IRS Still Out of Control: GAO

The accountability office keeps up its annual criticism of the tax agency's "serious" internal-control problems.
Sarah JohnsonNovember 9, 2007

In its latest audit of the Internal Revenue Service, the U.S. Government Accountability Office found problems in the tax collector’s internal controls, an issue that has plagued the agency for years.

The IRS has had to put processes in place to make up for its “serious internal control and financial management systems deficiencies,” the GAO noted, which cuts into the IRS’s already crunched resources. The agency has continually been unable to maintain effective internal control over financial reporting or consistently comply with the laws and regulations that govern it to keep up-to-date financial systems, according to the GAO.

The “IRS continues to lack accurate, useful, and timely financial information and sound controls with which to make informed decisions day-to-day to ensure ongoing accountability,” the GAO wrote in its annual IRS audit opinion, released on Friday. Because of the IRS’s myriad information-systems problems, the GAO worries about its future ability to determine whether the IRS’s financial statements are fairly stated.

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Still, for now, the GAO has given the IRS its eighth unqualified audit opinion for its fiscal year 2007 and 2006 financial statements. The GAO largely attributes this result to the work the IRS managers and staff have done to make up for their systems’ deficiencies.

The GAO also praised the IRS for making “significant” progress in addressing its financial-management problems. For example, in the past year the agency has become quicker about certifying its excise-tax receipts from recipient trust funds, it has issued its first cost-accounting policy, and it is closer to figuring out how to create a subsidiary ledger for its tax-administration activities.

However, the GAO noted repeatedly in its report, the IRS’s progress will continue to be hampered by its legacy financial-management systems. The IRS is working on modernizing its systems but does not have a target date. “It is unclear when this effort will be completed or if it will be fully successful,” the GAO wrote.

The GAO also reminded the IRS of its previous recommendations for improving the agency’s internal controls. Of the 144 outstanding recommendations, nearly half relate to material weakness in information security, one of the major quibbles the GAO noted in last year’s audit.

Moreover, the IRS’s four material weaknesses in its internal controls have prevented the GAO from receiving “assurance that losses, misstatements, and noncompliance with laws material in relation to the financial statements would be prevented or detected on a timely basis,” the report said.

Among the main issues the GAO still holds against the IRS is the ongoing risk of losing taxpayer receipts, saying the risk is currently not at an acceptable level. While the IRS has improved its processes to make sure its hard-copy receipts don’t get stolen or lost, the GAO still found instances where these practices were not followed. The GAO blamed this on the IRS not following through on training new and far-flung staff on proper procedures.

The GAO also took the IRS to task for its control issues concerning unpaid tax assessments. The agency does not have a detailed listing that tracks the status of these assessments, the GAO noted. The GAO has also found the IRS to be lax in recording taxpayer information and payments.

The result has been frustration on the part of taxpayers, including businesses. For example, the IRS once gave a business a nearly $5 million penalty for not including a supporting schedule with its quarterly payroll tax return. Later, the IRS discovered that that information had actually been attached to the return.

For its part, the IRS acknowledged it has financial challenges but emphasized the many strides it has taken to improve them. Deputy commissioner Richard Spies noted in his response letter to the GAO report that the IRS has “established its ability to consistently produce accurate and reliable financial statements.” The agency considers information security to be a top priority, he also wrote.