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United States General Accounting Office Report to the Congress June 1994 /45vQcl FINANCIAL AUDIT Examination of IRS’ Fiscal Year 1993 Financial Statements www.adultpdf.com... 20648

United States General Accounting Office

Report to the Congress

June 1994

/45vQcl

FINANCIAL AUDIT

Examination of IRS’ Fiscal Year 1993

Financial Statements

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1 Notice: This is a reprint of a GAO report This is trial version

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GAO United States

General Accounting Office Washington, D.C 20648

Comptroller General

of the United States B-250977

June 15,1994

To the President of the Senate and the Speaker of the House of Representatives

In accordance with the Chief F’inancial Officers Act of 1990, this report presents the results of our efforts to audit the Principal Financial Statements of the Internal Revenue Service (IRS) for fiscal year 1993 and an assessment of its internal controls and compliance with laws and

regulations IRS implemented many improvements since the first audit of its financial statements last year and has expressed its commitment to resolving the problems we reported However, IRS continues to face major challenges in developing meaningful and reliable financial management information and in providing adequate internal controls that are essential

to effectively manage and report on its operations Overcoming these challenges is difficult because of the long-standing nature and depth of IRS’ financial management problems and the antiquated state of its systems

We are unable to express an opinion on the reliability of IRS’ fiscal year

1993 principal Financial Statements The Significant Matters section of this report discusses the scope and severity of IIZS’ financial management and control problems, the adverse impact of these problems on IRS’ ability to effectively carry out its mission, and IRS’ actions to remedy the problems Our report also contains recommendations to help IRS continue its efforts

to resolve these long-standing and difficult problems and strengthen its financial management operations

We are sending copies of this report to the Commissioner of Internal Revenue, the Secretary of the Treasury, the Director of the Office of Management and Budget, the Chairmen and Ranking Minority Members of the Senate Committee on Governmental Affairs and the House Committee

on Government Government Operations, and other interested congressional committees Copies wiIl be made available to others upon request

Page 1 GAO/AIMD-94-120 IF&’ Fiscal Year 1992 FIna.ucia.l Statements

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B-250977

This report was prepared under the direction of Gregory M Holloway, Director, Civil Audits, who may be reached at (202) 512-9510 Other major contributors to this report are listed in appendix IV

Charles k Bowsher

Comptroller General

of the United States

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Page 3 GACVAIMD-94-120 IRS’ Fkal Year 1993 Financial Statements

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Contents

Letter

Opinion Letter Summary of Results

IRS’ Mission and Operating Environment Significant Matters

More Complete and Reliable Information Would Improve Taxpayer Compliance

Additional and More Timely Controls Necessary to Identify Improper Refunds and Errors in Taxpayer Returns and Other Transactions

Additional Analysis Critical to Reporting Reliable Information on IRS’ Tax Collection Activities

IRS’ Management of Its Operating Funds Needs IFurther Improvement

Further Work Required to Correct, Computer Control Weaknesses More Reliable Information Is Key to Managing Seized Assets Corrections to IRS’ Self-Assessment of Internal Controls Need to

Be Implemented Conclusions Recommendations Agency Comments and Our Evaluation

Financial Statements

Overview to the Financial Statements Statements of Financial Position Statements of Collections and Operations Statements of Cash Flows for Appropriated Funds Statement of Budget and Actual Expenses

Notes to Principal Financial Statements SuppIemental Financial and Management Information

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Appendix I

Status of Fiscal Year

1992 F’inancial Audit

Recommendations

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Contents

A

Objectives, Scope,

and Methodology

Comments From the

Internal Revenue

Service

Appendix IV

Major Contributors to

This Report

Figures Figure 1: Types of Taxes IRS Collected 10

Abbreviations

ADP Al3 cl?0 EIC

mm FTD GSA Ims IRS NFC OMB SSA TCMP TSM

automated data processing Automated Financial System Chief Financial Officer earned income credit Federal Managers’ Financial Integrity Act federal tax deposit

General Services Administration integrated data retrieval system Internal Revenue Service National Finance Center Office of Management and Budget Social Security Administration taxpayer compliance measurement program Tax Systems Modernization

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GAO United States

B-250977 June 15,1994

To the Commissioner of Internal Revenue

In accordance with the Chief Financial Officers (CM)) Act of 1990, the Internal Revenue Service (IRS) prepared the accompanying Principal Financial Statements for the fiscal years ended September 30, 1993 and

1992 Based on our efforts to audit IRS’ fiscal year 1992 Principal Financial Statements; we issued six reports containing recommendations for improving IRS fmancial management and internal controls The weaknesses we identified and the status of IRS’ actions on our recommendations to correct them are listed in appendix I

In response to our audit reports, IRS’ senior officials expressed their commitment to develop meaningful and reliable financial management information and establish sound internal controls During fiscal year 1993,

IRS took many important steps toward addressing recommendations from our fiscal year 1992 audit These included the following:

IRS provided critical supporting information for revenue transactions, such

as tax returns, cash receipts, and refunds, which was not available for our fiscal year 1992 audit This lack of supporting information precluded us from auditing these transactions for fiscal year 1992 IRS is also in the

l IRS estimated both valid and collectible accounts receivable based on a statistical sample While IRS needs to develop systems that routinely produce reliable information about accounts receivable, this is a good first

step IRS has also developed accounting policies that define accounts receivable for financial reporting purposes and has begun to develop a system to assess the collectibility of accounts receivable

l IRS implemented a new, integrated core accounting and budget system agencywide; introduced quarterly, rather than annual, budget allocations; and obtained payroll services from the Department of Agriculture’s National Finance Center (NFC) These steps enabled IRS to provide critical supporting information for its administrative expenditures (including

payroll), which was not available for our fiscal year 1992 audit IRS also

continued development of a new cost management system, designed to provide information on the component costs of operations to support informed financial management decision-making

l IRS conducted its first nationwide physical inventory of automated data processing property and equipment and is nearing the end of its first

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B-250977

3-year cycle for complete physical inventories of its other property and equipment

IRS began to implement corrective actions to address the significant

weaknesses in its computer controls that left taxpayer data exposed to unauthorized change and disclosure

IRS placed responsibility for compliance with the Federal Managers’ Financial Integrity Act (FMFIA) under the CFO and established a Senior Council for Management Controls to oversee the FMIX~ process

While IRS implemented many improvements during fiscal year 1993, it is still hampered by serious, pervasive financial management problems Its antiquated systems were not designed to provide the meaningful and reliable financial information needed to effectively manage and report on IRS operations Further, IRS still does not have supporting information for certain financial statement amounts and has not been able to properly analyze and record certain types of transactions, These problems also adversely impact IRS’ operations and impede its ability to effectively

achieve its mission

Given the severity of these problems, it wilI take a sign&ant and

sustained commitment by IRS management, particularly by the CFO and CFO

staff, to build on efforts now underway to develop such information and put proper controls into place Our fiscal year 1993 audit identified a number of critical financiaI management problems that stih demand attention We continue to strongly believe that investment in the financial management function will yield substantial long-term benefits to IEEL One of the significant challenges facing IRS involves establishing a financial management team with sufficient expertise, responsibility, and authority

to ensure that financial systems, processes, and internal controls provide the reliable financial information needed to effectively achieve IRS’

mission IRS’ Commissioner, Deputy Commissioner, and CFO have

demonstrated the vision for and dedication to improving financial

management But it will take a sound support team consisting of an

appropriate number of skilled professionals to produce an effective CFO

structure commensurate with IRS’ massive financial operations and

mission

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B-260977

Summary of Results The results of our audit of IRs’ summarized as follows: fiscal year 1993 financial statements are

0 We were unable to express an opinion on the reliability of IRS’ fiscal year

1993 Principal Financial Statements because (1) critical supporting information for seized assets, accounts payable, and collections by type of tax was not available and (2) supporting information for in-process

revenue transactions, tax credit balances, and funds with Treasury was not properly analyzed and recorded, Additionally, we noted that most financial statement balances were unreliable due to the effect of errors in revenue and operating funds transactions, As a result, internal and external reports that were based on this information were also unreliable Last year, we were similarly unable to express an opinion on IRS’ fiscal year 1992 financial statements because complete, critical supporting information was not available and available supporting information was generally unreliable

In our opinion, internal controls in fiscal years 1993 and 1992 were not properly designed and implemented to effectively safeguard assets, provide a reasonable basis for determinin g material compliance with laws governing the use of budget authority and other relevant laws and

regulations, and assure that there were no material misstatements in the Principal F’inancial Statements We were unable to evaluate and test all significant internal controls due to the limitations on the availability of supporting information

l The ineffective internal conbrols and unreliable information also affected the reliability of a signiscant amount of the information contained in the Overview to the Financial Statements and Supplemental Financial and Management Information- Much of the information in the Overview was either derived from the same sources as the information presented in the Principal Financial Statements or lacked adequate controls over its reliability Consequently, the information in the Overview may be unreliable

l Our tests for compliance with selected provisions of laws and regulations disclosed no instances of noncompliance that had a material effect on the financial statements However, our work identified some instances of noncompliance with (1) certain provisions of the Internal Revenue Code relating to distribution of excise taxes and to the approval of refunds and credits of $1 million or more by the Joint Committee on Taxation and (2) statutes requiring that expenditures be charged to the proper appropriation year

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The following sections of this report provide details on IRS’ mission and complex operating environment They describe specific weaknesses we identified, outline IRS’ corrective actions, and include additional

recommendations for needed improvements

IRS’ Mission and

Operating

Environment

rRs’ mission is to (1) collect the proper amount of tax revenue at the least cost, (2) serve the public by continually improving the quality of its products and services, and (3) perform in a manner warranting the highest degree of public confidence in its integrity, efficiency, and fairness IRS pursues its mission through actions intended to

9 increase voluntary compliance,

9 reduce the burden to taxpayers, and improve quality-driven productivity and customer satisfaction

IRS is the primary revenue collector for the federal government, reporting tax collections of $1.2 trillion for fiscal year 1993 F’igure 1 shows the various types of taxes collected in fiscal year 1993

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