This is the accessible text file for GAO report number GAO-11-142 
entitled 'Financial Audit: IRS's Fiscal Years 2010 and 2009 Financial 
Statements' which was released on November 10, 2010. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as 
part of a longer term project to improve GAO products' accessibility. 
Every attempt has been made to maintain the structural and data 
integrity of the original printed product. Accessibility features, 
such as text descriptions of tables, consecutively numbered footnotes 
placed at the end of the file, and the text of agency comment letters, 
are provided but may not exactly duplicate the presentation or format 
of the printed version. The portable document format (PDF) file is an 
exact electronic replica of the printed version. We welcome your 
feedback. Please E-mail your comments regarding the contents or 
accessibility features of this document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

Report to the Secretary of the Treasury: 

United States Government Accountability Office: 
GAO: 

November 2010: 

Financial Audit: 

IRS's Fiscal Years 2010 and 2010: 
2009 Financial Statements: 

GAO-11-142: 

GAO Highlights: 

Highlights of GAO-11-142, a report to the Secretary of the Treasury. 

Why GAO Did This Study: 

Because of the significance of Internal Revenue Service (IRS) 
collections to overall federal receipts and, in turn, to the 
consolidated financial statements of the U.S. government, which GAO is 
required to audit, and Congress’s interest in financial management at 
IRS, GAO audits IRS’s financial statements annually to determine 
whether (1) the financial statements are fairly stated, and (2) IRS 
management maintained effective internal control over financial 
reporting. GAO also tests IRS’s compliance with selected provisions of 
significant laws and regulations and its financial systems’ compliance 
with the Federal Financial Management Improvement Act of 1996 (FFMIA). 

What GAO Found: 

In GAO’s opinion, IRS’s fiscal years 2010 and 2009 financial 
statements are fairly presented in all material respects. However, 
serious internal control and financial management systems deficiencies 
continued to make it necessary for IRS to use resource-intensive 
compensating processes to prepare its balance sheet. Because of these 
and other deficiencies, IRS did not, in GAO’s opinion, maintain 
effective internal control over financial reporting as of September 
30, 2010, and thus did not provide reasonable assurance that losses 
and misstatements material to the financial statements would be 
prevented or detected and corrected timely. 

During fiscal year 2010, IRS continued to make strides in addressing 
its internal control deficiencies. Specifically, IRS made progress in 
addressing its financial management systems’ noncompliance with the 
requirements of FFMIA by bringing its financial management systems 
into compliance with the United States Standard General Ledger. IRS 
also corrected several information security weaknesses that GAO 
identified in previous audits. However, remaining deficiencies pertain 
to IRS’s (1) material weaknesses in internal control over unpaid tax 
assessments and information security, (2) noncompliance with the law 
concerning the timely release of tax liens, and (3) financial 
management systems’ substantial noncompliance with FFMIA requirements. 
Additionally, GAO’s fiscal year 2010 financial audit identified a 
significant deficiency in IRS’s internal control over tax refund 
disbursements. 

IRS also faces serious challenges due to continued reliance on 
financial management systems that do not substantially comply with 
FFMIA requirements and that affect IRS’s ability to (1) produce 
reliable financial statements without significant compensating 
procedures and (2) make well-informed decisions. IRS’s continued 
material weakness in internal control over information security, which 
jeopardizes the reliability of the financial information it processes, 
could have implications for GAO’s future ability to determine whether 
IRS’s financial statements are fairly stated because as IRS continues 
to automate its processes, the availability of alternative methods of 
obtaining reasonable assurance that its financial statements are 
fairly stated diminish. This weakness also significantly increases the 
risk that sensitive taxpayer information may be compromised. 

Further, during fiscal year 2010, IRS continued to face management 
challenges in developing and institutionalizing the use of financial 
management information, specifically cost- and revenue-based 
performance information, to assist it in making operational decisions 
and measuring the effectiveness of its programs. Sustained management 
efforts will be necessary to build on the progress made to date and to 
fully address IRS’s remaining internal control, compliance, and 
systems deficiencies and remaining financial management challenges. 

What GAO Recommends: 

Based on prior audits, GAO made numerous recommendations to IRS to 
address the internal control and compliance issues that continued to 
persist during fiscal year 2010. GAO will continue to monitor and 
report on IRS’s progress in implementing the 173 recommendations that 
remain open as of the date of this report. In addition, as 
appropriate, we will report separately on any recommended actions to 
address the new deficiencies identified in this year’s audit. 

IRS agreed that identified weaknesses continue to exist and stated 
that it has taken actions to reduce the risks associated with these 
identified weaknesses. IRS expressed confidence that GAO would find 
that significant progress has been made during its fiscal year 2011 
audit. 

View [hyperlink, http://www.gao.gov/products/GAO-11-142] or key 
components. For more information, contact Steven J. Sebastian at (202) 
512-3406 or sebastians@gao.gov. 

[End of section] 

Contents: 

Letter: 

Auditor's Report: 

Opinion on IRS's Financial Statements: 

Opinion on Internal Control: 

Compliance with Laws and Regulations: 

Systems' Compliance with FFMIA Requirements: 

Consistency of Other Information: 

Other Financial Management Challenges: 

Objectives, Scope, and Methodology: 

Agency Comments and Our Evaluation: 

Management Discussion and Analysis: 

Financial Statements: 

Required Supplementary Information: 

Other Accompanying Information: 

Appendixes: 

Appendix I: Material Weaknesses, Significant Deficiency, and 
Compliance Issues: Material Weaknesses: 
Significant Deficiency: 
Compliance Issues: 

Appendix II: Management's Report on Internal Revenue Control over 
Financial Reporting: 

Appendix III: Comments from the Internal Revenue Service: 

Abbreviations: 

CDDB: Custodial Detail Data Base: 

CFO: Chief Financial Officer: 

FFMIA: Federal Financial Management Improvement Act of 1996: 

FFMSR: Federal Financial Management System Requirements: 

FMFIA: Federal Managers' Financial Integrity Act of 1982: 

FTHBC: First-Time Home Buyer Credit: 

IFS: Integrated Financial System: 

IRACS: Interim Revenue Accounting Control System: 

IRS: Internal Revenue Service: 

MD&A: Management Discussion and Analysis: 

OMB: Office of Management and Budget: 

RRACS: Redesign Revenue Accounting Control System: 

TFRP: Trust Fund Recovery Penalty: 

USSGL: United States Standard General Ledger: 

[End of section] 

United States Government Accountability Office: 
Washington, D.C. 20548: 

November 10, 2010: 

The Honorable Timothy F. Geithner: 
The Secretary of the Treasury: 

Dear Mr. Secretary: 

The accompanying report presents the results of our audits of the 
financial statements of the Internal Revenue Service (IRS) as of, and 
for the fiscal years ending, September 30, 2010, and 2009. We 
performed our audits in accordance with the Chief Financial Officers 
Act of 1990. This report contains our (1) unqualified opinions on 
IRS's financial statements, (2) opinion that IRS's internal control 
over financial reporting was not effective as of September 30, 2010, 
(3) conclusion that IRS did not comply with one of the legal 
provisions we tested, and (4) conclusion that IRS's financial 
management systems were not in substantial compliance with the 
requirements of the Federal Financial Management Improvement Act of 
1996, as of September 30, 2010. The accompanying report also discusses 
other significant issues that we identified in performing our audit 
that we believe should be brought to the attention of IRS management 
and users of IRS's financial statements. 

During fiscal year 2010, IRS continued to make progress in addressing 
its financial management challenges. Specifically, IRS made progress 
in addressing weaknesses in its financial management systems' 
compliance with the Federal Financial Management Improvement Act of 
1996 by bringing its financial systems into compliance with United 
States Standard General Ledger requirements. IRS also addressed 
numerous information security weaknesses we identified in previous 
audits by upgrading key Integrated Financial System (IFS) servers, 
restricting privileges on certain service accounts used for 
transferring IFS data, and limiting access to certain key financial 
documents used for input into IFS. 

However, despite these actions, deficiencies in internal control we 
identified over unpaid tax assessments and information security 
continued to constitute material weaknesses[Footnote 1]in IRS's 
internal control. In addition, IRS also faces significant challenges 
in resolving a significant deficiency[Footnote 2] in internal control 
over tax refund disbursements we are reporting in this year's audit. 

In fiscal year 2010, IRS continued to have a material weakness in its 
internal control over unpaid tax assessments. We found a continuing 
deficiency in IRS's ability to maintain a subsidiary ledger for unpaid 
tax assessments supporting federal taxes receivable on its balance 
sheet and the related compliance assessments and write-off amounts in 
its required supplementary information. To compensate for this 
deficiency, IRS relied on a resource-intensive statistical sampling 
process to estimate these amounts. As a result, IRS could not trace 
amounts reported in its financial statements and required 
supplementary information through its general ledger back to 
underlying source documents on a transaction-by-transaction basis. 

Also in fiscal year 2010, IRS's internal control over its information 
systems' security continued to be ineffective, particularly as it 
relates to controls over access to mission-critical applications and 
processing sensitive information. As a result, IRS could not rely on 
the internal controls contained in its automated financial management 
system to provide reasonable assurance that (1) its financial 
statements, taken as a whole, were fairly stated, (2) the information 
IRS relied on to make decisions on a daily basis was accurate, 
complete, and timely, and (3) proprietary financial and taxpayer 
information was appropriately safeguarded. These ongoing internal 
control deficiencies continued to constitute a material weakness in 
IRS's internal control over its information systems security in fiscal 
year 2010. 

In addition to these material weaknesses, during fiscal year 2010, we 
found continuing deficiencies in internal control over manual tax 
refunds as well as other, related deficiencies identified for the 
first time in this year's audit. We also identified deficiencies in 
IRS's internal control over the processing of claims for the First-
Time Home Buyer Credit. As a result, we identified instances of 
duplicate or otherwise erroneous tax refund disbursements. The 
existence of these internal control deficiencies, coupled with the 
rise in the materiality of the dollar value of manual tax refunds in 
relation to IRS's financial statements, led us to conclude that 
collectively, they constitute a significant deficiency in IRS's 
internal control over tax refund disbursements. As a result, there is 
an increased risk that additional undetected erroneous tax refund 
payments have been disbursed. 

During fiscal year 2010, IRS also continued to experience challenges 
with respect to developing full cost information across all of its 
programs and activities, institutionalizing the use of cost accounting 
agencywide, and developing and routinely using cost-based (and, where 
appropriate, enforcement revenue-based)performance metrics to measure 
the results of its efforts and to assist in making resource allocation 
decisions. It is important that IRS continue to aggressively pursue 
and expand the financial management improvement initiatives it has 
under way in order to achieve comprehensive and lasting financial 
management reform. 

We are sending copies of this report to the Chairmen and Ranking 
Members of the Senate Committee on Appropriations; Senate Committee on 
Finance; Senate Committee on Homeland Security and Governmental 
Affairs; Subcommittee on Financial Services and General Government, 
Senate Committee on Appropriations; Subcommittee on Federal Financial 
Management, Government Information, Federal Services, and 
International Security, Senate Committee on Homeland Security and 
Governmental Affairs; House Committee on Appropriations; House 
Committee on Ways and Means; House Committee on Oversight and 
Government Reform; Subcommittee on Financial Services and General 
Government, House Committee on Appropriations; and Subcommittee on 
Government Management, Organization, and Procurement, House Committee 
on Oversight and Government Reform. We are also sending copies of this 
report to the Chairman and Vice Chairman of the Joint Committee on 
Taxation, the Commissioner of Internal Revenue, the Director of the 
Office of Management and Budget (OMB), the Chairman of the IRS 
Oversight Board, and other interested parties. The report is available 
at no charge on GAO's Web site at [hyperlink, http://www.gao.gov]. 

If you have any questions concerning this report, please contact me at 
(202) 512-3406 or sebastians@gao.gov. Contact points for our Offices 
of Congressional Relations and Public Affairs may be found on the last 
page of this report. 

Sincerely yours, 

Signed by: 

Steven J. Sebastian: 
Director: 
Financial Management and Assurance: 

[End of section] 

United States Government Accountability Office: 
Washington, D.C. 20548: 

To the Commissioner of Internal Revenue: 

In accordance with the Chief Financial Officers (CFO) Act of 1990, 
[Footnote 3] we are responsible for conducting audits of the financial 
statements of the Internal Revenue Service (IRS). IRS's financial 
statements report the assets, liabilities, net position, net costs, 
changes in net position, budgetary resources, and custodial activity 
related to the administration of its responsibilities for implementing 
federal tax legislation. The financial statements do not include an 
estimate of the dollar amount of taxes that are owed the federal 
government but have not been reported by taxpayers or identified 
through IRS's enforcement programs, often referred to as the tax gap, 
[Footnote 4] nor do they include information on tax expenditures. 
[Footnote 5] 

In our audits of IRS's fiscal years 2010 and 2009 financial 
statements, we found: 

* the financial statements are presented fairly, in all material 
respects, in conformity with U.S. generally accepted accounting 
principles; 

* IRS's internal control over financial reporting was not effective as 
of September 30, 2010; 

* IRS did not comply with one of the legal provisions we tested; and: 

* IRS's financial management systems were not in substantial 
compliance with the requirements of the Federal Financial Management 
Improvement Act of 1996 (FFMIA)[Footnote 6] as of September 30, 2010. 

In its role as the nation's tax collector, IRS has a demanding 
responsibility in collecting federal taxes, processing federal tax 
returns, and enforcing the nation's tax laws. IRS is a large and 
complex organization, posing unique operational and financial 
management challenges for its management. IRS employs over 100,000 
people in its Washington, D.C., headquarters and over 700 offices in 
all 50 states and U.S. territories and in some U.S. embassies and 
consulates. In fiscal years 2010 and 2009, IRS collected about $2.3 
trillion in federal tax payments, processed hundreds of millions of 
tax and information returns, and paid about $467 billion and $438 
billion, respectively, in refunds to taxpayers. 

In fiscal year 2010, for the 11th consecutive year, IRS's financial 
statements are fairly stated in all material respects. IRS also 
continued to make progress in modernizing its financial management 
capabilities and in addressing its financial management challenges. 
However, despite its progress, IRS continued to (1) have material 
weaknesses and other deficiencies in its internal control, and (2) not 
comply with certain laws and regulations. Specifically, we identified: 

* A continuing material weakness[Footnote 7] in internal control over 
unpaid tax assessments[Footnote 8] and inability to rely on its 
financial management systems for tax-related transactions and its 
underlying subsidiary records to report taxes receivable, compliance 
assessments, or write-offs in accordance with federal accounting 
standards. These issues also lead to increased taxpayer burden. 

* A continuing material weakness in internal control over information 
security that resulted in IRS's inability to rely on the controls 
embedded in its automated financial management systems to provide 
reasonable assurance that (1) the financial statements are fairly 
stated in accordance with U.S. generally accepted accounting 
principles; (2) financial information management relies on to support 
day-to-day decision-making is current, complete, and accurate; and (3) 
proprietary information processed by these automated systems is 
appropriately safeguarded. These issues increase the risk of 
unauthorized individuals accessing, altering, or abusing proprietary 
IRS programs and electronic data and taxpayer information. 

* A significant deficiency[Footnote 9] in internal control over tax 
refund disbursements that resulted from the continuation of control 
deficiencies that we have found in the past as well as newly 
identified deficiencies in internal control over manual tax refunds, 
[Footnote 10] and deficiencies we identified during fiscal year 2010 
related to the processing of claims for the First-Time Home Buyer 
Credit (FTHBC)[Footnote 11] that in some instances resulted in the 
disbursement of duplicate or otherwise erroneous refunds. 

* Two instances of noncompliance with provisions of laws and 
regulations. Specifically, (1) IRS did not always release federal tax 
liens against taxpayers' property within 30 days of the satisfaction 
of the tax debt, and (2) IRS's financial management systems did not 
substantially comply with the requirements of FFMIA. 

Opinion on IRS's Financial Statements: 

IRS's financial statements including the accompanying notes present 
fairly, in all material respects, in conformity with U.S. generally 
accepted accounting principles, IRS's assets, liabilities, and net 
position as of September 30, 2010, and 2009; and its net costs; 
changes in net position; budgetary resources; and custodial activity 
for the fiscal years then ended. 

However, misstatements may nevertheless occur in other financial 
information reported by IRS and not be detected as a result of the 
internal control deficiencies described in this report. 

In conformity with U.S. generally accepted accounting principles, 
IRS's financial statements reflect federal tax revenues collected 
during the fiscal year, as well as the total unpaid federal taxes for 
which IRS and the taxpayers or courts agree on the amounts owed. 
Cumulative unpaid federal tax assessments for which there is no future 
collection potential or for which there is no agreement on the amounts 
owed are not reported in the financial statements. Rather, they are 
reported as write-offs and compliance assessments, respectively, in 
required supplemental information to IRS's financial statements. To 
the extent that taxes owed in accordance with the nation's tax laws 
are not reported by taxpayers and are not identified through IRS's 
various enforcement programs (often referred to as the tax gap), they 
are not reported in the financial statements or in required 
supplemental information to the financial statements. Tax 
expenditures, which represent the amount of federal tax revenue the 
federal government forgoes resulting from federal tax law provisions 
that (1) allow a special exclusion, exemption, or deduction from gross 
income, or (2) provide a special credit, preferential rate, or 
deferred tax liability, are not reported in the financial statements, 
but rather are presented as other accompanying information. 

Opinion on Internal Control: 

Because of the two material weaknesses in internal control discussed 
below, IRS did not maintain, in all material respects, effective 
internal control over financial reporting as of September 30, 2010, 
and thus did not provide reasonable assurance that losses and 
misstatements material in relation to the financial statements would 
be prevented or detected and corrected on a timely basis. Our opinion 
is based on criteria established under 31 U.S.C. sec. 3512 (c), (d), 
commonly known as the Federal Managers' Financial Integrity Act of 
1982 (FMFIA). 

Despite its material weaknesses in internal control, IRS was able to 
prepare financial statements that were fairly stated in all material 
respects for fiscal years 2010 and 2009. Nonetheless, IRS continues to 
face significant challenges in addressing its material weaknesses in 
internal control over (1) unpaid tax assessments and (2) information 
security, as described below. 

The material weaknesses in internal control over unpaid tax 
assessments and information systems security may adversely affect any 
decision by IRS's management that is based, in whole or in part, on 
information that is inaccurate because of these deficiencies. In 
addition, unaudited financial information reported by IRS, including 
budget information, may also contain misstatements resulting from 
these deficiencies. The issues constituting these material weaknesses 
were encompassed in the material weaknesses reported by IRS in (1) its 
fiscal year 2010 FMFIA assurance statement to the Department of the 
Treasury, and (2) Management's Report on Internal Control over 
Financial Reporting. We considered these material weaknesses in 
determining the nature, timing, and extent of our audit procedures on 
IRS's fiscal years 2010 and 2009 financial statements. 

In addition to the material weaknesses in internal control noted above 
and described below, we identified several deficiencies in internal 
control related to IRS's disbursement of tax refunds which 
collectively, although not a material weakness, we believe are 
important enough to be brought to the attention of those charged with 
IRS governance and which thus represent a significant deficiency in 
IRS's internal control. This significant deficiency is also described 
below. 

Material Weakness in Internal Control over Unpaid Tax Assessments: 

During fiscal year 2010, IRS continued to have a material weakness in 
its internal control over unpaid tax assessments. This material 
weakness encompasses internal control deficiencies concerning IRS's 
(1) inability to rely on its general ledger system for tax 
transactions and underlying subsidiary records to report federal taxes 
receivable, compliance assessments, and write-offs in accordance with 
federal accounting standards without significant compensating 
procedures,[Footnote 12] (2) lack of transaction traceability for the 
reported balance in taxes receivable that comprises over 80 percent of 
IRS's total assets as of September 30, 2010, and an effective 
transaction-based subledger for unpaid tax assessment transactions, 
and (3) inability to effectively prevent or timely detect and correct 
errors in taxpayer accounts. These internal control deficiencies are 
caused primarily by IRS's continued reliance on software applications 
that were not designed to provide the accurate, complete, and timely 
transaction-level financial information that management needs to make 
well-informed decisions or to accumulate and report financial 
information in accordance with federal accounting standards. These 
problems are likely to continue to exist until these software 
applications are either significantly enhanced or replaced. 
Successfully addressing these issues is vital and is one of the goals 
of IRS's ongoing systems modernization effort. 

Material Weakness in Internal Control over Information Security: 

During fiscal year 2010, IRS continued to have a material weakness in 
its internal control related to its management of information systems 
security. IRS made progress during fiscal year 2010 in addressing 
several information security weaknesses identified in our previous 
audits. Specifically, IRS (1) upgraded key Integrated Financial System 
(IFS)[Footnote 13] servers, (2) discontinued the use of unencrypted 
protocols for the servers supporting its procurement system, and (3) 
limited access to certain key financial documents used for input into 
IFS. Nevertheless, persistent, serious deficiencies in IRS's internal 
control over information security remain uncorrected. For example, IRS 
continued to allow individuals more access to sensitive information 
contained on the network than they needed to perform their jobs and 
had not effectively addressed a vulnerability in its procurement 
system that allowed users to bypass normal application controls. In 
addition, access control weaknesses in the Redesign Revenue Accounting 
Control System (RRACS)[Footnote 14] compromised IRS's ability to 
segregate incompatible duties and jeopardized the integrity of the 
application's data. Also, visitor badges to secured areas at one data 
center continued to provide cardholders unnecessary access. As a 
result of these deficiencies, IRS was (1) unable to rely upon these 
controls to provide reasonable assurance that its financial statements 
are fairly stated in the absence of effective compensating procedures, 
(2) unable to ensure the reliability of other financial management 
information produced by its systems, and (3) at increased risk of 
compromising confidential IRS and taxpayer information. 

As IRS continues to increase the automation of accounting and 
reporting processes, the need for effective security over the data 
these systems process becomes increasingly more critical. Absent 
effective information security, confidential taxpayer records will 
remain at risk and both IRS's management and we, as IRS's auditors, 
will continue to be unable to rely on the automated controls, 
including those to ensure the integrity of electronic signatures, 
built into these systems to assist in obtaining reasonable assurance 
of the reliability of reported balances. Thus far, we have been able 
to compensate for these deficiencies to obtain reasonable assurance 
that IRS's financial statements are presented fairly by utilizing 
other evidence. However, as IRS's modernization effort progresses, 
these options are diminishing as its records become more automated. If 
IRS does not resolve its information security material weakness before 
these options disappear, it could have serious adverse implications 
for our ability to determine whether IRS's financial statements are 
fairly stated in the future. 

Significant Deficiency in Internal Control over Tax Refund 
Disbursements: 

During fiscal year 2010, we identified several deficiencies in IRS's 
internal control over tax refund disbursements that do not 
individually or collectively represent a material weakness, but in our 
judgment (1) do collectively represent a significant deficiency in the 
design or operation of internal control that adversely affects IRS's 
ability to meet the internal control objectives described in this 
report and (2) are important enough to merit the attention of those 
charged with IRS governance. Specifically, IRS has not effectively 
addressed the deficiencies in internal control over manual tax refunds 
that we have reported in previous years.[Footnote 15] We also 
identified new deficiencies in internal control over manual tax 
refunds during this year's audit, as well as deficiencies in IRS's 
internal control over processing of claims for the FTHBC during fiscal 
year 2010. We identified instances in which these deficiencies 
resulted in duplicate or otherwise erroneous tax refund disbursements. 
The existence of these control deficiencies, coupled with the rise in 
the materiality of manual tax refunds to IRS's financial statements, 
led us to conclude that they collectively constitute a significant 
deficiency in IRS's internal control over tax refund disbursements. As 
a result, there is an increased risk that additional undetected 
erroneous tax refund payments have been disbursed. 

We have reported on IRS's internal control weaknesses in prior audits 
and have provided IRS recommendations to address these and other less- 
significant issues.[Footnote 16] As of the date of this report, 173 
recommendations were still open, of which 14 relate to the material 
weakness in internal control over unpaid tax assessments, 88 relate to 
the material weakness in internal control over information security, 
and 6 relate to issues encompassed by the significant deficiency in 
internal control over tax refund disbursements. For more details on 
the material weaknesses and the significant deficiency identified as a 
result of our audit, see appendix I. 

During our fiscal year 2010 audit, we also identified other 
deficiencies in IRS's system of internal control that we do not 
consider to be material weaknesses or significant deficiencies. We 
have communicated these matters to management informally and as 
appropriate, will be reporting them to IRS separately at a later date. 

Compliance with Laws and Regulations: 

Our tests of IRS's compliance with selected provisions of laws and 
regulations for fiscal year 2010 disclosed one area of noncompliance 
that is reportable under U.S. generally accepted government auditing 
standards. This area relates to IRS not releasing federal tax liens 
against taxpayers' property on time.[Footnote 17] For more details on 
our findings with respect to this compliance issue, see appendix I. 

Except as noted above, our tests for compliance with laws and 
regulations disclosed no other instances of noncompliance that would 
be reportable under U.S. generally accepted government auditing 
standards. However, the objective of our audit was not to provide an 
opinion on overall compliance with laws and regulations. Accordingly, 
we do not express such an opinion. 

Systems' Compliance with FFMIA Requirements: 

We found that IRS's financial management systems did not substantially 
comply with the requirements of the Federal Financial Management 
Improvement Act of 1996 (FFMIA) as of September 30, 2010.[Footnote 18] 
Specifically, IRS's financial management systems did not substantially 
comply with (1) Federal Financial Management System Requirements 
(FFMSR) and (2) federal accounting standards (U.S. generally accepted 
accounting principles). IRS's financial management systems 
substantially complied with the United States Standard General Ledger 
(USSGL) at the transaction level. Our conclusion is based on criteria 
established under FFMIA for federal financial management systems, U.S. 
generally accepted accounting principles, and the USSGL. 

The deficiencies resulting in IRS's financial management systems' lack 
of substantial compliance with the FFMIA requirements relate to the 
material weaknesses discussed previously. Further, IRS reported on 
these deficiencies in its (1) fiscal year 2010 FMFIA assurance 
statement to the Department of the Treasury and (2) Management's 
Report on Internal Control over Financial Reporting. IRS's FFMIA 
remediation plan details its planned corrective actions for the 
weaknesses that render its financial management systems substantially 
noncompliant with the requirements of FFMIA. For more details on the 
IRS financial management systems' FFMIA compliance issue, see appendix 
I. 

Consistency of Other Information: 

IRS's MD&A and other required supplementary and other accompanying 
information contain a wide range of information, some of which is not 
directly related to the financial statements. We did not audit and do 
not express an opinion on this information. However, we compared this 
information for consistency with the financial statements and 
discussed the methods of measurement and presentation with IRS 
officials. On the basis of this limited work, we found no material 
inconsistencies with the financial statements, U.S. generally accepted 
accounting principles, or applicable requirements of OMB Circular No. 
A-136, Financial Reporting Requirements. 

Other Financial Management Challenges: 

In addition to the challenge of addressing its internal control 
weaknesses, IRS also faces additional financial management challenges 
related to performance measurement and the safeguarding of taxpayer 
receipts and associated information. These challenges are discussed 
below. 

Performance Measurement: 

During fiscal year 2010, IRS continued to face challenges in 
developing and institutionalizing the use of financial information to 
assist it in making operational decisions and measuring the 
effectiveness of its programs. The Federal Accounting Standards 
Advisory Board's (FASAB) Statement of Federal Financial Accounting 
Concepts No. 1, Objectives of Federal Financial Reporting,[Footnote 
19] provides that federal entities' financial data should facilitate 
accountability and decision-making on the costs and the outputs and 
outcomes achieved, and for evaluating service efforts, costs, and 
accomplishments. A key objective of the CFO act is for federal 
agencies to routinely provide and ensure the use of appropriate 
financial management information needed to evaluate program 
effectiveness, make fully informed operational decisions, and ensure 
accountability. IRS's existing performance metrics only partially 
achieve those goals in that its metrics are focused primarily on 
process-oriented workload measures of program outputs rather than on 
metrics that measure program outcomes, such as specific IRS 
enforcement programs' costs and revenues. 

IRS has not yet fully developed and integrated the use of cost-based 
(and when appropriate, enforcement revenue-based[Footnote 20]) 
performance information into its routine managerial decision-making 
processes or to its externally reported performance metrics. 
Specifically, IRS has not yet developed full cost[Footnote 21] 
information on the range of its programs and activities that could 
provide important resource allocation-related information, nor has it 
developed cost-or revenue-based[Footnote 22] performance metrics for 
its programs and activities. Completing the task of developing full 
cost information and adding outcome-oriented performance metrics for 
all its programs and activities should help improve IRS's ability to 
establish measurable outcome goals; evaluate the relative merits of 
various program options, especially its enforcement programs and new 
initiatives; and highlight opportunities for optimizing the allocation 
of resources. 

We acknowledge that IRS faces challenges in developing such data, 
especially cost-benefit (return-on-investment) performance metrics. 
However, doing so would better position IRS to evaluate the 
effectiveness of its programs and activities and optimize the 
allocation of resources among them. It would also provide IRS better 
information with which to defend its budgets and more credibly 
demonstrate to Congress and the public that it is using its 
appropriations wisely. 

Safeguarding Taxpayer Receipts and Associated Information: 

Although levels of electronic filing of tax and information returns 
have been steadily increasing, IRS also faces an ongoing management 
challenge due to the millions of hard-copy tax returns it continues to 
receive and process each year, along with hundreds of billions of 
dollars in associated taxpayer payments it receives. As long as IRS 
continues to receive such large volumes of hard-copy taxpayer payments 
and supporting data, there will continue to be a significant risk to 
the government and taxpayers alike that loss of receipts or 
inappropriate disclosure or compromise of taxpayer information may 
occur during this process. Safeguarding these taxpayer receipts and 
associated taxpayer information to prevent such events are among IRS's 
most important and demanding responsibilities, and congressional and 
taxpayer expectations in this regard are justifiably high. Thus, it is 
critical that IRS maintain effective internal control to mitigate this 
risk, including ongoing monitoring of key internal controls to verify 
that they do not deteriorate over time. 

Objectives, Scope, and Methodology: 

IRS management is responsible for (1) preparing the financial 
statements in conformity with U.S. generally accepted accounting 
principles, (2) establishing and maintaining effective internal 
control over financial reporting and evaluating its effectiveness, (3) 
ensuring that IRS's financial management systems substantially comply 
with FFMIA requirements, and (4) complying with applicable laws and 
regulations. IRS management evaluated the effectiveness of IRS's 
internal control over financial reporting as of September 30, 2010, 
based on the criteria established under FMFIA. IRS management's 
assertion based on its evaluation is included in appendix II. 

We are responsible for planning and performing the audit to obtain 
reasonable assurance and provide our opinion about whether (1) IRS's 
financial statements are presented fairly, in all material respects, 
in conformity with U.S. generally accepted accounting principles, (2) 
IRS management maintained, in all material respects, effective 
internal control over financial reporting as of September 30, 2010, 
and (3) IRS's financial management systems substantially comply with 
FFMIA requirements. We are also responsible for (1) testing compliance 
with selected provisions of laws and regulations that have a direct 
and material effect on the financial statements, and (2) performing 
limited procedures with respect to certain other information 
accompanying the financial statements. 

In order to fulfill these responsibilities, we: 

* examined, on a test basis, evidence supporting the amounts and 
disclosures in the financial statements. This included selecting 
statistical samples of unpaid tax assessments, revenue, refunds, 
payroll and nonpayroll expenses, property and equipment, and 
undelivered order transactions;[Footnote 23] 

* assessed the accounting principles used and significant estimates 
made by IRS management; 

* evaluated the overall presentation of IRS's financial statements; 

* obtained an understanding of IRS and its operations, including its 
internal control over financial reporting; 

* considered IRS's process for evaluating and reporting on (1) 
internal control over financial reporting based on criteria 
established under FMFIA and (2) financial management systems under 
FFMIA; 

* assessed the risk of (1) material misstatement in IRS's financial 
statements and (2) material weakness in its internal control over 
financial reporting; 

* tested relevant internal control over IRS's financial reporting; 

* evaluated the design and operating effectiveness of IRS's internal 
control over financial reporting based on the assessed risk; 

* tested compliance with selected provisions of the following laws and 
regulations: Internal Revenue Code; Anti-Deficiency Act, as amended; 
Purpose Statute; Prompt Payment Act; Pay and Allowance System for 
Civilian Employees; Federal Employees' Retirement System Act of 1986, 
as amended; Social Security Act of 1935, as amended; Federal Employees 
Health Benefits Act of 1959, as amended; American Recovery and 
Reinvestment Act of 2009; Worker, Homeownership, and Business 
Assistance Act of 2009; Homebuyer Assistance Improvement Act of 2010; 
Economic Stimulus Act of 2008; and the Financial Services and General 
Government Appropriations Act, 2010; 

* tested whether IRS's financial management systems substantially 
complied with the three FFMIA requirements; and: 

* performed such other procedures as we considered necessary in the 
circumstances. 

An entity's internal control over financial reporting is a process 
affected by those charged with governance, management, and other 
personnel, the objectives of which are to provide reasonable assurance 
that (1) transactions are properly recorded, processed, and summarized 
to permit the preparation of financial statements in accordance with 
U.S. generally accepted accounting principles, and assets are 
safeguarded against loss from unauthorized acquisition, use, or 
disposition; and (2) transactions are executed in accordance with the 
laws governing the use of budget authority and other laws and 
regulations that could have a direct and material effect on the 
financial statements. 

We did not evaluate all internal control relevant to operating 
objectives as broadly established under FMFIA, such as controls 
relevant to preparing statistical reports and ensuring efficient 
operations. We limited our internal control testing to testing 
controls over financial reporting. Our internal control testing was 
for the purpose of expressing an opinion on the effectiveness of 
internal control over financial reporting and may not be sufficient 
for other purposes. Consequently, our audit may not identify all 
deficiencies in internal control over financial reporting that are 
less severe than a material weakness. Because of inherent limitations 
in internal control, internal control may not prevent or detect and 
correct misstatements due to error or fraud, losses, or noncompliance. 
We also caution that projecting any evaluation of effectiveness to 
future periods is subject to the risk that controls may become 
inadequate because of changes in conditions, or that the degree of 
compliance with policies or procedures may deteriorate. 

We did not test compliance with all laws and regulations applicable to 
IRS. We limited our tests of compliance to those laws and regulations 
that have a direct and material effect on the financial statements for 
the fiscal year ended September 30, 2010. We caution that 
noncompliance may occur and not be detected by these tests and that 
such testing may not be sufficient for other purposes. Also, our work 
on FFMIA would not necessarily disclose all instances of noncompliance 
with FFMIA requirements. 

We performed our audit in accordance with U.S. generally accepted 
government auditing standards. We believe our audit provides a 
reasonable basis for our opinions and other conclusions. 

Agency Comments and Our Evaluation: 

In commenting on a draft of this report, IRS stated that there are 
identified weaknesses that continue to exist and that while challenges 
remain, it has established its ability to consistently produce 
accurate and reliable financial statements, has a solid management 
team in place that is dedicated to promoting the highest standard of 
financial management, and would continue to increase the focus on 
information security and internal controls while improving financial 
reporting. IRS stated that it continued to make information security a 
top priority during fiscal year 2010 and had made notable improvements 
again this year, including (1) completing corrective actions in 
network access controls; (2) implementing standard security 
configurations and establishing metrics in the areas of inventory 
management and configuration management, auditing, access 
authorization, and change management for network access systems and 
devices; and (3) upgrading its IFS servers and the UNIX operating 
system to Solaris 10. 

IRS also stated that it took significant steps to strengthen controls 
and reduce risks of duplicate, erroneous, or fraudulent refunds 
associated with the manual refund process. IRS stated that while the 
timing of our testing did not provide sufficient opportunity to 
demonstrate positive improvements during the year under audit, it 
noted that it was already seeing positive improvements as a result of 
the corrective actions it has taken. With respect to processing FTHBC 
claims, IRS stated that given the complexity of tax administration and 
the time constraints the IRS faced implementing the FTHBC, it was 
impossible to address all potentially erroneous FTHBC claims. IRS 
stated that it would continue its aggressive approach to ensuring the 
accuracy and legitimacy of FTHBC claims and continue to put a high 
priority on working FTHBC claims in its post-refund enforcement work 
that were not addressed during its pre-refund compliance activities. 
IRS expressed confidence that we will find it has made significant 
progress in addressing its internal control deficiencies during our 
fiscal year 2011 audit. 

We will evaluate the effectiveness of IRS's corrective actions during 
our audit of IRS's fiscal year 2011 financial statements. The complete 
text of IRS's response is included in appendix III. 

Sincerely yours, 

Signed by: 

Steven J. Sebastian: 
Director: 
Financial Management and Assurance: 

November 5, 2010: 

[End of section] 

Management Discussion and Analysis: 

The Internal Revenue Service: 
FY 2010 Management Discussion and Analysis: 
At A Glace: 

Douglas Shulman became the 47th Commissioner of Internal Revenue on 
March 24, 2008. He presides over the nation's tax administration 
system, which annually collects over $2 trillion in tax revenue that 
funds most government operations and public services. 

History: 

The IRS is one of the oldest bureaus in the United States Government. 
Article 1, Section 8 of the Constitution gave the Federal Government 
the power to lay and collect Taxes, Duties, Imposts and Excises, to 
pay the Debts and provide for the common Defence and general Welfare 
of the United States... In 1862, President Lincoln and the Congress 
established the Bureau of Internal Revenue and the nation's first 
income tax. In 1953, the Bureau of Internal Revenue's name was changed 
to the Internal Revenue Service (IRS). 

Vision: 
Funding America's future by strengthening our system of voluntary tax 
compliance. 

Mission: 

Provide America's taxpayers top-quality service by helping them 
understand and meet their tax responsibilities and enforce the law 
with integrity and fairness to all. 

Organization: 

The IRS organizational structure (Appendix A) closely resembles the 
private sector model of organizing around customers with similar 
needs. The scope of IRS operations includes collection of individual 
and corporate taxes, examination of returns, taxpayer assistance, as 
well as oversight of tax-exempt organizations and the Earned Income 
Tax Credit program, the nation's largest federally administered means-
tested benefits program. 

Operating Divisions: 
* Wage and Investment; 
* Small Business and Self-Employed; 
* Large and Mid-Size Business; 
* Tax-Exempt and Government Entities. 

Employees: 

The IRS employs over 100,000 employees. 

Location: 

The IRS is headquartered in Washington, DC. The IRS also has employees 
located at over 700 offices in all states and territories and some 
U.S. embassies and consulates. 

IRS FY 2010 Statistics: 

Total Revenue Collected: $2.3 trillion; 
Total Enforcement Revenue Collected: $57.6 billion; 
Total Refunds: $467 billion; 
Number of Hits on IRS.gov: 1.7 billion; 
Number of Downloads from IRS.gov: 213.3 million; 
Number of Returns Filed: 230.6 million; 
"Where's My Refund?" Usage: 66.9 million; 
Number of Taxpayers Assisted: 78.2 million; 
Number of Returns Filed Electronically: 110.3 million; 
Average Individual Refund: $3,048; 
Number of Customers served at Taxpayer Assistance Centers: 6.4 million. 

Financial Resources: 

The IRS FY 2010 budget was $12.15 billion in direct appropriations, 
supplemented by $290.5 million in user fee revenue and $135.5 million 
in reimbursable resources for a total operating level of $12.58 
billion. 

Internet: 

The IRS provides tax information, taxpayer services, forms, and 
publications at www.IRS.gov. 

IRS Resources: 

Figure: Funding by Appropriations: 

[Refer to PDF for image: pie-chart] 

Enforcement: 44%; 
Operations Support: 33%; 
Taxpayer Service: 18%; 
Business Systems Modernization: 2%; 
Health Insurance Tax Credit Administration: less than 1%; 
Other: 3%. 

[End of figure] 

Funding by Appropriations ($ thousands): 

In FY 2010, funding for the three core operating appropriations was 
allocated as follows: 

* Taxpayer Services [$2,278,830] funds processing tax returns and 
related documents, and assistance for taxpayers in filing returns and 
paying taxes due. 

* Enforcement [$5,504,000] funds examination of tax returns, 
collection of balances, the administrative and judicial settlement of 
taxpayer appeals of examination findings, as well as providing 
resources for strengthened enforcement to reduce invalid claims and 
erroneous filings associated with the Earned Income Tax Credit (EITC) 
program. 

* Operations Support [$4,083,884] funds administrative services, 
policy management and IRS-wide support. The appropriation also funds 
staffing, equipment, and related costs to manage, maintain, and 
operate critical information systems that support tax administration. 

In addition to the core appropriations, the IRS has the following 
appropriations: 

* Business Systems Modernization [$263,897] funds capital asset 
acquisitions of information technology systems to modernize key tax 
administration systems. 

* Health Insurance Tax Credit Administration [$15,512] funds the 
administration of the Health Coverage Tax Credit (HCTC). 

* Other: User Fees 1$290,452] are receipts from payment for services 
provided and reimbursable agreements [$135,504]. 

* Affordable Care Act of 2010 ($6,682) funds the administration of the 
Therapeutic Discovery Program Grants and Administration. 

Figure: How IRS Uses its Resources: 

[Refer to PDF for image: pie-chart] 

Compliance: 67%; 
Filing and Account Services: 25%; 
Taxpayer Assistance and Education: 6%; 
Administration of Health Insurance/Tax Credit Programs: 2%. 

[End of figure] 

How IRS Uses its Resources: 

The Statement of Net Cost reflects the use of IRS resources in 
conducting its major programs. The IRS uses a cost allocation 
methodology to assign support and overhead costs to each program 
described below. The Statement of Net Cost reports the full cost of 
these programs in accordance with the Statement of Federal Financial 
Accounting Standards No. 4, "Managerial Cost Accounting." 

* Taxpayer Assistance and Education activities include taxpayer 
education and outreach, tax publication issuance and distribution. 

* Filing and Account Services activities include filing tax returns, 
maintaining customer accounts, and processing taxpayer information. 

* Compliance activities include pre-filing agreements, document 
matching, examination, collection, and criminal investigation 
activities. 

* Administration of Health Insurance/Tax Credit Programs includes 
costs for Earned Income Tax Credit (EITC) and HCTC program activities. 

The following table shows FY 2010 and 2009 data on the use of IRS 
resources by major programs: 

Table: Use of Resources ($ thousands): 
	
Program: Taxpayer Assistance and Education; 
FY 2010: $793,492; 
FY 2009: $555,735. 

Program: Filing and Account Services; 
FY 2010: $3,527,840; 
FY 2009: $3,950,070. 

Program: Compliance; 
FY 2010: $9,330,435; 
FY 2009: $8,174,550. 

Program: Administration of Health Insurance/Tax Credit Programs; 
FY 2010: $249,577; 
FY 2009: $189,685. 

[End of table] 

Fiscal Year (FY) 2010 Performance: 

The IRS achieved an overall success rate of 66% in meeting or 
exceeding the targets for 21 of its 32 performance measures.[Footnote 
1] Nine of the eleven measures that fell below the target were within 
96 percent of the target. Detailed information on performance is 
contained in Appendix B, Performance Measurement Data; and Appendix C, 
Explanation of Shortfalls. 

Collections related to enforcement activities totaled $57.6 billion, a 
34% increase over FY 2004. 

Figure: IRS Enforcement Revenue ($ Billions): 

[Refer to PDF for image: vertical bar graph] 
				
FY 04: $43.1; 
FY 05: $47.3; 
FY 06: $48.7; 
FY 07: $59.2; 
FY 08: $56.4; 
FY 09: $48.9; 
FY 10: $57.6. 

[End of figure] 

The IRS remains committed to finding ways to increase compliance and 
reduce the tax gap. In FY 2010, the IRS developed new methodologies 
for estimating the corporate income tax gap; updated the estate and 
gift tax nonfiling and underreporting tax gap estimates, and developed 
a new basis for estimating the individual income tax nonfiler gap. 

Research allows the IRS to target specific areas of noncompliance to 
improve voluntary compliance and allocate resources more effectively 
to reduce the tax gap. The FY 2010 National Research Program (NRP) 
efforts included a study to assess the reporting compliance of 
employment taxes. The study will span three tax years, from 2008 
through 2010, examining approximately 2,200 randomly-selected 
taxpayers each year. The new study complements the ongoing study of 
individual reporting compliance and the study of subchapter S 
Corporations due to be released in 2011. 

The IRS continues to study the effects of services it offers to 
taxpayers on the internet, at walk-in sites, and on its toll-free 
telephone lines as well as exploring the relationships between 
taxpayer errors and unclear correspondence. As part of this effort, 
the IRS is testing the impact of online assistance and instruction, 
and the impact of service quality to aid in the development of new 
approaches to service. 

In FY 2010, the IRS developed a strategic plan for the IRS Research 
Community. The plan features strategies that support continuing growth 
of the Research Community and serves as a roadmap for providing world-
class research to support the administration of the tax system. 

[Side bar: Austin Incident: 

In February 2010, a single-engine plane intentionally crashed into the 
IRS office in Austin, Texas, resulting in the death of our employee 
Vernon Hunter, the injury of many others, and destroying the workspace 
of nearly 200 IRS employees. 

Shortly after the incident, Commissioner Shulman and Secretary 
Geithner visited Austin to express their condolences. On February 22, 
President Barack Obama posted a message on the White House website 
where he said the following: 

"I want the dedicated employees of the IRS to know that I am thankful 
for your dedication, courage, and professionalism as we rebuild in 
Austin." 

The rebuilding of Austin started immediately with IRS and GSA 
restoring service in temporary workspace within six workdays of the 
incident. A One Stop Shop" was set up to help employees, providing 
counseling services and other services to assist employees. Employees 
moved into new permanent office space early in July. 

During a formal ribbon-cutting ceremony held on July 29, 2010, 
Commissioner Shulman announced the creation of an annual award to 
honor the career, dedication, and values of Vernon Hunter." The annual 
award will recognize IRS employees who have achieved a lifetime of 
service honoring the spirit and values of the best of the IRS. 

High Priority Performance Goals: 

In FY 2010, the IRS established a set of High Priority Performance 
Goals to address high priority issues that can have measurable 
accomplishment in the next 12 to 24 months. The IRS goals through FY 
2011 are: 

* Make progress against the Tax Gap through improved service & 
enhanced enforcement of the tax laws: 
- Achieve more than 4 million document matching closures in FY 2011. 
- Increase individual income tax filers' ACSI (customer satisfaction) 
score to 69 percent. 
- Improve telephone level of service to 75 percent by the end of FY 
2011. 
- Increase individual e-File rate to 81 percent in 2011. 
[End of side bar] 

Many Taxpayers Took Advantage of the American Recovery and 
Reinvestment Act of 2009 (ARRA) Tax Credits: 

The IRS accomplished 100% of its activities that were planned in
FY 2010 to implement provisions of ARRA, including preparing systems 
and products in a timely manner, enabling taxpayers to take advantage 
of the Recovery Act tax provisions, and providing benefit to the 
economy as soon as possible. 

Implementation was accomplished via education and outreach, guidance 
and instructions, IRS programming and processing changes, and 
compliance and reporting. The IRS issued news releases, published up-
to-date information and pertinent questions and answers on IRS.gov. 
Forums, including conference calls with targeted groups like 
professional tax preparers were held, toll-free telephone assistance 
to taxpayers on the Recovery Act was provided, and the IRS also 
published fact sheets on many of the provisions. The guidance and 
instruction provided assisted taxpayers in determining which credits 
applied to them and how to claim them. Tax forms, schedules, 
publications, and instructions were updated and issuance of Internal 
Revenue Bulletin Notices and Revenue Procedures also provided 
information for filers. The IRS outreach efforts were designed to 
ensure that tax credits were correctly claimed and that benefits were 
only going to those eligible. 

In FY 2010, taxpayers benefited from the Recovery Act tax provisions 
in the following ways: 

* An estimated $82.6 billion was made available to taxpayers through 
the Making Work Pay provision. 

* Over 2.6 million taxpayers claimed over $19 billion in First-Time 
Homebuyer credits for houses purchased in 2009 and 2010. 

* Nearly 4 million households have benefited from the COBRA premium 
assistance program. 

* Over $3.5 billion in Net Operating Loss Carryback Adjustments were 
claimed by businesses to offset taxable income for the preceding 3 to 
5 years. 

* Issued over 1,600 Build America Bonds, which provided $115 billion 
in financing for education, transportation, environmental and other 
public projects. 

* Allocated $2.4 billion of Clean Renewable Energy Bonds (CREBS) to 
1,067 applicants and $1 billion of Tribal Economic Development Bonds 
to 76 Indian tribal governments. 

[Side bar: IRS Implementation of the Patient Protection and Affordable 
Care Act (ACA) of 2010: 

The Affordable Care Act (ACA) was signed into law on March 23, 2010, 
and later amended by the Health Care and Education Reconciliation Bill 
of 2010 on March 30, 2010. 

ACA represents the largest set of tax law changes in more than 20 
years, with more than 40 provisions that amend the tax laws. Although 
the new law goes into effect gradually over many years, numerous 
provisions require the IRS to take immediate action like the Small 
Business Health Care Tax Credit, the Qualifying Therapeutic Discovery 
Credit, and the expanded Adoption Credit. 

To enact the range of provisions that were retroactive to 2009 and 
immediately effective for calendar year 2010, the IRS established 
teams to implement respective provisions by affected taxpayer groups -
individual taxpayers, small businesses large industry, and tax-exempt 
and government entities. During FY 2010, IRS efforts focused on: 

* Developing new systems and business processes for near-term 
provisions. 

* Conducting initial planning for longer-term provisions. 

* Defining appropriate outreach activities for each affected group. 

Provisions that will become effective in later years, when new options 
for buying health insurance through state-sponsored exchanges go into 
effect, place significant new administrative responsibilities on the 
IRS requiring the design and development of complex new systems and 
business processes along with substantial coordination with other 
federal and state entities. 

The IRS and the Department of Health and Human Services (HHS) 
partnered to form a Coordinating Committee to assess cross-cutting 
policy considerations. Also, interagency working teams have formed to 
assess operational needs such as data infrastructure, eligibility, 
enrollment, customer service, communications, and payment of premium 
tax credits. 
[End of side bar] 

Improve Service to Make Voluntary Compliance Easier: 

Helping taxpayers understand their tax reporting and payment 
obligations is vital to maintaining public confidence in the tax 
system. In FY 2010, the IRS met or exceeded 83% (10 of 12) of the 
Taxpayer Service performance targets. 

During FY 2010, the IRS continued to develop and improve on products 
and services such as updating forms to help taxpayers comply with 
filing requirements, converting forms for visually impaired taxpayers, 
translating more tax products into Spanish, implementing a 
multilingual website to facilitate participation in the tax system by 
individuals who do not speak English, reducing taxpayer telephone wait 
time, and working with banks so taxpayers without bank accounts could 
receive refunds on a prepaid debit card in the 2011 filing season. 

Highlights of the 2010 Filing Season: 

The IRS delivered a successful 2010 filing season, rising to 
challenges posed by the implementation of provisions in the American 
Reinvestment and Recovery Act of 2009 (ARRA), the Worker, 
Homeownership, and Business Assistance Act of 2009 (WHBAA), and 
increased telephone demand for Economic Recovery Payment inquiries. 
Results of the 2010 filing season include: 

* Processed 141.9 million individual returns and issued more than 
109.5 million refunds totaling $366 billion compared to 144.4 million 
returns resulting in 111.4 million refunds totaling over $339.6 
billion in 2009. 

* Achieved a 74.0% telephone level of service, an increase from 70.0% 
in 2009, while answering 36.7 million assistor calls. 

* Answered 35.1 million automated calls, a 21% increase from 2009,
reflecting a growing public appetite for quality self-service options. 

* Correctly responded to 92.7% of tax law questions and 95.7% of 
account questions. 

* Processed over 2.9 million Free File returns. 

Millions of taxpayers continue to file their returns electronically. 
There is, however, a growing trend for Home-Computer filing, versus 
returns filed by paid preparers. As a result: 

* Home-Computer filing increased to 34.6 million returns, up from 32.2 
million in 2009. 

* Individual returns electronically filed increased to 69.3%, up from 
65.9% in 2009, with the total number of individual returns filed 
electronically reaching 98.4 million. 

* Business returns electronically filed increased 11.9% over 2009, 
reaching 25.5%. 

* Tax professional use of e-file reached 62.3 million returns. 

[Side bar: Strategic Goal: Improve Service to Make Voluntary 
Compliance Easier: 

Objectives: 

* Incorporate Taxpayer Perspectives To Improve All Service 
Interactions. 

* Expedite And Improve Issue Resolution Across All Interactions With 
Taxpayers, Making It Easier To Navigate The IRS. 

* Provide Taxpayers With Targeted, Timely Guidance And Outreach. 

* Strengthen Partnerships With Tax Practitioners, Tax Preparers, And 
Other Third Parties In Order To Ensure Effective Tax Administration. 

Taxpayer Service Facts: 

In FY 2010, the IRS continued efforts to assist taxpayers in complying 
with their federal tax obligations while satisfying demand for 
services. One such effort has been to improve automated web services 
that provide timely and accurate information. Notable automated 
accomplishments include: 

* Created a special section on IRS.gov entitled "Tax Center to Assist 
Unemployed Taxpayers" for taxpayers who are struggling financially. 

* Developed an automated service for taxpayers to obtain a PIN to 
satisfy signature requirements when e-filing a current year return, an 
alternative to providing prior year adjusted gross Income. 

* Provided website and phone tools for taxpayers needing information 
on the one-time $250 Economic Recovery Payment (ERP). More than 5.6 
million web and 815,300 telephone requests were completed. 

* Developed the "VITA Site List" pilot on IRS.gov to provide taxpayers 
updated information on locations and availability of VITA sites 
throughout the nation, attracting over 45,000 visits to its webpage. 
[End of side bar] 

During the 2010 filing season, IRS.gov remained a preferred source of 
information for taxpayers seeking answers to their questions on 
preparing and filing their tax returns accurately and timely, and on 
the economic recovery legislation. With online services such as the 
Electronic Federal Tax Payment System (EFTPS), the IRS website also 
helped taxpayers fulfill their tax reporting and payment obligations. 
As a result: 

* Over 1.7 billion web pages were viewed. 

* More than 66.9 million taxpayers used "Where's My Refund?" an 
increase of 23.8% from 2009. 

* Over 213.3 million downloads of various tax products by taxpayers, 
an increase of almost 12%. 

* More than 108.8 million electronic payments totaling over $1.9 
trillion were processed through EFTPS. 

[Side bar: Reaching Taxpayers through Social Media: 

The IRS expanded outreach and educational services through social 
media networks (Facebook, Twitter, YouTube, etc.), which are used by 
more and more taxpayers as a source for information, news, and social 
interaction. 

In FY 2010, the IRS produced and posted 258 YouTube videos on a 
variety of subjects including the Education Tax Credit, Making Work 
Pay, Health Care, Return Preparer, and the Homebuyer Credit. These 
videos attracted more than 963,800 upload views and were available in 
English, Spanish, and American Sign Language. In addition, the IRS: 

* Provided links on Facebook and Twitter to the "Tax Toolkit," which 
explains tax responsibilities and the benefits of complying with tax 
laws to taxpayers new to the tax system. 

* Created an Earned Income Tax Credit (EITC) Awareness Day Twitter 
account to provide taxpayers and partners with information on EITC and 
upcoming events. 

* Launched an iTunes podcast to share information about ARRA tax
provisions and other tax credits, which received more than 4,500 
downloads. 

* Posted 73 YouTube videos in American Sign Language, targeting the 
deaf and hard of hearing community, which received more than 74,000 
hits. 

* Enhanced recruitment efforts by posting employment opportunities on 
YouTube, Facebook, and the professional network, LinkedIn. 
[End of side bar] 

Taxpayer Education and Outreach: 

The IRS partners with state taxing authorities, volunteer groups, and 
other organizations to enhance taxpayer outreach and education. Each 
year, the IRS and its partners provide free tax assistance to the 
elderly, disabled, and limited English proficient individuals and 
families at Volunteer Income Tax Assistance (VITA) and Tax Counseling 
for the Elderly (TCE) sites. In FY 2010, more than $13.5 million in 
VITA and TCE Grants were awarded to a total of 171 organizations, a 
17% increase in the number of organizations from 2009. Consequently, 
assistors at the more than 12,000 VITA and TCE sites throughout the 
nation prepared more than 3.1 million tax returns, including 360,500 
returns for individuals with disabilities and/or families with 
disabled dependents. 

In an effort to assist the taxpayer community during the economic 
downturn, the IRS and its partners hosted five Open House events at 
200 Taxpayer Assistance Centers (TACs) and partner sites, including at 
least one in every state. The goal of these events was to improve the 
taxpayer's experience by creating seamless case resolution on a 
variety of tax issues. As a result, more than 31,400 taxpayers were 
served and over 7,700 returns were prepared. Other noteworthy efforts 
in FY 2010 included: 

* Held two special Saturday events in which more than 9,500 taxpayers 
struggling to resolve tax related issues were assisted and over 4,000 
returns prepared. 

* Expanded service in the preparation of state income tax returns for 
low-income taxpayers from 20 to 27 states, contributing to more than 
57,000 returns being prepared. 

* Created a system that allows taxpayers to self screen and make 
online appointments for return preparation in the TACs. Taxpayers made 
approximately 19,000 or 18% of scheduled appointments online. 

* Provided a dedicated toll-free telephone line and hosted a Gulf 
Coast Assistance Day at seven TACs in the Gulf region, to provide
guidance to taxpayers affected by the oil spill in the Gulf of Mexico. 

Furthermore, the IRS also provided assistance to taxpayers who owed 
delinquent taxes, especially those who were having difficulties 
meeting their tax obligations because of unemployment or other 
financial problems, by: 

* Granting assistors greater authority to suspend collection actions 
in certain hardship cases, preventing an automatic default of an 
installment agreement, and expediting levy releases, if warranted. 

* Considering Offers in Compromise from taxpayers facing economic 
troubles, including those who are recently unemployed. 

* Increasing the taxpayer's ability to speak to an assistor by 
expanding the number of call sites for taxpayers looking to resolve 
their balance due and/or delinquent return account while experiencing 
shorter wait times. 

The Earned Income Tax Credit (EITC) is one of the federal government's 
largest benefit programs for working families and individuals. In FY 
2010, the IRS conducted its 4th annual EITC Awareness Day to educate 
the public on the availability and benefits of this important tax 
credit. As part of a national outreach strategy, the IRS hoped to 
reach qualifying taxpayers by communicating the benefits of EITC 
through: 

* Interviews with prominent newspapers with nationwide audience bases. 

* Over 50 satellite television media tours in English and Spanish. 

* Interviews with radio networks reaching more than 1,000 radio 
stations. 

* 72 news conferences held around the country. 

Throughout FY 2010, the IRS continued the redesign and revision of 
taxpayer correspondence in an effort to improve the clarity, accuracy, 
and effectiveness of written communications. Notable accomplishments 
in FY 2010 included: 

* Submitting programming requirements for 115 notices (25 in Spanish). 

* Posting translation of new notices in five different languages on 
IRS.gov. 

* Redesigning IRS.gov web pages to provide information on locating 
specific notices and an explanation of the redesign process. 

[Side bar: Improving Taxpayer Experience: 
In an effort to better serve the taxpayer community, the IRS continued 
to develop and improve on products and services, which offer the 
taxpayer a seamless and positive experience. 

As a result, actions taken by the IRS in FY 2010 include: 

* Reducing taxpayer telephone wait time by expanding capability to 
manually transfer calls to the appropriate function, replacing the 
process of asking taxpayers to call back on the appropriate toll-free 
number. 

* Converting forms to accessible formats for visually impaired
taxpayers. 

* Developing a multi-dimensional assessment of the international 
taxpayer population in order to better assist taxpayers abroad. 

* Producing a web-based EITC Due Diligence Training Module, which was 
completed by over 11,000 tax preparers, and EITC webinars, in which 
over 5,500 preparers participated. Over 7,000 preparers attended 
presentations on EITC at the Nationwide Tax Forums. 

* Developing clearer, shorter forms in English and Spanish to simplify 
the ordering of tax transcripts. 

* Implementing the Hiring Incentives to Restore Employment (HIRE) Act, 
which provides tax benefits to employers who hire previously 
unemployed individuals.	Efforts included: 
- Collaborating with the payroll industry to develop comprehensive 
Frequently Asked Questions. 
- Soliciting input from the industry to revise Forms 941, W-2, and W-3. 
- Creating Form W-11 for use by businesses as an affidavit to document 
HIRE. 
- Developing internal compliance filters. 
[End of side bar] 

[Side bar: Strategic Goal: Enforce the Law to Ensure Everyone Meets 
Their Obligation to Pay Taxes: 

Objectives: 

* Proactively Enforce The Law In a Timely Manner While Respecting 
Taxpayer Rights And Minimizing Taxpayer Burden. 

* Expand Enforcement Approaches And Tools. 

* Meet The Challenges Of International Tax Administration. 

* Allocate Compliance Resources Using A Data-Driven Approach To Target 
Existing And Emerging High-Risk Areas. 

* Continue Focused Oversight Of The Tax-Exempt Sector. 

* Ensure That All Tax Practitioners, Tax Preparers, And Other Third 
Parties In The Tax System Adhere To Professional Standards And Follow 
The Law. 

Enforcement Facts: 

* Increased revenue from enforcement programs by 34%, from FY 2004 to 
FY 2010, yielding a 4.7 to 1 return on investment in 2010 based on the 
$57.6 billion in enforcement revenue with a budget of $12.15 billion. 

* Audited over 49,000 small business returns and almost 15,000 large 
corporate returns. 

* Increased collection case closures by 6.3%. 

* Completed over 41,400 tax-exempt and government entities enforcement 
contacts. 
[End of side bar] 

Enforce the Law to Ensure Everyone Meets Their Obligation to Pay Taxes: 

Enforcement of the tax laws is an integral component of the IRS effort 
to enhance voluntary compliance. IRS enforcement activities, such as 
examination and collection, target elements of the tax gap and will 
always remain a high priority. 

Highlights of Enforcement Performance: 

The IRS met 56% (10 of 18) of its enforcement performance measures in 
FY 2010. 

Total enforcement revenue was $57.6 billion in FY 2010, which exceeds 
the $48.9 billion in revenue received in FY 2009, increasing by 18%. 
The IRS showed steady progress, building on its FY 2009 successes in 
key enforcement programs: 

* Total individual audits increased 11%. 

* Automated underreporter contact closures increased 19.8%. 

* Number of high-income/high-wealth audits increased 5.5%. 

* Large corporate audits increased 8.1%, a significant achievement 
given the size (more than $10 million) and complexity of these 
corporate entities. 

In FY 2010, the IRS continued to focus on identifying those who hide 
assets overseas to avoid paying tax. As part of an overall strategy to 
improve offshore compliance, the IRS continued to take aggressive 
steps to track tax evaders who hide their wealth by engaging in tax 
evasion schemes through the use of offshore accounts. 

The voluntary disclosure program the IRS offered in 2009, combined 
with powerful whistle-blower initiatives, yielded information on 
illegal transactions and violations of international laws and fraud by 
banks and professionals, including foreign professionals. The pressure 
on offshore financial institutions known to facilitate concealment of 
income by U.S. citizens resulted in: 

* A large Swiss bank entering into a deferred prosecution agreement on 
charges of conspiring to defraud the United States. Investigations 
resulted in indictments or guilty pleas of clients and bankers on 
federal income tax related charges including filing false income tax 
returns, failing to report foreign bank accounts, and concealing 
millions in income subject to taxation. 

* A bank in Scotland agreeing to forfeit $500 million as part of a 
deferred prosecution agreement. The bank violated the Bank Secrecy Act 
(BSA) and conspired to defraud the U.S. Certain offices, branches, 
affiliates, and subsidiaries altered or removed names and references 
from payment messages to sanctioned countries thereby allowing these 
entities to move hundreds of millions of dollars through the U.S. 
financial system without identification. 

* A Swiss corporation agreeing to forfeit $536 million to the United 
States. The violations relate to transactions illegally conducted on 
behalf of customers and other countries sanctioned in programs 
administered by the Department of the Treasury. The corporation 
deliberately removed material information from payment messages so 
that wire transfers would pass undetected through filters at U.S. 
financial institutions. 

[Side bar: International Tax Administration: 

In FY 2010, successes with complex, high profile, international 
investigations led to increases in voluntary disclosures and the self-
reporting of significant income and resulting tax. 

The IRS more than doubled its offshore presence by opening new offices 
in Asia and Central America, as well as placing additional law 
enforcement personnel at each of its existing offices throughout the 
world. 

The IRS also expanded its interaction with key international 
organizations involved in tax and financial law compliance, such as 
the Organisation of Economic Co-Operation and Development (OECD) and 
the Financial Action Task Force (FATF). 

In addition, the IRS formed the Global High Wealth (GH1N) Industry, a 
new tax examination group, to address one of its top priorities, to 
promote voluntary compliance of high-wealth individuals and focus 
compliance expertise on these individuals along with the enterprises 
they control. 

The U.S. is expanding the crackdown on offshore tax evasion beyond the 
largest Swiss bank to Europe's biggest lender by market value. The IRS 
along with the Justice Department is conducting criminal 
investigations of clients who kept accounts at overseas branches of 
the bank and failed to report them to the IRS. 

The IRS Foreign Resident Compliance group closed 17,888 audits with 
tax deficiencies totaling over $1.64 billion. 

Original Issue Discount Scheme: 

Original Issue Discount (01D) redemption is a tax scheme in which 
promoters convince taxpayers to file a series of false returns, to 
request fraudulent refunds based on fictional claims of large income 
tax withholding. The IRS identifies and blocks the vast majority of 
these refund requests. In FY 2010, the IRS set up a task force to 
investigate OID cases resulting in: 

* 100 open investigations. 

* Drop in frivolous scheme returns from 14,290 in 2009 to 5,540 in 
2010. 

* Drop in frivolous refund claims from $24 trillion in 2009 to $1.2 
trillion in 2010. 
[End of side bar] 

Through the offshore voluntary disclosure program, the IRS has 
identified previously unreported foreign bank accounts from every 
continent except Antarctica. 

Additionally, the IRS Accounts Management Taxpayer Assurance Program 
(AMTAP) and Questionable Refund Program (QRP) are designed to identify 
fraudulent returns and to stop payment of fraudulent refunds. In FY 
2010, the IRS had the following successes: 

* Identified 807,898 potentially fraudulent returns claiming over $5.2 
billion in fraudulent refunds through the AMTAP. 

* Identified 1,576 schemes in potentially fraudulent refund claims 
through the QRP. 
- Initiated 504 investigations, achieved a 92.4% conviction rate, an 
83.8% incarceration rate, and an 84.6% publicity rate on adjudicated 
cases. 

In FY 2010, the IRS proposed new requirements for certain large 
business taxpayers to annually report information about their 
uncertain tax positions that could affect their federal income tax 
liability. This new requirement will benefit taxpayers and the IRS by: 

* Strengthening tax compliance and administration. 

* Improving consistency and efficiency of large business examinations 
by identifying issues on returns sooner, thereby reducing taxpayer 
burden. 

* Selecting and prioritizing taxpayer issues for examination more 
accurately. 

The IRS Compliance Assurance Process (CAP) has been the most 
successful example of enhanced transparency between the IRS and large 
corporate taxpayers. In exchange for more openness and transparency 
before filing, the IRS helps to resolve issues early and ensure 
accurate returns are filed. The CAP program allows taxpayers that are 
transparent with their tax issues to get certainty with their tax 
obligations at the time the return is filed, rather than waiting for 
the IRS to examine issues during the regular audit process. The CAP 
program benefits both the IRS and the taxpayer by fostering 
compliance, reducing the time it takes to process a return, and 
improving both customer and employee satisfaction while maintaining a 
high level of quality. In FY 2010, participation increased to 112 
corporate taxpayers, with all 102 from 2009 returning. 

[Side bar: Tax Return Preparer Strategy: 

In FY 2010, as part of a Tax Return Preparer Strategy developed in FY 
2009, the IRS began implementing a number of the recommendations to 
ensure that more than one million tax return preparers are competent 
to help ensure the IRS collects the right amount of tax. Key elements 
of the strategy include: 

* Requiring registration for all paid tax return preparers. 

* Establishing mandatory testing and continuing education. 

* Developing a public database for tax return preparer registration 
with the IRS. 

* Making all tax return preparers subject to ethical standards. 

Setting higher standards for the tax return preparer community will 
significantly enhance protections and services for taxpayers, increase 
confidence in the tax system and result in greater compliance with tax 
laws. 

In FY 2010, the IRS also worked with the Department of Justice to 
pursue questionable tax return preparers, an effort that: 

* Initiated 397 investigations. 

* Led to 182 indictments and 145 convictions. 

* Achieved a 98.6% conviction rate. 

* Achieved an 88.6% incarceration rate. 

* Achieved a 94.7% publicity rate. 

Tax Return Preparer Visits: 

Another key element of the Tax Return Preparer Strategy includes 
increasing the IRS enforcement presence in the tax return preparer 
community. In FY 2010, the IRS made a number of due diligence visits 
to tax return preparers and conducted more than 5,000 field visits to 
ensure compliance with the tax laws. 

During the filing season, the IRS conducted 265 undercover visits to 
tax return preparers. During these visits, IRS agents posed as 
taxpayers to seek out and stop unscrupulous preparers from filing 
inaccurate returns. 
[End of side bar] 

In FY 2010, the IRS introduced a new quality examination process 
replacing the old joint audit planning process. The new process 
improves efficiency by streamlining internal administrative processes, 
increasing consistency, clearly defining roles and responsibilities, 
and providing the examination teams with more administrative 
flexibility. The taxpayer benefits from improved communication and 
interaction from planning the audit to execution, and ultimately, to 
resolution. This approach ensures taxpayers are actively engaged with 
the audit team throughout the entire examination process. 

Colleges and universities make up one of the largest non-profit 
segments in terms of revenue and assets. The Colleges and Universities 
project is part of an ongoing effort by IRS to review the largest, 
most complex organizations in the tax-exempt sector to identify issues 
that warrant additional guidance or scrutiny. In FY 2010, the IRS 
released an interim report summarizing responses to compliance 
questionnaires sent to 400 public and private colleges and 
universities. The report discusses the respondents' organizational 
structures, demographics, exempt and unrelated business activities, 
endowments, executive compensation, and governance practices. The 
preliminary data shows: 

* A large number of organizations reported having related entities, 
the most common type being related to tax-exempt organizations. 

* Many organizations reported conducting a wide variety of activities 
that could be either exempt or taxable. Some organizations reported 
that they conducted activities other than those reported on
Form 990-T as taxable. 

* Nearly all of the organizations reported maintaining an endowment 
fund directly or through another entity. The majority of colleges and 
universities reported making foreign investments through their 
endowments. 

Examinations will be completed in FY 2011, with the final report 
issued in FY 2012. 

The IRS criminal investigation program continued investigating 
egregious tax, money laundering, and other financial crimes that 
adversely affect tax administration. Improved case development and 
selection methods, coupled with heightened fraud awareness, resulted 
in the successful prosecution of taxpayers involved in abusive tax 
schemes, high-income nonfilers, employment tax evasion cases, and 
other flagrant forms of tax evasion. Using its unique statutory 
jurisdiction and financial expertise, the IRS made significant 
contributions to important national law enforcement priorities. 
Performance levels for the IRS criminal investigation program remained 
high in FY 2010: 

* Completion of 4,325 criminal investigations. 

* A conviction rate of 90.2%. 

* A Department of Justice acceptance rate of 93.9%, with a U.S. 
Attorney acceptance rate of 91.8%, which compares favorably with other 
federal law enforcement agencies. 

* 2,184 convictions secured. 

[Side bar: Strategic Foundations Invest For High Performance: 

Objectives: 

* Make The IRS The Best Place To Work In Government. 

* Build And Deploy Advanced Information Technology Systems, Processes, 
And Tools To Improve IRS Efficiency And Productivity. 

* Use Data And Research Across The Organization To Make Informed
Decisions And Allocate Resources. 

* Ensure The Privacy And Security Of Data And Safety And Security Of 
Employees. 

Strategic Foundation Facts: 

* Successfully delivered 200 filing season applications	and 
modernization projects. 

* Refreshed over 15,500 laptops and 10,260 desktops. 

* Deployed over 32,000 aircards, 350 scanners, and 1,100 printers to 
employees across the country. 

* Completed a "Reduced Sign-on" pilot to improve security and reduce 
burden of managing multiple systems and applications passwords using 
the Homeland Security Presidential Directive-12 (HSPD-12) SmartiD. 

* Processed and mitigated emerging threats posed by over 5,200 cyber 
and over 2,800 physical incidents. 

The IRS is One of the Most Improved Agencies on the Best Places to 
Work in Government List: 

Results from the Federal Viewpoint Survey, used to rank agencies 
across the Federal Government and encourage the best and brightest' to 
work in government, ranked the Department of Treasury, with IRS the 
key driver, as one of the top 10 most improved agencies in government 
in all four of the survey indices. IRS achieved a 20 percentage point 
gain over its 2008 rank on Business Week's 2009 annual list of best 
places to launch a career. 
[End of side bar] 

Strategic Foundations: Invest For High Performance: 

Business Systems Modernization (BSM): 

IRS modernization efforts continue to focus on core tax administration 
systems designed to provide more sophisticated tools to taxpayers and 
to IRS employees. In FY 2010, the IRS achieved 50 percent (1 of 2) of 
its Business System Modernization targets. The following highlights 
the IRS accomplishments in FY 2010: 

* Customer Account Data Engine (CADE). CADE posted more than 41.2 
million tax returns and processed more than 35.8 million refunds. For 
the first time, CADE posted over 7.2 million payments submitted with 
taxpayer returns and issued 8,128 Savings Bonds Refunds to taxpayers 
requesting them. 

* Modernized e-File (MeF). The IRS deployed an additional release that 
enabled the acceptance of individual Forms 1040 (federal and state 
returns), Form 4868 extensions, and 21 other supporting 1040 forms and 
schedules. In FY 2010, MeF accepted over 6.9 million returns. 

* Accounts Management Services (AMS). The final AMS Release 2.1 
provided all AMS users the ability to view correspondence images 
online and on demand, eliminating users' reliance on the manual 
processes to obtain copies of images. Direct access to images via AMS 
reduced the case cycle time from 10 to 14 days to zero. In 2010, 1.329 
million images were viewed using the View Image option. 

CADE to CADE2: 

The IRS launched the Customer Account Data Engine (CADE) in 2000 as 
one of the cornerstones of the Business Systems Modernization (BSM) 
programs. Since its inception, CADE has made significant progress 
towards replacing the IRS aged master file processing system. It has 
delivered increased value to taxpayers as well as operational 
efficiencies for the IRS. 

In FY 2010, IRS implemented a revised CADE2 strategy, with completion 
of Transition State 1 expected for the 2012 filing season. Transition 
State 1 will allow the migration of 140 million individual taxpayer 
accounts to a modernized database that will support daily processing 
resulting in faster refunds for all individual refund filers, 
improving taxpayer service. This new processing environment will also 
have improved data security and allow the development of new tools to 
combat fraud and improve enforcement activities. 

In addition, completion of the taxpayer account database is the 
prerequisite for other major initiatives, including significant 
expansion of online services and transactions and the next generation 
of enforcement technologies. 

[Side bar: Workforce of Tomorrow: 

One of the key efforts to make the IRS the best place to work was the 
establishment of the Workforce of Tomorrow (WOT) task group. In FY 
2010, the IRS completed 41 of 58 recommendations outlined in the 2009 
WOT report. The recommendations address the most significant 
challenges facing current employees and managers. Implementation 
included the recognition of employee successes through the web, 
issuing anniversary congratulations messages, enhancing the Career 
Management Resource Center website, and developing a comprehensive on-
boarding strategy for new IRS employees, which includes providing 
forms and benefit information, as well as orientation information. 

The IRS also ensured employees received training they needed in a 
timely manner, with 104,900 IRS employees attending at lease one 
training course. The Tuition Assistance Program was revamped to 
provide IRS employees an opportunity to take up to four college 
courses to improve their skills. 

Results of the annual employee engagement survey are also used to 
improve the workplace. The level of employee engagement affects the 
overall ability of the organization to meet goals, minimize attrition, 
and increase productivity. In FY 2010, a record 79% of employees 
participated in the annual survey, with overall employee satisfaction 
increasing from 73.7% in FY 2009 to 74.4% in FY 2010. 

Hiring Reform: 

The IRS implemented Federal Government hiring reform. Hiring persons 
with severe physical disabilities or other targeted disabilities was 
streamlined through the development of a stand-alone system that gives 
the disabled, students, veterans, attorneys, and rehired annuitants 
the ability to electronically submit their applications for 
consideration under various programs. 

Veteran Hiring: 

In FY 2010, the IRS partnered with veterans' organizations, other 
government agencies, and job fairs to recruit and hire more veterans. 
The IRS met its goal of hiring 1,000 military veterans for the third 
year in a row. Veterans comprise 11% of total hires in FY10, up from 
9% in FY09. 
[End of side bar] 

Information and Cyber Security: 

The IRS takes the issue of identity theft very seriously. In FY 2010, 
to preserve and enhance public confidence, the IRS advocated the 
protection and proper use of identity information by: 

* Placing markers on more than 284,000 taxpayer accounts to alert 
employees the account belongs to a substantiated identity theft victim. 

* Ensuring identity theft indicators and business rules isolate 
returns for additional screening to validate whether the true taxpayer 
filed the return. More than 82,000 returns were selected for 
additional screening and closed, and $245 million was protected from 
being refunded to perpetrators on more than 48,000 fraudulent returns.
The IRS also protects its systems and taxpayers from increasing and 
evolving online threats. By monitoring, identifying, and mitigating 
fraudulent sites and phishing scams, the IRS helps to reduce the 
number of taxpayers who fall victim to online fraud schemes. During FY 
2010, the IRS shut down 4,109 phishing sites (899 domestic and 3,210 
international), compared to 3,444 sites shut down through all of 2009. 

Human Capital: 

In FY 2010, the IRS continued to focus on attracting, retaining, and 
developing a quality workforce to support workforce management 
activities that contribute to making the IRS one of the best places to 
work in government. 

To attract the best and increase the number of qualified and diverse 
applicants, the IRS enhanced its recruitment programs and introduced a 
new recruitment brand, "Count on Me!" on print materials, USAjobs.gov, 
IRS Careers website, Internet advertisements, and social media. 

Leadership competencies are the foundation for hiring, promoting, 
developing, and evaluating IRS leaders. The IRS uses leadership 
competencies to assess employee skills, abilities, and knowledge to 
determine their readiness for leadership in the IRS. For 2010, the IRS 
phased in a new and improved leadership competency model that 
comprises four leadership competencies, each of which has either three 
or four supporting behaviors. This replaces the old model that had 21 
competencies, reducing managerial burden associated with employee 
assessment, and making the overall process easier to use. 

[Side bar: OMB Circular A-123, "Management's Responsibility for 
Internal Control:" 

IRS conducted the required evaluation of the effectiveness of its 
internal control over financial reporting in accordance with OMB 
Circular A-123. 

In FY 2010, the IRS conducted the following A-123 activities: 

* Tested 21 transaction processes material to Treasury's Consolidated 
Financial Statements consisting of: 
- 15 administrative processes related to $12.58 billion in 
administrative transactions.
- Three	information system processes. 
- Three	custodial revenue processes related to the over $2.3 trillion 
in tax revenue receipts. 

* Performed supplemental testing of the FY 2010 transactions in the 
fourth quarter to verify that controls remained effective throughout 
the year. 

* Reviewed controls over financial reporting, including Treasury 
Information Executive Repository reporting, and determined controls 
are primarily in place but ineffective. 

* Conducted a self-assessment of the IRS internal control environment 
using GAO's Abbreviated Internal Control Evaluation Checklist. 

* Reviewed IRS compliance with applicable laws and regulatory 
requirements regarding financial reporting and internal control. 

Based upon the results of the evaluation, the IRS provided qualified 
assurance that its internal controls were operating effectively. 

The qualified assurance is based on the fact that the IRS has open 
material weaknesses currently being addressed in corrective action 
plans. The IRS has developed compensating procedures, which are tested 
in the A-123 internal controls review program to produce financial 
statements that are fairly stated and on which GAO has issued an 
unqualified opinion in FY 2010 and 2009. 
[End of side bar] 

Systems Controls and Legal Compliance: 

The IRS continued to enhance financial management and appropriate 
controls that are an integral component of all IRS programs. 

Federal Managers' Financial Integrity Act (FMFIA): 

During Fiscal Year (FY) 2010, the IRS adhered to the internal control 
requirements of the Federal Managers' Financial Integrity Act (FMFIA), 
the Federal Financial Management Improvement Act (FFMIA), the Office 
of Management and Budget (OMB) Circular A-123, and the Reports 
Consolidation Act of 2000. 

The objectives of systems of management control for the IRS 
organizations are to provide management with reasonable assurance that: 

* Programs achieve their intended results. 

* Resources are used consistent with the overall mission. 

* Programs and resources are free from waste, fraud, and mismanagement. 

* Laws and regulations are followed. 

* Controls are sufficient to minimize improper and erroneous payments. 

* Performance information is reliable. 

* System security is in substantial compliance with all relevant 
requirements. 

* Continuity of operations planning in critical areas is sufficient to 
reduce risk to reasonable levels. 

* Financial management systems are in compliance with federal 
financial systems standards, i.e., FMFIA Section 4 and FFMIA. 

Because the IRS has outstanding material weaknesses and the financial 
management systems do not substantially comply with FFMIA, the IRS 
provides qualified assurance that the above-listed systems of 
management control objectives were achieved by the IRS during FY 2010. 
This assurance is provided relative to Sections 2 and 4 of FMFIA. 

The FMFIA material weaknesses are: 

* Improve Modernization Management Controls and Processes. 

* Computer Security. 

* Unpaid Tax Assessments. 

Federal Financial Management Improvement Act (FFMIA): 

In January 2010, the IRS implemented the Redesign Revenue Accounting 
Control System (RRACS), which enabled the custodial financial 
management system to substantially comply with the United States 
Standard General Ledger (USSGL) chart of accounts to address 
noncompliance with FFMIA. RRACS now records all tax revenue and 
refunds using the USSGL format and for the first time records the 
taxes receivable and allowance for doubtful accounts addressing this 
component of the Unpaid Tax Assessments material weakness. RRACS 
generates amounts for the monthly Treasury Information Executive 
Repository File submission and produced the Statement of Custodial 
Activities for the FY 2010 financial statements. The IRS also 
implemented interfaces between RRACS and the lockbox deposit system 
and the Integrated Submission and Remittance Processing (ISRP) system 
which enabled traceability for 98.6 percent of the over $2.3 trillion 
in revenue collections reported in its financial statements from the 
revenue summary records to the individual taxpayer transactions. 

[Side bar: Federal Information Security Management Act (FISMA): 

In accordance with the requirements of the Federal Information 
Security Management Act (FISMA), the IRS maintained an agency-wide 
information security program and provided a comprehensive framework 
for ensuring the effectiveness of information security controls over 
information resources that support Internal Revenue Service business 
operations and goals. Specifically, the IRS inventory of FISMA 
reportable systems is compliant with security requirements from the 
OMB, the National Institute of Standards and Technology, the 
Department of Treasury, and the IRS. These systems have compliant 
Annual Security Control tests, Security Authorizations, and Plans of 
Actions and Milestones. Additionally, security training has been 
completed by all IRS employees with security responsibilities. 

Table: 

Action: Certification and Testing of Systems; 
Status: 100%. 

Action: Systems Accreditation; 
Status: 97%. 

Action: Specialized training; 
Status: 99.8%. 

Action: Annual Awareness Training; 
Status: 97%. 

Action: Contractor Systems Reviews; 
Status: 100%. 

Action: Annual Security Controls Testing; 
Status: 100%. 

Action: Annual IT Contingency Plan Testing; 
Status: 100%. 

Action: Privacy Impact Assessment; 
Status: 100%. 

Action: System of Record Notice; 
Status: 100%. 

[End of table] 

In addition to the sustained performance from last year: 

To address concerns regarding information security controls affecting 
IRS key financial systems and mainframe operations in Detroit, the IRS 
transferred RRACS to the Martinsburg Computing Center (MCC). The IRS 
also upgraded its Integrated Financial System (IFS) servers, upgraded 
the UNIX operating system to Solaris 10, and deployed Internet 
Protocol Security (IPSec). 

The IRS also completed corrective actions in Network Access Controls 
and the Enterprise Security Audit Trail (ESAT) Program and established 
a process for collecting and reporting on metrics on inventory and 
configuration management, auditing, access authorization, and change 
management for network access systems and devices. The IRS implemented 
auditing capability that identifies auditable events and event content 
consistent with IRS policy to include monitoring, collection analysis, 
storage, and reporting. 
[End of side bar] 

Lien Release Non-Compliance Issue: 

As of September 30, 2010, the IRS did not consistently comply with 
section 6325 of the Internal Revenue Code regarding the timely release 
of federal tax liens. The IRS Financial and Management Controls 
Executive Steering Committee (FMC ESC) continues to monitor the action 
plan, which addresses lien release issues identified by the IRS, 
Government Accountability Office (GAO), and the Treasury Inspector 
General for Tax Administration (TIGTA). 

Reports Consolidation Act of 2000: 

In accordance with the Reports Consolidation Act of 2000, the IRS 
provides assurance that the IRS Critical Performance Measures are 
reliable. Internal Revenue Manual 1.5.1, "Managing Statistics in a 
Balanced Measurement System, the IRS Balanced Performance Measurement 
System," provides a detailed template that documents each measure's 
definition, formula, reliability, and reporting frequency. These 
controls ensure the data are consistently and accurately collected 
over time. 

Continuity of Operations (COOP): 

The IRS has made major enhancements to the disaster recovery program 
to ensure the continuity and resiliency of the IRS critical business 
processing systems. The IRS developed 161 application disaster 
recovery plans and 23 General Support System disaster recovery plans; 
updated all FISMA IT Contingency Plans; executed over 400 tests and 
exercises; and completed an enterprise business impact analysis 
evaluating over 600 business processes. 

Major Management Challenges and High-Risk Areas: 

The Government Accountability Office (GAO) and the Treasury Inspector 
General for Tax Administration (TIGTA) identified several Management 
Challenges and High-Risk Areas facing the IRS. The IRS is addressing 
these issues through its existing program activities. Measures of 
these program activities serve to show progress in addressing the 
management challenges and high-risk areas. The following are the 
management and performance challenges identified by GAO in its January 
2009 High Risk Series Update and by TIGTA in the October 15, 2009, 
memorandum titled Management and Performance Challenges Facing the 
Internal Revenue Service for Fiscal Year 2010. 

* GAO High Risk Areas for IRS: 
- IRS Business Systems Modernization; 
- Enforcement of Tax Laws. 

* TIGTA Management Challenges: 
- Modernization of the Internal Revenue Service (Computerized Systems 
and Business Structure) and IRS Business Systems; 
- Security of the Internal Revenue Service; 
- Tax Compliance Initiatives; 
- Implementing Tax Law Changes; 
- Providing Quality Taxpayer Service Operations; 
- Human Capital; 
- Erroneous and Improper Credits and Payments; 
- Globalization; 
- Taxpayer Protection and Rights; 
- Leveraging Data to Improve Program Effectiveness and Reduce Costs. 

Limitations of Financial Statements: 

The principal financial statements have been prepared to report the 
results of IRS operations, pursuant to the requirements of 31 U.S.C. 
3515(b). The statements were prepared from the books and records of 
the IRS in accordance with generally accepted accounting principles 
for Federal entities and the format prescribed by OMB. The statements 
are in addition to the financial reports used to monitor and control 
budgetary resources, which are prepared from the same books and 
records. The statements should be read with the realization that the 
IRS is a component of the U.S. Government, a sovereign entity. 

[Side bar: Overview of Revenue and Administrative Accounts: 

The IRS FY 2010 financial statements received an unqualified audit 
opinion for the eleventh consecutive year. 

The Balance Sheet reflects total assets of $43 billion of which $35 
billion (81.3%) are Federal Taxes Receivable, which represents amounts 
expected to be collected from past due accounts. The $6 billion 
increase in total assets is primarily attributable to the $6 billion 
increase in taxes receivable. The majority of IRS liabilities consist 
of amounts due to Treasury related to Federal Taxes Receivable. 

The Statement of Custodial Activity shows that IRS programs collected 
$2.3 trillion in federal tax receipts.
[End of side bar] 

Financial Highlights: 

Revenue and Refund Trend Information: 

FY 2010 revenue receipts collected by IRS remained constant at $2.3 
trillion. Federal tax revenues are collected through six major 
classifications: individual income and FICA/SECA, corporate income, 
excise taxes, estate and gift taxes, railroad retirement, and federal 
unemployment taxes. 

FY 2010 tax refund activity totaled $467 billion, representing an 
increase of approximately 7% from FY 2009. Federal tax refunds include 
refunds of tax overpayments, payments for interest, and disbursements 
for refundable tax credits such as Earned Income Tax Credit and the 
Additional Child Care Tax. 

[Side bar: Financing Sources: 

The IRS receives the majority of its funding through annual and multi-
year appropriations, which are available for use within certain 
specified statutory limits. Besides appropriations, the IRS used other 
financing sources. These included net transfers from other federal 
agencies, and revenue from user fees for direct services provided to 
customers (for example, installment agreement fees, photocopy fees, 
and letter rulings and determinations fees). 
[End of side bar] 

Excise Tax Trust Fund: 

The Quarterly Federal Excise Tax Return, Form 720, reports taxpayer 
liability for excise taxes. Taxpayers make periodic deposits in 
advance of filing the return. These deposits are classified as Federal 
Excise Tax. After the IRS receives and processes the returns, the IRS 
certifies amounts for several trust funds. Amounts reported on the 
Statement of Custodial Activity are for fiscal year collections 
(October 1 through September 30). Because Form 720 reporting 
requirements are completed after receipt of most of the deposits, the 
certification amounts will not match the amounts collected in the 
fiscal year. The table below shows revised receipts certified to the 
Airport and Airway Trust Fund, Black Lung Disability Trust Fund and 
the Highway Trust Fund for the eight liability quarters from December 
2007 through September 2009. The Department of the Treasury prepares 
the warrants and allocations to the trust funds. 

Table: 

Airport & Airway Trust Fund: 
Liability Quarter Ended	December 2007—September 2008: $11,734,723,000; 
Liability Quarter Ended	December 2008—September 2009: $10,533,488,000. 

Black Lung Disability Trust Fund: 
Liability Quarter Ended	December 2007—September 2008: $644,590,000; 
Liability Quarter Ended	December 2008—September 2009: $631,138,000. 

Highway Trust Fund: 
Liability Quarter Ended	December 2007—September 2008: $38,052,198,000; 
Liability Quarter Ended	December 2008—September 2009: $36,445,773,000. 

Total: 
Liability Quarter Ended	December 2007—September 2008: $50,431,511,000; 
Liability Quarter Ended	December 2008—September 2009: $47,610,399,000. 

[End of table] 

Analysis of Unpaid Assessments — Most Unpaid Assessments Are Not 
Receivables and Are Largely Uncollectible: 

The unpaid assessment balance includes amounts owed by taxpayers who 
file returns without sufficient payment as well as amounts assessed 
through the IRS enforcement programs. As reflected in the supplemental 
information to the IRS FY 2010 Financial Statements, the unpaid 
assessment balance was $330 billion as of September 30, 2010, and $184 
billion (56%) of this balance consists of interest and penalties. 
Furthermore, the total outstanding balance of IRS unpaid assessments 
is largely uncollectible because it is composed mostly of compliance 
assessments and write-offs. Under federal accounting standards, unpaid 
assessments require taxpayer or court agreement to be considered 
federal taxes receivable. Assessments not agreed to by taxpayers or 
the courts are considered compliance assessments and are not 
considered federal taxes receivable. Assessments considered to have no 
future collection potential are called write-offs. The following 
provides detail on unpaid assessments: 

* Taxes receivable represent $138 billion (42%) of unpaid assessments 
and increased $10 billion (8%) from $128 billion as of September 30, 
2010. About $103 billion (75%) of this balance is estimated to be 
uncollectible due primarily because of the economic situation of the 
taxpayers. Except for bankruptcy situations, the IRS may continue 
collection actions for 10 years after the assessment. About $35 
billion (25%) of taxes receivable is estimated to be collectible. 

* Compliance assessments of $93 billion represent amounts that have 
not been agreed to by either the taxpayer or a court. These 
assessments result primarily from various IRS enforcement programs 
promoting voluntary compliance. 

* Write-off amounts of $99 billion include amounts owed by defunct 
corporations with no assets and failed financial institutions. The 
remaining amounts are owed by taxpayers with extreme economic and/or 
financial hardships, deceased taxpayers, and taxpayers who are 
insolvent due to bankruptcy. 

The Integrated Financial System (IFS): 

The IFS is the financial management system for the administrative 
activities in IRS. IFS also provides timely financial statements and 
reports in accordance with the federal accounting and reporting 
standards including information for budgeting, analysis, and 
government-wide reporting. 

In addition, IFS provides the core processes of General Ledger, 
Accounts Payable, Accounts Receivable, Budget Execution, Cost 
Accounting, Administrative Tax and Travel Accounting, Cost 
Allocations, some tax processing functionality for Health Care Tax 
Credit Payments (HCTC), Budget Formulation, Labor Forecasting and 
Budget Execution decision support. Detailed financial, cost 
accounting, property accounting and procurement data are available for 
authorized users. 

[Side bar: Integrated Financial System (IFS): 

FY 2010 accomplishments include: 

* Replaced IFS servers and upgraded to Solaris 10. 

* Migrated IFS mainframe information from Detroit to Martinsburg. 

* Conducted IFS Certification & Accreditation on time with zero Plan 
of Action & Milestones items. 

* Modified the Automated Lien System (ALS) processing to standardize 
the payment of court recording fees, which reduce labor costs. 
[End of side bar] 

Appendix A: Organization chart: 

[Refer to PDF for image: illustration] 

Department Of The Treasury: 
Internal Revenue Service: 

Top level: 
Commissioner: 
* Chief of Staff; 
* Deputy Chief of Staff. 

Reporting to Commissioner: 
* Chief Counsel; 
* Appeals; 
* National Taxpayer Advocate; 
* Equity, Diversity and Inclusion; 
* Research, Analysis and Statistics; 
* Communications and Liaison. 

Second level, reporting to Commissioner: 
Deputy Commissioner, Services and Enforcement; 
Deputy Commissioner, Operations Support. 

Third level, reporting to Deputy Commissioner, Services and 
Enforcement: 
* Large and Mid-Sized Business; 
* Wage and Investment; 
* Tax-Exempt and Government Entities; 
* Small Business/Self-Employed; 
* Criminal Investigation; 
* Whistleblower Office; 
* Office of Professional Responsibility (also reports to the 
Commissioner). 

Third level, reporting to Deputy Commissioner, Operations Support: 
* Chief Technology Officer; 
* Agency-Wide Shared Services; 
* Office of Privacy, Information Protection and Data Security; 
* Chief Financial Officer; 
* Chief Human Capital Officer. 

[End of figure] 

Appendix B: Performance Measurement Data: 

Goal 1: Improve Service to Make Voluntary Compliance Easier: 

Measure: Customer Service Representative (CSR) Level of Service; 
2007: 82.1%; 
2008: 52.8%; 
2009: 70.0%; 
2010 Target: 71.0%; 
2010 Actual: 74.0%. 

Measure: Customer Contacts Resolved per Staff Year; 
2007: 7,648; 
2008: 12,634; 
2009: 12,918; 
2010 Target: 9,398; 
2010 Actual: 10.744. 

Measure: Percent of Eligible Taxpayers Who File for EITC (CY); 
2007: [A]; 
2008: [A]; 
2009: NA; 
2010 Target: 75%-80%; 
2010 Actual: [A]. 

Measure: Customer Accuracy - Tax Law Phones; 
2007: 91.2%; 
2008: 91.2%; 
2009: 92.9%; 
2010 Target: 91.2%; 
2010 Actual: 92.7%. 

Measure: Customer Accuracy - Customer Accounts (Phones); 
2007: 93.4%; 
2008: 93.7%; 
2009: 94.9%; 
2010 Target: 93.7%; 
2010 Actual: 95.7%. 

Measure: Timeliness of Critical individual Filing Season Tax Products 
to the Public; 
2007: 83.5%; 
2008: 92.4%; 
2009: 96.8%; 
2010 Target: 94.0%; 
2010 Actual: 95.3%. 

Measure: Timeliness of Critical TE/GE and Business Tax Products to the 
Public; 
2007: 84.0%; 
2008: 89.5%; 
2009: 95.2%; 
2010 Target: 90.0%; 
2010 Actual: 97.7%. 

Measure: Percent individual Returns Processed Electronically; 
2007: 57.1%; 
2008: 57.6%; 
2009: 65.9%; 
2010 Target: 70.2%; 
2010 Actual: 69.3%. 

Measure: Cost per Taxpayer Served ($) (HCTC); 
2007: $14.90; 
2008: $16.94; 
2009: $13.79; 
2009 Target: Baseline[B]; 
2009 Actual: $9.52. 

Measure: Sign-Up Time (Days) - Customer Engagement (HCTC); 
2007: 93.3; 
2008: 94.0; 
2009: 91.3; 
2010 Target: Baseline[B]; 
2010 Actual: 124.0. 

Measure: Percent Business Returns Processed Electronically; 
2007: 19.1%; 
2008: 19.4%; 
2009: 22.8%; 
2010 Target: 24.3%; 
2010 Actual: 25.5%. 

Measure: Refund Timeliness - individual (Paper); 
2007: 98.9%; 
2008: 99.1%; 
2009: 99.2%; 
2010 Target: 98.4%; 
2010 Actual: 96.1%. 

Measure: Taxpayer Self Assistance Rate; 
2007: 49.5%; 
2008: 66.8%; 
2009: 69.3%; 
2010 Target: 61.3%; 
2010 Actual: 64.4%. 

Goal 2: Enforce the Law to Ensure Everyone Meets Their Obligation to 
Pay Taxes: 

Measure: Examination Coverage - individual; 
2007: 1.0%; 
2008: 1.0%; 
2009: 1.0%; 
2010 Target: 1.1%; 
2010 Actual: 1.1%. 

Measure: Field Examination National Quality Review Score; 
2007: 85.9%; 
2008: 86.0%; 
2009: 85.1%; 
2010 Target: 86.3%; 
2010 Actual: 84.9%. 

Measure: Office Examination National Quality Review Score; 
2007: 89.4%; 
2008: 90.0%; 
2009: 92.1%; 
2010 Target: 90.9%; 
2010 Actual: 91.6%. 

Measure: Examination Quality - Industry; 
2007: 87.0%; 
2008: 88.0%; 
2009: 88.0%; 
2010 Target: 89.0%; 
2010 Actual: 87.0%. 

Measure: Examination Quality - Coordinated Industry; 
2007: 96.0%; 
2008: 97.0%; 
2009: 95.0%; 
2010 Target: 96.0%; 
2010 Actual: 95.0%. 

Measure: Examination Coverage - Business (Corps. >$10M); 
2007: 6.8%; 
2008: 6.1%; 
2009: 5.6%; 
2010 Target: 5.1%; 
2010 Actual: 5.7%. 

Measure: Examination Efficiency-individual (1040); 
2007: 137; 
2008: 138; 
2009: 138; 
2010 Target: 132; 
2010 Actual: 140. 

Measure: Automated Underreporter (AUR) Efficiency	
2007: 1,956; 
2008: 1,982; 
2009: 1,905; 
2010 Target: 1,868; 	
2010 Actual: 1,924. 

Measure: Automated Underreporter (AUR) Coverage; 
2007: 2.5%; 
2008: 2.6%; 
2009: 2.6%; 
2010 Target: 3.0%; 
2010 Actual: 3.0%. 

Measure: Collection Coverage-Units; 
2007: 54.0%; 
2008: 55.2%; 
2009: 54.2%; 
2010 Target: 50.5%; 
2010 Actual: 50.1%. 

Measure: Collection Efficiency-Units; 
2007: 1,828; 
2008: 1,926; 
2009: 1,845; 
2010 Target: 1,898; 
2010 Actual: 1,822. 

Measure: Field Collection Embedded Quality; 
2007: 84.0%; 
2008: 79.0%; 
2009: 80.5%; 
2010 Target: 81.0%; 
2010 Actual: 80.6%. 

Measure: Automated Collection System (ACS) Accuracy; 
2007: 92.9%; 
2008: 95.3%; 
2009: 94.3%; 
2010 Target: 92.5%; 
2010 Actual: 95.9%. 

Measure: Criminal investigations Completed; 
2007: 4,269; 
2008: 4,044; 
2009: 3,848; 
2010 Target: 3,900; 
2010 Actual: 4,325. 

Measure: Number of Convictions; 
2007: 2,155; 
2008: 2,144; 
2009: 2,105; 
2010 Target: 2,135; 
2010 Actual: 2,184. 

Measure: Conviction Rate; 
2007: 90.2%; 
2008: 92.3%; 
2009: 87.2%; 
2010 Target: 92.0%; 
2010 Actual: 90.2%. 

Measure: Conviction Efficiency Rate ($); 
2007: $301,788; 
2008: $315,751; 
2009: $327,328; 
2010 Target: $331,000; 
2010 Actual: $324,776. 

Measure: TE/GE Determination Case Closures; 
2007: 109,408; 
2008: 100,050; 
2009: 96,246; 
2010 Target: 140,465; 
2010 Actual: 105,247. 

Strategic Foundations: Invest for High Performance: 
				
Measure: Percent of BSM Projects within +/-10% Cost Variance; 
2007: [C]; 
2008: 92.0%; 
2009: 60.0%; 
2010 Target: 90.0%; 
2010 Actual: 40.0%; 

Measure: Percent of BSM Projects within +/-10% Schedule Variance; 
2007: [C]; 
2008: 92.0%; 
2009: 90.0%; 
2010 Target: 90.0%; 
2010 Actual: 100.0%. 

[A] The methodology for estimating the eligibility rate is being 
revised. 

[B] An increase in participation is expected due to the Recovery Act. 
IRS will establish a new baseline by the end of FY 2010. 

[C] Cost and Schedule variance is based on +/-10% and was reported 
separately for each project release/sub-release. In FY 2008,
these measures were changed to reflect an overall percentage of all 
projects that were within the +/-10% threshold for cost and schedule 
variance. 

[End of table] 

[End of section] 

Appendix C: Explanation of Shortfalls: 

Percent Individual Returns Processed Electronically: Actual paper 
receipts for the year were over 5% higher than plan resulting in 
target not being met. 

Refund Timeliness: Refund timeliness fell short of the target due to 
delays caused by the computation of the Making Work Pay credit and the 
First-Time Homebuyer Credit. 

Field Examination National Quality Review Score: Exam continues to 
focus on improving the lowest scoring quality attributes, including 
income probes and efficient resolution/time frames met. Actions to 
improve quality include: ongoing delivery of Income Toolkit training; 
establishing a Process Improvement Challenge team to focus on the 
quality of income determinations; and more emphasis placed on quality 
casework by Area Directors (especially income determinations, and 
timeframes) during their Operational Reviews and staff meetings. 

Exam Quality — Industry: Factors contributing to the shortfall 
include: large, unusual and questionable items not identified by the 
agent and mandatory referrals to a specialist not made; taxpayer 
interviews not conducted as required or documentation of interviews 
inadequate in the case file; and report writing procedures not being 
followed regarding no-change reports. Feedback continues to be 
provided to field teams through the development and circulation of 
quality articles, reports, memos, and partnering with the Industries 
in improvement efforts. 

Exam Quality — Coordinated Industry: Factors contributing to the 
shortfall include: work papers not fully documenting the audit trail; 
techniques used and how conclusions are reached; and lack of examiner 
and manager signatures. The quality management staff continues to 
focus on the importance of meeting the quality measures through direct 
feedback to field teams, partnering with the Industries in quality 
improvement efforts, quality articles, quarterly reports/memos, and 
outreach to field teams. 

Collection Coverage: The target was not met primarily due to the 10% 
(2M) decrease in planned balance due first notices issued resulting in 
a corresponding 10% (1.2M) decrease in balance due notice 
dispositions. The IRS will continue to ensure dispositions are keeping 
up with the notices being issued in the future, however, a similar 
decrease in balance due first notices issued (1.6M) is projected in FY 
2011. Although this will have a positive impact on potentially 
collectible inventory, the notice decrease will negatively impact 
collection coverage and efficiency. 

Collection Efficiency: The year end target will not be met due 
primarily to Balance Due First Notices Issued being down 11% due to 
lower balance due return volumes, causing Balance Due Dispositions to 
be down 10%. 

Field Collection National Quality Review Score: The year end target 
was not met. The shortfall is attributed to transition issues 
associated with the new quality attributes. To minimize the impact of 
the changes, Collection developed a training module on quality and 
presented it at the spring all-manager CPE, included monthly "Quality 
Tip" articles in the technical digest, and implemented a quarterly 
conference call to provide managers with a forum to ask questions 
about factors driving performance. Future plans include holding 
another Summit focusing on lower scoring attributes to look for 
additional improvement opportunities. 

Conviction Rate: The reason for the shortfall is the increase in the 
number of dismissals. These dismissals are primarily money laundering 
investigations where more than three years passed since the date of 
indictment. 

TEGE Determination Case Closures: The shortfall is attributable to two 
factors: a planned system conversion took longer than anticipated, 
requiring EC determinations staff to switch to manual processing on 
multiple occasions; and receipt of fewer defined contribution Form 
5307 (Adopter of Master or Prototype Plans or Volume Submitter Plans) 
applications than expected, the work plan called for 100,000 Form 5307 
applications; however, only 41,600 applications were received, of 
which only 16,600 met the criteria for minimal review. To address 
these issues TE/GE is currently analyzing determination processing 
improvements for future implementation. Additionally, TE/GE will 
conduct research on Form 5307 filers to determine the factors that 
contributed to lower than anticipated receipts in FY 2010. 

Percent of BSM Projects within +/-10% Cost Variance: 2 out of 5 
releases met the cost variance threshold. The cost of AMS Release 2.1 
Milestone 5 deployment was less than planned due to the required 
realignment of AMS project funds to support R1.3 software and 
infrastructure design activities, and the cost of CADE Release 5.2 
Milestone 4b was less than planned because legislative and Filing 
Season changes were reduced in scope and complexity. The MeF Release 
6.1 Milestone 4a-5 required additional funding to support unplanned, 
required needs including Disaster Recovery activities, an automated 
interface to support external users, the development of a 
transactional national account profile and expanded software/hardware 
needs. 

[End of section] 

Appendix D: Performance Measures Descriptions: 

Goal 1: Improve Service to Make Voluntary Compliance Easier: 
	
Customer Service Representative (CSR) Level of Service: 
The number of toll free callers that either speak to a Customer Service 
Representative or receive automated informational messages divided by 
the total number of attempted calls. 

Customer Contacts Resolved per Staff Year: 
The number of Customer Contacts resolved in relation to time expended.
Percent of Eligible Taxpayers Who File for EITC	The number of taxpayers 
who claim the Earned Income Tax Credit (EITC) compared to the number of 
taxpayers who appear to be eligible for the EITC. 

Customer Accuracy — Tax Law Phones: 
The percentage of correct tax law answers given by a live assistor on 
Toll-free tax law inquiries. 

Customer Accuracy — Customer Accounts (Phones): 
The percentage of correct account answers given by a live assistor on 
Toll-free account inquiries. 

Timeliness of Critical Individual Filing Season Tax Products to the 
Public:	
The percentage of critical individual filing season tax products (tax 
forms, schedules, instructions, publications, tax packages, and certain 
notices required by a large number of filers to prepare a complete and 
accurate tax return) available to the public in a timely fashion.
Timeliness of Critical TE/GE & Business Tax Products to the Public	
The percentage of critical other tax products, paper and electronic, 
available to the public in a timely fashion. 

Percent Individual Returns Processed Electronically: 
The number of electronically filed individual tax returns divided by 
the total individual returns filed. 

Cost per Taxpayer Served ($) (HCTC): 
The costs associated with serving the taxpayers including program kit 
correspondence, registration, and program participation. 

Sign-Up Time (Days) — Customer Engagement (HCTC): 
The length of time between the first Program Kit mailing and the first 
payment received. 

Percent Business Returns Processed Electronically: 
The percentage of electronically filed business tax returns divided by 
the total business tax returns filed. 

Refund Timeliness — Individual (Paper): 
The percentage of refunds resulting from processing Individual Master 
File paper returns issued within 40 days or less. 

Taxpayer Self Assistance Rate: 
The percentage of taxpayer assistance requests resolved using self-
assisted automated services. 

Goal 2: Enforce the Law to Ensure Everyone Meets Their Obligation to 
Pay Taxes: 
	
Examination Coverage — Individual (1040): 
The sum of all individual 1040 returns closed by Small Business/Self 
Employed (SB/SE), Wage & Investment (W&I), and Large and Mid-Sized 
Business (LMSB) (Field Exam and Correspondence Exam programs) divided 
by the total individual return filings for the prior calendar year. 

Field Examination National Quality Review Score: 
The score awarded to a reviewed field examination case by a Quality 
Reviewer using the National Quality Review System quality attributes. 

Office Examination National Quality Review Score: 
The score awarded to a reviewed office examination case by a Quality 
Reviewer using the National Quality Review System quality attributes. 

Examination Quality — Industry: 
Average of the scores of Industry Cases reviewed. Case scores are based 
on the percentage of elements passed within each auditing standard. 

Examination Quality — Coordinated Industry: 
Average of the scores of Coordinated Industry Cases reviewed. Case 
scores are based on the percentage of elements passed within each 
auditing standard. 

Examination Coverage — Business (Corps. 410M): 
The number of LMSB returns (C and S Corporations with assets over $10 
million and all partnerships) examined and closed by LMSB during the 
current fiscal year divided by the number of filings for the preceding 
calendar year. 

Examination Efficiency — Individual (1040): 
The sum of all individual 1040 returns closed by SB/SE, W&I, and LMSB 
(Field Exam and Correspondence Examination programs) divided by the 
total Full-Time Equivalent (FTE) expended in relation to those 
individual returns. 
	
Automated Underreporter (AUR) Efficiency: 
The total number of SB/SE and W&I contact closures (a closure resulting 
from a case where IRS made contact) divided by the total FTE, including 
overtime. 

Automated Underreporter (AUR) Coverage: 
The percentage representing the total number of SB/SE and W&I contact 
closures (a closure resulting from a case where IRS made contact) 
divided by the total return filings for the prior year. 

Collection Coverage — Units: 
The volume of collection work disposed compared to the volume of 
collection work available. 

Collection Efficiency — Units: 
The sum of all modules disposed by Automated Collection System (ACS) 
(SB/SE and W&I) and by SB/SE Field Collection divided by the total 
collection FTE. 

Field Collection National Quality Review Score:	
The score awarded to a reviewed collection case by a Quality Reviewer 
using the NQRS quality attributes. 

Automated Collection System (ACS) Accuracy: 
The percent of taxpayers who receive the correct answer to their ACS 
question. 

Criminal Investigations Completed: 
The total number of subject criminal investigations completed during 
the fiscal year, including those that resulted in prosecution 
recommendations to the Department of Justice as well as those 
discontinued due to a lack of prosecution potential. 

Number of Convictions: 
The number of criminal convictions. 

Conviction Rate: 
The percent of adjudicated criminal cases that result in convictions. 

Conviction Efficiency Rate ($): 
The cost of Criminal Investigation's (CI) program divided by the number 
of convictions. 

TE/GE Determination Case Closures: 
The number of cases closed in the Employee Plans or Exempt 
Organizations Determination programs, regardless of type of case or 
type of closing. 

Strategic Foundations: Invest for High Performance: 
	
Percent of Major BSM Projects within +/-10% Cost Variance: 
The percentage of Major BSM projects that are within the +/-10% 
threshold for cost. The cost variance is measured from the initial cost 
estimate versus current cost estimate. 

Percent of Major BSM Projects within +/-10% Schedule Variance: 
The percentage of Major BSM projects that are within the +/-10% 
threshold for schedule. The schedule variance is measured from the 
initial schedule estimate versus current schedule estimate. 

Appendix E: Major Management Challenges and High-Risk Areas with 
Future Challenges: 

Over the last several years GAO, TIGTA, and the OIG for Treasury have 
identified several Management Challenges and High-Risk Areas facing 
the IRS. The IRS has identified specific steps and actions to address 
these issues through its existing program activities. Measures of 
these program activities serve to show progress in addressing the 
management challenges and high-risk areas. The following summarizes 
each Management Challenge and High-Risk Issue, FY 2010 
accomplishments, actions identified for completion in FY 2011 and 
beyond, and future challenges. These have been arranged in the order 
of priority as determined by the TIGTA. 

Table: 

Modernization of the Internal Revenue Service (Computerized Systems 
and Business Structure)	and IRS Business Systems: 

Challenge/Issue: Bring the IRS’s business systems and financial 
systems to a level that provides management current and reliable 
information to support informed decision making. GAO continues to 
include IRS business systems modernization on its high risk list. 
Actions Taken in FY 2010 and Actions Planned or Underway: 
Actions Taken: 
* Customer Account Data Engine (CADE). CADE posted more than 41.2 
million tax returns and processed more than 35.8 million refunds. For 
the first time, CADE posted over 7.2 million payments submitted with 
taxpayer returns and issued 8,128 Savings Bonds Refunds to taxpayers 
requesting them. 
- Deployed release for current CADE that included capability to apply 
refunds to future tax liabilities (Credit Elect) and refund hold 
capability for Criminal Investigation. 
- Delivered production pilot supporting tax law changes and 
requirements for the 2011 filing season. 
* Modernized e-File (MeF). The IRS deployed an additional release that 
enabled the acceptance of individual Forms 1040 (federal and state 
returns), Form 4868 extensions, and 21 other supporting 1040 forms and 
schedules. In FY 2010, MeF accepted over 6.9 million returns. 
- Initiated MeF Release to provide enhanced Disaster Recovery 
capabilities that ensure operational risk is managed appropriately. 
* Account Management Services (AMS). The final AMS Release 2.1 
provided all AMS users the ability to view correspondence images 
online and on demand, eliminating users’ reliance on the manual 
processes to obtain copies of images. Direct access to images via AMS 
reduced the case cycle time from 10 to 14 days to zero. In 2010, 1.329 
million images were viewed using the View Image option. 
* Delivered Vision & Strategy, Program Initiation and Architecture for 
CADE2. Began the Integrated Design Phase that outlines business 
benefits and opportunities. 
* Developed baseline set of CADE2 business and technical requirements 
for transition. 
* Implemented the Redesign Revenue Accounting Control System (RRACS).
Transactions are recorded and posted to United States Standard General 
Ledger (USSGL) accounts. RRACS also systemically generates the 
custodial financial statements and the file for Treasury Information 
Executive Repository (TIER) data transmissions. 
Actions Planned or Underway for FY 2011 and Beyond: 
* Continue CADE2 development and prepare to deploy Transition State 1 
for Filing Season 2012. 
* Complete analysis, design and development of current CADE release to
accommodate tax law changes in the 2012 filing season. 

Security of the Internal Revenue Service: 

Challenge/Issue: Strengthening the security infrastructure and the
applications that guard sensitive data. 
Actions Taken in FY 2010 and Actions Planned or Underway: 
Actions Taken:
* Completed traceability for corrective actions in the Computer 
Security Material Weakness plan including: 
- Document and tracking results of internal security inspections.
- Perform continuous monitoring of security controls for selected 
business processes.
- Provide centralized repository for test results and self-inspections.
- Issue risk levels and compliance status on a near real-time basis.
* Conducted a Sign-on Pilot to improve security and reduce burden of 
managing multiple passwords for systems and applications utilizing the 
Homeland Security Presidential Directive-12 SmartID.
* Procured equipment for the Criminal Investigation Disaster Recovery 
Site in Martinsburg, WV.
* Identified, analyzed, and mitigated over 5,200 individual cyber 
incidents which could have compromised the integrity of the IRS 
enterprise, impacting the availability of services to employees, 
external partners, and constituent taxpayers. 
* Identified and disabled access to over 7,000 malicious or 
unauthorized web sites. 
* Produced over 450 advisories, bulletins, and alerts informing the 
business units and system administrators of current vulnerabilities 
and threats that impact IRS systems to ensure the confidentiality, 
integrity, and availability of systems instrumental to tax collection 
and processing on a large scale. 
* Enhanced the ability to combat increased tax administration-related 
online fraud against taxpayers by shutting down 4,109 phishing web 
sites (899 domestic and 3,210 international).
* Flagged accounts of identity theft victims with “markers” that 
indicated to an employee that they were dealing with a substantiated 
case of identity theft, and to ensure that returns submitted on those 
accounts were filtered to verify that they were submitted by the 
legitimate taxpayer and not the identity theft perpetrator.
- From the inception of the identity theft program in 2008 through 
September 2010, more than 615,700 taxpayer accounts have received 
account markers related to identity theft.
Actions Planned or Underway for FY 2011 and Beyond: 
* Complete the development of a Criminal Investigation Disaster 
Recovery Site in Martinsburg, WV.
* Deploy additional account “markers” that will improve the processing 
of taxpayer accounts impacted by identity theft.
* Expand and apply the Rational AppScan Source Edition pilot to five 
projects to “build security into” applications to allow developers to 
identify and fix security bugs early in the lifecycle, thus saving 
money and time. 
* Complete the Information Technology Security Compliance Monitoring 
project to enhance compliance monitoring and security controls. 

Tax Compliance Initiatives: 

Challenge/Issue: Administer programs to deal with tax gap issues, 
especially those resulting from corporate and high-income individual
taxpayers, as well as domestic and off-shore tax and financial criminal
activity. Address the evolving challenge of unpaid taxes and 
continuing Earned Income Tax Credit (EITC) noncompliance. 
Actions Taken in FY 2010 and Actions Planned or Underway: 
Individuals and Businesses: Actions Taken:
* Modified Examination case selection rules for cases where the First-
Time Home Buyer Credit was claimed and adjusted the number of pre-
refund cases selected.
* Modified Automated Underreporter (AUR) case selection rules to 
reduce the number of “no change” closures. In FY 2010, the number of “
no change” closures was reduced by 7.4%. Additionally, completed 
testing of soft notices to provide taxpayers the opportunity to self-
correct income reporting errors. 
* Developed improved case selection models in ACS to leverage decision 
analytics and completed work on a tool to adjust inventory volumes 
when necessary to ensure the ACS system can better predict the outcome 
of cases in inventory. 
* Optimized collection case selection and assignment to ensure ROs are 
working the highest probability cases. 
* Utilized a risk-based scoring and selection model to select tax 
return preparers to receive educational and/or compliance notices. 
Prior to the start of the 2010 filing season, IRS mailed 2,400 notices.
* Expanded participation in the Compliance Assurance Process to improve
identification and resolution of tax issues for large corporations 
prior to the filing of tax returns. In FY 2010, the number of 
participants increased from 102 to 112. 
* Continued selection and examination of locally hired employees of 
foreign embassies who did not elect to participate in settlement 
initiatives. 
* Approximately 3,550 returns have been examined and closed with over 
$23 million in additional tax assessed. 
* Developed a Quality Examination Process for all new Large and Mid-Size
Business examinations. 
* Verified refund claims on Form 1040NR and Form 1120-F tax returns by 
matching the recipients and withholding agent copies of the Form 1042-
S withholding documents. 
* Conducted 100 Spanish language Small Business Tax Workshops to improve
compliance. 
* Identified 1,576 schemes in potentially fraudulent refund claims 
through the Questionable Refund Program. 
Actions Planned or Underway for FY 2011 and Beyond: 
* Modify Examination case selection and modeling to include cases where
taxpayers claim the Adoption Credit. 
* Adjust 2011 work plans to include examination of post-refund cases 
where First-Time Home Buyer Credits were claimed. 
* Implement improved analytics in AUR case selection and continue 
testing soft notices as alternatives to conducting examinations. 
* Identify alternative workload selection models and further refine 
the definition of high-wealth taxpayers. 
* Implement Return Preparer Strategy including requiring that all paid 
preparers except attorneys, certified public accountants, and enrolled 
agents pass a competency test and complete continuing professional 
education of 15 hours per year. 
* Build a Return Review Program to enhance IRS ability to detect fraud 
and other forms of noncompliance at the time of filing, before the 
refund is released. 
* Continue the matching program for Forms 1042 and 1042-S and Forms 
8804 and 8805. 
* Continue to develop cases for examination on high-income foreign 
athletes and entertainers who have been identified as nonfilers. 
* Establish an approach to address multiple compliance concerns during 
tax return preparer visitations. 
* Continue to expand Spanish language Small Business Tax Workshops to 
improve compliance. 
Tax-Exempt Entities: Actions Taken: 
* Assisted the DOJ in fraud and conspiracy investigations related to 
municipal bond contracts. Work thus far has resulted in seven guilty 
pleas and indictments of seven former financial services executives. 
* Analyzed results from governmental bond questionnaires and initiated
examination projects in identified areas of noncompliance. 
* Improved procedures and training to identify promoters of abusive 
transactions involving retirement plans to deter the marketing of 
abusive promoter schemes. 
* Released interim report on compliance of College and Universities 
for unrelated business taxable income and compensation. Based on 
responses IRS has opened several dozen examinations of colleges and 
universities focusing on unrelated business income and executive 
compensation. 
Actions Planned or Underway for FY 2011 and Beyond: 
* Complete examinations of college and university unrelated business 
income and compensation issues and prepare a final report. 
* Initiate compliance reviews of over 100 of the largest private 
foundations. 
* Continue to assist the DOJ in developing criminal cases and in 
preparing prosecutions on abusive tax-exempt bond transactions. 
* Continue to investigate potential promoters of abusive transactions 
involving retirement plans. 
* Begin the regular public listing of organizations that are revoked 
based on rules established by the Pension Protection Act of 2006. 

Implementing Tax Law Changes: 

Challenge/Issue: Implementing tax law changes correctly is critical 
for an effective filing season. Many programs, activities and 
resources have to be planned and managed effectively for successful
implementation. 
Actions Taken in FY 2010 and Actions Planned or Underway: 
Actions Taken: 
* Completed 52 risk assessments covering 64 ARRA provisions and 
ensured risk mitigation actions were identified and completed. 
* Modified tax forms and publications to ensure all reflected changes 
resulting from ARRA legislative provisions including forms for Build 
America Bonds and other direct pay tax credit bonds. 
* Delivered a successful 2010 filing season, processing 141.9 million 
individual returns and issuing 109.5 million refunds totaling $366 
billion. 
* Provided more than 3.6 million responses to taxpayers calling to 
obtain information on ARRA and other credits available to them. 
* Identified erroneous and fraudulent FTHBC claims through new 
programming and pre-refund filters that reject returns where claims in 
excess of the maximum allowable credit and claims in excess of 
allowable amounts for taxpayers with AGI exceeded income limitations. 
* Provided an IRS.gov application that provides a PIN for use in 
electronically submitting a TY 2009 return. 
* Continued to provide customers with access to tax law information on 
IRS.gov in an easily understandable format. 
- Provided taxpayers self-service guidance to answers to tax law 
questions through the Interactive Tax Assistant (ITA). 
- Provided website and phone tools for taxpayers needing information 
on the one-time $250 Economic Recovery Payment. More than 5.6 million 
web and 815,300 telephone requests were completed. 
* Implemented streamlined examination closing agreement process for 
both walk-in and IRS initiated exempt organization closing agreements. 
* Allocated $2.4 billion of Clean Renewable Energy Bonds (CREBS) to 
1,067 applicants and $1 billion of Tribal Economic Development Bonds 
to 76 Indian tribal governments. 
Actions Planned or Underway for FY 2011 and Beyond: 
* Prepare for the implementation of the Affordable Care Act (ACA) 
including the revision of more than 30 and creation of three new tax 
forms based on preliminary analysis of the legislation. 
* Publish new IRM provisions to clarify the processes for handling 
rebate refund cases for Tax-Exempt Bonds. 
* Develop new voluntary compliance procedures to resolve tax law 
violations related to Build America Bonds and other direct-pay bonds. 
* Develop recommendations to improve the staggered determination 
letter process for employee plans. 
* Continue to identify erroneous and fraudulent claims and schemes on 
returns claiming new tax law credits. 
* Implement a compliance approach to address the refundable Adoption 
Credit for TY 2010. 

Providing Quality Taxpayer Service Operations: 

Challenge/Issue: Providing top quality service to every taxpayer in 
every transaction is an integral part of the IRS strategic and 
modernization plans. 
Actions Taken in FY 2010 and Actions Planned or Underway: 
Actions Taken:
* Provided topical information, alternative resources, and expedited 
routing options through the toll-free telephone system including the 
deployment of enhanced menu scripting, informational announcements and 
call routing to address taxpayer inquiries related to ARRA and other 
legislative changes. 
* Created a unique Economic Recovery Toll-Free line to allow taxpayers 
to choose from a menu of major provisions of the ARRA and WHBAA and 
routing to a Customer Service Representative (CSR), if necessary.
* Continued implementation of TAB service improvements including: 
- Application to obtain a Personal Identification Number to file returns
electronically.
- Modification of IRS.gov home page to improve visitors’ experiences.
- Expanded traditional TAC services to 27 volunteer locations.
- IRS.gov search capability for volunteer tax assistance sites.
* Provided greater access to available services on non-workdays 
through events such as “Solution Saturday” and other special services 
like EITC awareness day. 
* Implemented new quality initiatives at Taxpayer Assistance Centers 
and volunteer return preparation sites using sampling reviews of 
prepared returns to determine the accuracy. 
* Gathered feedback from professional organizations that represent 
external stakeholders (i.e. Accountants, Reporting Agents, etc.) to 
simplify forms and the tax filing process. 
Actions Planned or Underway for FY 2011 and Beyond: 
* Provide a toll-free number for taxpayer transcript request.
* Provide a system that will accommodate all levels of teletype (TTY) 
users. 
* Continue to utilize IRS partners to disseminate information and 
simplify forms and the tax filling process. 
* Increase the number of Limited English Proficiency (LEP) products.
* Continue outreach efforts with advocacy groups that serve and 
support the visually and hearing impaired. 
* Continue to engage partners in support of special service days.
* Engage national and local partners in providing feedback on how the 
tax filing process can be improved. 

Human Capital: 

Challenge/Issue: The IRS’s ability to meet expectations in personnel
management area, such as recruiting, training, and retaining employees. 
Actions Taken in FY 2010 and Actions Planned or Underway: 
Actions Taken:
* Launched a job search tool on YouTube to provide the public with 
information on employment opportunities with the IRS. “Working at the 
IRS,” provides information about various career paths available and 
features “Day in the Life” videos in which IRS employees discuss their 
jobs, the diversity of the IRS workforce, and the culture of the 
agency. 
* Developed an overall strategy for improving the coaching and 
mentoring skills at all leadership levels, including implementation of 
an internal coaching certification program and core workshops for all 
leaders. 
* Implemented a streamlined hiring process that incorporates full 
capabilities of automated ranking and rating. 
* Developed an Accelerated Leadership Program pilot to test a “fast 
track” training program for identified high potential candidates. 
* Increased the emphasis on veteran hiring, with veterans comprising 
11% of total hires in FY10, up from 9% in FY09 and 7% in FY08. 
* Launched the Schedule A website recruiting, hiring, developing, 
retaining, and promoting individuals with disabilities. 
* Completed 41 of 58 Workforce of Tomorrow recommendations that 
address the most significant workforce challenges facing current 
employees and managers. 
Actions Planned or Underway for FY 2011 and Beyond: 
* Implement the Accelerated Leadership Program pilot to test a “fast 
track” training program for identified high potential candidates. 
* Finalize a strategy to further IRS as the Best Place to Work in 
Government. 
* Continue to improve processes and leverage systems to streamline 
hiring. 
* Continue the use of cutting edge technologies and communication 
tools to increase the breadth of recruitment to better deliver a 
diverse applicant pool that is reflective of the IRS workforce. 

Erroneous and Improper Credits and Payments: 

Challenge/Issue: Reduce improper payments that include base compliance 
activities and redesign efforts. 
Actions Taken in FY 2010 and Actions Planned or Underway: 
Actions Taken:
* Protected over $3.7 billion in revenue through EITC enforcement 
efforts, which includes the examination of over 474,000 original and 
amended returns claiming EITC, 900,000 document matching reviews, and 
300,000 math error process corrections. 
* Identified more than 405,500 fraudulent returns claiming over $3.0 
billion in refunds, stopped over $2.6 billion in fraudulent claims 
using the Electronic Fraud Detection System, with an average refund of 
$8,230. 
* Refined marketing for the 4th EITC Awareness Day to increase overall
participation, targeting the underserved and a new population segment 
emerging from the economic downturn. 
- Provided PSA campaigns in English and Spanish, utilizing TV, radio, 
and print ads with 58,610 airings/insertions. 
- Utilized social media venues including Twitter, Facebook, and My 
Space. 
- Increased free EITC return preparation by 1.2% using IRS partners.
- Increased EITC dollars distributed by 17.5% over the same period in 
2009.
* Completed the following EITC Tax Return Preparer Study activities:
° Improved overall program results through development of a risk-based
scoring model to match preparer risk of noncompliance with an 
appropriate treatment.
- More than tripled the number of EITC preparers treated using the new 
risk-based scoring model.
- Improved case selection and program implementation for EITC paid tax 
return preparer due diligence visits resulting in a 75% increase in 
the number of tax return preparers penalized over 2009, with proposed 
penalties increasing by 550% to over $3 million.
- Sent 2,400 pre-filing season letters to first-time and experienced 
paid preparers with education and compliance messages.
* Identified research-based approaches to improve EITC participation 
and minimize taxpayer errors. 
- Continued partnerships with key tax software associations to 
identify program enhancements to help reduce EITC errors and assist 
tax return preparers in meeting requirements. 
- Refined an IRS.gov EITC Tax Return Preparer Toolkit to help tax return
preparers assist taxpayers.
- Expanded outreach to ensure tax return preparers were aware of their 
due diligence requirements on newly issued regulations. 
* Implemented the web-based EITC Preparer Due Diligence Training 
Module for preparers that cover requirements and standards. Over 
11,000 preparers completed the training. Additionally, over 5,500 
preparers viewed webinars on EITC due diligence and over 7,000 
preparers attended presentations on EITC at the Nationwide Tax Forums. 
* Implemented the new EITC math error authority, systemic verification 
and disallowance during processing, using third party data to verify 
the new requirement that a child must be younger than the taxpayer 
unless the child is disabled.
* Utilized AUR data to identify outreach and education opportunities 
for identified patterns of noncompliance that may be replicated in 
EITC returns. 
Actions Planned or Underway for FY 2011 and Beyond: 
* Continue to hold an EITC Awareness Day as the jump start to IRS 
marketing and outreach efforts in underserved markets. 
* Develop a Spanish version of the on-line training module for tax 
return preparers that cover requirements and standards. 
* Expand partnerships with external partners to increase EITC 
communication channels. 
* Develop and refine educational and marketing material housed on EITC 
Central and IRS.gov. 
* Increase the activities associated with EITC paid preparer 
treatments, based on refined risk-based selections, including due 
diligence audits, visits by revenue and criminal investigation agents, 
streamlined injunctions, and educational and compliance notices to 
first-time and experienced preparers to influence the accuracy of EITC 
returns filed. 
* Expand education and outreach to EITC paid tax return preparers on 
their EITC due diligence requirements through enhancements to the on-
line Tax Return Preparer Toolkit, promotion of the web-based Due 
Diligence Training Module including a new Spanish version, and 
seminars at IRS Nationwide Tax Forums. 
* Continue partnerships with the EITC software industry to identify 
and recommend enhancements to tax return preparer and consumer 
software and with the tax return preparer community to improve the 
accuracy of EITC returns. 

Globalization: 

Challenge/Issue: International tax compliance is a key challenge as 
reflected by IRS’s recent enforcement initiatives, as well as its 
prominence in the IRS Strategic Plan. The IRS has placed unprecedented
focus on detecting and bringing to justice those taxpayers who hide 
assets overseas to avoid paying tax. 
Actions Taken in FY 2010 and Actions Planned or Underway: 
Actions Taken:
* Improved the way compliance risks are identified and addressed in 
large, complex global businesses and high-wealth individuals. 
* Refined case identification and selection methods used in ongoing 
offshore investigations of promoters, facilitators and participants in 
abusive offshore arrangements. 
* Expanded international presence and coordination with treaty 
partners and international organizations to improve offshore 
compliance. 
* Began mining data from the 2009 Offshore Voluntary Disclosure 
Initiative. 
* Launched the Large Business and International Expansion including a 
Global High-Wealth Industry to ensure compliance with tax laws in a 
global tax environment. 
* Continued collaboration with Organization for Economic Cooperation and
Development (OECD), the Forum on Tax Administration (FTA) and the Joint
International Tax Shelter Information Center to identify and curb 
abusive tax avoidance transactions, arrangements and schemes and to 
enhance activities against cross-border transactions involving tax 
compliance risks including conducting joint audits. 
* Presented workshops at the National Tax Forums on “Foreign Athletes 
and Entertainers – Special Withholding Rules” and “Form 2555 – Foreign 
Earned Income Exclusion.” 
* Continued to ensure that residents of Puerto Rico properly pay U.S. 
Self-Employment Tax on their earnings by: 
- Issuing 25,735 soft letters requesting a total of $13 million of 
additional tax.
- Resolving cases with approximately 6,800 of the soft letter 
recipients filing tax returns and paying tax due of $3 million. 
* Continued to address emerging compliance issues, including 
internationally sponsored pension plans, the movement of in-kind 
charitable gifts offshore, ensuring that charities adhere to 
requirements for foreign bank accounts, expanding coordination of 
employment tax compliance with foreign countries, and cross-border 
commerce using Indian reservations and casinos. 
* Established the Global Illicit Financial Team (GIFT) to identify and 
investigate large multi-national tax and financial crime cases 
generally perpetrated by organized crime syndicates. 
Actions Planned or Underway for FY 2011 and Beyond: 
* Focus on realigning international resources to create a more 
centralized organization dedicated to improving international tax 
compliance. 
* Implement additional rules for determining risk in the Global High-
Wealth population. 
* Continue to conduct examinations of taxpayers who applied under the 
Offshore Voluntary Disclosure Initiative. 
* Continue developing cases for examination on high-income foreign 
athletes and entertainers who have been identified as nonfilers.
- Implement procedures to require certain large business taxpayers to 
report uncertain tax positions on their tax returns to reduce the 
amount of time spent identifying issues on the taxpayer’s return.
- Create a group to develop policies, targeting criteria, and case 
procedures to focus on combating international illicit money networks 
and professional money launderers. 
* Address tax-exempt emerging compliance issues, including 
internationally sponsored pension plans, the movement of in-kind 
charitable gifts offshore, ensuring that charities adhere to 
requirements for foreign bank accounts, expanding coordination of 
employment tax compliance with foreign countries, and cross-border 
commerce using Indian reservations and casinos. 

Taxpayer Protection and Rights: 

Challenge/Issue: The IRS has made significant progress in complying 
with the Internal Revenue Service Restructuring and Reform Act of 
1998, and most provisions pertaining to taxpayer protection and rights 
have been implemented. Significant management attention is still 
required to ensure that remaining issues have been addressed 
Actions Taken in FY 2010 and Actions Planned or Underway: 
Actions Taken:
* Continued efforts to remove or redact Social Security Numbers (SSNs) 
from outgoing taxpayer correspondence, eliminating or mitigating SSNs 
from 4.3% of notices and 22.3% of letters in FY 2010. 
* Completed requirements for contractor handling of taxpayer Personally
Identifiable Information (PII) for all publishing contracts that 
utilize PII. 
* Developed filters to exclude taxpayers from the Federal Payment Levy 
Program by FY 2011 if income levels meet specified poverty level 
guidelines. 
* Developed a comprehensive set of tax return preparer recommendations 
and metrics to ensure uniform and high-ethical standards of conduct 
for tax return preparers. 
* Implemented the Quality Examination Process (QEP) to strengthen
communication and coordination between IRS agents and large and mid-size
business taxpayers reducing taxpayer burden. 
Actions Planned or Underway for FY 2011 and Beyond: 
* Implement plans to regulate the tax return preparer industry, 
including a requirement that all paid tax return preparers, with some 
exception, pass a competency test and complete continuing professional 
education of 15 hours per year. 
* Utilize low-income filters to exclude taxpayers that meet income 
thresholds from in the Federal Payment Levy Program. 
* Continue efforts to remove or redact Social Security Numbers from 
outgoing correspondence. 
* Provide a 2-D barcode encoded with the taxpayer’s SSN on notices 
which will provide an additional level of security to protect 
sensitive taxpayer information in the event of lost or misrouted 
notices. 

Management Discussions and Analysis Footnotes: 

[1] In addition, to the 32 measures, the methodology for estimating 
the Percent of Eligible Taxpayers Who File for EITC is being revised 
and data is not available for FY 2010. 

[End of section] 

Financial Statements: 

Principal Financial Statements: 

The principal financial statements have been prepared to report the 
financial position and results of operations of the Internal Revenue 
Service (IRS), pursuant to the requirements of the Chief Financial 
Officers Act of 1990 (P.L. 101-576), the Government Management Reform 
Act of 1994 and the Office of Management and Budget (OMB) Circular No. 
A-136, Financial Reporting Requirements, as amended. The 
responsibility for the integrity of the financial information included 
in these statements rests with the management of the IRS. The audit of 
the IRS principal financial statements was performed by the Government 
Accountability Office (GAO). 

The IRS principal financial statements for fiscal years 2010 and 2009 
are as follows: 

* The Balance Sheet presents the assets, liabilities and net position. 

* The Statement of Net Cost presents the net cost of operations by 
program. It includes the gross costs less any exchange revenue earned 
from activities. 

* The Statement of Changes in Net Position presents the change in net 
position resulting from the net cost of operations, budgetary 
financing sources other than exchange revenues, and other financing 
sources. 

* The Statement of Budgetary Resources presents the budgetary 
resources; the status of those resources; the change in obligated 
balances during the year; and the outlays. Additional detail by major 
budget accounts is available in the Required Supplementary
Information section. 

* The Statement of Custodial Activity presents the sources and 
disposition of nonexchange federal tax revenues collected. 

Internal Revenue Service: 
Balance Sheet: 
As of September 30, 2010 and 2009: 
(In Millions) 

Assets: 

Intragovernmental: 
			
Fund Balance with Treasury (Note 2): 
2010: $2,562; 
2009: $2,463. 

Due from Treasury (Note 6): 
2010: $4,133; 
2009: $4,031. 

Other Assets (Note 3): 
2010: $136
2009: $147. 

Total Intragovernmental: 
2010: $6,831
2009: $6,641. 
	
Cash and Other Monetary Assets (Notes 4, 6): 
2010: $295; 
2009: $63. 

Federal Taxes Receivable, Net (Notes 5, 6): 
2010: $35,000; 
2009: $29,000. 

Property and Equipment, Net (Note 7): 
2010: $1,060; 
2009: $1,094. 

Other Assets (Note 3): 	
2010: $12; 
2009: $12. 
		
Total Assets: 
2010: $43,198; 
2009: $36,810. 

Liabilities: 

Intragovernmental: 

Due to Treasury (Note 5): 
2010: $35,000; 
2009: $29,000. 

Other Liabilities (Note 8): 
2010: $235; 
2009: $208. 

Total Intragovernmental: 
2010: $35,235; 
2009: $29,208. 
			
Federal Tax Refunds Payable: 
2010: $4,133; 
2009: $4,031. 

Other Liabilities (Notes 8, 9): 
2010: $2,003; 
2009: $1,659. 
			
Total Liabilities: 
2010: $41,371; 
2009: $34,898. 

Net Position: 

Unexpended Appropriations: 
2010: $1,531; 
2009: $1,675. 

Cumulative Results of Operations: 
2010: $296; 
2009: $237. 
		
Total Net Position: 
2010: $1,827; 
2009: $1,912. 

Total Liabilities and Net Position: 
2010: $43,198; 
2009: $36,810. 

The accompanying notes are an integral part of these statements. 

Internal Revenue Service: 
Statement of Net Cost: 
For the Years Ended September 30, 2010 and 2009: 
(In Millions) 

Program: Taxpayer Assistance and Education; 

Gross Cost: 
2010: 793; 
2009: $556. 

Earned Revenue: 
2010: ($7); 
2009: ($5). 

Net Cost of Program: 
2010: $786; 
2009: $551. 

Program: Filing and Account Services: 
	
Gross Cost: 
2010: $3,528; 
2009: $3,950. 

Earned Revenue: 
2010: ($70); 
2009: ($68). 

Net Cost of Program: 
2010: $8,953; 
2009: $3,882. 

Program: Compliance: 

Gross Cost; 
2010: $9,331; 
2009: $8,175. 

Earned Revenue: 
2010: ($378); 
2009: ($295). 

Net Cost of Program: 
2010: $8,953; 
2009: $7,880. 

Program: Administration of Tax Credit Programs; 

Gross Cost: 
2010: $250; 
2009: $190. 

Earned Revenue: 
2010: [Empty]; 
2009: [Empty]. 

Net Cost of Program: 
2010: $250; 
2009: $190. 

Net Cost of Operations (Note 11): 
2010: $13,447; 
2009: $12,503. 

The accompanying notes are an integral part of these statements. 

Internal Revenue Service: 
Statement of Changes in Net Position: 
For the Years Ended September 30, 2010 and 2009: 
(In Millions) 

Beginning Balances: 
2010: Cumulative Results of Operations: $237; 
2010: Unexpended Appropriations: $1,675; 
2009: Cumulative Results of Operations: $162; 
2009: Unexpended Appropriations: $1,523. 

Budgetary Financing Sources: 

Appropriations Received: 
2010: Unexpended Appropriations: $12,154; 
2009: Unexpended Appropriations: $11,603. 

Appropriations Transferred In/Out: 
2010: Unexpended Appropriations: [Empty]; 
2009: Unexpended Appropriations: $130. 

Other Adjustments: 
2010: Unexpended Appropriations: ($153); 
2009: Unexpended Appropriations: ($112). 

Appropriations Used: 
2010: Cumulative Results of Operations: $12,145; 
2010: Unexpended Appropriations: ($12,145); 
2009: Cumulative Results of Operations: $11,469; 
2009: Unexpended Appropriations: ($11,469). 

Transfers In Without Reimbursement - Earmarked Funds: 
2010: Cumulative Results of Operations: [Empty]; 
2009: Cumulative Results of Operations: $10. 

Other Financing Sources: 

Imputed Financing: 
2010: Cumulative Results of Operations: $1,390; 
2009: Cumulative Results of Operations: $1,123. 

Transfers In/Out Without Reimbursement: 
2010: Cumulative Results of Operations: $35; 
2009: Cumulative Results of Operations: $21. 

Transfers to General Fund: 
2010: Cumulative Results of Operations: ($64); 
2009: Cumulative Results of Operations: ($45). 

Total Financing Sources: 
2010: Cumulative Results of Operations: $13,506; 
2010: Unexpended Appropriations: ($144); 
2009: Cumulative Results of Operations: $12,578; 
2009: Unexpended Appropriations: $152. 

Net Cost of Operations: 
2010: Cumulative Results of Operations: ($133,447); 
2009: Cumulative Results of Operations: ($12,503). 

Net Change: 
2010: Cumulative Results of Operations: $59; 
2010: Unexpended Appropriations: ($144); 
2009: Cumulative Results of Operations: $75; 
2009: Unexpended Appropriations: $152. 

Ending Balances: 
2010: Cumulative Results of Operations: $296; 
2010: Unexpended Appropriations: $1,531; 
2009: Cumulative Results of Operations: $237; 
2009: Unexpended Appropriations: $1,675. 

The accompanying notes are an integral part of these statements. 

Internal Revenue Service: 
Statement of Budgetary Resources: 
For the Years Ended September 30, 2010 and 2009: 
(In Millions) 

Budgetary Resources:
		
Unobligated Balance, Brought Forward, October 1: 
2010: $887; 
2009: $690. 

Recoveries of Prior Year Unpaid Obligations: 
2010: $90
2009: $94. 

Budget Authority: 	 

Appropriations: 
2010: $12,444; 
2009: $11,851. 

Spending Authority from Offsetting Collections: 
2010: $151; 
2009: $130. 

Nonexpenditure Transfers, Net: 
2010: [Empty]; 
2009: $130. 

Permanently Not Available: 
2010: ($153); 
2009: ($112). 

Total Budgetary Resources: 
2010: $13,419; 
2009: $12,783. 

Status of Budgetary Resources: 

Obligations Incurred: 
2010: $12,603; 
2009: $11,896. 

Unobligated Balance — Available (Note 2): 
2010: $241; 
2009: $384. 

Unobligated Balance — Not Available (Note 2): 
2010: $575; 
2009: $503. 

Total Status of Budgetary Resources: 
2010: $13,419; 
2009: $12,783. 

Change in Obligated Balance: 

Obligated Balance, Net, Brought Forward, October 1: 
2010: $1,587; 
2009: $1,394. 

Obligations Incurred: 
2010: $12,603; 
2009: $11,896. 

Gross Outlays: 
2010: ($12,324); 
2009: ($11,624). 

Recoveries of Prior Year Unpaid Obligations, Actual: 
2010: ($90); 
2009: ($94). 

Change in Uncollected Customer Payments from Federal Sources: 
2010: ($24); 
2009: $15. 

Obligated Balance, Net, End of Period: 
2010: $1,752; 
2009: $1,587. 

Net Outlays: 

Gross Outlays: 
2010: $12,324; 
2009: $11,624. 

Offsetting Collections: 
2010: ($127); 
2009: ($144). 

Distributed Offsetting Receipts: 
2010: ($283); 
2009: ($233). 

Net Outlays: 
2010: $11,914; 
2009: $11,247. 

The accompanying notes are an integral part of these statements. 

Internal Revenue Service: 
Statement of Custodial Activity: 
For the Years Ended September 30, 2010 and 2009: 
(In Billions) 

Revenue Activity: 

Collections of Federal Tax Revenue (Note 13): 
		
Individual Income, FICA/SECA, and Other: 
2010: $1,989; 
2009: $2,036. 

Corporate Income: 
2010: $278; 
2009: $225. 

Excise: 
2010: $47; 
2009: $47. 

Estate and Gift: 
2010: $20; 
2009: $25. 

Railroad Retirement: 
2010: $5; 
2009: $5. 

Federal Unemployment: 
2010: $6; 
2009: $7. 

Total Collections of Federal Tax Revenue: 
2010: $2,345; 
2009: $2,345. 

Increase in Federal Taxes Receivable, Net: 
2010: $6; 
2009: [Empty]. 

Total Federal Tax Revenue: 
2010: $2,351; 
2009: $2,345. 

Distribution of Federal Tax Revenue to Treasury: 
2010: $2,345; 
2009: $2,345. 

Increase in Amount Due to Treasury: 
2010: $6; 
2009: [Empty]. 

Total Disposition of Federal Tax Revenue: 
2010: $2,351; 
2009: $2,345. 

Net Federal Revenue Activity: 
2010: [Empty]; 
2009: [Empty]. 

Federal Tax Refund Activity: 

Total Refunds of Federal Taxes (Note 14): 
2010: $467; 
2009: $438. 

Appropriations Used for Refund of Federal Taxes: 
2010: ($467); 
2009: ($438). 

Net Federal Tax Refund Activity: 
2010: [Empty]; 
2009: [Empty]. 

The accompanying notes are an integral part of these statement. 

Internal Revenue Service: 
Notes to the Financial Statements
For the Years Ended September 30, 2010 and 2009: 

Note 1. Summary of Significant Accounting Policies: 

A. Reporting Entity: 

The Internal Revenue Service (IRS) is a bureau of the U.S. Department 
of the Treasury (Treasury). The IRS originated in 1862, when Congress 
established the Office of the Commissioner of the Internal Revenue. In 
1952, the Bureau was reorganized by Congress and became the Internal 
Revenue Service in 1953. 

The mission of the IRS is to provide America's taxpayers top quality 
service by helping them understand and meet their tax responsibilities 
and enforce the law with integrity and fairness to all. 

The organizational structure of the IRS consists of organizations and 
major programs which administers the nation's tax laws and annually 
collects 95 percent of the revenues funding the Federal government. 

Organizations: 

* Operating Divisions. 

* Functional Divisions. 

* Support Divisions. 

There are four operating divisions. Wage and Investment (W&I) provides 
customer support, submission processing and compliance activities with 
respect to individuals with wage and investment income. Small Business 
and Self-Employed (SB SE) administers compliance activities with 
respect to small businesses, self-employed individuals and others with 
income from sources other than wages. Tax-Exempt and Government 
Entities (TEGE) oversees employee plans, tax exempt organizations, and 
government entities in complying with tax laws and regulations. Large 
and Mid-Size Business (LMSB) serves corporations, subchapter S 
corporations, and partnerships with assets greater than
$10 million on complex issues involving tax law and accounting 
principles. 

The five functional divisions are Appeals, Criminal Investigation, 
Communications and Liaison, Taxpayer Advocate Service and the IRS 
Chief Counsel. These divisions provide enforcement services supporting 
both internal and external operations. They are independent of the 
operating divisions and other units of the IRS. The National Taxpayer 
Advocate Service reports directly to Congress and the IRS Chief 
Counsel reports to the Secretary of the Treasury. 

The eight support divisions are Modernization and Information 
Technology Services, Agency Wide Shared Services, Stewardship, Wage & 
Investment Stewardship, Executive Leadership and Direction, Human 
Capital Office, Human Capital Office Corporate Programs and Chief 
Financial Officer. These divisions provide shared services support to 
all the IRS organizations. 

Major Programs: 

* Taxpayer Assistance and Education. 

* Compliance. 

* Filing and Account Services. 

* Administration of Tax Credit Programs. 

The major programs are discussed in Note 1.J., Program Costs. 

B. Basis of Accounting and Presentation: 

The financial statements have been prepared from the accounting 
records of the IRS in conformity with accounting principles generally 
accepted in the United States and in accordance with the Office of 
Management and Budget (OMB) Circular No. A-136, Financial Reporting 
Requirements, as amended. Accounting principles generally accepted for 
Federal entities are the standards prescribed by the Federal 
Accounting Standards Advisory Board (FASAB), which is the official 
body for setting accounting standards of the Federal government. 

These comparative financial statements and related notes consist of 
the Balance Sheet, the Statement of Net Cost, the Statement of Changes 
in Net Position, the Statement of Budgetary Resources and the 
Statement of Custodial Activity. 

The accounting structure of Federal agencies is designed to reflect 
both accrual and budgetary accounting transactions. Under the accrual 
method of accounting, revenues are recognized when earned and expenses 
are recognized when incurred, without regard to receipt or payment of 
cash. Budgetary accounting facilitates compliance with legal 
constraints and controls over the use of Federal funds. The Statement 
of Custodial Activity is presented on the modified cash basis of 
accounting. Cash collections and disbursements to Treasury are 
reported on a cash basis and the change in Federal tax receivables and 
refunds payable are reported on an accrual basis. 

Certain assets, liabilities, earned revenues and costs have been 
classified as intragovernmental throughout the financial statements 
and notes. Intragovemmental is defined as exchange transactions made 
between two reporting entities within the Federal government. 

C. Fund Balance with Treasury: 

The fund balance with Treasury is the aggregate of funds in the 
accounts of the IRS, primarily appropriated funds, from which the IRS 
is authorized to make expenditures and pay liabilities. 

The status of fund balance with Treasury represents amounts obligated 
and unobligated. The obligated balances not yet disbursed include the 
amount of funds against which budgetary obligations have been 
incurred, but disbursements have not been made Unobligated balances, 
available represent amounts in unexpired appropriations as of the end 
of the current fiscal year. Unobligated balances become available when 
apportioned by the OMB. Unobligated balances, unavailable represent 
amounts in expired appropriations and amounts not apportioned for 
obligation as of the end of the current fiscal year. 

D. Other Assets: 

Accounts receivable consist of amounts due to the IRS from the public 
and Federal agencies. Accounts receivable are recorded and 
reimbursable revenues are recognized as the services are performed and 
costs are incurred. The allowance for uncollectible accounts is based 
on an annual review of groups of accounts by age for accounts 
receivable balances older than one year. 

Advances to government agencies primarily represent funds paid to the 
Treasury Working Capital Fund (WCF). Centralized services funded 
through the WCF consist primarily of telecommunications services, 
payroll processing, and depreciation of property and equipment owned 
by the WCF. Advances to the public are cash outlays for criminal 
investigations and employee travel. 

Forfeited property held for sale is acquired as a result of forfeiture 
proceedings or foreclosure sales to satisfy a tax liability. The 
Federal Tax Lien Revolving Fund, established in accordance with Title 
26 United States Code, Section 7810, is used to redeem real property 
foreclosed upon by a holder of a lien. The IRS may sell the property, 
reimburse the revolving fund in an amount equal to the redemption and 
apply the net proceeds to the outstanding tax obligation. 

E. Cash and Other Monetary Assets: 

Imprest funds are maintained by headquarters and field offices in 
commercial bank accounts. Other monetary assets consist primarily of 
offers in compromise, voluntary deposits received from taxpayers 
pending application of the funds to unpaid tax assessments and seized 
monies pending the results of criminal investigations. 

F. Federal Taxes Receivable, Net and Due to Treasury: 

Federal taxes receivable, net and the corresponding liability, due to 
Treasury, are not accrued until related tax returns are filed or 
assessments are made by the IRS and agreed to by either the taxpayer 
or the court. Accruals are made to reflect penalties and interest on 
taxes receivable through the balance sheet date. 

Taxes receivable consist of unpaid assessments (taxes and associated 
penalties and interest) due from taxpayers. The existence of a 
receivable is supported by a taxpayer agreement, such as filing of a 
tax return without sufficient payment, or a court ruling in favor of 
the IRS. The allowance reflects an estimate of the portion of total 
taxes receivable deemed to be uncollectible. 

Compliance assessments are unpaid assessments which neither the 
taxpayer nor a court has affirmed the taxpayer owes to the Federal 
government. Examples include assessments resulting from an IRS audit 
or examination in which the taxpayer does not agree with the results. 
Write-offs consist of unpaid assessments for which the IRS does not 
expect further collections due to factors such as taxpayers' 
bankruptcy, insolvency, or death. Compliance assessments and write-
offs are not reported on the balance sheet. Statutory provisions 
require the accounts to be maintained until the statute for collection 
expires. 

Tax Assessments: 

Under the Internal Revenue Code (26 USC) Section 6201, the Secretary 
of the Treasury is authorized and required to make inquiries, 
determinations, and assessments of all taxes imposed and accruing 
under any internal revenue law which have not been duly paid including 
interest, additions to the tax, and assessable penalties. The 
Secretary has delegated this authority to the Commissioner of the IRS. 
Unpaid assessments result from taxpayers filing returns without 
sufficient payments and from the enforcement programs of the IRS, such 
as examination, under-reporter, substitute for return, and combined 
annual wage reporting. 

Abatements: 

Under the Internal Revenue Code (26 USC) Section 6404, the 
Commissioner of the IRS has authority to abate the paid or unpaid 
portion of an assessed tax, interest, and penalty. Abatements occur 
for a number of reasons and are a normal part of the tax 
administration process. Abatements may: 

* Be allowed for a qualifying corporation claiming a net operating 
loss which created a credit. The credit can be carried back to reduce 
a prior year's tax liability and amend tax returns. Additionally, the 
credit can correct an assessment from an enforcement program, taxes 
discharged in bankruptcy, accepted offers in compromise, penalty 
abatements for reasonable cause, contested assessments made due to 
mathematical or clerical errors and assessments contested after the 
liability has been satisfied. 

* Result in claims for refunds or a reduction of the unpaid assessed 
amount. 

G. Property and Equipment: 

Property and equipment is recorded at historical cost. It consists of 
tangible assets and software. The IRS depreciates property and 
equipment on a straight line basis over its estimated useful life. In 
the first and final years, one-half year depreciation is taken. 
Disposals are recorded when deemed material. 

The IRS capitalization policy for property and equipment is presented 
by asset class and capitalization threshold. 

Asset Class: ADP equipment; 
Capitalization Threshold: Capitalized regardless of acquisition cost. 

Asset Class: Non-ADP equipment; 
Capitalization Threshold: Individual asset cost of $5 thousand or 
greater. 

Asset Class: Furniture; 
Capitalization Threshold: Individual asset cost of $5 thousand or 
greater. 

Asset Class: Investigative equipment; 
Capitalization Threshold: Individual asset cost of $5 thousand or 
greater. 

Asset Class: Vehicles; 
Capitalization Threshold: Capitalized regardless of acquisition cost. 

Asset Class: Major systems; 
Capitalization Threshold: Projects with costs of $20 million or 
greater. 

Asset Class: Internal Use Software; 
Capitalization Threshold: Major business systems modernization 
projects independent of cost. 

Asset Class: Leasehold Improvements; 
Capitalization Threshold: Capitalized regardless of acquisition cost. 

Asset Class: Assets under capital lease; 
Capitalization Threshold: Assets with bulk cost of $50 thousand or 
greater. 

ADP Equipment includes related commercial off-the-shelf software. 
Major systems was a category for large-scale computer systems prior to 
Statement of Federal Financial Accounting Standards No. 10 (SFFAS No. 
10), Accounting for Internal Use Software. 

Internal Use Software captures the costs of major Business Systems 
Modernization projects in accordance with SFFAS No. 10. It encompasses 
software design, development and testing of projects adding 
significant new functionality and long-term benefits. Costs for 
developing internal use software are accumulated in work in process 
until final acceptance and testing are successfully completed. When 
the software is completed and placed into service, the costs are 
transferred to depreciable property. 

H. Federal Tax Refunds Payable and Due from Treasury: 

Federal tax refunds payable is a fully funded liability and is offset 
with a corresponding asset due from Treasury. The IRS records an 
amount due from Treasury to designate approved funding to pay year end 
tax refund liabilities to taxpayers. 

I. Financing Sources and Revenues Appropriations Received: 

The IRS receives the majority of its funding through annual, multi-
year, and no-year appropriations available for use within statutory 
limits for operating and capital expenditures. Appropriations are 
recognized as budgetary financing sources when the related expenses 
are incurred. 

Appropriations: 

* Taxpayer Services; 
* Operations Support; 
* Enforcement; 
* Other Appropriations. 

Taxpayer Services provides funds for the direct costs of the Taxpayer 
Assistance and Education and the Filing and Account Services Programs 
discussed in Note 1. J., Program Costs. 

Enforcement provides resources for the direct costs of the Compliance 
Program discussed in Note 1. J., Program Costs. Additionally, it funds 
the direct costs of administration of the Earned Income Tax Credit 
Program (EITC). 

Operations Support funds the indirect costs of all programs. 
Activities include executive planning and direction; shared service 
support for facilities, rent, utilities and security; procurement, 
printing and postage; headquarters activities such as strategic 
planning, finance, human resources and Equal Employment Opportunity; 
research and statistics of income; and information systems, data 
processing and telecommunication. 

Other Appropriations include Business Systems Modernization (BSM), 
Administrative Expenses -Recovery Act and Health and Insurance Tax 
Credit Administration. BSM provides resources for the planning and 
capital asset acquisition of information technology to modernize the 
business systems. Additionally, BSM is obligated pursuant to an 
expenditure plan approved by Congress. Administrative Expenses - 
Recovery Act supports the funding for the administration of new and 
expanded tax credit programs of the ARRA. Health and Insurance Tax 
Credit Administration provides funding for health insurance and 
refundable tax credits to qualified individuals. Additional funding 
was included by the ARRA to implement and administer the health 
insurance tax credit under the Trade Adjustment Assistance Health 
Coverage Improvement Act of 2009. 

The American Recovery and Reinvestment Act of 2009 (ARRA) was signed 
into law on February 17, 2009. The IRS has significant 
responsibilities related to the ARRA for the administration of tax 
relief programs, additional tax credits and incentives. 

The Affordable Care Act of 2010 (ACA) was enacted on March 23, 2010. 
There are tax provisions effective in calendar year 2010 and more to 
be implemented during the next several years. The role of the IRS is 
to administer the various tax provisions included in the new law, the 
largest set of tax law changes in 20 years. 

Exchange Revenues: 

Exchange revenues recognized by the IRS represent reimbursements and 
user fees. Reimbursements are recognized as the result of costs 
incurred for services performed for Federal agencies or the public 
under reimbursable agreements. User fees are derived from transactions 
with the public and are recognized when the fees are collected. 

Non-exchange Revenues — Earmarked Funds: 

Non-exchange revenues in FY 2009 represented amounts retained from tax 
collections for payments to private collection agencies (PCAs) and for 
enforcement activities. The Private Collection Agent Program 
authorized contracts with PCAs to collect delinquent taxes on behalf 
of the IRS not to exceed 25 percent of the total taxes collected. 
Additionally, the IRS retained 25 percent of the total taxes collected 
to fund enforcement activities. This program is discussed in Note 
1.L., Earmarked Funds. 

Imputed Financing Sources: 

Other financing sources include imputed financing sources to offset 
the imputed costs recognized for goods or services received from other 
Federal agencies without reimbursement from the IRS. The imputed costs 
are pension and other retirement benefit costs administered by the 
Office of Personnel Management, costs of processing payments and 
collections by the Financial Management Service and legal judgments 
paid by the Treasury Judgment Fund. 

J. Program Costs: 

Taxpayer Assistance and Education provides services to taxpayers to 
assist them in preparing returns accurately. Primary activities 
include tax forms and instructions; tax publications and information; 
taxpayer education and outreach programs; walk-in taxpayer assistance; 
and the National Distribution Center to process orders for forms and 
publications. Earned revenues are primarily from enrolled agents fees. 

Filing and Account Services perform functions of processing tax 
returns, recording tax payments, issuing refunds, and maintaining 
taxpayer accounts. Program activities include submission processing; 
operating taxpayer assistance call centers and websites; and Taxpayer 
Advocate. Earned revenues are primarily from the Tax Refund Offset 
Program and tax return copying and verification. 

Compliance manages activities to identify and correct possible errors 
or underpayments. This program includes pre-filing agreements, letter 
rulings and determinations; exam functions of document matching, desk 
and field exams; collection functions of notices, Automated Collection 
Systems and field collections; criminal investigations of tax, money 
laundering and illegal drug activities; and Appeals and Chief Counsel. 
Earned revenues are primarily from the Treasury Forfeiture Fund, 
Financial Crimes Enforcement Network, installment agreement fees, 
offers in compromise and letter rulings and determinations. 

Administration of Tax Credit Programs oversees the Earned Income Tax 
Credit (EITC) and Health Coverage Tax Credit (HCTC) programs. EITC 
performs expanded customer service, public outreach, enforcement, and 
research efforts to reduce claims and erroneous filings associated 
with the program. EITC comprises the full spectrum of taxpayer 
services and compliance activities. However, EITC payments actually 
refunded to individuals or credited against tax liabilities are not 
included in program costs. 

HCTC activities are focused on implementing the health insurance tax 
credit program set out in the Trade Adjustment Assistance Reform Act 
of 2002 (Trade Act of 2002). These costs do not encompass payments 
made to health insurance carriers on behalf of participants or tax 
credits refunded to qualifying individuals. (See Other Accompanying 
Information - unaudited for discussion of refundable tax credits.) 

K. Custodial Activity Non-exchange Revenues: 

The IRS collects custodial non-exchange revenues for taxes levied 
against taxpayers for: individual and corporate income, Federal 
Insurance Contributions Act (FICA) and Self-Employment Contribution 
Act (SECA), excise, estate, gift, railroad retirement and Federal 
unemployment taxes. These collections are not available to the IRS for 
obligation or expenditure and are recognized as custodial revenues 
when collected. The disposition of these revenues is reported on the 
Statement of Custodial Activity and as distribution of federal tax 
revenue to the general fund of the U.S. Treasury. 

Permanent Indefinite Appropriations: 

The IRS was granted permanent and indefinite budgetary authority 
through legislation to disburse tax refund principle and related 
interest as they become due. The permanent and indefinite 
appropriations are not subject to budgetary ceilings set by Congress 
during the annual appropriation process. 

Refunds due to taxpayers are reported as federal tax refunds payable 
on the Balance Sheet. The IRS records an offsetting asset, due from 
Treasury, to reflect the year-end budget authority to pay this 
liability. 

Disbursements for tax refunds and related interest, reported on the 
Statement of Custodial Activity, are offset by appropriations used for 
refunds. Disbursements for refunds are not a cost to the IRS, but 
rather a cost to the Federal government as a whole. 

L. Earmarked Funds: 

Earmarked funds are financed by specifically identified revenues which 
remain available over time. These specifically identified revenues are 
required by statute to be used for designated activities, benefits or 
purposes and must be accounted for separately from the Federal 
government's general revenues. 

The Federal Tax Lien Revolving Fund (20X4413) was established pursuant 
to section 112(a) of the Federal Tax Lien Act of 1966, to serve as the 
source of financing the redemption of real property by the United 
States. 

The Private Collection Agent Program (20X5510) was established under 
the American Jobs Creation Act of 2004. The IRS was authorized to 
enter into contracts with PCAs to assist in the collection of 
delinquent Federal tax liabilities. A portion of the collections was 
retained by the IRS to pay the PCAs and fund enforcement activities. 
The Omnibus Appropriations Act, 2009 (P.L. 111-8), Section 106, 
stipulated "None of the funds made available in this Act may be used 
to enter into, renew, extend, administer, implement, enforce or 
provide oversight of any qualified tax collection contract." The PCA 
Program effectively ended on March 5, 2009 when the IRS Commissioner 
announced the program would not renew contracts with the private debt 
collection agencies. 

M. Allocation Transfers: 

The IRS is a party to allocation transfers from the Department of 
Transportation's (Transportation) Federal Highway Administration and 
the Department of Health and Human Services (HHS) as a receiving 
entity. Obligations and outlays incurred by the IRS are charged to the 
allocation account as it executes the delegated activity on behalf of 
Transportation and HHS. Financial activity for the allocations 
transfers are reported in the financial statements of Transportation 
and HHS. 

N. Fiduciary Activities: 

Fiduciary activities are the collection or receipt, and the 
management, protection, accounting, investment and disposition by the 
Federal government of cash or other assets in which non-Federal 
individuals or entities have an ownership interest the Federal 
government must uphold. 

The IRS fiduciary activities include the net collections for a taxable 
year from United States military and federal employees working in the 
United States (U.S.) territories of the Northern Mariana Islands, the 
U.S. Virgin Islands, Guam and American Samoa. These fiduciary assets 
are not assets of the IRS. Beginning in FY 2009, fiduciary activities 
are not recognized on the balance sheet. 

O. Employee Compensation and Benefits Accrued Annual, Sick, and Other 
Leave: 

Annual and compensatory leave is expensed with an offsetting liability 
as it is earned and the liability is reduced as leave is taken. Each 
year, the balance in the accrued annual leave liability account is 
adjusted to reflect current pay rates. To the extent current or prior 
year appropriations are not available to fund annual and compensatory 
leave earned but not taken, funding will be obtained from future 
financing sources. Sick leave and other types of non-vested leave are 
expensed as taken. 

Federal Employees Compensation Act: 

The Federal Employees Compensation Act (FECA) provides income and 
medical cost protection to covered federal civilian employees injured 
on the job, to employees who have incurred work-related occupational 
diseases, and to beneficiaries of employees whose deaths are 
attributable to job-related injuries or occupational diseases. The 
FECA program is administered by the U.S. Department of Labor (DOL), 
which pays valid claims and subsequently seeks reimbursement for 
claims paid. Accrued FECA liability represents amounts due to DOL for 
claims paid on behalf of the IRS. Actuarial FECA liability represents 
the liability for future workers' compensation benefits, which
includes the expected liability for death, disability, medical, and 
miscellaneous costs for approved cases. DOL estimates the liability 
for future payments as a result of past events. 

Employee Pension Benefits: 

The IRS employees participate in the Civil Service Retirement System 
(CSRS) or the Federal Employees Retirement System (FERS). For 
employees covered by CSRS, the IRS contributes 7% of the employees' 
gross pay for regular and 7.5% for law enforcement officers' 
retirement. For employees covered by FERS, the IRS contributes 11.2% 
of employees' gross pay for regular and 24.9% for law enforcement 
officers' retirement. 

Employees covered by CSRS and FERS are eligible to contribute to the 
Thrift Savings Plan (TSP), a defined contribution plan. For those 
employees participating in the FERS, a TSP account is automatically 
established, and IRS makes a mandatory contribution to this plan equal 
to one percent of the employees' compensation as well as matching 
contributions ranging from one to four percent of the employees' 
compensation for FERS-eligible employees who contribute to their TSP. 
No matching contributions are made to the TSP for employees 
participating in the CSRS. 

Employee Health and Life Insurance Benefits: 

Employees are eligible to participate in the Federal Employees Health 
Benefit Program (FEHB) and Federal Employees Group Life Insurance 
Program (FEGLI). Employees participating in the FEGLI program can 
obtain basic term life insurance, with the employee paying two-thirds 
of the cost and IRS paying one-third. Additional coverage is optional, 
to be paid fully by the employee. The basic life coverage may be 
continued into retirement if certain requirements are met. The IRS 
recognizes the full cost of providing these benefits. 

P. Use of Estimates: 

The preparation of financial statements in conformity with accounting 
principles generally accepted in the United States of America requires 
management to make estimates and assumptions related to the reporting 
of assets, liabilities, revenues, and expenses and the disclosure of 
contingent liabilities. Actual results could differ from those 
estimates. 

Note 2. Fund Balance with Treasury: 

(In Millions) 
			
General Funds: 
2010: $2,248; 
2009: $2,300. 

Special Funds: 
2010: $310; 
2009: $158. 

Revolving Funds: 
2010: $6; 
2009: $6. 

Other Funds: 
2010: ($2); 
2009: ($1). 

Fund Balance with Treasury: 
2010: $2,562; 
2009: $2,463. 

Unobligated balances: 

Available: 
2010: $241; 
2009: $384. 

Unavailable: 
2010: $575; 
2009: $503. 

Obligated Balance not yet disbursed: 
2010: $1,752; 
2009: $1,586. 

Non-Budgetary FBWT: 
2010: ($6); 
2009: ($10). 

Status of Fund Balance with Treasury: 
2010: $2,562; 
2009: $2,463. 

Note 3. Other Assets: 

Advances: 
2010: Intra-governmental: $83; 
2010: With the Public: $8; 
2009: Intra-governmental: $117; 
2009: With the Public: $7. 

Accounts receivable, net: 
2010: Intra-governmental: $49; 
2010: With the Public: $2; 
2009: Intra-governmental: $26; 
2009: With the Public: $3. 

Forfeited property held for sale: 
2010: Intra-governmental: [Empty]; 
2010: With the Public: $2; 
2009: Intra-governmental: [Empty]; 
2009: With the Public: $2. 

Clearing accounts: 
2010: Intra-governmental: $4; 
2010: With the Public: [Empty]; 
2009: Intra-governmental: $4; 
2009: With the Public: [Empty]. 

Other Assets: 
2010: Intra-governmental: $136; 
2010: With the Public: $12; 
2009: Intra-governmental: $147; 
2009: With the Public: $12. 

Note 4. Cash and Other Monetary Assets: 

Imprest Fund: 
2010: $4; 
2009: $4. 

Other monetary assets: 
2010: $291; 
2009: $59. 

Cash and Other Monetary Assets: 
2010: $295; 
2009: $63; 

Note 5.	Federal Taxes Receivable, Net and Due to Treasury: 
(In Billions) 

Federal taxes receivable: 
2010: $138; 
2009: $128. 

Allowance for uncollectible taxes receivable: 
2010: ($103); 
2009: ($99). 

Federal taxes receivable, net and Due to Treasury: 
2010: $35; 
2009: $29. 

Federal taxes receivable consists of tax assessments, penalties and 
interest not paid or abated which were agreed to by the taxpayer and 
the IRS or upheld by the courts. Federal taxes receivable, net is
the portion of gross Federal taxes receivable estimated to be 
collectible. It is based on projections of collectibility from a 
statistical sample of taxes receivable. The allowance for 
uncollectible taxes receivable was established for the difference 
between the gross Federal taxes receivable and the portion estimated 
to be collectible. Due to Treasury is the offsetting liability to 
Federal taxes receivable, net, and represents amounts to be 
transferred to Treasury when collected. 

Note 6. Non-entity Assets: 
(In Millions)	 

Due from Treasury: 
2010: Intra-governmental: $4,133; 
2010: With the Public: [Empty]; 
2009: Intra-governmental: $4,031; 
2009: With the Public: [Empty]. 

Federal taxes receivable, net: 
2010: Intra-governmental: [Empty]; 
2010: With the Public: $35,000; 
2009: Intra-governmental: [Empty]; 
2009: With the Public: $29,000. 

Other monetary assets: 
2010: Intra-governmental: [Empty]; 
2010: With the Public: $291; 
2009: Intra-governmental: [Empty]; 
2009: With the Public: $59. 

Non-entity Assets: 
2010: Intra-governmental: $4,133; 
2010: With the Public: $35,291; 
2009: Intra-governmental: $4,031; 
2009: With the Public: $29,059. 

Non-entity assets are not available for use by the IRS. Federal taxes 
receivable are collected for the U.S. Government, but the IRS does not 
have the authority to spend them. 

Note 7.	Property and Equipment: 
(In Millions) 

ADP assets: 
Useful Cost (Years): 3 to 7; 
Cost: $1,526; 
Accumulated Depreciation: ($1,094); 
2010 Net Book Value: $432; 
2009 Net Book Value: $411. 

Internal use software: 
Useful Cost (Years): 3 to 7: 
Cost: $1,073; 
Accumulated Depreciation: ($706); 
2010 Net Book Value: $367; 
2009 Net Book Value: $429. 

Leasehold improvements: 
Useful Cost (Years): 10;	
Cost: $426; 
Accumulated Depreciation: ($263); 
2010 Net Book Value: $163; 
2009 Net Book Value: $139. 

Major systems	
Useful Cost (Years): 7; 
Cost: $422; 
Accumulated Depreciation: ($422); 
2010 Net Book Value: [Empty]; 
2009 Net Book Value: [Empty]. 

Internal use software — work in process: 
Cost: $60; 
Accumulated Depreciation: [Empty]; 
2010 Net Book Value: $60; 
2009 Net Book Value: $75. 

Vehicles: 
Useful Cost (Years): 5; 
Cost: $63; 
Accumulated Depreciation: ($43); 
2010 Net Book Value: $20; 
2009 Net Book Value: $27. 

Furniture and non-ADP equipment:	
Useful Cost (Years): 8 to 10; 
Cost: $43; 
Accumulated Depreciation: ($27); 
2010 Net Book Value: $16; 
2009 Net Book Value: $12. 

Assets under capital lease: 
Useful Cost (Years): 3 to 7; 
Cost: $2; 
Accumulated Depreciation: [Empty]; 
2010 Net Book Value: $2; 
2009 Net Book Value: [Empty]. 

Investigative equipment: 
Useful Cost (Years): 10; 
Cost: $7; 
Accumulated Depreciation: ($7); 
2010 Net Book Value: [Empty]; 
2009 Net Book Value: $1. 

Property and Equipment: 
Cost: $3,622;
Accumulated Depreciation: ($2,562); 
2010 Net Book Value: $1,060; 
2009 Net Book Value: $1,094. 

The Cost column represents the historical cost of property and 
equipment, net of disposals. The cost basis for FY 2010 and FY 2009 is 
$3,622 million and $3,513 million, respectively. Accumulated
depreciation for FY 2010 and FY 2009 is $2,562 million and $2,419 
million, respectively. 

The IRS has 14 internal use software projects, including deployed and 
work in process. 

* Modernized E-File is an electronic filing system for tax returns. 

* Current Customer Account Data Engine (CADE) is a project to replace 
the master files for individual taxpayer accounts. 

* Customer Account Data Engine 2 (CADE 2) is leveraging existing 
systems and new development to implement a single, data-centric 
solution which provides daily processing of individual taxpayer 
accounts and establishes a solid data foundation for the future. 

* Account Management Services (AMS) is a project which establishes the 
foundation for major compliance programs by providing the applications 
to monitor and interface with taxpayers, issue enhanced notices and 
deliver improved customer support and functionality. 

* Integrated Financial System (IFS) is the IRS administrative 
financial system. 

* E-Services is a system of web-based products and services for tax 
practitioners and the public. 

* Enterprise Systems Management (ESM) is an infrastructure system 
allowing remote monitoring and network management. 

* Security and Technology Infrastructure Release (STIR) is the 
infrastructure for information technology security. 

* Customer Communications is a customer service telephone system. 

* Internet Refund Fact of Filing allows taxpayers to review the status 
of their refund. 

* The Custodial Detail Database (CDDB) is the subsidiary ledger for 
RRACS which provides the functionality needed for custodial financial 
management and reporting. 

* Redesign Revenue and Accounting System (RRACS) adds enhancements to 
financial reporting of taxpayer receipts and adds traceability between 
summary records and the detailed subsidiary ledger (CDDB). 

* Knowledge Incident/Problem Service Asset Management (KISAM) project 
will replace the IRS’ current asset and problem management system, 
Information Technology Asset Management System. 

* Integrated Procurement System (IPS) is a project to re-engineer the 
existing procurement system, Web Requisition Tracking 
System/Integrated Procurement System, to meet current enterprise 
architecture and security standards. 

Deployed Internal Use Software: 
(In Millions) 
				
Current CADE: 
Cost: $302; 
Accumulated Depreciation: ($165); 
2010 Net Book Value: $137; 
2009 Net Book Value: $185. 

Modernized E-File: 
Cost: $251; 
Accumulated Depreciation: ($145); 
2010 Net Book Value: $106; 
2009 Net Book Value: $70. 

Integrated Financial System: 
Cost: $147; 
Accumulated Depreciation: ($115); 
2010 Net Book Value: $32; 
2009 Net Book Value: $53. 

E-Services: 
Cost: $141; 
Accumulated Depreciation: ($131); 
2010 Net Book Value: $10; 
2009 Net Book Value: $30. 

AMS: 
Cost: $78; 
Accumulated Depreciation: ($8); 
2010 Net Book Value: $70; 
2009 Net Book Value: $76. 

STIR: 
Cost: $76; 
Accumulated Depreciation: ($76); 
2010 Net Book Value: [Empty]; 
2009 Net Book Value: $5. 

Customer Communications: 
Cost: $25; 
Accumulated Depreciation: ($25); 
2010 Net Book Value: [Empty]; 
2009 Net Book Value: [Empty]. 

Enterprise Systems Management: 
Cost: $16; 
Accumulated Depreciation: ($16); 
2010 Net Book Value: [Empty]; 
2009 Net Book Value: $1. 

Internet Refund Fact of Filing: 
Cost: $15; 
Accumulated Depreciation: ($15); 
2010 Net Book Value: [Empty]; 
2009 Net Book Value: $1. 

CDDB: 
Cost: $8; 
Accumulated Depreciation: ($2); 
2010 Net Book Value: $6; 
2009 Net Book Value: $7. 

Other: 
Cost: $8; 
Accumulated Depreciation: $7; 
2010 Net Book Value: $1; 
2009 Net Book Value: $1. 

Deployed Internal Use Software: 
Cost: $1,073; 
Accumulated Depreciation: ($706); 
2010 Net Book Value: $367; 
2009 Net Book Value: $429. 

Work in Process Internal Use Software: 		
(In Millions)	 

Modernized E-File: 
2010: $11; 
2009: $49. 

Current CADE: 
2010: [Empty]; 
2009: $23. 

RRACS: 
2010: [Empty]; 
2009: $3. 

KISAM: 
2010: $5
2009: [Empty]. 

CADE2: 
2010: $40; 
2009: [Empty]. 

Work in Process Internal Use Software: 
2010: $60; 
2009: $75. 

Note 8. Liabilities: 
(In Millions) 
	
Other Liabilities: 

Intragovernmental: 

Accrued payroll and benefits: 
2010: Current: $89; 
2010: Non-Current: [Empty]; 
2010: Total: $89. 

Accrued FECA liability: 
2010: Current: $43; 
2010: Non-Current: $55; 
2010: Total: $98. 

Accrued expense: 
2010: Current: $48; 
2010: Non-Current: [Empty]; 
2010: Total: $48. 

Other Liabilities: 
2010: Current: $180; 
2010: Non-Current: $55; 
2010: Total: $235. 

With the Public: 

Accrued annual leave: 
2010: Current: $549; 
2010: Non-Current: [Empty]; 
2010: Total: $549. 

Actuarial FECA liability: 
2010: Current: [Empty]; 
2010: Non-Current: $441; 
2010: Total: $441. 

Accrued payroll and benefits: 
2010: Current: $375; 
2010: Non-Current: [Empty]; 
2010: Total: $375. 

Accrued expenses: 
2010: Current: $235; 
2010: Non-Current: [Empty]; 
2010: Total: $235. 

Liability for Deposit Funds and Clearing Accounts and Custodial 
Liabilities: 
2010: Current: $300; 
2010: Non-Current: [Empty]; 
2010: Total: $300. 

Accounts payable: 
2010: Current: $103; 	
2010: Non-Current: [Empty]; 
2010: Total: $103. 

Other Liabilities: 
2010: Current: $1,562; 
2010: Non-Current: $441; 
2010: Total: $2,003. 

Intragovernmental: 

Accrued payroll and benefits: 
2009: Current: $80; 
2009: Non-Current: [Empty]; 
2009: Total: $80. 

Accrued FECA liability: 
2009: Current: $43; 
2009: Non-Current: $55; 
2009: Total: $98. 

Accrued expense: 
2009: Current: $30; 
2009: Non-Current: [Empty]; 
2009: Total: $30. 

Other Liabilities: 
2009: Current: $153; 
2009: Non-Current: $55; 
2009: Total: $208. 

With the Public: 

Accrued annual leave: 
2009: Current: $531; 
2009: Non-Current: [Empty]; 
2009: Total: $531. 

Actuarial FECA liability: 
2009: Current: [Empty]; 
2009: Non-Current: $426; 
2009: Total: $426. 

Accrued payroll and benefits: 
2009: Current: $340; 
2009: Non-Current: [Empty]; 
2009: Total: $340. 

Accrued expenses: 
2009: Current: $215; 
2009: Non-Current: [Empty]; 
2009: Total: $215. 

Liability for Deposit Funds and Clearing Accounts: 
2009: Current: $62; 
2009: Non-Current: [Empty]; 
2009: Total: $62. 

Accounts payable: 
2009: Current: $85; 	
2009: Non-Current: [Empty]; 
2009: Total: $85. 

Other Liabilities: 
2009: Current: $1,233; 
2009: Non-Current: $426; 
2009: Total: $1,659. 

Liabilities Not Covered by Budgetary Resources: 

(In Millions) 

Accrued annual leave: 
2010 Intra-governmental: [Empty]; 
2010 With the Public: $549; 
2009 Intra-governmental: [Empty]; 
2009 With the Public: $531. 

Actuarial FECA liability: 
2010 Intra-governmental: [Empty]; 
2010 With the Public: $441; 
2009 Intra-governmental: [Empty]; 
2009 With the Public: $426. 

Accrued FECA liability:	
2010 Intra-governmental: $98; 
2010 With the Public: [Empty]; 
2009 Intra-governmental: $98; 
2009 With the Public: [Empty]. 

Liabilities Not Covered by Budgetary Resources:
2010 Intra-governmental: $98; 
2010 With the Public: $990; 
2009 Intra-governmental: $98; 
2009 With the Public: $957. 

Liabilities not covered by budgetary resources include liabilities for 
which congressional action is needed before budgetary resources can be 
provided. Although future appropriations to fund these liabilities are 
likely, it is not certain appropriations will be enacted to fund these 
liabilities. 

Note 9. Leases: 

Capital Leases: 

The IRS leases ADP telecommunications equipment for toll free call 
centers under seven year leases. The payments for the leased equipment 
are made at the beginning of the leases. There are no future payments 
due. 

Operating Leases: 
(In Millions) 

Fiscal Year: 2011; 
Lease Payment: $13. 

Fiscal Year: 2012; 
Lease Payment: $12. 

Fiscal Year: 2013; 
Lease Payment: $7. 

Fiscal Year: 2014; 
Lease Payment: $1. 

Fiscal Year: 2015; 
Lease Payment: $1. 

Fiscal Year: After 2015; 
Lease Payment: $3. 

Total Future Lease Payments: 
Lease Payment: $37. 

The IRS leases office space from commercial entities under five year 
non-cancelable operating leases. Future lease payments under non-
cancelable leases of office spaces are presented above. 

Additionally, the IRS has annual operating leases with the General 
Services Administration for office space and vehicles and with 
commercial entities for equipment. These leases are cancelable or
renewable on an annual basis at the option of the IRS. They do not 
impose binding commitments on the IRS for future rental payments on 
leases with terms longer than one year. 

Note 10. Commitments and Contingencies: 

The IRS is a party to legal actions whose outcome, if unfavorable, 
could materially affect the financial statements. For some of these 
actions, management and legal counsel have determined the likelihood
of an unfavorable outcome is remote. As of September 30, 2010 and 
2009, there were no estimated contingent liabilities arising from 
these actions. 

For some of the legal actions to which the IRS is a party, management 
and legal counsel cannot determine the likelihood of an unfavorable 
outcome nor can any related loss be reasonably estimated. The IRS does 
not accrue for possible losses related to cases where the potential 
loss cannot be estimated or the likelihood of an unfavorable outcome 
is less than probable. As of September 30, 2010 and 2009, there were 
three cases and two cases, respectively, for which management and legal
counsel are unable to determine the likelihood of an unfavorable 
outcome or establish a range of potential losses. 

The IRS has pending refund claims and lawsuits relating to whether the 
FICA tax is owed on stipends paid to medical residents for their 
services prior to April 1, 2005. It is probable these claims and 
lawsuits will result in a loss to the Federal government. An estimate 
of the potential loss cannot be made. 

As of September 30, 2010 and 2009, the IRS does not have contractual 
commitments for payments on obligations related to canceled 
appropriations. 

Note 11. Cost and Earned Revenue by Programs: 
(In Millions) 

2010: 

Intragovernmental Gross Cost: 
Taxpayer Assistance and Education: $201; 
Filing and Account Services: $1,499; 
Compliance: $2,834; 
Administration of Tax Credit: $45; 
Total: $4,579. 

Gross Costs with the Public: 
Taxpayer Assistance and Education: $592; 
Filing and Account Services: $2,029; 
Compliance: $6,497; 
Administration of Tax Credit: $205; 
Total: $9,323. 

Program Costs: 
Taxpayer Assistance and Education: $793; 
Filing and Account Services: $3,528; 
Compliance: $9,331; 
Administration of Tax Credit: $250; 
Total: $13,902. 

Intragovemmental Earned Revenue: 
Taxpayer Assistance and Education: ($4); 
Filing and Account Services: ($6); 
Compliance: ($59); 
Administration of Tax Credit: [Empty]; 
Total: ($69). 

Earned Revenue from the Public: 
Taxpayer Assistance and Education: ($3); 
Filing and Account Services: ($64); 
Compliance: ($319); 
Administration of Tax Credit: [Empty]; 
Total: ($386). 

Program Revenues: 
Taxpayer Assistance and Education: ($7); 
Filing and Account Services: ($70); 
Compliance: ($378); 
Administration of Tax Credit: [Empty]; 
Total: ($455). 

Net Cost of Operations: 
Taxpayer Assistance and Education: $786; 
Filing and Account Services: $3,458; 
Compliance: $8,953; 
Administration of Tax Credit: $250; 
Total: $13,447. 

2009: 

Intragovernmental Gross Cost: 
Taxpayer Assistance and Education: $88; 
Filing and Account Services: $1,639; 
Compliance: $2,372; 
Administration of Tax Credit: $43; 
Total: $4,142. 

Gross Costs with the Public: 
Taxpayer Assistance and Education: $468; 
Filing and Account Services: $2,311; 
Compliance: $5,803; 
Administration of Tax Credit: $147; 
Total: $8,729. 

Program Costs: 
Taxpayer Assistance and Education: $556; 
Filing and Account Services: $3,950; 
Compliance: $8,175; 
Administration of Tax Credit: $190; 
Total: $12,871. 

Intragovemmental Earned Revenue: 
Taxpayer Assistance and Education: ($2); 
Filing and Account Services: ($12); 
Compliance: ($41); 
Administration of Tax Credit: [Empty]; 
Total: ($55). 

Earned Revenue from the Public: 
Taxpayer Assistance and Education: ($3); 
Filing and Account Services: ($56); 
Compliance: ($254); 
Administration of Tax Credit: [Empty]; 
Total: ($313). 

Program Revenues: 
Taxpayer Assistance and Education: ($5); 
Filing and Account Services: ($68); 
Compliance: ($295); 
Administration of Tax Credit: [Empty]; 
Total: ($368). 

Net Cost of Operations: 
Taxpayer Assistance and Education: $551; 
Filing and Account Services: $3,882; 
Compliance: $7,880; 
Administration of Tax Credit: $190; 
Total: $12,503. 

Note 12. Statement of Budgetary Resources Obligations Incurred: 
(In Millions)	 

Direct - Category B: 
2010: $12,467; 
2009: $11,782. 

Reimbursable - Category B: 
2010: $136; 
2009: $114. 

Obligations Incurred: 
2010: $12,603; 
2009: $11,896. 

Category B apportionments distribute budgetary resources by activities 
or programs and are restricted by purpose for which obligations can be 
incurred. 

Explanation of Differences Between the Statement of Budgetary Resources 
and the President's Budget: 

(In Millions) 

Statement of Budgetary Resources (SBR): 
Budgetary Resources: $12,783; 
Obligations Incurred: $11,896; 
Distributed Offsetting Receipts: $233; 
Net Outlays: $11,247. 

Included on SBR, not in President's Budget: Expired Funds; 
Budgetary Resources: ($386); 
Obligations Incurred: ($38); 
Distributed Offsetting Receipts: [Empty]; 
Net Outlays: [Empty]. 

Included on SBR, not in President's Budget: Distributed Offsetting 
Receipts: 
Budgetary Resources: [Empty]; 
Obligations Incurred: [Empty]; 
Distributed Offsetting Receipts: ($233); 
Net Outlays: $233. 

Included on SBR, not in President's Budget: Allocation Transfer from 
Treasury; 
Budgetary Resources: ($122); 
Obligations Incurred: 9$27); 	
Distributed Offsetting Receipts: [Empty]; 
Net Outlays: $24. 

Included on SBR, not in President's Budget: Other; 
Budgetary Resources: ($1); 
Obligations Incurred: $3; 	
Distributed Offsetting Receipts: [Empty]; 
Net Outlays: ($5). 

Included in President's Budget, not on SBR: Tax credits and interest 
refunds to taxpayers; 
Budgetary Resources: $82,373; 
Obligations Incurred: $82,373; 
Distributed Offsetting Receipts: [Empty]; 
Net Outlays: $82,373. 

Included in President's Budget, not on SBR: Payments to informants; 
Budgetary Resources: $5; 
Obligations Incurred: $5; 
Distributed Offsetting Receipts: [Empty]; 
Net Outlays: $5. 

Budget of the United States Government: 
Budgetary Resources: $94,692; 
Obligations Incurred: $94,212; 
Distributed Offsetting Receipts: [Empty]; 
Net Outlays: $93,829. 

The FY 2012 Budget of the United States Government (President’s 
Budget) presenting the actual amounts for the year ended September 30, 
2010 has not been published as of the issue date of these financial 
statements. The FY 2012 President’s Budget is scheduled for 
publication in February 2011. A reconciliation of the FY 2009 column 
on the Statement of Budgetary Resources (SBR) to the actual
amounts for FY 2009 in the FY 2011 President’s Budget for budgetary 
resources, obligations incurred, distributed offsetting receipts, and 
net outlays is presented above. 

The President’s Budget includes appropriations for EITC, Child Tax 
Credit, HCTC, interest relating to taxpayer refunds, informant 
payments and additional refundable tax credits relating to the Recovery
Act totaling $82.4 billion. The majority of the appropriations 
represent budgetary resources and outlays of payments to taxpayers for 
credits that exceed the taxpayer’s income tax liability and interest
paid on refunds of collections. 

Undelivered Orders at the End of Period: 

Undelivered orders are the value of goods and services ordered and 
obligated which have not been received. This amount includes any 
orders which may have been prepaid or advanced but for which delivery 
or performance has not yet occurred. Undelivered orders were $1,043 
million and $985 million for the periods ended September 30, 2010 and 
2009, respectively. 

Note 13. Collections of Federal Tax Revenue: 
(In Billions) 

Individual income, FICA/SECA, and other: 
Tax year 2010: $1,316[A]; 
Tax Year 2009: $636; 
Tax Year 2008: $20; 
Prior Years: $17; 
Collections Received FY 2010: $1,989; 
Collections Received FY 2009: $2,036. 

Corporate income: 
Tax year 2010: $189[B]; 
Tax Year 2009: $75; 
Tax Year 2008: $2; 
Prior Years: $12; 
Collections Received FY 2010: $278; 
Collections Received FY 2009: $225. 

Excise: 
Tax year 2010: $35; 
Tax Year 2009: $12; 
Tax Year 2008: [Empty]; 
Prior Years: [Empty]; 
Collections Received FY 2010: $47; 
Collections Received FY 2009: $47. 

Estate and gift: 
Tax year 2010: [Empty]; 
Tax Year 2009: $8; 
Tax Year 2008: $1; 
Prior Years: $11; 
Collections Received FY 2010: $20; 
Collections Received FY 2009: $25. 

Railroad retirement: 
Tax year 2010: $4; 
Tax Year 2009: $1; 
Tax Year 2008: [Empty]; 
Prior Years: [Empty]; 
Collections Received FY 2010: $5; 
Collections Received FY 2009: $5. 

Federal unemployment: 
Tax year 2010: $4; 
Tax Year 2009: $2; 
Tax Year 2008: [Empty]; 
Prior Years: [Empty]; 
Collections Received FY 2010: $6; 
Collections Received FY 2009: $7. 

Collections of Federal Tax Revenue: 
Tax year 2010: $1,548; 
Tax Year 2009: $732; 
Tax Year 2008: $23; 
Prior Years: $40; 
Collections Received FY 2010: $2,345; 
Collections Received FY 2009: $2,345. 

[A] Includes other collections of $241 million. 

[B] Includes tax year 2011 corporate income tax receipts of $13 
trillion. 

Note 14. Federal Tax Refund Activity: 
(In Billions) 

Individual income, FICA/SECA, and other: 
Tax year 2010: $1; 
Tax Year 2009: $312; 
Tax Year 2008: $36; 
Prior Years: $17; 
Collections Received FY 2010: $366; 
Collections Received FY 2009: $340. 

Corporate income: 
Tax year 2010: $3; 
Tax Year 2009: $16; 
Tax Year 2008: $17; 
Prior Years: $62; 
Collections Received FY 2010: $98; 
Collections Received FY 2009: $95. 

Excise: 
Tax year 2010: $1; 
Tax Year 2009: $1; 
Tax Year 2008: [Empty]; 
Prior Years: [Empty]; 
Collections Received FY 2010: $2
Collections Received FY 2009: $2. 

Estate and gift: 
Tax year 2010: [Empty]; 
Tax Year 2009: [Empty]; 
Tax Year 2008: $1; 
Prior Years: [Empty]; 
Collections Received FY 2010: $1; 
Collections Received FY 2009: $1. 

Federal Tax Refund Activity: 
Tax year 2010: $5; 
Tax Year 2009: $329; 
Tax Year 2008: $54; 
Prior Years: $79; 
Collections Received FY 2010: $467; 
Collections Received FY 2009: $438. 

Refund disbursements include EITC, child tax credit and those enacted 
under the ARRA. The Economic Stimulus Act of 2008 included provisions 
to help stimulate the economy through recovery rebates. (See Other 
Accompanying Information - unaudited for discussion of refundable tax 
credits.) 

Note 15. Fiduciary Activities: 
(In Millions) 

Fiduciary net assets, beginning of year: 
2010: 20X6737: [Empty]; 
2010: 20X6738: $18; 
2010: 20X6740: [Empty]; 
2010: 20X6741: [Empty]; 
2010: Total: $18. 

Contributions: 
2010: 20X6737: $17; 
2010: 20X6738: $27; 
2010: 20X6740: $772; 
2010: 20X6741: $20; 
2010: Total: $836. 

Disbursements to and on behalf of beneficiaries: 
2010: 20X6737: ($17); 
2010: 20X6738: ($26); 
2010: 20X6740: ($772); 
2010: 20X6741: ($20); 
2010: Total: ($835). 

Increase (Decrease) in fiduciary net Assets: 
2010: 20X6737: [Empty]; 
2010: 20X6738: $1; 
2010: 20X6740: [Empty]; 
2010: 20X6741: [Empty]; 
2010: Total: $1. 

Fiduciary Net Assets, end of year: 
2010: 20X6737: [Empty]; 
2010: 20X6738: $19; 
2010: 20X6740: [Empty]; 
2010: 20X6741: [Empty]; 
2010: Total: $19. 

Note 15. Fiduciary Activities: 
(In Millions) 

Fiduciary net assets, beginning of year: 
2009: 20X6737: ($2); 
2009: 20X6738: $11; 
2009: 20X6740: [Empty]; 
2009: 20X6741: [Empty]; 
2009: Total: $9;. 

Contributions: 
2009: 20X6737: $47; 
2009: 20X6738: $37; 
2009: 20X6740: $635; 
2009: 20X6741: $18; 
2009: Total: $737. 

Disbursements to and on behalf of beneficiaries: 
2009: 20X6737: ($45); 
2009: 20X6738: ($30); 
2009: 20X6740: ($635); 
2009: 20X6741: ($18); 
2009: Total: ($728). 

Increase (Decrease) in fiduciary net Assets: 
2009: 20X6737: $2; 
2009: 20X6738: $7; 
2009: 20X6740: [Empty]; 
2009: 20X6741: [Empty]; 
2009: Total: $9. 

Fiduciary Net Assets, end of year: 
2009: 20X6737: [Empty]; 
2009: 20X6738: $18; 
2009: 20X6740: [Empty]; 
2009: 20X6741: [Empty]; 
2009: Total: $18. 

In fiduciary fund 20X6738, the fiduciary net assets, end of the year 
balances are pending a tax matter resolution. 

In accordance with Statement of Federal Financial Accounting Standards 
No. 31, Accounting for Fiduciary Activities, fiduciary cash and other 
assets are not assets of the Federal government. The IRS has four 
fiduciary funds not reported on the balance sheet: 

* Internal Revenue Collections for Northern Mariana Islands: 20X6737; 
* Coverover Withholdings – U.S. Virgin Islands: 20X6738; 
* Coverover Withholdings – Guam: 20X6740; 
* Coverover Withholdings – American Samoa: 20X6741. 

Internal Revenue Code (26 USC) Section 7654 governs the tax 
coordination between the governments of the United States and the U.S. 
territories of the Northern Mariana Islands, the U.S. Virgin Islands,
Guam and American Samoa. 

The collections of federal income taxes withheld from United States 
military and federal employees who are working in these U.S. 
territories are maintained in fiduciary funds of the IRS. The 
disbursements of these collections to these U.S. territory governments 
represent the transfer of the individual tax liability for a taxable 
year. 

Note 16. Reconciliation of Net Cost of Operations to Budget: 
(In Millions) 

Resources used to finance activities: 

Obligations incurred: 
2010: $12,603; 
2009: $11,896. 

Spending authority from offsetting collections and recoveries: 
2010: ($241); 
2009: ($224). 

Distributed offsetting receipts: 
2010: ($284); 
2009: ($233). 

Transfers to General Fund: 
2010: ($64); 
2009: ($45). 

Imputed financing: 
2010: $1,390; 
2009: $1,123. 

Transfers in/out without reimbursement: 
2010: $35; 
2009: $21. 

Total: 
2010: $13,440; 
2009: $12,538. 

Resources that do not fund net cost of operations: 

Changes in goods, services and benefits ordered but not yet received or 
provided: 
2010: ($56); 
2009: ($64). 

Costs capitalized on the balance sheet: 
2010: ($249); 
2009: ($300). 

Budgetary offsetting collections and receipts: 
2010: ($1); 
2009: $0. 

Costs that do not require resources In current period: 

Depreciation and amortization; 
2010: $361; 
2009: $320. 

Increase (Decrease) in unfunded liabilities; 
2010: $33; 
2009: ($29). 

Revaluation of assets and liabilities; 
2010: $16; 
2009: $42. 

Other: 
2010: ($97); 
2009: ($4). 

Total: 
2010: $313; 
2009: $329. 

Net Cost of Operations: 
2010: $13,447; 
2009: $12,503. 

[End of section] 

Required Supplementary Information: 

Internal Revenue Service: 
Required Supplementary Information - Unaudited: 
For the Years Ended September 30, 2010 and 2009: 

Schedule of Budgetary Resources by Major Budget Accounts: 
(In Millions) 

2010: 

Budgetary Resources: 
		
Unobligated Balance, Brought Forward, October 1; 
Taxpayer Service: $156; 
Enforcement: $90; 
Operations Support: $217; 
Other Appropriations: $424; 
Total: $887. 

Recoveries of Prior Year Unpaid Obligations; 
Taxpayer Service: $12;
Enforcement: $26; 
Operations Support: $46; 
Other Appropriations: $6; 
Total: $90. 

Budget Authority: Appropriations; 
Taxpayer Service: $2,279; 
Enforcement: $5,504; 
Operations Support: $4,084; 
Other Appropriations: $577; 
Total: $12,444. 

Budget Authority: Spending Authority from Offsetting Collections; 
Taxpayer Service: $27; 
Enforcement: $79; 
Operations Support: $42; 
Other Appropriations: $3; 
Total: $151. 

Nonexpenditure Transfers, Net; 
Taxpayer Service: $133; 
Enforcement: ($10); 
Operations Support: $22; 
Other Appropriations: ($145); 
Total: [Empty]. 

Permanently Not Available; 
Taxpayer Service: ($76); 
Enforcement: ($24); 
Operations Support: ($34); 
Other Appropriations: ($19); 
Total: ($153). 

Total Budgetary Resources; 
Taxpayer Service: $2,531; 
Enforcement: $5,665; 
Operations Support: $4,377; 
Other Appropriations: $846; 
Total: $13,419. 

Status of Budgetary Resources: 

Obligations Incurred; 
Taxpayer Service: $2,437; 
Enforcement: $5,574; 
Operations Support: $4,168; 
Other Appropriations: $424; 
Total: $12,603. 

Unobligated Balance — Available; 
Taxpayer Service: $22; 
Enforcement: $23; 
Operations Support: $77; 	
Other Appropriations: $119; 
Total: $241. 

Unobligated Balance — Not Available; 
Taxpayer Service: $72; 
Enforcement: $68; 
Operations Support: $132; 	
Other Appropriations: $303; 
Total: $575. 

Total Status of Budgetary Resources; 
Taxpayer Service: $2,531; 
Enforcement: $5,665; 
Operations Support: $4,377; 
Other Appropriations: $846; 
Total: $13,419. 

Change In Obligated Balance: 
		
Obligated Balance, Net Brought Forward, October 1; 
Taxpayer Service: $205; 
Enforcement: $410; 
Operations Support: $826; 
Other Appropriations: $146; 
Total: $1,587. 

Obligations Incurred; 
Taxpayer Service: $2,437; 
Enforcement: $5,574; 
Operations Support: $4,168; 
Other Appropriations: $424; 
Total: $12,603. 

Gross Outlays; 
Taxpayer Service: ($2,430); 
Enforcement: ($5,524); 
Operations Support: ($3,986); 
Other Appropriations: ($384); 
Total: ($12,324). 

Recoveries of Prior Year Unpaid Obligations, Actual; 
Taxpayer Service: ($12); 
Enforcement: ($26); 
Operations Support: ($46); 
Other Appropriations: ($6); 
Total: ($90). 

Change in Uncollected Customer Payments from Federal Sources; 
Taxpayer Service: [Empty]; 
Enforcement: $23; 
Operations Support: ($1); 
Other Appropriations: [Empty]; 
Total: ($24). 

Obligated Balances, Net End of Period; 
Taxpayer Service: $200; 
Enforcement: $411; 
Operations Support: $961; 
Other Appropriations: $180; 
Total: $1,752. 

Net Outlays: 

Gross Outlays; 
Taxpayer Service: $2,430; 
Enforcement: $5,524; 
Operations Support: $3,986; 
Other Appropriations: $384; 
Total: $12,324. 

Offsetting Collections; 
Taxpayer Service: ($27); 
Enforcement: ($56); 
Operations Support: ($41); 	
Other Appropriations: ($3); 
Total: ($127). 

Distributed Offsetting Receipt; 
Taxpayer Service: [Empty]; 
Enforcement: [Empty]; 
Operations Support: [Empty]; 
Other Appropriations: ($283); 
Total: ($283). 

Net Outlays; 
Taxpayer Service: $2,403; 
Enforcement: $5,468; 
Operations Support: $3,945; 
Other Appropriations: $98; 
Total: $11,914. 

2009: 

Schedule of Budgetary Resources by Major Budget Accounts: 
(In Millions) 

Budgetary Resources: 
		
Unobligated Balance, Brought Forward, October 1; 
Taxpayer Service: $181; 
Enforcement: $100; 
Operations Support: $184; 
Other Appropriations: $225; 
Total: $890. 

Recoveries of Prior Year Unpaid Obligations; 
Taxpayer Service: $23;
Enforcement: $20; 
Operations Support: $47; 
Other Appropriations: $4; 
Total: $94. 

Budget Authority: Appropriations; 
Taxpayer Service: $2,293; 
Enforcement: $5,118; 
Operations Support: $3,888; 
Other Appropriations: $574; 
Total: $11,851. 

Budget Authority: Spending Authority from Offsetting Collections; 
Taxpayer Service: $30; 
Enforcement: $53; 
Operations Support: $41; 
Other Appropriations: $8; 
Total: $130. 

Nonexpenditure Transfers, Net; 
Taxpayer Service: $129; 
Enforcement: $1; 
Operations Support: $44; 
Other Appropriations: ($44); 
Total: $130. 

Permanently Not Available; 
Taxpayer Service: ($49); 
Enforcement: ($28); 
Operations Support: ($30); 
Other Appropriations: ($7); 
Total: ($112). 

Total Budgetary Resources; 
Taxpayer Service: $2,607; 
Enforcement: $5,266; 
Operations Support: $4,152; 
Other Appropriations: $758; 
Total: $12,783. 

Status of Budgetary Resources: 

Obligations Incurred; 
Taxpayer Service: $2,451; 
Enforcement: $5,178; 
Operations Support: $3,935; 
Other Appropriations: $334; 
Total: $11,898. 

Unobligated Balance — Available; 
Taxpayer Service: $23; 
Enforcement: $18; 
Operations Support: $102; 	
Other Appropriations: $243; 
Total: $384. 

Unobligated Balance — Not Available; 
Taxpayer Service: $133; 
Enforcement: $74; 
Operations Support: $115; 	
Other Appropriations: $181; 
Total: $503. 

Total Status of Budgetary Resources; 
Taxpayer Service: $2,607; 
Enforcement: $5,266; 
Operations Support: $4,152; 
Other Appropriations: $758; 
Total: $12,783. 

Change In Obligated Balance: 
		
Obligated Balance, Net Brought Forward, October 1; 
Taxpayer Service: $224; 
Enforcement: $301; 
Operations Support: $757; 
Other Appropriations: $112; 
Total: $1,394. 

Obligations Incurred; 
Taxpayer Service: $2,451; 
Enforcement: $5,178; 
Operations Support: $3,935; 
Other Appropriations: $334; 
Total: $11,898. 

Gross Outlays; 
Taxpayer Service: ($2,447); 
Enforcement: ($5,049); 
Operations Support: ($3,832); 
Other Appropriations: ($296); 
Total: ($11,824). 

Recoveries of Prior Year Unpaid Obligations, Actual; 
Taxpayer Service: ($23); 
Enforcement: ($20); 
Operations Support: ($47); 
Other Appropriations: ($4); 
Total: ($94). 

Change in Uncollected Customer Payments from Federal Sources; 
Taxpayer Service: [Empty]; 
Enforcement: $2; 
Operations Support: $13; 
Other Appropriations: [Empty]; 
Total: $15. 

Obligated Balances, Net End of Period; 
Taxpayer Service: $205; 
Enforcement: $410; 
Operations Support: $826; 
Other Appropriations: $146; 
Total: $1,587. 

Net Outlays: 

Gross Outlays; 
Taxpayer Service: $2,447; 
Enforcement: $5,049; 
Operations Support: $3,832; 
Other Appropriations: $298; 
Total: $11,824. 

Offsetting Collections; 
Taxpayer Service: ($30); 
Enforcement: ($55); 
Operations Support: ($53); 	
Other Appropriations: ($6); 
Total: ($144). 

Distributed Offsetting Receipt; 
Taxpayer Service: [Empty]; 
Enforcement: [Empty]; 
Operations Support: [Empty]; 
Other Appropriations: ($233); 
Total: ($233). 

Net Outlays; 
Taxpayer Service: $2,417; 
Enforcement: $4,994; 
Operations Support: $3,779; 
Other Appropriations: $57; 
Total: $11,247. 

Other Claims for Refunds: 

Management has estimated amounts which may be paid out as other claims 
for tax refunds. This estimate represents an amount (principal and 
interest) which may be paid for claims pending judicial review by the 
Federal courts or, internally, by Appeals. In FY 2010, the total 
estimated payout (including principal and interest) for claims pending 
judicial review by the Federal courts is $8.8 billion and by Appeals 
is $8.0 billion. In FY 2009, the total estimated payout (including 
principal and interest) for claims pending judicial review by the 
Federal courts was $4.7 billion and by Appeals was $6.3 billion. To 
the extent judgments against the government in these cases prompt other
similarly situated taxpayers to file similar refund claims, these 
amounts could become significantly greater. 

Federal Taxes Receivable, Net: 

In accordance with SFFAS No. 7, some unpaid assessments do not meet 
the criteria for financial statement recognition as discussed in Note 
1. F., Federal Taxes Receivable, Net and Due to Treasury. Although 
compliance assessments and write-offs are not considered receivables 
under Federal accounting standards, they represent legally enforceable 
claims of the IRS acting on behalf of the Federal government. There 
is, however, a significant difference in the collection potential of 
these categories. 

The components of the total unpaid assessments and derivation of net 
Federal taxes receivable were as follows: 

(In Billions) 

Total unpaid assessments: 
2010: $330; 
2009: $308. 

Compliance assessments: 
2010: ($93); 
2009: ($75). 

Write-offs: 
2010: ($96); 
2009: ($105). 

Gross Federal taxes receivables: 
2010: $138; 
2009: $128. 

Allowance for uncollectible taxes receivable: 
2010: ($103); 
2009: ($99). 

Federal taxes receivable, net: 
2010: $35; 
2009: $29. 

The IRS cannot reasonably estimate the amount of allowance for 
uncollectible amounts pertaining to its compliance assessments, and 
thus cannot determine their net realizable value or the value of the
pre-assessment work-in-process. 

To eliminate double-counting, the compliance assessments reported 
above exclude trust fund recovery penalties, totaling $3 billion as of 
September 30, 2010 and 2009, respectively, which were assessed against 
officers and directors of businesses who were involved in the non-
remittance of Federal taxes withheld from their employees. The related 
unpaid assessments of those businesses are reported as taxes 
receivable or write-offs, but the IRS may also recover portions of 
those businesses’ unpaid assessments from any and all individual 
officers and directors against whom a trust fund recovery penalty is 
assessed. 

[End of section] 

Other Accompanying Information: 

Internal Revenue Service: 
Other Accompanying Information - Unaudited: 
For the Years Ended September 30, 2010 and 2009: 

Refundable Tax Credits and Other Outlays: 

To provide tax relief to targeted individuals and businesses, Congress 
has provided assistance in the form of tax credits. For the majority 
of tax credits, the economic benefit is limited to the taxpayer's tax 
liability. Credits limited in this manner are termed nonrefundable 
There is an additional class of tax credits which is fully payable to 
the taxpayer, even if the credit exceeds the tax liability. These 
refundable credits provide a greater economic benefit as the taxpayer 
realizes the full benefit of the calculated credit, unlimited by any 
underlying tax liability. 

The overview which follows summarizes the refundable credits which the 
IRS administers and pays. Included in the overview are descriptions of 
refundable credits in existence for many years as well as those 
enacted as part of the American Recovery and Reinvestment Act of 2009 
(ARRA). The ARRA temporarily increased the benefits for several 
existing refundable credits including the Earned Income Tax Credit 
(EITC) and the Child Tax Credit. Additionally, ARRA authorized several 
new refundable credits. The bulk of tax provisions in ARRA affect tax 
years 2009 and 2010. 

Stimulus Credit: 

In 2008 the Economic Stimulus Act provided taxpayers with a one-time 
rebate. These rebates were mailed or sent via direct deposit to 
individuals who filed a 2007 tax return and met certain eligibility 
requirements. The IRS calculated the amount of the rebate based on 
2007 income information. The maximum rebate payment was $600 for 
unmarried persons and $1,200 for married couples, plus an additional 
$300 per qualifying child. 

Earned Income Tax Credit: 

The Earned Income Tax Credit (EITC) is a refundable tax credit for low 
to moderate income working individuals and families. Congress 
originally approved the tax credit legislation in 1975 in part to 
offset the burden of social security taxes and to provide an incentive 
to work. To qualify, taxpayers must meet certain requirements and file 
a tax return, even if they did not earn enough money to be obligated 
to file a tax return. 

ARRA temporarily increased the earned income tax credit for working 
families to forty-five percent (45%) of the family's first $12,570 of 
earned income for families with three or more children. Additionally, 
the initial phase-out range for all married couples filing a joint 
return increased (regardless of the number of children) by $1,880. 

Additional Child Tax Credit: 

The Additional Child Tax Credit is a special credit for taxpayers who 
work, have earnings below an established ceiling and have a qualifying 
child. The Child Tax Credit is limited to the taxpayer's tax liability 
and is a nonrefundable tax credit. However, certain individuals who 
receive less than the full amount of the Child Tax Credit may qualify 
for the "Additional" Child Tax Credit. Under this credit, subject to 
additional criteria, the taxpayer may receive the full credit amount 
even if such amount exceeds the taxpayer's tax liability. 
Consequently, the Additional Child Tax Credit is categorized as a 
refundable tax credit. Benefits of the credit were augmented under 
ARRA by increasing eligibility for the credit in 2009 and 2010. 

Health Care Tax Credit: 

The Health Care Tax Credit was established in 2002 to assist 
economically dislocated workers in acquiring or continuing critical 
health care coverage during periods of economic distress. Under this 
credit, participants can elect to take a portion of their premium as a 
credit on their tax return. Alternatively, participants can elect to 
receive direct reimbursements should they have insufficient tax 
liability against which to apply the credit. 

Individual Alternative Minimum Tax (AMT) Credit: 

In 2007, the Individual Alternative Minimum Tax (AMT) Credit was 
established. This refundable credit is calculated by referencing 
specific timing items which produced an AMT liability in earlier 
years. Timing items involve certain transactions such as incentive 
stock options and adjustments for accelerated depreciation. Non timing 
events, such as having a large number of exemptions or a large 
itemized deduction for state and local taxes, will not qualify for the 
credit. 

First-Time Home Buyer Credit: 

In 2008, Congress provided taxpayers with a refundable tax credit 
equivalent to an interest-free loan equal to 10 percent of the 
purchase of a home (up to $7,500) by a first-time home buyer. The 
provision applied to homes purchased on or after April 9, 2008 and 
before July 1, 2009. Taxpayers receiving this tax credit are required 
to repay any amount received under this provision back to the 
government over 15 years in equal installments, or, if earlier, when 
the home is sold. The credit phases out for taxpayers with adjusted 
gross income in excess of $75,000 ($150,000 in the case of a joint 
return). 

Under ARRA, the bill eliminated the repayment obligation for taxpayers 
who purchase homes after January 1, 2009, increased the maximum value 
of the credit to $8,000, and removed the prohibition on financing by 
mortgage revenue bonds. Additionally, ARRA extended the availability 
of the credit for homes purchased before December 1, 2009. The ARRA 
provision retains the credit recapture if the house is sold within 
three years of purchase. 

Making Work Pay Credit and Credit for Certain Government Retirees: 

The Making Work Pay Credit and Credit for Certain Government Retirees 
was established in 2009. This is a refundable tax credit calculated at 
a rate of 6.2 percent of earned income, phasing out for taxpayers with 
adjusted gross income in excess of $75,000 ($150,000 for married 
couples filing jointly). Taxpayers receive this benefit through a 
reduction in the amount of income tax withheld from their paychecks or 
through claiming the credit on their tax returns. The Making Work Pay 
Credit is reduced by a separate $250 credit (the Credit for Certain 
Government Retirees) for government retirees who are not eligible for 
Social Security benefits. 

Build America and Recovery Zone Bonds: 

Build America Bonds are a financing tool for state and local 
governments. The bonds, which allow a new direct federal payment 
subsidy, are taxable bonds issued by state and local governments which 
will give them access to the conventional corporate debt markets. At 
the election of the state and local governments, the Treasury 
Department will make a direct payment to the state or local 
governmental issuer in an amount equal to 35 percent of the interest 
payment on the Build America Bonds. As a result of this federal 
subsidy payment, state and local governments will have lower net 
borrowing costs and be able to reach more sources of borrowing than 
with more traditional tax-exempt or tax credit bonds. 

Created by the ARRA, Recovery Zone Bonds are targeted to areas 
particularly affected by job losses and will help local governments 
obtain financing for much needed economic development projects, such 
as public infrastructure development. 

COBRA Continuation Coverage for Unemployed Workers: 

To assist persons in maintaining health coverage for themselves and 
their families, ARRA provides a 65 percent subsidy for COBRA 
continuation premiums for up to 9 months for workers who have been 
involuntarily terminated. Additionally, this subsidy applies to health 
care continuation coverage if required by states for small employers. 

To qualify for premium assistance, a worker must be involuntarily 
terminated between September 1, 2008 and December 31, 2009. The 
subsidy would terminate upon an offer of any new employer-sponsored 
health care coverage or Medicare eligibility. Workers who were 
involuntarily terminated between September 1, 2008 and enactment, but 
failed to initially elect COBRA because it was unaffordable, would be 
given an additional 60 days to elect COBRA and receive the subsidy. To 
ensure this assistance is targeted at workers who are most in need, 
participants must attest their same year income will not exceed 
$125,000 for individuals and $250,000 for families. 

COBRA continuation coverage payments to workers are initially paid by 
the employer. The employer receives reimbursement either as a direct 
refund or through their payroll tax return where payments are taken as 
a credit against existing withholdings and payroll taxes. 

American Opportunity Tax Credit: 

The American Opportunity Tax credit modifies the existing Hope Credit 
for tax years 2009 and 2010. This tax credit makes the Hope Credit 
available to a broader range of taxpayers including many with higher 
incomes and those who owe no tax. Additionally, it adds required 
course materials to the list of qualifying expenses and allows the 
credit to be claimed for four post-secondary education years instead 
of two. Many of those eligible will qualify for the maximum annual 
credit of $2,500 per student. 

The following table summarizes refundable tax credit amounts paid in 
2010 and 2009. 
(In Millions) 

Stimulus Credit; 
2010: $81; 
2009: $2,024. 

Earned Income Tax Credit[A]; 
2010: $54,712; 
2009: $42,418. 

Additional Child Tax Credit[A]; 
2010: $22,659; 
2009: $24,284. 

Health Care Tax Credit[A]; 
2010: $205; 
2009: $113. 

Individual Alternative Minimum Tax (AMT) Credit; 
2010: $1,034; 
2009: $711. 

First-Time Homebuyer Credit[A]; 
2010: $8,668; 
2009: $9,386. 

Making Work Pay Credit and Credit for Certain Government Retirees[B]; 
2010: $13,740; 
2009: $663. 

Build America and Recovery Zone Bonds[B]; 
2010: $1,376; 
2009: $19. 

COBRA Credit[B]; 
2010: $3,857; 
2009: $313. 

American Opportunity Tax Credit; 
2010: $3,851; 
2009: [Empty]. 

Corporate Alternative Minimum Tax (AMT) Credit; 
2010: $86; 
2009: $24. 

Refundable Tax Credits; 
2010: $110,269; 
2009: $79,955. 

[A] Existing refundable credits expanded under the ARRA. 

[B] New refundable credits resulting from the ARRA. 

Social Security and Medicare Taxes: 

The Federal Insurance Contributions Act (FICA) provides for a Federal 
system of old-age, survivors, disability, and hospital insurance 
benefits. Payments to trust funds established for these programs are
financed by payroll taxes on employee wages and tips, employers’ 
matching payments, and a tax on self-employment income. 

A portion of FICA benefits involves old-age, survivors, and disability 
payments. These benefits are funded by the social security tax which 
is currently 6.2 percent of wages and tips up to $106,800 and an 
employer matching amount of 6.2 percent bringing the total rate to 
12.4 percent. These benefits are also funded by a self-employment tax 
of 12.4 percent on self employment income up to $106,800 for calendar 
year 2009. Remaining benefits under FICA pertain to hospital benefits 
(referred to as “Medicare”) and are funded by a separate 1.45 percent 
tax on all wages and tips (there is no wage limit) and the employer 
matching contribution of 1.45 percent bringing the total rate to 2.9 
percent. Self-employed individuals pay a Medicare tax of 2.9 percent 
on all self employment income. Social Security taxes collected by the 
IRS were estimated to be approximately $639 billion and $661 billion
in FY 2010 and FY 2009, respectively. Medicare taxes collected by the 
IRS were estimated to be approximately $182 billion and $192 billion 
in FY 2010 and FY 2009, respectively. Social Security taxes and 
Medicare taxes are included in individual income, FICA/SECA and other 
on the Statement of Custodial Activity. 

Tax Gap: 

The tax gap is the difference between the amount of tax imposed by law 
and what taxpayers actually pay on time. The tax gap arises from the 
three types of noncompliance: not filing required tax returns on time 
or at all (the nonfiling gap), underreporting the correct amount of 
tax on timely filed returns (the underreporting gap), and not paying 
on time the full amount reported on timely filed returns (the 
underpayment gap). Of these three components, only the underpayment 
gap is observed; the nonfiling gap and the underreporting gap must be 
estimated. The tax gap, estimated to be about $345 billion for tax 
year 2001 (the most recent estimate made), represents the net amount 
of noncompliance with the tax laws. Underreporting of tax liability 
accounts for 82 percent of the gap, with the remainder almost evenly 
divided between nonfiling (eight percent) and underpaying (ten 
percent). Part of the estimate is based on data from a study of 
individual returns filed for tax year 2001. It does not include any 
taxes that should have been paid on income from illegal activities. 
Each instance of noncompliance by a taxpayer contributes to the tax 
gap, whether or not the IRS detects it, and whether or not the taxpayer
is even aware of the noncompliance. Some of the tax gap arises from 
intentional (willful) noncompliance, and some of it arises from 
unintentional mistakes. 

The collection gap is the cumulative amount of tax, penalties, and 
interest that has been assessed over many years, but has not been paid 
by a certain point in time, and which the IRS expects to remain 
uncollectible. In essence, it represents the difference between the 
total balance of unpaid assessments and the net taxes receivable 
reported on the balance sheet of the IRS. The tax gap and the collection
gap are related and overlapping concepts, but they have significant 
differences. The collection gap is a cumulative balance sheet concept 
for a particular point in time, while the tax gap is like an income
statement item for a single year. Moreover, the tax gap estimates 
include all noncompliance, while the collection gap includes only 
amounts that have been assessed (a small portion of all noncompliance) 
and have not yet reached their statutory collection expiration date. 
Also, the tax gap includes only tax, while the collection gap includes 
tax, penalties, and interest. 

Tax Burden and Tax Expenditures: 

The Internal Revenue Code provides for progressive rates of tax, 
whereby higher incomes are generally subject to higher rates of tax. 
The following graphs and charts present the latest available 
information on income tax and adjusted gross income (AGI) for 
individuals by AGI level and for corporations by size of assets. For 
individuals, the information illustrates, in percentage terms, the tax
burden borne by varying AGI levels. For corporations, the information 
illustrates, in percentage terms, the tax burden borne by these 
entities by various sizes of their total assets. The graphs are only
representative of more detailed data and analysis available from the 
Statistics of Income (SOI) office. 

Total tax expenditures are the foregone Federal revenue resulting from 
deductions and credits provided in the Internal Revenue Code. Since 
tax expenditures directly affect funds available for government 
operations, decisions to forego Federal revenue are as important as 
decisions to spend Federal revenue. 

Figure: Average Individual Income Tax Liability and Adjusted Gross 
Income (AGI), Tax Year 2008: 
[Refer to PDF for image: vertical bar graph] 

Adjusted gross income (AGI): Under $15,000; 
Number of taxable returns (in thousands): 37,970; 
AGI (in millions): $104,025; 
Total income tax (in millions): $2,227; 
Average AGI per return (in whole dollars): $2,740; 
Average income tax per return (in whole dollars): $59; 
Income tax as a percentage of AGI: 2.1%. 

Adjusted gross income (AGI): $15,000 under $30,000; 
Number of taxable returns (in thousands): 29,687; 
AGI (in millions): $655,035; 
Total income tax (in millions): $18,958; 
Average AGI per return (in whole dollars): $22,065; 
Average income tax per return (in whole dollars): $639; 
Income tax as a percentage of AGI: 2.9%. 

Adjusted gross income (AGI): $30,000 under $50,000; 
Number of taxable returns (in thousands): 25,641; 
AGI (in millions): $1,002,998; 
Total income tax (in millions): $56,953; 
Average AGI per return (in whole dollars): $39,117; 
Average income tax per return (in whole dollars): $2,221; 
Income tax as a percentage of AGI: 5.7%. 

Adjusted gross income (AGI): $50,000 under $100,000; 
Number of taxable returns (in thousands): 30,926; 
AGI (in millions): $2,193,891; 
Total income tax (in millions): $184,554; 
Average AGI per return (in whole dollars): $70,934; 
Average income tax per return (in whole dollars): $5,968; 
Income tax as a percentage of AGI: 8.4%. 

Adjusted gross income (AGI): $100,000 under $200,000; 
Number of taxable returns (in thousands): 13,851; 
AGI (in millions): $1,845,103; 
Total income tax (in millions): $232,270; 
Average AGI per return (in whole dollars): $133,211; 
Average income tax per return (in whole dollars): $16,769; 
Income tax as a percentage of AGI: 12.6%. 

Adjusted gross income (AGI): $200,000 under $500,000; 
Number of taxable returns (in thousands): 3,477; 
AGI (in millions): $993,427; 
Total income tax (in millions): $193,700; 
Average AGI per return (in whole dollars): $285,714; 
Average income tax per return (in whole dollars): $55,709; 
Income tax as a percentage of AGI: 19.5%. 

Adjusted gross income (AGI): $500,000 or more; 
Number of taxable returns (in thousands): 899; 
AGI (in millions): $1,468,581; 
Total income tax (in millions): $342,919; 
Average AGI per return (in whole dollars): $1,633,572; 
Average income tax per return (in whole dollars): $381,445; 
Income tax as a percentage of AGI: 23.4%. 

Totals: 
Number of taxable returns (in thousands): 142,451; 
AGI (in millions): $8,262,860; 
Total income tax (in millions): $1,031,581. 

(All figures are estimates and based on samples provided by the 
Statistics of Income (S0I) Office). 

[End of figure] 

Figure: Individual Income Tax Liability As A Percentage Of AGI, Tax 
Year 2008: 

[Refer to PDF for image: vertical bar graph] 

Under $15,000: 2.1%; 
$15,000	under $30,000: 2.9%; 
$30,000 under $50,000: 5.7%; 
$50,000	under $100,000: 8.4%; 
$100,000 under $200,000: 12.6%; 
$200,000 under $250,000: 19.5%; 
$250,000 or more: 23.4%. 

(All figures are estimates and based on samples provided by the 
Statistics of Income (SOI Office). 

[End of figure] 

Figure: Corporation Tax Liability As A Percentage Of Taxable Income, 
Tax Year 2007 Data: 

Total Assets (in thousands): Zero Assets; 
Income subject to tax (in millions): $26,280; 
Total income tax after credits (in millions): $8,593; 
Percentage of income tax after credits to taxable income: 32.7%. 

Total Assets (in thousands): $1 under $500; 
Income subject to tax (in millions): $8,205; 
Total income tax after credits (in millions): $1,582; 
Percentage of income tax after credits to taxable income: 19.3%. 

Total Assets (in thousands): $500 under $1,000; 
Income subject to tax (in millions): $4,292; 
Total income tax after credits (in millions): $1,017; 
Percentage of income tax after credits to taxable income: 23.7%. 

Total Assets (in thousands): $1,000 under $5,000; 
Income subject to tax (in millions): $15,577; 
Total income tax after credits (in millions): $4,628; 
Percentage of income tax after credits to taxable income: 29.7%. 

Total Assets (in thousands): $5,000 under $10,000; 
Income subject to tax (in millions): $10,008; 
Total income tax after credits (in millions): $3,299; 
Percentage of income tax after credits to taxable income: 33.0%. 

Total Assets (in thousands): $10,000 under $25,000; 
Income subject to tax (in millions): $16,650; 
Total income tax after credits (in millions): $5,547; 
Percentage of income tax after credits to taxable income: 33.3%. 

Total Assets (in thousands): $25,000 under $50,000; 
Income subject to tax (in millions): $13,139; 
Total income tax after credits (in millions): $4,347; 
Percentage of income tax after credits to taxable income: 33.1%. 

Total Assets (in thousands): $50,000 under $100,000; 
Income subject to tax (in millions): $16,621; 
Total income tax after credits (in millions): $5,392; 
Percentage of income tax after credits to taxable income: 32.4%. 

Total Assets (in thousands): $100,000 under $250,000; 
Income subject to tax (in millions): $27,977; 
Total income tax after credits (in millions): $9,100; 
Percentage of income tax after credits to taxable income: 32.5%. 

Total Assets (in thousands): $250,000 under $500,000; 
Income subject to tax (in millions): $35,046; 
Total income tax after credits (in millions): $10.876; 
Percentage of income tax after credits to taxable income: 31.0%. 

Total Assets (in thousands): $500,000 under $2,500,000; 
Income subject to tax (in millions): $145,944; 
Total income tax after credits (in millions): $44,586; 
Percentage of income tax after credits to taxable income: 30.6%. 

Total Assets (in thousands): $2,500,000 or more; 
Income subject to tax (in millions): $928,546; 
Total income tax after credits (in millions): $232,408; 
Percentage of income tax after credits to taxable income: 25.0%. 

Total Assets (in thousands): 
Income subject to tax (in millions): $1,248,285; 
Total income tax after credits (in millions): $331,375; 
Percentage of income tax after credits to taxable income: 26.5%. 

(All figures are estimates and based on samples provided by the 
Statistics of Income (SOI) Office). 

[End of figure] 

[End of section] 

Appendix I: Material Weaknesses, Significant Deficiency, and 
Compliance Issues: 

Material Weaknesses: 

During our audits of the Internal Revenue Service's (IRS) fiscal years 
2010 2009 financial statements, we identified two material weaknesses 
[Footnote 24] in internal control. These material weaknesses represent 
significant management challenges and have (1) impaired management's 
ability to prepare its balance sheet without extensive compensating 
procedures, (2) limited the availability of reliable information to 
assist management in making well-informed decisions concerning its 
unpaid tax assessments[Footnote 25] on an ongoing basis, (3) resulted 
in errors in taxpayer accounts that increased taxpayer burden, and (4) 
reduced assurance that data processed by IRS's information systems are 
reliable and that sensitive taxpayer information is appropriately 
protected. The deficiencies that we identified relate to IRS's 
internal control over (1) unpaid tax assessments and (2) information 
security. We reported on each of these deficiencies last year[Footnote 
26] and in prior audits. We highlight these deficiencies in the 
following sections. 

Unpaid Tax Assessments: 

During fiscal year 2010, we continued to find serious internal control 
issues that affected IRS's management of unpaid tax assessments. 
Specifically, we continued to find (1) IRS's reported balances for 
taxes receivable and other unpaid tax assessments[Footnote 27] were 
not traceable from its general ledger system for tax administration-
related transactions (Redesign Revenue Accounting Control System 
(RRACS))[Footnote 28] to individual transactions in underlying source 
records, (2) IRS lacked a subsidiary ledger for unpaid tax assessments 
that would allow it to produce reliable, useful, and timely 
information with which to manage and report externally, and (3) IRS 
experienced errors and delays in recording taxpayer information, 
payments, and other tax assessment-related activities. 

As we reported in prior years,[Footnote 29] IRS's balance for federal 
taxes receivable, which comprised over 80 percent of IRS's total 
assets as reported on its fiscal year 2010 balance sheet, is a product 
of a compensating statistical estimation process rather than the 
summation of individual account balances. IRS's financial management 
systems could not reliably classify and report the transaction-by-
transaction unpaid tax assessments balances in accordance with federal 
accounting standards due to material inaccuracies. To compensate for 
this deficiency, IRS applied a statistical sampling and estimation 
process to data from its master files to estimate the year-end 
balances of (1) taxes receivable in its financial statements and 
required supplementary information and (2) compliance assessments and 
write-offs in its required supplementary information. 

While IRS adjusts the gross taxes receivable balance in its general 
ledger based on the results of this estimation process, the adjusted 
account balance can no longer be traced back to the detailed records 
because it was the product of a statistical estimate. This process 
leaves IRS unable to identify which taxpayers owe the tax debts 
summarized in the gross taxes receivable balance or how much each one 
owes because it does not have records to trace transactions from the 
taxes receivable amount, through its general ledger system, and back 
to underlying transaction-level source documents. Such traceability is 
necessary to enable IRS to ensure that recorded transactions are 
complete, accurate, and supported by underlying records. 

Over the years, IRS has taken a number of actions intended to improve 
its accounting and reporting of unpaid tax assessments. IRS began 
phasing in the use of the Custodial Detail Data Base (CDDB) in 2006. 
One key objective of CDDB was to serve as a transaction-level 
subsidiary ledger for unpaid tax assessments by linking and 
classifying taxpayer account information from IRS's master 
files[Footnote 30] to its general ledger for tax-related transactions 
and activity, thus providing transactional traceability. In fiscal 
year 2008, IRS enhanced CDDB to analyze and record unpaid tax 
assessments balances from its master file on a weekly basis, including 
related interest and penalty accruals, to its general ledger by the 
various financial reporting categories (taxes receivable, compliance 
assessments, and write-offs). These enhancements established CDDB's 
capability to function as a transaction-level subsidiary ledger for 
unpaid tax assessments. Additionally, during fiscal year 2010, IRS 
implemented its RRACS general ledger, which contains United States 
Standard General Ledger (USSGL) accounts for the reporting of taxes 
receivable. RRACS gives IRS the ability to record the taxes receivable-
related balance into USSGL accounts and use the account balances to 
produce the taxes receivable information in its financial statements. 

However, IRS cannot yet use CDDB as its subsidiary ledger for 
recording transaction-based tax debt information to its general ledger 
in a manner that ensures reliable internal and external reporting. 
While CDDB analyzes and classifies master file tax debt transactions 
into the various financial reporting categories, the analysis and 
classification continues to contain material inaccuracies. 
Specifically, through its use of its statistical sampling and 
estimation process, IRS identified errors necessitating almost $10 
billion in adjustments to the 2010 fiscal year-end gross taxes 
receivable balance produced by CDDB. Accordingly, IRS must continue to 
use a resource intensive statistical sampling and estimation process 
in order to derive reliable amounts for taxes receivable and other 
unpaid tax assessments categories for internal and external reporting. 
While the use of CDDB has refined this process, it continued to take 
IRS several months to complete and required multibillion-dollar 
adjustments to the taxes receivable balance in its general ledger. 
Once adjusted, the taxes receivable balance in IRS's general ledger 
could no longer be traced back to underlying transaction-level source 
documents. Consequently, the lack of an effective transaction-level 
subsidiary ledger continued to inhibit IRS's ability to timely develop 
reliable financial and management reports useful for ongoing 
management decisions and external reporting in accordance with federal 
accounting standards. 

During our fiscal year 2010 audit, we continued to identify several 
systemic deficiencies in the programs used by CDDB that resulted in it 
misclassifying tax debt accounts among the three financial reporting 
categories--taxes receivable, compliance assessments, and write-offs. 
We identified instances in which CDDB did not correctly classify an 
account module.[Footnote 31] Specifically, IRS had not written 
sufficient details into the CDDB classification program to allow it to 
sort through, identify, and analyze all the relevant transaction-level 
information required for proper classification, recording, and 
reporting. For example, when IRS records multiple tax assessments on a 
single account module, CDDB is currently unable to distinguish among 
and separately classify the various balances. In one instance we 
identified, a taxpayer filed a tax return but did not pay the entire 
amount of the tax liability reported on the return, which resulted in 
the amount owed being classified as a tax receivable.[Footnote 32] IRS 
later audited the taxpayer and assessed additional taxes against the 
taxpayer for the same tax period. However, IRS had no evidence that 
the taxpayer had agreed to the additional tax assessment. 
Consequently, the additional tax assessment should have been 
classified as a compliance assessment.[Footnote 33] Instead, CDDB 
classified the entire outstanding balance as taxes receivable because 
CDDB programming did not provide for separate classification of 
different tax assessments recorded on the same account module into 
separate accounting categories. 

In another example, CDDB was unable to process and properly classify 
related account modules associated with unpaid payroll taxes when IRS 
(1) assessed a trust fund recovery penalty (TFRP) against an officer 
of a business for a specific tax period and (2) assessed the same 
individual a TFRP from a different business for the same tax 
period.[Footnote 34] In one case we reviewed, IRS assessed a TFRP 
against two officers related to a defunct business's unpaid payroll 
taxes for a particular tax period.[Footnote 35] The business filed a 
tax return reporting the unpaid payroll taxes for the period. However, 
since the business was defunct, IRS's only recourse was to pursue 
collection on the TFRP from the defunct business's individual 
officers. In this situation, CDDB should have (1) classified the 
outstanding TFRP against one of the officers as taxes receivable, (2) 
classified the outstanding TFRP against the other officer as a 
duplicate tax assessment that is not counted for financial reporting 
purposes, (3) classified a like amount of the business's outstanding 
payroll tax as a duplicate tax assessment that is not counted for 
financial reporting purposes, and (4) classified any remaining balance 
from the business's unpaid payroll tax account that is above the TFRP 
amount as a write-off. However, in this case, IRS had also assessed 
these same individuals a TFRP related to another business for the same 
tax period. Because there were two separate TFRP tax assessments 
recorded on the individuals' master file account modules for the same 
tax period, CDDB was unable to process and correctly classify the 
related account modules. As a result, CDDB defaulted to classifying 
the business's outstanding payroll tax account as taxes receivable and 
classifying the individual TFRP accounts as duplicate tax assessments. 
Since the business was defunct and the amount of the payroll tax owed 
by the business was more than the amount of the TFRP assessed against 
the individuals, the taxes receivable balance was overstated by the 
amount assessed against the defunct business that was in excess of the 
TFRP assessment. Consequently, IRS had to make an adjustment to reduce 
the balance of taxes receivable on this account. 

In addition to CDDB's systemic limitations, IRS's management and 
reporting of unpaid tax assessments also continued to be hindered by 
inaccurate tax records. During our fiscal year 2010 audit, we again 
found errors in taxpayer records resulting from IRS not recording 
information accurately and timely. Such errors directly affect the 
accuracy of CDDB's tax debt classification and reporting. 
Additionally, such errors can cause frustration to taxpayers who 
either have already paid taxes owed or who owe significantly lower 
amounts. 

For example, in one case we reviewed, IRS made a data entry error when 
recording information from a taxpayer's payroll tax return that 
resulted in a tax assessment against the taxpayer for approximately $1 
million when the taxpayer had reported a tax liability of less than 
$50,000. IRS's error created a balance due within the account and led 
to IRS erroneously issuing a notice to the taxpayer requesting payment 
for approximately $1 million. Although IRS subsequently determined 
that the balance due was the result of its own error and corrected the 
information in the taxpayer's account module, it did so only after 
inconveniencing the taxpayer. In another case, IRS recorded on a 
taxpayer's tax account module in January of 1985 that the taxpayer was 
involved in litigation. When IRS recorded the litigation activity on 
the taxpayer's account module, this action appropriately suspended the 
automated countdown to the expiration date of the statutory collection 
period[Footnote 36] for the outstanding tax debt on the master file 
record. However, when IRS selected and reviewed this case as part of 
its unpaid tax assessments statistical estimation process in fiscal 
year 2010, its research showed that the litigation was settled in 1991 
and the taxpayer subsequently paid a portion of the total outstanding 
tax debt in a settlement with the government. If IRS had timely 
recorded the settlement of the litigation on the taxpayer's account 
module, the countdown of the statutory collection period would have 
resumed and the taxpayer's account module would likely have been 
removed from IRS's systems years earlier. Instead, as a result of 
IRS's processing delay, the taxpayer's account module balance of over 
$8 million was erroneously included in IRS's inventory of unpaid tax 
assessments during fiscal year 2010. 

Errors involving IRS's failure to properly record payments to all 
related taxpayer accounts associated with unpaid payroll taxes also 
continued to affect the accuracy of IRS's records. As we have reported 
in prior years' audits,[Footnote 37] IRS's systems were unable to 
reflect a reduction in the amounts owed on the related accounts when 
the business or any officer of that business pays some or all of the 
outstanding taxes. During our fiscal year 2009 audit, we tested a 
statistical sample of payments recorded on TFRP accounts and estimated 
that about 8.7 percent of TFRP payment transactions in the first 3 
months of fiscal year 2009 that were posted on TFRP accounts could 
contain errors.[Footnote 38] Although IRS has made improvements in its 
processes for recording trust fund recovery penalties over the last 
several years and continues to work towards improving these controls, 
it conceded that it had not made significant progress during fiscal 
year 2010. Consequently, with IRS's concurrence that no significant 
actions were taken to address the conditions found in our 2009 audit, 
we did not test IRS's controls in this area as part of our fiscal year 
2010 audit. 

Furthermore, processing delays and errors contributed to IRS's 
inability to timely release federal tax liens against taxpayers who 
fully satisfied or were otherwise relieved of their tax liability. 
Such delays and errors resulted not only in inaccurate tax records but 
also delayed IRS's release of federal tax liens and may cause undue 
burden to taxpayers who attempt to sell property or apply for 
commercial credit.[Footnote 39] 

Current systemic limitations and processing errors that caused 
inaccurate tax records resulted in IRS having to make numerous 
adjustments as part of its process for reporting net taxes receivable 
and other unpaid tax assessment balances. IRS identified misclassified 
tax assessment records when reviewing a sample of unpaid tax 
assessment cases during fiscal year 2010. To address these errors, it 
recorded adjustments to affected accounts to reflect correct values at 
the point in time that IRS sampled the account information. On the 
basis of a statistical projection of these individual adjustments, IRS 
had to make multibillion dollar adjustments to the year-end balances 
of all three categories of unpaid tax assessments generated by CDDB in 
order to produce reliable amounts for external reporting on its 
balance sheet and required supplementary information for fiscal year 
2010. Absent the use of this statistical estimation process, the 
various fiscal year 2010 unpaid tax assessment balances produced by 
CDDB would have been materially inaccurate. 

The progress IRS has made to date with using CDDB is an important step 
in moving toward a fully functioning subsidiary ledger that could 
provide for full traceability of detailed taxes receivable transaction 
information to the general ledger. However, IRS has not yet fully 
addressed all the issues that cause material inaccuracies in the 
unpaid tax assessments information produced by CDDB. This will require 
further enhancements to CDDB to enable it to more accurately 
distinguish between the three categories of unpaid tax assessments, 
and improving controls over the recording of information in taxpayer 
accounts so that reliable transaction-based balances for taxes 
receivable can be ultimately recorded in the general ledger. Our June 
2010 report discussed the existing control deficiencies in this area 
and contained recommendations to address those issues.[Footnote 40] 

Information Security: 

IRS relies extensively on computerized systems to support its 
financial and mission-related operations. Ensuring that taxpayer and 
financial information is adequately protected from inadvertent or 
deliberate misuse, fraudulent use, or improper disclosure, 
modification, or destruction requires effective information system 
controls. Further, ineffective information system controls can impair 
the accuracy, completeness, and timeliness of information used by 
management. The absence of effective compensating procedures both 
increases the potential for undetected material misstatements in the 
agency's financial statements or other internal and external reports, 
and the risk that sensitive IRS and taxpayer information may be 
compromised. 

During fiscal year 2010, IRS made progress in addressing numerous 
information security weaknesses we identified in previous audits. IRS 
corrected about 25 percent of the weaknesses that we had previously 
reported. For example, IRS (1) upgraded key Integrated Financial System 
(IFS)[Footnote 41] servers, decreasing the risk that known 
vulnerabilities may be exploited; (2) discontinued the use of 
unencrypted protocols on the servers supporting its procurement 
system, decreasing the risk that malicious users could capture 
sensitive information; and (3) limited access to certain key financial 
documents used for input into IFS, decreasing the risk that users 
could intentionally or unintentionally corrupt data. 

Despite these actions, most of the previously identified weaknesses in 
internal control over information security remain unresolved and 
continue to place IRS systems at risk. For example, IRS continued to 
allow individuals more access to sensitive information contained on 
the network than needed to perform their assigned duties. In addition, 
IRS had not completed actions to address a vulnerability in its 
procurement system that allowed users to enter commands that bypassed 
normal application security controls. Further, at one data center, 
visitors continued to be provided unnecessary access to secured areas. 

During our fiscal year 2010 audit, we identified additional 
deficiencies in internal control over information security that, along 
with previously identified deficiencies that remain unresolved, 
continued to jeopardize the confidentiality, integrity, and 
availability of information processed by IRS's key systems, and 
increased the risk of material misstatement for financial reporting. 
For example, the database associated with the online system IRS used 
to support and manage its computer access request, approval, and 
review processes was not appropriately secured. Weak control of 
powerful database IDs and insecure configurations reduce the 
confidence in the integrity of individuals' access privileges assigned 
to key IRS systems. In addition, IRS had not appropriately restricted 
permissions on the database that supported an application used for 
cost allocation of rent-related data, allowing database users to run 
operating system commands. Also, IRS used unencrypted protocols on a 
server supporting the Electronic Federal Tax Payment System (EFTPS) 
[Footnote 42] and several internal routers, potentially exposing user 
IDs and passwords transmitted in clear text across the network to 
inappropriate disclosure and unauthorized use. Further, even though 
five updates have been released since 2006 (with the latest being 
released in August 2009), IRS had not updated the database software on 
the Microsoft Windows servers that supported RRACS, IRS's general 
ledger system. Such software access updates are necessary to protect 
against known vulnerabilities. Similarly, IRS did not install critical 
patch updates on several databases supporting IFS, and the operating 
system software supporting several network routers was out of date, 
increasing the risk that known information security vulnerabilities 
may be exploited. 

An underlying reason for these deficiencies is that IRS has not yet 
fully implemented key components of its comprehensive information 
security program. Although IRS has processes in place intended to 
monitor and assess its internal controls, these processes were not 
always effective. For example, IRS did not: 

* detect many of the vulnerabilities we identified during the fiscal 
year 2010 audit, some of which were readily identifiable. 

* test RRACS application security in its current production 
environment. We tested access controls in the current environment and 
identified weaknesses in RRACS controls that compromised segregation 
of duties and jeopardized the integrity of the application's data. 

* perform comprehensive testing within the past year of one of its key 
network components that it considered to be a high risk system. 

In addition, IRS often did not take sufficient actions to correct 
known information security control deficiencies. Specifically, IRS did 
not always effectively validate that corrective actions taken 
effectively addressed previously reported weaknesses. We continued to 
identify weaknesses that IRS informed us it had mitigated. For 
example, IRS informed us that it had corrected 39 of the 88 
information systems security weaknesses we had previously reported. 
However, we determined that 16 (41 percent) of the 39 weaknesses had 
not yet been fully resolved. 

Until IRS takes additional steps to implement more comprehensive 
testing and effective validation processes, its facilities, computing 
resources, and information will remain vulnerable to inappropriate 
use, modification, or disclosure, and agency management will have 
limited assurance of the integrity and reliability of its financial 
and taxpayer information. 

Collectively, the new control deficiencies identified in fiscal year 
2010 and the unresolved deficiencies from prior audits reduce IRS's 
ability to ensure that its financial and taxpayer information is 
secure and, in the absence of effective compensating procedures, 
increase the potential for undetected material misstatements in the 
agency's financial statements. We plan to issue a separate report to 
IRS on the information security control deficiencies we identified 
during fiscal year 2010 and the status of previously identified 
deficiencies in this area. 

To address its information security weaknesses, IRS has various 
initiatives underway. IRS has developed and documented a detailed plan 
to guide its efforts in addressing critical information security 
weaknesses. The agency is in the process of implementing this 
comprehensive plan to address numerous information security 
weaknesses, such as those associated with access controls, audit 
trails, contingency planning, and training. According to the plan, the 
last of these weaknesses is scheduled to be resolved in the first 
quarter of fiscal year 2014. In addition, IRS has developed metrics to 
measure success in complying with guides, policies, and standards in 
such areas as configuration management, access authorizations, 
auditing, and change management. As long as these efforts include the 
flexibility to adapt to changing technology and evolving threats, 
encompass the findings of GAO and the Treasury Inspector General for 
Tax Administration (TIGTA) in measuring success, and are fully and 
effectively implemented, they should improve the agency's overall 
information security posture. 

Significant Deficiency: 

In addition to the material weaknesses discussed previously, during 
the fiscal year 2010 audit, we identified a significant deficiency 
[Footnote 43] in IRS's internal control over tax refund disbursements. 

Tax Refund Disbursements: 

In recent years, we have reported[Footnote 44] a number of 
deficiencies in IRS's internal control over the processing of manual 
tax refunds.[Footnote 45]In fiscal year 2010, we continued to identify 
similar deficiencies. The persistence of such deficiencies increases 
the risk of IRS paying erroneous tax refunds that once paid, compelled 
IRS to devote resources to attempting to recover, with no guarantee of 
success. The significance of these recurring deficiencies has grown as 
the magnitude of manual tax refunds has increased in recent years. As 
a result of these persistent internal control deficiencies, coupled 
with the magnitude of manual tax refunds disbursed, as well as new 
deficiencies we identified in internal control over manual tax refunds 
and claims associated with the First-Time Home Buyer Credit (FTHBC) 
[Footnote 46] during our fiscal year 2010 audit, we concluded that 
collectively, these control deficiencies constitute a significant 
deficiency in IRS's internal control over tax refund disbursements. 
This significant deficiency increases the risk that IRS may pay out 
duplicate or otherwise erroneous tax refunds to which individuals or 
businesses are not entitled and for which IRS must spend resources 
attempting to recover. 

The deficiencies in IRS's controls over manual tax refunds that we 
have reported in previous years and that continued to exist in fiscal 
year 2010 include the following: 

* Employees were not effectively monitoring taxpayer accounts during 
refund processing to identify duplicate tax refunds in process and 
prevent their disbursement. Effective monitoring is critical because 
IRS's automated and manual tax refund systems are not adequately 
coordinated to prevent the issuance of a duplicate automated tax 
refund if a corresponding manual tax refund has already been generated. 

* Employees were not effectively documenting actions to monitor tax 
refund processing. Appropriate documentation is necessary to provide 
verifiable evidence that appropriate tax refund monitoring was being 
conducted. 

* Training for employees responsible for (1) processing manual tax 
refunds and (2) maintaining security over IRS's tax processing systems 
was not effective. Effective training is critical to ensure that 
employees responsible for these important functions are proficient in 
their responsibilities. 

* Reviews of duplicate tax refund transcripts that identify potential 
duplicate tax refunds were incomplete. Because IRS did not effectively 
review these transcripts before these tax refunds were disbursed, it 
lost the opportunity to prevent erroneous tax refunds from being 
disbursed. 

Over the years, we have made numerous recommendations for corrective 
actions to address these deficiencies. IRS has taken these issues 
seriously, has devoted significant resources to its efforts to resolve 
them, and has successfully implemented a number of our 
recommendations. Nevertheless, the underlying deficiencies have 
persisted. Additionally, during fiscal year 2010, we found instances 
where the guidance IRS provided to employees responsible for 
processing manual tax refunds was outdated or contradictory with 
other, related guidance. We also found flaws in the documentation that 
identified which officials were authorized to approve manual tax 
refunds. 

At the same time, the magnitude of manual tax refunds has also 
increased significantly in recent years. This significant increase 
exacerbates the adverse impact of the unresolved and newly identified 
internal control deficiencies. From fiscal year 2008 to fiscal year 
2010, IRS's manual tax refund payments increased from about $55 
billion to over $100 billion (over 80 percent). During fiscal year 
2010, about 22 percent of all tax refunds disbursed ($467 billion) 
were manual compared to about 13 percent in fiscal year 2008. 
Consequently, the significance of the persistent manual tax refund 
processing control deficiencies has increased the risk that IRS may 
pay out duplicate or otherwise erroneous tax refunds to individuals or 
businesses that are not entitled to them. 

In fiscal year 2010, IRS prepared a corrective action plan intended to 
improve internal control over manual tax refunds. While this plan has 
much potential, IRS also recognized that it would take time for it to 
yield meaningful results. As of June 2010, when we conducted our 
testing of internal control over manual tax refund transactions, these 
actions had not yet had a significant effect, and as discussed 
earlier, we continued to find issues similar to those we identified in 
prior years. One reason for the persistence of these problems has been 
that IRS assigned responsibilities for manual tax refund initiation to 
large numbers of staff in many different organizational units. This 
wide dispersal of responsibilities made it more difficult for IRS to 
ensure that responsible staff understood current policies and 
procedures, including providing them the appropriate training needed 
to ensure they consistently and effectively implemented required 
policies and procedures in this area. The large number of staff 
involved also resulted in some staff processing relatively small 
numbers of manual tax refunds, making it more difficult for them to 
maintain proficiency in their related responsibilities. In July 2009, 
IRS centralized manual tax refund processing. Under this approach, 
smaller numbers of employees have been given broader responsibilities 
with respect to manual tax refund monitoring. If effectively 
implemented, this approach, coupled with the other corrective actions 
IRS has planned, has the potential to ultimately yield substantive 
progress in improving controls in this area that has thus far been 
elusive. However, the issues we reported in the past largely continued 
to exist in fiscal year 2010. At the time of our fiscal year 2010 
audit testing, the employees given these broader responsibilities had 
not always received training commensurate with their new 
responsibilities, which may have impaired their ability to reduce the 
risk of erroneous tax refunds. 

In addition to the persistent internal control issues affecting manual 
tax refunds, we found deficiencies in IRS's internal controls over 
processing FTHBC claims. As a result of these deficiencies, we found 
instances of erroneous tax refund disbursements. During fiscal year 
2010, taxpayers filed over 2.2 million FTHBC claims totaling about $16 
billion. Of these FTHBC claims, over 1.7 million (over 77 percent) 
resulted in tax refund payments to taxpayers totaling over $8.6 
billion (over 53 percent of the amount claimed). 

From the nearly 1.7 million FTHBCs allowed between October 1, 2009, 
and May 31, 2010, we statistically selected a random sample of 60 
credits, and reviewed supporting documentation to determine whether 
the credit, and ultimately the resultant tax refund paid, if any, was 
valid to the extent this was determinable based on the limited 
documentary support made available to IRS.[Footnote 47] 

In testing the transactions included in this sample, we found four 
cases in which the FTHBCs IRS allowed were not supported by properly 
completed documentation. In each case, a related tax refund was 
disbursed to the taxpayer. However, because the supporting 
documentation was not properly completed, the tax refund may have been 
erroneous. Specifically, we found: 

* two cases in which an FTHBC was allowed although the taxpayer did 
not provide a required settlement statement documenting the cost of 
the home and the date of its purchase, 

* one case in which the FTHBC amount IRS allowed was incorrect based 
on supporting documentation, and: 

* one case in which IRS allowed an FTHBC based on a claim in which the 
stated purchase date of the home was not supported by the settlement 
statement, which indicated a home purchase date in the future. 

Based on our work, we estimated that as much as 12.9 percent[Footnote 
48] of FTHBCs filed during this period that IRS allowed were not 
supported by properly completed documentation. Therefore, we concluded 
that IRS's internal control over FTHBC claims was not effective in 
ensuring that the claims and any resultant tax refunds paid were valid. 

We also identified 201 taxpayers who, based on information in IRS's 
database, appeared to have been allowed two FTHBCs.[Footnote 49] From 
these 201 cases, we statistically selected a random sample of 20 
taxpayers and reviewed documentation supporting their FTHBC claims to 
determine whether they complied with the IRC and if they did not, to 
determine why this had occurred and the extent of any related 
erroneous tax refunds. Based on our testing, we determined that IRS 
paid an erroneous tax refund to 19 of these taxpayers.[Footnote 50] 

* In 18 cases, IRS allowed an FTHBC in both tax year 2008 and tax year 
2009. In each case, the taxpayer had filed an amended 2008 tax return 
claiming an FTHBC. When they subsequently submitted their 2009 tax 
return, they again claimed an FTHBC. Because IRS did not effectively 
review these taxpayers' accounts when the second claim was filed, it 
did not detect the fact that a previous claim had already been filed. 
In each case, IRS allowed both claims and consequently, paid an 
erroneous tax refund. 

* In 2 cases, IRS recorded a 2009 FTHBC in the taxpayer's account and 
initiated a tax refund payment, although the taxpayer had not filed a 
claim. In each case, the taxpayer had previously filed an FTHBC claim 
on his or her amended 2008 tax return, based on which IRS also paid a 
related tax refund. In one of these cases, IRS detected the erroneous 
duplicate refund and prevented its disbursement. However, in the other 
case, a duplicate refund was disbursed to the taxpayer. 

We brought all 201 cases to the attention of IRS officials so that 
they could follow up, determine the facts, and initiate any 
appropriate corrective action. 

These errors in FTHBC processing occurred primarily because IRS's 
internal control over tax refunds processing were not updated in time 
to provide for effective review of the new tax form and supporting 
documentation needed to implement certain provisions of the laws that 
created the FTHBC, which allow taxpayers to claim an FTHBC for calendar 
2009 on their tax return for calendar year 2008. 

The deficiencies in internal control over tax refund disbursements we 
identified resulted in IRS disbursing duplicate erroneous tax refunds 
and increase the risk of duplicate or otherwise erroneous tax refund 
payments beyond those we have identified. 

Compliance Issues: 

Our tests of IRS's compliance with selected provisions of laws and 
regulations disclosed one instance of noncompliance that is reportable 
under U.S. generally accepted government auditing standards. This 
instance relates to the release of federal tax liens against 
taxpayers' property. We also found that IRS's financial management 
systems do not substantially comply with the requirements of the 
Federal Financial Management Improvement Act of 1996 (FFMIA). 

Release of Federal Tax Liens: 

The Internal Revenue Code grants IRS the authority to file a lien 
against the property of any taxpayer who neglects or refuses to pay 
all assessed federal taxes. The lien becomes effective when it is 
filed with a designated office, such as a courthouse in the county 
where the taxpayer's property is located.[Footnote 51] The lien serves 
to protect the interest of the federal government and as a public 
notice to current and potential creditors of the government's interest 
in the taxpayer's property. For example, federal tax liens are 
disclosed in individuals' credit reports. Under section 6325 of the 
Internal Revenue Code, IRS is required to release federal tax liens 
within 30 days after the date the tax liability is satisfied or has 
become legally unenforceable or the Secretary of the Treasury has 
accepted a bond for the assessed tax. 

In our prior audits, we found that IRS did not always release the 
applicable federal tax lien within 30 days after a tax liability is 
satisfied, either through payment or abatement, as required by the 
Internal Revenue Code.[Footnote 52] In response, IRS has taken a 
number of actions over the years to improve its lien release 
processing. For example, IRS centralized all lien processing at its 
Cincinnati Service Center Campus in 2005. In addition, in July 2006, 
IRS enhanced various lien release processing-related exception reports 
to include a cumulative list of unresolved lien releases, allowing it 
to more readily track the release status and take corrective action. 

Despite the actions IRS has taken to date to improve its lien release 
process, our work in fiscal year 2010 and IRS's own testing continued 
to find that it did not always release all tax liens within 30 days 
after taxpayers paid or were otherwise relieved of a tax liability. 
Prior to fiscal year 2006, as part of our annual audits, we tested a 
statistical sample of tax cases with liens in which the taxpayers' 
total outstanding tax liabilities were either paid off or abated 
during the fiscal year under audit. Beginning in fiscal year 2006, IRS 
began performing its own test of the effectiveness of its lien release 
process as part of implementing the requirements of the revised OMB 
Circular No. A-123[Footnote 53] and we reviewed its test results. 

In our review and validation of IRS's testing of 59 statistically 
selected tax cases with liens in which the taxpayers' total 
outstanding tax liabilities were either paid off or abated during 
fiscal year 2010, we noted that IRS's testing identified nine 
instances in which it did not release the applicable federal tax lien 
within the statutorily mandated 30 days. The time between satisfaction 
of the liability and release of the lien ranged from 33 days to 97 
days. On the basis of the sample of unpaid tax assessment cases 
resolved in the first 6 months of fiscal year 2010 for which it had 
filed a tax lien, IRS did not release liens within 30 days[Footnote 
54] for an estimated 15 percent of the cases. 

Various IRS processing errors and delays resulted in IRS not releasing 
these liens timely. These issues are similar to those we reported in 
prior audits.[Footnote 55] We previously issued a report discussing 
the continued delays IRS was experiencing in releasing tax liens and 
recommended that IRS analyze the cause of delays in releasing liens 
and implement procedures to ensure their timely release.[Footnote 56] 
IRS has not yet completed actions to fully address this 
recommendation. Until IRS addresses the deficiencies we previously 
reported, as well as those it has identified through its own testing, 
IRS will not be able to ensure that it releases liens in accordance 
with the 30-day limit mandated by the Internal Revenue Code. Further, 
the continued failure to promptly release tax liens could cause undue 
hardship and burden to taxpayers who are attempting to sell property 
or apply for commercial credit. 

Financial Management Systems' Noncompliance with FFMIA: 

In fiscal year 2010, we found that IRS's financial management systems 
did not substantially comply with the requirements of FFMIA. 
Specifically, IRS's systems did not substantially comply with Federal 
Financial Management Systems Requirements (FFMSR)[Footnote 57] or 
federal accounting standards (U.S. generally accepted accounting 
principles). However, we did find that IRS's systems substantially 
complied with the United States Standard General Ledger at the 
transaction level. In its fiscal year 2010 Federal Managers' Financial 
Integrity Act of 1982 assurance statement to the Department of the 
Treasury, IRS reported the same conclusion. 

In fiscal year 2010, IRS's systems did not substantially comply with 
FFMSR because of the existence of material weaknesses in IRS's 
internal control over unpaid tax assessments and information security, 
as discussed earlier in this report. As a result of these material 
weaknesses, IRS's internal control over financial reporting was not 
effective as of September 30, 2010. 

IRS's financial management systems also did not substantially comply 
with federal accounting standards, specifically Statement of Federal 
Financial Accounting Standards No. 7, Accounting for Revenue and Other 
Financing Sources and Concepts for Reconciling Budgetary and Financial 
Accounting.[Footnote 58] IRS's automated systems for tax related 
transactions did not support the net federal taxes receivable amount 
on IRS's balance sheet and other required supplemental information 
related to uncollected taxes--compliance assessments, and write-offs--
as required by the standard. 

In previous years, we also reported that IRS's financial system for 
reporting tax related activities, then known as the Interim Revenue 
Accounting Control System (IRACS), did not conform to the USSGL at the 
transaction level because (1) IRS lacked transaction traceability for 
taxes receivable, which was the product of a complex statistical 
estimation process and was not recorded in IRACS, and (2) IRACS did 
not post transactions in conformance with USSGL posting models. 
However, during fiscal year 2010, IRS implemented RRACS--a significant 
enhancement to IRACS, which brought IRS's system into conformance with 
the requirements of the USSGL. 

As discussed earlier in the report, IRS implemented RRACS in January 
2010. During our 2010 audit, we determined that the posting model 
utilized by RRACS substantially conformed with the USSGL requirements. 
We also determined that IRS's systems posted tax revenue and tax 
refund transactions in conformance with the USSGL. During 2010, IRS 
continued to materially adjust its gross federal taxes receivable 
balance based on the results of a statistical estimation process, as 
it had done in prior years. However, as discussed earlier in this 
report, we found that unlike in prior years, the material statistical 
adjustments to federal taxes receivable were posted to RRACS in 
accordance with the USSGL. These statistically derived adjustments, 
and consequently the resultant adjusted gross federal taxes receivable 
balance, were not traceable to individual underlying transactions and 
consequently, continued to constitute an internal control deficiency 
that contributed to the material weakness in unpaid tax assessments 
discussed earlier in this report. However, we concluded that IRS 
recorded federal taxes receivable in substantial conformance with the 
USSGL because these adjustments were themselves recorded in accordance 
with the USSGL, and the reported gross federal taxes receivable 
balance could be traced through the adjustments to the unadjusted 
federal taxes receivable balance, and from there to underlying 
transaction detail which had also been recorded in accordance with the 
USSGL. As discussed above, the essential purpose of this estimation 
process is to compensate for the existence of a continued material 
weakness in internal control over unpaid tax assessments which results 
in a material misstatement of the unadjusted balance for taxes 
receivable. 

IRS has established a remediation plan to address the conditions that 
lead to its systems' substantial noncompliance with the FFMIA 
requirements. This plan outlines the actions to be taken to resolve 
these issues and defines related resources and responsible 
organizational units. Many of the actions detailed in the plan are 
long-term in nature and are tied to IRS's systems modernization 
efforts.[Footnote 59] 

[End of section] 

Appendix II: Management's Report on Internal Revenue Control over 
Financial Reporting: 

Department Of The Treasury: 
Internal Revenue Service: 
Commissioner
Washington, D.C. 20224: 

November 5, 2010: 

Mr. Steven J. Sebastian: 
Director, Financial Management and Assurance: 
U.S. Government Accountability Office: 
441 G Street, N.W. Room 5474: 
Washington, DC 20548: 

Dear Mr. Sebastian: 

The Internal Revenue Service (IRS) internal control over financial 
reporting is a process affected by those charged with governance, 
management, and other personnel, the objectives of which are to 
provide reasonable assurance that (1) transactions are properly 
recorded, processed and summarized to permit the preparation of 
financial statements in accordance with U.S. generally accepted 
accounting principles, and assets are safeguarded against loss from 
unauthorized acquisition, use, or disposition; and (2) transactions 
are executed in accordance with the laws governing the use of budget 
authority and other laws and regulations that could have a direct and 
material effect on the financial statements. 

IRS management is responsible for establishing and maintaining 
effective internal control over financial reporting. IRS management 
evaluated the effectiveness of IRS internal control over financial 
reporting as of September 30, 2010, based on the criteria established 
under 31 U.S.C. 3512, commonly known as the Federal Managers' 
Financial Integrity Act (FMFIA). 

Based on our evaluation, IRS has two material weaknesses in its 
internal control over financial reporting, specifically (1) unpaid tax 
assessments and (2) information security. IRS financial management 
systems do not substantially comply with the requirements of the 
Federal Financial Management Improvement Act (FFMIA). On this basis, 
management provides qualified assurance that as of September 30, 2010, 
IRS internal control over financial reporting was effective. 

Signed by: 

Douglas Shulman: 
Commissioner: 

Date: November 5, 2010: 

Signed by: 

Gregory E, Kane: 
Acting Chief Financial Officer: 

Date: November 5, 2010: 

[End of section] 

Appendix III: Comments from the Internal Revenue Service: 

Department Of The Treasury: 
Internal Revenue Service: 
Commissioner: 
Washington, D.C. 20224: 

November 5, 2010: 

Mr. Steven J. Sebastian: 
Director: 
Financial Management and Assurance: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Mr. Sebastian: 

Thank you for the opportunity to comment on the draft report titled, 
Financial Audit: IRS's Fiscal Years 2010 and 2009 Financial 
Statements. We are pleased that the Internal Revenue Service (IRS) 
received an unqualified opinion on the combined financial statements 
for the eleventh consecutive year. The unqualified opinion
demonstrates that the IRS accurately accounts for approximately $2.3 
trillion in tax revenue receipts, $467 billion in tax refunds, and $12 
billion in IRS appropriated funds. 

We are pleased the Government Accountability Office (GAO) determined 
that the Redesign Revenue Accounting Control System (RRACS) we 
implemented in January 2010 complies with the United States Standard 
General Ledger (USSGL), and that the taxes receivable balance we 
recorded in RRACS for the first time also substantially complies with 
the USSGL, addressing this component of the material weakness on 
unpaid tax assessments. 

The IRS continued to make improving information security a top 
priority during FY 2010, and we made notable improvements again this 
year: 

* Completed corrective actions in network access controls and the 
Enterprise Security Audit Trail (ESAT) program. 

* Implemented standard security configurations and established metrics 
in the areas of inventory management and configuration management, 
auditing, access authorization, and change management for network 
access systems and devices. 

* Implemented auditing capability through ArcSight that identifies 
auditable events and event content consistent with IRS policy to 
include monitoring, collection analysis, storage, and reporting. 

* Transferred RRACS to the Martinsburg Computing Center (MCC) to 
resolve the auditor concerns with the mainframe operations in Detroit. 

* Upgraded the Integrated Financial System (IFS) servers and the UNIX 
operating system to Solaris 10. 

* Deployed Internet Protocol Security (IPSec) to address the auditor 
concerns with controls that affect the key IRS financial systems. 

While we agree with GAO that there are identified weaknesses that 
continue to exist, we view their materiality to have decreased. The 
IRS believes that the improvements we made have significantly reduced 
the overall risk, and we look forward to working with GAO to develop 
testing of the IT security controls and the compensating processes and 
procedures during the FY 2011 audit to demonstrate that the overall 
risk has been reduced to below a material weakness. 

During FY 2010, the IRS took significant steps to strengthen controls 
and reduce risks of duplicate, erroneous, or fraudulent refunds 
associated with the manual refund process. As GAO acknowledged in the 
report, the IRS developed, a corrective action plan to improve the 
controls over manual refunds in FY 2010, but due to the timing of
when GAO conducted the testing of these controls, there was not 
sufficient time for the corrective actions to have been fully 
implemented and tested. As a result, the GAO concluded that 
significant progress had not been made and declared this a significant 
deficiency. The IRS is already seeing positive improvements as a 
result of the actions we have taken. While the number of manual 
refunds issued on individual accounts increased by over 15,000 between 
2009 and 2010, the number of erroneous refunds issued decreased by 46 
percent. The IRS expects to see continued improvement once all 
business areas implement the new established process. The IRS is 
committed to implementing all of the corrective actions we shared with 
GAO, and are confident that GAO will find significant progress has 
been made during the FY 2011 audit. 

GAO also provided in the report examples of where the IRS had issued 
erroneous refunds related to the First-Time Home Buyers Credit 
(FTHBC). During FY 2010, the IRS took many corrective actions to 
substantially minimize the number of erroneous claims paid out. 
Through the compliance filter process alone, we have identified and 
audited approximately 300,000 claims in FY 2010 and prevented these 
erroneous refunds being issued. Additionally, the IRS has more than 
130,000 claims in review with statuses yet to be determined. Given the 
complexity of tax administration and the time constraints the IRS 
faced implementing this legislation, it was impossible to either
stop or address every potentially erroneous claim. The IRS will 
continue its aggressive approach to ensure the accuracy and legitimacy 
of FTHBC claims and continue to consider high risk claims that were 
not addressed during our pre-refund compliance and enforcement 
activities in our post-refund work selection. We will also rely on our 
comprehensive Recapture and Repayment Strategy using third party data 
to identify instances of non-compliance including and in addition to 
those identified in this report. We are confident that GAO will find 
significant progress has been made during the FY 2011 audit. 

I want to recognize GAO's support throughout the audit. While 
challenges remain, the IRS has established its ability to consistently 
produce accurate and reliable financial statements. We have a solid 
management team dedicated to promoting the highest standard of 
financial management, and we continue to increase the focus on 
information security and internal controls while improving financial 
reporting. 

Sincerely, 

Signed by: 

Douglas Shulman: 

[End of section] 

Footnotes: 

[1] A material weakness is a deficiency, or a combination of 
deficiencies, in internal control such that there is a reasonable 
possibility that a material misstatement of the entity's financial 
statements will not be prevented, or detected and corrected on a 
timely basis. A control deficiency exists when the design or operation 
of a control does not allow management or employees, in the normal 
course of performing their assigned functions, to prevent, or detect 
and correct misstatements on a timely basis. 

[2] A significant deficiency is a deficiency, or a combination of 
deficiencies, in internal control that is less severe than a material 
weakness, yet important enough to merit attention by those charged 
with governance. 

[3] See the CFO Act of 1990, Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 
15, 1990); codified in relevant part, as amended at 31 U.S.C. § 
3521(g). Under the authority of 31 U.S.C. § 3515, the Office of 
Management and Budget requires IRS to issue separate annual audited 
financial statements. 

[4] IRS includes an estimate of the tax gap in the other accompanying 
information to the financial statements. This estimate is based on a 
study conducted to measure the compliance rate of individual filers 
based on an examination of a statistical sample of tax returns filed 
for tax year 2001. 

[5] Tax expenditures are revenue losses--the amount of revenue that 
the government forgoes--resulting from federal tax law provisions that 
(1) allow a special exclusion, exemption, or deduction from gross 
income, or (2) provide a special credit, preferential rate, or 
deferred tax liability. Under U.S. generally accepted accounting 
principles, tax expenditure amounts are not required to be disclosed 
as part of federal agencies' financial statements, but certain 
information on tax expenditures can be included as other accompanying 
information to the financial statements. 

[6] Pub. L. No. 104-208, div. A, § 101(f), title VIII, 110 Stat. 3009, 
3009-389 (Sept. 30, 1996). 

[7] A material weakness is a deficiency, or a combination of 
deficiencies, in internal control such that there is a reasonable 
possibility that a material misstatement of the entity's financial 
statements will not be prevented, or detected and corrected on a 
timely basis. A control deficiency exists when the design or operation 
of a control does not allow management or employees, in the normal 
course of performing their assigned functions, to prevent, or detect 
and correct misstatements on a timely basis. 

[8] An unpaid tax assessment is a legally enforceable claim against a 
taxpayer and consists of taxes, penalties, and interest that have not 
been collected or abated (a reduction in a tax assessment). 

[9] A significant deficiency is a deficiency, or a combination of 
deficiencies, in internal control that is less severe than a material 
weakness, yet important enough to merit attention by those charged 
with governance. 

[10] The preponderance of tax refunds are disbursed to taxpayers 
automatically by IRS's automated systems once a tax return is posted 
to the taxpayer's account and an overpayment to IRS is identified and 
calculated. However, tax refunds meeting certain defined criteria, 
such as those exceeding $10 million in dollar amount, are subject to 
manual review before disbursement and are known as manual tax refunds. 

[11] See FTHBC, 26 U.S.C. § 36. The FTHBC was originally authorized by 
section 3011 of the Housing and Economic Recovery Act of 2008. The new 
credit was originally available for a limited time only, applying to 
taxpayers who purchased a principal residence after April 8, 2008, and 
before July 1, 2009. Taxpayers were permitted to claim a fully 
refundable credit equal to 10 percent of the purchase price of the 
home, with a maximum available credit of $7,500. This credit was to be 
repaid within 15 years with payments beginning two years after the 
credit was claimed. Section 1006 of the American Recovery and 
Reinvestment Act of 2009 extended the First-Time Home Buyer Credit to 
include purchases made on or after January 1, 2009, and before 
December 1, 2009; increased the maximum credit to $8,000; and 
eliminated the repayment requirement as long as the taxpayer retains 
the residence for 36 months. Taxpayers qualifying for the revised 
credit may claim the $8,000 credit on either their 2008 or 2009 
individual income tax returns. Section 11 of the Worker, 
Homeownership, and Business Assistance Act of 2009, as amended by 
section 2 of the Homebuyer Assistance and Improvement Act of 2010, 
extended the deadline for home purchases to May 1, 2010, (with the 
requirement that the taxpayer with a binding contract settle on the 
home purchase before October 1, 2010) and expanded eligibility for the 
credit (with a maximum available credit of $6,500) to qualifying long-
time resident homebuyers. 

[12] Federal accounting standards classify unpaid tax assessments into 
one of the following three categories for reporting purposes: federal 
taxes receivables, compliance assessments, and write-offs. Federal 
taxes receivable are taxes due from taxpayers for which IRS can 
support the existence of a receivable through taxpayer agreement or a 
favorable court ruling. Compliance assessments are tax assessments 
where neither the taxpayer nor the court has affirmed that the amounts 
are owed. Write-offs represent unpaid tax assessments for which IRS 
does not expect further collections because of factors such as the 
taxpayer's death, bankruptcy, or insolvency. Of these three 
classifications of unpaid tax assessments, only federal taxes 
receivable, net of an allowance for uncollectible amounts, are 
reported on the financial statements. 

[13] IFS is IRS's administrative accounting system, which IRS uses to 
facilitate core financial management activities, including general 
ledger, budget formulation, accounts payable, accounts receivable, 
funds management, cost management, and financial reporting. IFS does 
not process or report IRS's tax related transactions including tax 
revenues, tax refunds, and taxes receivable. 

[14] In January 2010, IRS implemented RRACS to account for custodial 
tax activities, including tax revenue, tax refunds, and taxes 
receivable. RRACS is an enhancement to the previous general ledger 
system known as the Interim Revenue Accounting Control System (IRACS) 
and RRACS is designed to conform to the governmentwide United States 
Standard General Ledger (USSGL) at the transaction level. 

[15] We have reported these deficiencies and recommendations to 
address them in various management reports to IRS. We report the 
outstanding deficiencies and our recommendations to address them in 
our annual Status of Recommendations reports to IRS. See GAO, Internal 
Revenue Service: Status of GAO Financial Audit and Related Financial 
Management Report Recommendations, [hyperlink, 
http://www.gao.gov/products/GAO-10-597] (Washington, D.C.: June 30, 
2010). 

[16] GAO, Internal Revenue Service: Status of GAO Financial Audit and 
Related Financial Management Report Recommendations, [hyperlink, 
http://www.gao.gov/products/GAO-10-597] (Washington, D.C.: June 30, 
2010); and GAO, Information Security: IRS Needs to Continue to Address 
Significant Weaknesses, [hyperlink, 
http://www.gao.gov/products/GAO-10-355] (Washington, D.C.: Mar.19, 
2010). 

[17] Tax law requires IRS to release a federal tax lien within 30 days 
after the date the tax liability is satisfied or has become legally 
unenforceable, or the Secretary of the Treasury has accepted a bond 
for the assessed tax. 26 U.S.C. § 6325(a). 

[18] Pub. L. No. 104-208, div. A, § 101(f), title VIII, 110 Stat. 
3009, 3009-389 (Sept. 30, 1996). 

[19] FASAB Statement of Federal Financial Accounting Concept 1: 
Objectives of Federal Financial Reporting, as codified in FASAB 
Pronouncements as Amended, Version 9 (Washington, D.C.: June 30, 2010). 

[20] The term enforcement revenue refers to the tax revenue received 
as a result of IRS's tax collection actions--enforcement--taken 
against taxpayers who do not voluntarily pay their taxes when due. 

[21] The "full cost" of a program or activity includes all the direct 
costs, including personnel time charges, and indirect costs, such as 
the allocation of overhead costs, that are applicable to the program 
or activity. 

[22] Section 1204 of the Internal Revenue Restructuring and Reform Act 
of 1998 restricts the uses of records of tax enforcement results. See 
Pub. L. No. 105-106, § 1204, 112 Stat. 685, 722; and implementing IRS 
guidance in IRM 1.5.2, Uses of Section 1204 Statistics (rev. June 1, 
2010). 

[23] These statistical samples were selected primarily to determine 
the validity of balances and activities reported in IRS's financial 
statements. We projected any errors in dollar amount to the population 
of transactions from which they were selected. In testing some of 
these samples, certain attributes were identified that indicated 
deficiencies in the design or operation of internal control. These 
attributes, where applicable, were statistically projected to the 
appropriate populations. 

[24] A material weakness is a deficiency, or a combination of 
deficiencies, in internal control such that there is a reasonable 
possibility that a material misstatement of the entity's financial 
statements will not be prevented, or detected and corrected on a 
timely basis. A control deficiency exists when the design or operation 
of a control does not allow management or employees, in the normal 
course of performing their assigned functions, to prevent, or detect 
and correct misstatements on a timely basis. 

[25] An unpaid tax assessment is a legally enforceable claim against a 
taxpayer and consists of taxes, penalties, and interest that have not 
been collected or abated (a reduction in a tax assessment). 

[26] GAO, Financial Audit: IRS's Fiscal Years 2009 and 2008 Financial 
Statements, [hyperlink, http://www.gao.gov/products/GAO-10-176] 
(Washington, D.C.: Nov. 10, 2009). 

[27] Federal accounting standards classify unpaid tax assessments into 
one of the following three categories for reporting purposes: federal 
taxes receivable, compliance assessments, and write-offs. Federal 
taxes receivable are taxes due from taxpayers for which IRS can 
support the existence of a receivable through taxpayer agreement or a 
favorable court ruling. Compliance assessments are tax assessments 
where neither the taxpayer nor the court has affirmed that the amounts 
are owed. Write-offs represent unpaid tax assessments for which IRS 
does not expect further collections because of factors such as the 
taxpayer's death, bankruptcy, or insolvency. Of these three 
classifications of unpaid tax assessments, only federal taxes 
receivable, net of an allowance for uncollectible amounts, are 
reported on the financial statements. 

[28] In January 2010, IRS implemented RRACS to account for custodial 
tax activities including tax revenue, tax refunds, and taxes 
receivable. RRACS is an enhancement to the previous general ledger 
system known as the Interim Revenue Accounting Control System (IRACS) 
and RRACS is designed to conform to the governmentwide United States 
Standard General Ledger (USSGL) at the transaction level. 

[29] [hyperlink, http://www.gao.gov/products/GAO-10-176]. 

[30] IRS's master files contain detailed records of taxpayer accounts. 
However, the master files do not contain all the details necessary to 
properly classify or estimate collectibility for unpaid tax assessment 
accounts. 

[31] A taxpayer may have multiple account modules within IRS's master 
files under a unique taxpayer identification number (i.e., Social 
Security number or an employer identification number). Each unique 
account module is identified by the taxpayer identification number, 
specific tax period (e.g., year, quarter), and tax type (e.g., excise 
tax, individual tax, payroll tax, etc.). 

[32] According to federal accounting standards, the self-reporting of 
an outstanding tax liability establishes the outstanding balance as a 
tax receivable for financial reporting purposes. 

[33] According to federal accounting standards, outstanding tax 
liabilities are to be classified as compliance assessments when there 
is no evidence that the taxpayer agreed with the tax assessment, and 
there is no court order in favor of IRS's tax assessment, unless IRS 
determines the assessment has no future collection potential, in which 
case it is to be classified as a write-off. 

[34] When a business willfully fails to collect, account for, or pay 
the taxes it is legally required to withhold from its employees' 
wages, such as Social Security or individual income tax withholdings 
(what is commonly referred to as "trust fund taxes"), IRS assesses 
underpayment penalties against the business and may impose an 
additional trust fund recovery penalty (TFRP) against the responsible 
officers. Although IRS has the authority to assess the TFRP 
individually against all responsible officers, the full amount of the 
TFRP need only be paid once. Thus, IRS may record tax assessments 
against each of several individuals for the employee-withholding 
component of the payroll tax liability of a given business in an 
effort to collect the total tax liability of the company. See 26 
U.S.C. § 6672 and implementing IRS guidance for IRS policy in the 
Internal Revenue Manual at § 4.23.9.13, Trust Fund Recovery Penalty 
(May 14, 2008). 

[35] A defunct business is one that is no longer operating and does 
not have any assets IRS can levy to pay off some or all of the 
business's outstanding tax debt. 

[36] IRS has a statutory limitation on the length of time it can 
pursue unpaid taxes, generally 10 years from the date of the tax 
assessment. See 26 U.S.C. § 6502. 

[37] [hyperlink, http://www.gao.gov/products/GAO-10-176]. 

[38] We are 95 percent confident that the error rate does not exceed 
15.1 percent. 

[39] This issue is discussed further in the Compliance Issues section 
of this report. 

[40] GAO, Management Report: Improvements Are Needed in IRS's Internal 
Controls and Compliance with Laws and Regulations, [hyperlink, 
http://www.gao.gov/products/GAO-10-565R] (Washington, D.C.: June 28, 
2010). 

[41] IFS is IRS's administrative accounting system, which IRS uses to 
facilitate core financial management activities, including general 
ledger, budget formulation, accounts payable, accounts receivable, 
funds management, cost management, and financial reporting. IFS does 
not process or report IRS's tax related transactions, including tax 
revenues, tax refunds, and taxes receivable. 

[42] The Electronic Federal Tax Payment System (EFTPS) is a tax 
payment system provided free by the U.S. Department of the Treasury, 
through which businesses and individuals can pay federal taxes 
electronically via the Internet or by phone. 

[43] A significant deficiency is a deficiency, or a combination of 
deficiencies, in internal control that is less severe than a material 
weakness, yet important enough to merit attention by those charged 
with governance. 

[44] GAO, Management Report: Improvements Needed in IRS's Internal 
Controls, [hyperlink, http://www.gao.gov/products/GAO-10-565R] 
(Washington, D.C.: June 28, 2010); Management Report: Improvements 
Needed in IRS's Internal Controls, [hyperlink, 
http://www.gao.gov/products/GAO-09-513R] (Washington, D.C.: June 24, 
2009); Management Report: Improvements Needed in IRS's Internal 
Controls, [hyperlink, http://www.gao.gov/products/GAO-07-689R] 
(Washington, D.C.: May 11, 2007); and Management Report: Improvements 
Needed in IRS's Internal Controls, [hyperlink, 
http://www.gao.gov/products/GAO-05-247R] (Washington, D.C.: April 27, 
2005). 

[45] The preponderance of tax refunds are disbursed to taxpayers 
automatically by IRS's automated systems once a tax return is posted 
to the taxpayer's account and an overpayment to IRS is identified and 
calculated. However, tax refunds meeting certain defined criteria, 
such as those exceeding $10 million in dollar amount, are subject to 
manual review before disbursement and are known as manual tax refunds. 
IRS policy requires that employees processing manual tax refunds 
monitor the taxpayers' account during tax refund processing to 
compensate for flaws in IRS's process that might otherwise allow these 
taxpayers to be paid two tax refunds; one manual and one automatically 
generated. 

[46] See FTHBC, 26 U.S.C. § 36. The FTHBC was originally authorized by 
section 3011 of the Housing and Economic Recovery Act of 2008. The new 
credit was originally available for a limited time only, applying to 
taxpayers who purchased a principal residence after April 8, 2008, and 
before July 1, 2009. Taxpayers were permitted to claim a fully 
refundable credit equal to 10 percent of the purchase price of the 
home, with a maximum available credit of $7,500. This credit was to be 
repaid within 15 years with payments beginning two years after the 
credit was claimed. The American Recovery and Reinvestment Act of 2009 
extended the FTHBC to include purchases made on or after January 1, 
2009, and before December 1, 2009; increased the maximum credit to 
$8,000; and eliminated the repayment requirement as long as the 
taxpayer retains the residence for 36 months. Further, section 11 of 
the Worker, Homeownership, and Business Assistance Act of 2009 
extended the FTHBC for purchases made from December 1, 2009, to April 
30, 2010, and expended eligibility for the credit (with a maximum 
available credit of $6,500) to qualifying long-time resident 
homebuyers. The law allowed taxpayers to claim the credit if they 
entered into a binding contract for the purchase of a home prior to 
May 1, 2010, and closed on the home prior to July 1, 2010. Section 2 
of the Homebuyer Assistance and Improvement Act of 2010 extended the 
closing deadline to September 30, 2010, for taxpayers who entered into 
a binding contract prior to May 1, 2010. Taxpayers qualifying for the 
revised credit may claim the credit on either their 2008 or 2009 
individual income tax returns even if the closing date was in 2010. 

[47] We attempted to select our random sample directly from a 
population of tax refund disbursements during this period resulting 
from FTHBC claims, which would have allowed us to statistically 
estimate the full effect of the issues we identified upon the 
resultant tax refunds. However, due to limitations in its records, IRS 
was not able to provide the population of tax refunds due to FTHBC 
claims. 

[48] We are 90 percent confident that not more than 12.9 percent of 
these credits were not supported by properly completed documentation. 

[49] Subsequently, we broadened this analysis to encompass FTHBCs 
filed between April 2009 and mid-July 2010, and identified an 
additional 201 taxpayers who also appeared to have been allowed 
multiple FTHBCs, and brought these to the attention of IRS. The 
procedures we used to identify these 402 suspicious cases were only 
able to detect instances where IRS allowed FTHBCs totaling more than 
$8,000, which is the dollar limit under the law. However, it would not 
detect instances where IRS allowed multiple FTHBCs totaling less than 
$8,000. Consequently, the actual number of taxpayers who were allowed 
multiple FTHBCs may be larger. 

[50] We are 90 percent confident that 99.5 percent of the FTHBCs we 
identified as potential duplicate FTHBCs, were actual duplicate FTHBCs 
that IRS had recorded in the taxpayers' accounts, and that as a 
result, 99 percent of the taxpayers in whose accounts IRS recorded 
these duplicate FTHBCs had also been paid an erroneous tax refund. 

[51] 26 U.S.C. §§ 6321, 6323. 

[52] [hyperlink, http://www.gao.gov/products/GAO-10-176]. 

[53] OMB's revised Circular No. A-123, Management's Responsibility for 
Internal Control, became effective on October 1, 2005. Appendix A to 
OMB Circular No. A-123 provides internal control guidance and 
requirements for executive branch agencies to follow in conducting 
management's assessment of the effectiveness of internal control over 
financial reporting. On the basis of this assessment, agency 
management is required to prepare an assurance statement on the 
effectiveness of internal control over financial reporting to be 
included in its performance and accountability report. These 
requirements are applicable to the 24 Chief Financial Officers Act 
agencies, including the Department of the Treasury, of which IRS is a 
significant component. 

[54] IRS reported that it is 95 percent confident that the percentage 
of cases in which the lien was not released within 30 days does not 
exceed 25 percent. 

[55] GAO, Financial Audit: IRS's Fiscal Years 2008 and 2007 Financial 
Statements, [hyperlink, http://www.gao.gov/products/GAO-09-119] 
(Washington, D.C.: Nov. 10, 2008). 

[56] GAO, Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management, [hyperlink, 
http://www.gao.gov/products/GAO-01-42] (Washington, D.C.: Nov. 17, 
2000). 

[57] The Office of Management and Budget (OMB) Circular No. A-127, 
Financial Management Systems, prescribes FFMSR for the executive 
agencies of the Federal Government. On January 9, 2009, OMB issued a 
revised Circular No. A-127, which superseded previous versions of this 
Circular and which became effective beginning with fiscal year 2010. 

[58] FASAB Statement of Federal Financial Accounting Standards 7, 
Accounting for Revenue and Other Financing Sources and Concepts for 
Reconciling Budgetary and Financial Accounting, as codified in FASAB 
Pronouncements as Amended, Version 9 (Washington, D.C.: June 30, 2010). 

[59] Section 803(c)(4) of FFMIA requires that Treasury, with the 
concurrence of the Director of OMB, specify the most feasible date for 
bringing its systems into substantial compliance with the three FFMIA 
systems requirements and designate a Treasury official who shall be 
responsible for bringing its systems into substantial compliance by 
that date. 

[End of section] 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each 
weekday, GAO posts newly released reports, testimony, and 
correspondence on its Web site. To have GAO e-mail you a list of newly 
posted products every afternoon, go to [hyperlink, http://www.gao.gov] 
and select "E-mail Updates." 

Order by Phone: 

The price of each GAO publication reflects GAO’s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO’s Web site, 
[hyperlink, http://www.gao.gov/ordering.htm]. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional 
information. 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: 
E-mail: fraudnet@gao.gov: 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Ralph Dawn, Managing Director, dawnr@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, D.C. 20548: 

Public Affairs: 

Chuck Young, Managing Director, youngc1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: