Management Report:

Improvements Are Needed to Enhance the Internal Revenue Service's Internal Controls

GAO-13-420R: Published: May 13, 2013. Publicly Released: May 13, 2013.

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What GAO Found

During its audit of the Internal Revenue Service's (IRS) fiscal year 2012 financial statements, GAO identified one new internal control deficiency that contributed to IRS's continuing material weakness in internal control over unpaid tax assessments as of September 30, 2012. Specifically, IRS's controls over its process for estimating the balances of federal taxes receivable and other unpaid tax assessments were not effectively implemented to ensure the proper accounting classification and dollar amounts.

In addition, GAO identified the following six less significant, new internal control deficiencies as of September 30, 2012:

  • Refunds disbursed to deceased taxpayers. IRS's internal controls were not effectively designed to ensure that deceased taxpayers were timely identified in its taxpayer records and that refunds issued to deceased taxpayers were valid.
  • Authorization of manual refunds. IRS's procedures were not effectively designed to ensure that those individuals allowed to approve the issuance of manual refunds were properly appointed to do so.
  • Computer system access rights of employees handling taxpayer receipts. IRS's policies and procedures were not effectively designed to appropriately limit remittance perfection technicians' system access to change taxpayer account information.
  • Cost allocation and user fee classification for the statement of net cost. IRS's controls were not effectively designed and implemented to ensure that IRS fully allocated costs or correctly classified all user fee exchange revenue within its Integrated Financial System, which IRS uses to prepare its Statement of Net Cost.
  • Recording of Obligation of funds. IRS's policies and procedures were not effectively designed to ensure that IRS staff recorded an obligation for goods and services prior to taking delivery of them from a contractor or a performing federal agency.
  • Excise tax receipt certification process. IRS's controls were not effectively implemented to ensure that staff properly calculated the quarterly excise tax revenues to be distributed to the Airport and Airway Trust Fund and the Highway Trust Fund. In addition, IRS's existing procedures were not operating effectively to ensure that changes it made to its methodology for calculating the amount of revenues to be distributed were concurred with by all affected parties within the Department of the Treasury prior to implementing the changes.

Further, GAO's work showed that as of September 30, 2012, IRS had completed corrective action on 23 of the 69 recommendations from GAO's prior financial audits and other financial management-related work that remained open at the beginning of the fiscal year 2012 financial audit. As a result, IRS currently has 60 recommendations that need to be addressed, which consist of the previous 46 open recommendations as well as 14 new recommendations GAO is making in this report.

Why GAO Did This Study

The purpose of this report is to present internal control deficiencies identified during GAO's audit of IRS's fiscal year 2012 financial statements and GAO's excise tax agreed-upon procedures work for which GAO did not already have outstanding recommendations. Although most of these deficiencies were not discussed in the GAO report on the results of its fiscal year 2012 financial statement audit because they were not considered material or significant, and were not reported in GAO's excise tax agreed-upon procedures report, they nonetheless warrant IRS management's attention. This report provides 14 recommendations to address the internal control issues GAO identified as part of its fiscal year 2012 IRS financial statement audit and agreed-upon procedures work. This report also presents the status, as of September 30, 2012, of IRS's corrective actions taken to address GAO's 69 previous recommendations from its prior IRS financial audits and related financial management reports that remained open at the end of the fiscal year 2011 audit.

What GAO Recommends

This report provides 2 new recommendations pertaining to IRS's continuing material weakness in internal control over unpaid tax assessments and 12 new recommendations related to the six other identified control deficiencies, for a total of 14 new recommendations. These recommendations are intended to improve IRS's internal controls over its financial management and accountability of resources as well as to bring IRS into conformance with its own policies, Standards for Internal Control in the Federal Government, or both. IRS agreed with all 14 of GAO's recommendations and described the actions it had taken, had under way, or planned to take to address the control deficiencies described in this report. At the end of the discussion of each issue in this report, GAO summarizes and evaluates IRS's related comments.

For more information contact Cheryl E. Clark at (202) 512-9377 or clarkce@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In March 2013, IRS updated its guidance for evaluating taxpayer accounts reviewed as part of its compensating process for deriving reported unpaid assessment amounts. The update provides additional guidance when evaluating accounts that involve complex legal and accounting interpretations. The guidance also includes requirements for additional levels of management review on complex cases.

    Recommendation: With respect to IRS's compensating statistical estimation process for unpaid tax assessments, the Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to update the existing guidance for classifying and determining the dollar amount of individual unpaid assessments to provide additional guidance or specific procedures to follow when evaluating taxpayer accounts that involve complex legal and accounting interpretations. In updating the guidance, consider whether additional levels of management review should be performed on such complex cases.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: When IRS updated its guidance for evaluating taxpayer accounts reviewed as part of its compensating process for deriving reported unpaid assessments amounts in March 2013, it provided training to staff on evaluating and determining the accounting classification and amount of the sampled taxpayer accounts. The training also covered supervisory review of the sampled accounts.

    Recommendation: With respect to IRS's compensating statistical estimation process for unpaid tax assessments, the Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to provide training on the new guidance to help staff evaluate and determine the proper accounting classification and amount of unpaid tax assessments, and to help with supervisory review of the sampled taxpayer accounts.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Open

    Comments: In January 2013, IRS implemented the automated process for routinely updating date of death information and deceased status in the master files using Social Security Administration (SSA) data; however, we continued to find instances wereh IRS disbursed invalid refunds with a deceased taxpayer's Social Security number. We will evaluate IRS's actions to address this recommendation during our fiscal year 2014 audit.

    Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to finalize implementation of the automated process for (1) routinely updating date of death information and deceased status in the master files using Social Security Administration (SSA) data and (2) preventing automatic processing of a tax return submitted using a deceased taxpayer's Social Security number.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Open

    Comments: In February 2013, IRS established written procedures to require that the manual refund unit verify that (1) any manual refund signature authorization forms that are signed by a delegated official are accompanied by a designation to act form, and (2) the designation to act form is dated prior to the approval date on the manual refund signature authorization form. However, during our fiscal year 2014 audit, we continued to find that manual refund signature authorization forms that are signed by a delegated official were not accompanied by a designation to act form and the designation to act form was not dated prior to the approval date on the manual refund signature authorization form. We will evaluate IRS's implementation of these written procedures during our fiscal year 2015 audit.

    Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to implement the policies and procedures that require the manual refund unit to verify that (1) any manual refund signature authorization forms that are signed by a delegated official are accompanied by a designation to act form, and (2) the designation to act form is dated prior to the approval date on the manual refund signature authorization form.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Open

    Comments: IRS's efforts to address this recommendation are ongoing. IRS stated that by October 2014, its Wage and Investment (W&I) and Information Technology (IT) organizations will work jointly to perform a risk assessment to determine the appropriate level of IDRS access that should be granted to employees who handle hard-copy taxpayer receipts and related taxpayer information. We will continue to evaluate IRS's actions to address this recommendation during our fiscal year 2014 and future audits.

    Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to perform a risk assessment to determine the appropriate level of Integrated Data Retrieval System (IDRS) access that should be granted to employee groups that handle hard-copy taxpayer receipts and related sensitive taxpayer information as part of their job responsibilities.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Open

    Comments: IRS's efforts to address this recommendation are ongoing. IRS stated that by October 2014, its W&I and IT organizations will work jointly to perform a risk assessment to determine the appropriate level of IDRS access that should be granted to employees who handle hard-copy taxpayer receipts and related taxpayer information. Once the appropriate level has been established, IRS plans to jointly update the applicable IRM sections by December 2015 to specify the appropriate level of IDRS access for employee groups with IDRS access. We will continue to evaluate IRS's actions to address this recommendation during our fiscal year 2014 and future audits.

    Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to, based on the results of the risk assessment, update the Internal Revenue Manual (IRM) accordingly to specify the appropriate level of IDRS access that should be allowed for (1) remittance perfection technicians and (2) all other employee groups with IDRS access that handle hard-copy taxpayer receipts and related sensitive information as part of their job responsibilities.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Open

    Comments: IRS's efforts to address this recommendation are ongoing. IRS stated that by October 2014, its W&I and IT organizations will work jointly to perform a risk assessment to determine the appropriate level of IDRS access that should be granted to employees who handle hard-copy taxpayer receipts and related taxpayer information. IRS plans to use the results of the risk assessment to evaluate existing controls that prevent employees from gaining access to command codes not required for their designated job duties and establish and document additional or replacement procedures as applicable. We will continue to evaluate IRS's actions to address this recommendation during our fiscal year 2014 and future audits.

    Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to establish procedures to implement the updated IRM, including required steps to follow to prevent (1) remittance perfection technicians and (2) all other employee groups that handle hard-copy taxpayer receipts and related sensitive information as part of their job responsibilities from gaining access to command codes not required as part of their designated job duties.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Open

    Comments: IRS established and implemented written procedures to ensure that only costs are included in the cost allocation process prior to the beginning of the fiscal year. However, IRS has not established written procedures to ensure that only costs are included in the cost allocation process prior to issuing its financial statements at fiscal year-end. IRS officials indicated that IRS plans to establish additional procedures during fiscal year 2014 to fully address our recommendation. We will continue to evaluate IRS's actions to address this recommendation during our fiscal year 2014 audit.

    Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to establish and implement written procedures to ensure that only costs are included in the cost allocation process.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  9. Status: Open

    Comments: In June 2013, IRS revised its existing procedures to require staff to review the Presentation 1.1 report to determine if costs were fully allocated to its five operational business units-Criminal Investigation, LB&I, Small Business/Self-Employed, TEGE, and W&I. Additionally, IRS officials stated that IRS plans to further revise its procedures during fiscal year 2014 to include instructions for staff to allocate any remaining costs identified during their review of the Presentation 1.1 report. We will continue to evaluate IRS's actions to address this recommendation during our fiscal year 2014 audit.

    Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to revise existing procedures to require staff responsible for monitoring the cost allocation to review the Presentation 1.1 report to determine if costs were fully allocated to the direct business units and if not, to allocate the remaining costs.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  10. Status: Open

    Comments: In October 2013, IRS established and implemented written procedures to require the Office of Cost Accounting to certify a list of assigned functional area codes to be used for posting user fee transactions in IFS. The procedures require a user fee accountant to forward this listing to the Debt Collection Unit at the beginning of each fiscal year and each time a functional area code change occurs, thus notifying the Debt Collection Unit of functional area codes changes. We will evaluate IRS's implementation of these written procedures during our fiscal year 2014 audit.

    Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to establish and implement written procedures to require that the Office of Cost Accounting inform the Debt Collection Unit of any changes to assigned functional area codes to be used for posting user fee transactions in Integrated Financial System (IFS).

    Agency Affected: Department of the Treasury: Internal Revenue Service

  11. Status: Open

    Comments: In September 2013, IRS established policies and procedures that listed various goods and services contracted by IRS and specified, as appropriate, the time frame to record obligations of funds and that obligations must be recorded prior to the start of services and ordering of goods. Because this policy was not established until the end of fiscal year 2013, we will evaluate IRS's actions to address this recommendation during our fiscal year 2014 audit.

    Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to establish and implement written policies or procedures that require the agency to record the obligation of funds when a contract or agreement is entered into and prior to taking delivery of goods or services.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  12. Status: Closed - Implemented

    Comments: In April 2013, IRS developed and implemented training for all staff currently assigned to prepare and review IRS's excise tax certifications. The training was given by an excise tax subject matter expert, and involved performing actual excise tax certification procedures following IRS's documented process. Our review of IRS excise tax certifications completed during fiscal year 2013 detected significantly fewer errors than in the prior year.

    Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to develop and implement a formal training program for staff assigned to perform and review excise tax certifications, including a comprehensive step-by-step description of the excise tax certification process.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  13. Status: Closed - Implemented

    Comments: In response to our recommendation, in December 2012, IRS enhanced its reviewer check sheets to better guide reviewers to detect errors in IRS's excise tax certification results. Our review of IRS excise tax certifications completed during fiscal year 2013 detected significantly fewer errors than in the prior year.

    Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to review existing supervisory review procedures to identify and implement additional needed actions to better ensure that certification errors do not continue to go undetected.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  14. Status: Closed - Implemented

    Comments: IRS issued written guidance in March 2014 requiring IRS personnel to obtain documented concurrence from affected Department of Treasury organizations before implementing any changes to how IRS calculates the amount of excise taxes certified to trust funds.

    Recommendation: The Acting Commissioner of Internal Revenue should direct the appropriate IRS officials to develop and implement written procedures requiring IRS to obtain documented concurrence from the other Treasury agencies involved in the excise tax collection and distribution process of any changes affecting how IRS calculates the amount of excise taxes it certifies to trust funds before IRS implements the change to its excise tax certification process.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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