IRS' efforts were not yet completed at the conclusion of the audit. IRS has continued its efforts to correct these problems with a goal of having these matters resolved in time for the fiscal year 1996 financial statement audit. Some of the corrective actions, particularly where they involve reprogramming software for IRS' antiquated systems and developing new systems, will require longer term solutions. Therefore, the focus of key IRS efforts are on interim solutions to facilitate reliable reporting while IRS works to put longer term corrective actions in place.

IRS advised us that, as of the end of May 1996, its status in correcting the problems our audit identified was as follows:

IRS stated that it had developed software programs to capture, from its revenue financial management system, the detailed revenue and refund transactions that, in the short term, would support reported amounts in its future financial statements until longer term system fixes could be made to achieve more reliable reporting of these amounts. In addition, IRS is attempting to complete documentation of its revenue financial management system to (1) aid in identifying better interim reporting solutions for reporting revenues and refunds, (2) provide better insights on the longer term systems fixes needed to enable IRS to readily and reliably provide the underlying support for its reported revenue and refund amounts, and (3) demonstrate that the level of misstatement related to its inability to reconcile the detailed transactions it identifies in its interim reporting efforts to its summary account records would not be material. • IRS asserted that it would continue its efforts to determine a means of using its current revenue financial management system's coding to identify its accounts receivable. IRS' efforts are focused on correcting known current coding errors through reviewing 100 percent of all receivables over a certain dollar threshold. In addition, through intensified training efforts and better internal control policies and procedures, it said it would seek to ensure more accurate input and processing of transactions that underpin accounts receivable.

• IRS stated that it had completed the reconciliation of its Fund Balance with Treasury accounts except for IRS' suspense accounts that contained reconciling items that were more than 6 months old. However, IRS said it was still in the process of making the necessary adjustments required to its general ledger and the related Department of the Treasury records to complete this effort.