Management Report: Improvements Needed in IRS's Accounting Procedures and Internal Controls

In June 2003, IRS issued a directive to field office area directors to instruct employees to issue receipts to taxpayers upon request. GAO verified that IRS included guidelines in its fiscal year 2003 Field Assistance Operating Procedures for the Taxpayer Assistance Center for employees to provide Form 809 receipts to taxpayers upon request.

In June 2003, IRS issued a directive to field office area directors to advise them to install Document 10161 in field offices, reminding taxpayers to obtain receipts for payment. GAO verified that IRS included guidelines in its fiscal year 2003 Field Assistance Operating Procedures (FAOP) for the Taxpayer Assistance Center (TAC), calling for such signs to be displayed in visible locations.

In July 2002, IRS issued an IRM procedural update removing drop boxes from all Taxpayer Assistance Centers after receiving the GAO report. By doing this, IRS removed the vulnerability that had initially led to the need for the recommendation made by GAO.

IRS updated the 2005 Lockbox Processing Guidelines (LPG) to direct the responsible manager to initial Form 9535 (Documentation of Items Found in Candling Form) everyday for each shift. The LPG requires that an entry be made each shift, whether or not items have been found. The initials are to serve as proof that all available information is correctly entered, items found have been reconciled with Form 9535 entries, items have been correctly categorized as "processable" or "unprocessable," all "processable" work has been cleared after each shift, i.e. the work has been put back into the stream of work, and the received date has been entered correctly. Only Form 9535 will be used for documenting items found in candling. Further, IRS updated its Internal Revenue Manual (IRM) to provide guidance for the campuses regarding final candling records. The IRM instructs management to maintain Form 13592 (Candling Log-R&C Discovered Remittances form) to record remittances found in final candling. An employee designated by management will be required to immediately record these items into the final candling log. In addition, a management official is required to initial the log to validate that all available information is correctly entered and ensure that all remittances listed on the log are brought to the deposit function on a daily basis. The National Office redesigned the Form 13592 candling log to record, at a minimum, the total number of payments found, the amount of each payment, and the taxpayer who submitted the payment. During its fiscal year 2005 audit, GAO verified that IRS updated its candling procedures in the LPG and IRM to include the recording of receipts in the control log at the time of discovery.

IRS stated that the 2003 LPG 3.2.8.1(1) directs the responsible manager to validate that the information was correctly entered on Form 9535 for every shift worked. The 2003 Extracting, Sorting & Numbering IRM, 3.10.72.6.2(1) states, "management shall immediately reconcile the discovered remittances with the final candling log." The 2003 LPG was updated January 31, 2003. IRM 3.10.72 has been updated with procedures that direct the responsible manager to validate that all information was correctly entered on Form 13592. In January 2005, the Submission Processing Director's Office contacted each SPC to address deficiencies identified by GAO in 2004 regarding reconciliation of the candling log. Local management was asked to discuss the deficiencies with their employees on a regular basis and ensure corrective action is taken. This issue will be reviewed monthly by the campus security review team and findings will be shared with the appropriate director for additional action, if required. GAO verified that IRS revised the LPG which now directs lockbox managers to validate Form 9535 daily and that the updated IRM requires that management initial the log to validate that all available information is correctly entered and ensure that all remittances listed in the log are brought to the deposit function on a daily basis. In addition, during its fiscal year 2004 audit, GAO found no instances in which IRS or lockbox managers were not performing the required reconciliations.

IRS continues to emphasize the requirements of segregation of duties and annually performs operational reviews at all levels to ensure field offices comply with the requirements of segregation of duties. GAO verified that IRS emphasizes its segregation of duties policy during routine training provided to its TAC managers.

In October 2002, the IRS Deputy Commissioner issued a memorandum to clarify that the intent of the requirement for background investigations is meant to apply to personnel being entrusted with taxpayer receipts and information rather than just personnel being granted access to an IRS facility. During the fiscal year 2003 audit, GAO verified that the October 3, 2002, memorandum reiterated the IRS requirement that all contractor employees who have access to taxpayer receipts and information must have an approved background investigation conducted by the IRS National Background Investigations Center.

According to IRS, its Personnel Security (PS) office successfully implemented three short-term measures to reduce the instances of Security Entry and Tracking System (SETS) errors. PS continues to issue biweekly emails to all SETS users containing the most current reports to be used in identifying and reporting errors to the National Finance Center (NFC) and to compile weekly extracts of all enter-on-duty dates where there were no fingerprints results or where the results were after the enter-on-duty date. SETS users then send these reports to each Employment Office for updates and feedback. PS addressed the long-term measures to include writing Standard Operating Procedures and vetting with the Human Capital Office's employment offices, along with forming a working group to develop a collaborative report. GAO confirmed during its audit of IRS's fiscal year 2009 financial statements that IRS implemented compensating controls to address the weaknesses associated with this recommendation. Specifically, IRS implemented biweekly reminders and reviews of SETS data and began utilizing the comment field in the SETS database to annotate important dates and other key information that SETS is unable to track and update due to its technical limitations.

IRS issued an information alert reminding staff to monitor manual refunds to prevent issuance of duplicate refunds and to monitor their reviews. GAO reviewed the alert notice and determined that IRS employees at service centers GAO visited during the fiscal year 2002 financial audit were aware of the issuance of the alert notice.

In January 2003, IRS issued a memorandum that had instructions for tracking liens when the certificates of lien release leave its control. In April 2004, an email was sent to territory managers in case processing emphasizing that the requirements and the procedures have been incorporated into IRS's Internal Revenue Manual. The new procedures call for IRS lien processing units to date-stamp a duplicate copy of the lien release-billing voucher so that IRS has actual knowledge of when lien releases are no longer under its control. IRS completed reviews of the lien processing units in 2004 and verified implementation. During GAO's fiscal year 2004 IRS financial statement audit, it verified that IRS substantially implemented the new procedures.

IRS implemented procedures for suppliers to provide Electronic Packing Slip information on asset purchases at the time the assets are purchased and shipped. This information is used to create skeletal inventory records. IRS also expanded its use of network monitoring tools to track asset activity. During its fiscal year 2003 audit, GAO found that skeletal records were available for the Single Point Inventory Function personnel to update upon receipt of assets.

IRS reported that it has developed procedures to reduce the possibility of invalid property records, which are published in (1) IRM 2.14.1, (2) the inventory certification plan, and (3) Asset Management Policy Directives. GAO verified that IRS implemented procedures to reduce the possibility of invalid records and GAO found improvement in the accuracy and reliability of IRS's inventory records during its fiscal year 2002 financial audit.

IRS continued to work with vendors and improved the process of using electronic packing slips to ensure that property records are complete and linked to the accounting records. During GAO's audit of IRS' fiscal year 2004 financial statements, it noted improvements in the accuracy of acquisitions recorded in the P&E inventory records and linkage to the accounting records.

During fiscal year 2003, IRS developed and implemented policy and procedures to identify and record software licenses into the ITAMS database. IRS also developed and implemented procedures to update software information on an ongoing basis.

During fiscal year 2003, IRS developed an inventory database of software licenses and procedures to assess compliance with contractual terms of the licenses.

During fiscal year 2003, GAO verified that IRS implemented this recommendation and is now reconciling monthly all reimbursable receivable accounts with the appropriate general ledger accounts and monitoring activities between custodial and administrative accounts as part of this process. Additionally, IRS has implemented a process to routinely review open receivables and take actions to write off amounts it determines to be uncollectible.