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entitled 'Financial Audit: IRS's Fiscal Years 2011 and 2010 Financial
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United States Government Accountability Office:
GAO:
Report to the Secretary of the Treasury:
November 2011:
Financial Audit:
IRS's Fiscal Years 2011 and 2010 Financial Statements:
GAO-12-165:
GAO Highlights:
Highlights of GAO-12-165, a report to the Secretary of the Treasury.
Why GAO Did This Study:
In accordance with authority granted by the Chief Financial Officers
Act of 1990, GAO annually audits the financial statements of the
Internal Revenue Service (IRS) to determine whether (1) the financial
statements are fairly presented 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). IRS’s tax
collection activities are significant to overall federal receipts, and
its financial management is of substantial interest to Congress.
What GAO Found:
In GAO’s opinion, IRS’s fiscal years 2011 and 2010 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 internal control, compliance, and system-related
deficiencies, IRS did not, in GAO’s opinion, maintain effective
internal control over financial reporting as of September 30, 2011,
and thus did not have reasonable assurance that losses and
misstatements material to the financial statements would be prevented
or detected and corrected timely.
During fiscal year 2011, IRS continued to make strides in addressing
its deficiencies in internal control. For example, to address its
information security deficiencies, IRS formed cross-functional working
groups to identify and remediate specific at-risk information security
control areas and made improvements in several system-level
information security controls.
However, deficiencies remain concerning (1) material weaknesses in
internal control over unpaid tax assessments and information security,
(2) a significant deficiency in its internal control over tax refund
disbursements, (3) a noncompliance with the law concerning the timely
release of tax liens, and (4) financial management systems’ lack of
substantial compliance with FFMIA requirements. The continuing
material weakness in internal control over unpaid tax assessments
results primarily from IRS’s reliance on financial management systems
that do not substantially comply with FFMIA requirements and that
affect IRS’s ability to produce reliable financial statements without
significant compensating procedures. IRS’s continued material weakness
in information security controls limit IRS’s ability to provide
reasonable assurance that (1) the financial statements are fairly
presented; (2) financial management information relied 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
inappropriate access, alteration, or abuse of proprietary IRS programs
and electronic data and taxpayer information.
Further, during fiscal year 2011, IRS continued to face management
challenges in developing and institutionalizing the use of financial
management information, specifically cost- and revenue-based, outcome
oriented 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:
In prior financial statement audits, GAO made numerous recommendations
to IRS to address internal control and compliance issues. Many of
these issues continued to persist during fiscal year 2011. GAO will
continue to monitor and will report separately on IRS’s progress in
implementing the 182 recommendations that remain open as of the date
of this report. GAO will report separately on recommended actions to
address new deficiencies identified in this year’s audit.
In commenting on a draft of this report, IRS stated that it would
continue to increase its focus on information security and internal
control while improving financial reporting.
View GAO-12-165. 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 Control over Financial
Reporting:
Appendix III: Comments from the Internal Revenue Service:
Abbreviations:
CDDB: Custodial Detail Data Base:
CFO: Chief Financial Officer:
FASAB: Federal Accounting Standards Advisory Board:
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 Homebuyer 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:
ROI: Return on Investment:
RRACS: Redesign Revenue Accounting Control System:
TFRP: Trust Fund Recovery Penalty:
USSGL: U.S. Government Standard General Ledger:
[End of section]
United States Government Accountability Office:
Washington, D.C. 20548:
November 10, 2011:
The Honorable Timothy F. Geithner:
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, 2011, and 2010. We
performed our audit in accordance with authority granted by the Chief
Financial Officers Act of 1990, as expanded by the Government
Management Reform Act of 1994. 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, 2011, (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, 2011. 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, those charged with governance, and users of IRS's
financial statements.
During fiscal year 2011, IRS continued to make progress in addressing
its financial management challenges. Specifically, IRS formed cross-
functional working groups to identify and remediate specific
information security control areas identified as being at risk and
made progress in integrating the principles of cost-based decision
making into its business units.
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 and in fully integrating return on
investment-based decision-making into its tax collection enforcement
operations.
In fiscal year 2011, 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 continued to rely on a resource-intensive statistical
sampling process to estimate these amounts. As a result, IRS could not
trace related 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 2011, IRS continued to have a material weakness in
internal control over information security. In particular, it had
deficiencies in its controls over access to the automated systems and
software applications it relies upon to process its financial
transactions, produce its internal and external financial reports, and
safeguard related sensitive information. As a result, IRS was limited
in its ability to provide reasonable assurance that (1) its financial
statements, taken as a whole, were fairly presented; (2) the financial
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.
In addition to these material weaknesses, IRS continued to have a
significant deficiency in internal control over tax refund processing
during fiscal year 2011. We continued to find deficiencies in internal
control over the processing of manually prepared tax refunds and in
the processing of claims for the First-time Homebuyer Credit that led
to erroneous refund disbursements. These deficiencies in internal
control over tax refund disbursements increased the risk of duplicate
or otherwise erroneous tax refund payments being disbursed.
During fiscal year 2011, 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 assist
it in measuring the results of its efforts and in making resource
allocation decisions. It is important that IRS continue to expand the
availability and reliability of cost-benefit information, especially
return on investment information, to its managers and to aggressively
pursue the integration of such data and related performance metrics
into both its long-term strategic and short-term routine decision-
making processes in order to assist it in effectively managing its
resources and 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 website 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:
We audited the fiscal year 2011 and 2010 financial statements of the
Internal Revenue Service (IRS) in accordance with authority granted by
the Chief Financial Officers (CFO) Act of 1990, as expanded by the
Government Management Reform Act of 1994.[Footnote 3] 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 2011 and 2010 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, 2011;
* 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, 2011.
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 2011 and 2010, IRS collected about $2.4
trillion and $2.3 trillion, respectively, in federal tax payments,
processed hundreds of millions of tax and information returns, and
paid about $416 billion and $467 billion, respectively, in refunds to
taxpayers.
In fiscal year 2011, for the 12th consecutive year, IRS's financial
statements are fairly presented in all material respects. IRS
continued to make progress in addressing its management challenges.
For example, IRS formed cross-functional working groups to identify
and remediate specific at-risk information security control areas, and
it made progress in integrating the principles of cost-based decision-
making into its business units. However, despite its progress, IRS
continued to have (1) material weaknesses,[Footnote 7] a significant
deficiency,[Footnote 8] and other deficiencies in its internal
control; and (2) noncompliance with legal provisions.
In evaluating the materiality of identified deficiencies in internal
control to determine whether they represent a material weakness or
significant deficiency, the auditor assesses the risk and magnitude of
potential misstatements that may not be prevented or be timely
detected and corrected by the entity's internal control due to the
existence of the identified deficiency or combination of deficiencies.
Because the judgments of financial statement users encompass not only
the amounts and disclosures contained in the financial statements but
are also made in light of surrounding circumstances, materiality
judgments necessarily involve both quantitative and qualitative
considerations. Quantitative considerations refer to the dollar
magnitude of actual or potential misstatements. Qualitative
considerations include the sensitivity of the circumstances and
perceived importance surrounding the actual or potential misstatement
and the significance of the financial statement element(s) affected by
the actual or potential misstatement. After considering both
quantitative and qualitative factors, we concluded, as noted below,
that deficiencies we identified in IRS's internal control over unpaid
tax assessments[Footnote 9] and information security constitute
material weaknesses.
In our evaluation of deficiencies in internal control at IRS during
fiscal year 2011, we identified the following:
* A continuing material weakness in internal control over unpaid tax
assessments due to IRS's 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
have also led to errors in taxpayer records, which can lead to
increased taxpayer burden.
* A continuing material weakness in internal control over information
security that limited IRS's ability to provide reasonable assurance
that (1) the financial statements are fairly presented in conformity
with U.S. generally accepted accounting principles; (2) financial
information that 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 continuing significant deficiency in internal control over tax
refund disbursements that resulted from deficiencies in internal
control over manual tax refunds[Footnote 10] and the processing of
claims for the First-time Homebuyer Credit (FTHBC)[Footnote 11] that
in some instances resulted in the disbursement of erroneous refunds.
In addition, we identified two instances of noncompliance with legal
provisions. Specifically, (1) IRS did not always release federal tax
liens against taxpayers' property within 30 days of the full
satisfaction of the tax debt as required by the Internal Revenue Code,
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, 2011 and 2010; 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
deficiencies in internal control 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 and related refunds disbursed, as well as the
total unpaid federal taxes for which IRS and the taxpayers or courts
agree on the amounts owed, less an allowance for an estimate of
amounts considered to be uncollectible.[Footnote 12] 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 supplementary
information to the financial statements; however, they are reported as
other accompanying information. 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 also 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 over unpaid
tax assessments and information security discussed below, IRS did not
maintain, in all material respects, effective internal control over
financial reporting as of September 30, 2011, and thus did not provide
reasonable assurance that losses and misstatements that were 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 presented in all
material respects for fiscal years 2011 and 2010. 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 may adversely affect
decisions by IRS's management that are 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 in IRS's fiscal year 2011
(1) FMFIA assurance statement to the Department of the Treasury, and
(2) Management's Report on Internal Control over Financial Reporting.
We considered these reported material weaknesses in determining the
nature, timing, and extent of our audit procedures on IRS's fiscal
years 2011 and 2010 financial statements.
In addition to the material weaknesses in internal control noted above
and described in greater detail 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 in greater detail below.
Material Weakness in Internal Control over Unpaid Tax Assessments:
During fiscal year 2011, IRS continued to have a material weakness in
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 13] (2) lack of transaction traceability for the reported
balance of taxes receivable that comprises over 80 percent of IRS's
total assets as of September 30, 2011, 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 accurate, complete, and timely
transaction-level financial information, as well as errors in taxpayer
accounts. Consequently, management lacks the information it needs to
make well-informed decisions and 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, and IRS
remedies the control deficiencies that continue to result in
significant errors in taxpayer accounts.
Material Weakness in Internal Control over Information Security:
During fiscal year 2011, IRS continued to have a material weakness in
internal control over information security. IRS made strides during
the fiscal year in initiating efforts to address many of the internal
control deficiencies that collectively comprise this material
weakness. Notable among these efforts was the formation of cross-
functional working groups tasked with the identification and
remediation of specific at-risk control areas. Also, IRS improved
several system-level controls, including the encryption of data
transferred between some accounting systems, upgrades to critical
network devices on the agency's internal network, and strengthening of
the architecture of an important financial system to eliminate
identified areas of weakness. However, despite these efforts and
enhanced management attention toward controls, a majority of the known
weaknesses in the agency's systems and internal network and physical
security controls remained unresolved in fiscal year 2011. For
example, (1) IRS continued to rely upon a procurement system that
lacks reliable controls due to access control weaknesses and database
maintenance that was not performed; (2) IRS continued to use
unencrypted protocols for a sensitive tax processing application; and
(3) many physical security control weaknesses identified in prior
years had not been resolved.
The results of our testing during this audit were consistent with our
findings in past years in that we identified additional deficiencies
with the same significance as we identified in prior audits. Among the
deficiencies we identified this year were weaknesses in (1) system
access and configuration controls and (2) controls intended to
compensate and mitigate for known deficiencies. For example, our
testing showed that systems used to process tax and financial
information did not effectively prevent access from unauthorized users
or excessive levels of access for authorized users. These
vulnerabilities were not known to IRS despite those systems being in
compliance with the agency's policies on periodic control reviews and
testing. As a result of these deficiencies considered collectively,
IRS was (1) unable to rely upon its systems or compensating and
mitigating controls to provide reasonable assurance that its financial
statements are fairly presented, (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.
Significant Deficiency in Internal Control over Tax Refund
Disbursements:
During fiscal year 2011, we continued to identify deficiencies in
IRS's internal control over tax refund disbursements. These
deficiencies do not individually or collectively represent a material
weakness, but in our judgment 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. Specifically, IRS has not
effectively addressed the deficiencies in internal control over manual
tax refunds that we have reported in previous years[Footnote 14] and
the processing of claims for the FTHBC we reported for fiscal year
2010. We also identified additional deficiencies in internal control
over manual tax refunds during this year's audit, as well as continued
deficiencies in IRS's internal control over processing of claims for
the FTHBC. These deficiencies related to the monitoring of manual
refunds, training of staff having key roles in refund processing, and
documentation of FTHBC claims. In some cases, these deficiencies
resulted in erroneous tax refund disbursements. These deficiencies in
internal control, coupled with the materiality of 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 also an increased risk
that in addition to those we identified, IRS may have disbursed other,
undetected, erroneous tax refund payments.
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 15] As of the date of this report, 182
recommendations related to our financial statement audits were still
open, of which 10 relate to the material weakness in internal control
over unpaid tax assessments, 105 relate to the material weakness in
internal control over information security, and 9 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 2011 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 IRS 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 2011 disclosed one area of noncompliance
that is reportable under U.S. generally accepted government auditing
standards. This area relates to IRS not always releasing federal tax
liens against taxpayers' property within the 30-day legal requirement.
[Footnote 16] 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, 2011.[Footnote 17]
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 U.S. 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 disclosed these
deficiencies in its fiscal year 2011 (1) 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 Management Discussion and Analysis 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.
Performance Measurement:
During fiscal year 2011, IRS continued to face challenges in
developing and institutionalizing the use of financial information to
assist it in making operational decisions and in 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
18] 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 these goals because its metrics are focused primarily on
process-oriented workload measures rather than on metrics that measure
program outcomes, such as specific IRS enforcement programs' return on
investment (ROI).
Although IRS made progress during fiscal year 2011 in implementing
cost-based performance information into its operational decision-
making processes, the agency has not yet reached a level of
implementation indicative of full integration of this type of
performance data such that it becomes a routine part of managers'
decision-making process throughout all of IRS's business units and its
externally reported performance metrics.
During the fiscal year, IRS continued to add to the number of programs
and activities for which full cost, and ROI,[Footnote 19] information
has been developed, and IRS has for the past several years annually
updated the data for each set of such information. Additionally, over
the last several years, IRS's Office of Chief Financial Officer (CFO)
has been the driving force in developing and promoting the use of full
cost (and revenue) information for IRS's programs and activities
within IRS's various business units, leadership that it continued to
provide during fiscal year 2011. The CFO's efforts have resulted in
progress during fiscal year 2011 in that the management teams of
several of IRS's business units began expressing their own interest
in, and have made requests to the CFO for, full cost information on
outputs from their business units' programs and activities, and they
reported that they are exploring ways in which to include such data in
their decision-making processes.
However, the use of programmatic full cost and ROI information, and
related performance metrics, has not yet extended to IRS's primary
business unit responsible for developing and directing IRS's corporate-
wide enforcement activities to collect unpaid taxes. The integration
of such information into both IRS's strategic and routine enforcement-
related management decisions could greatly enhance IRS's ability to
evaluate the efficiency and cost-effectiveness of its programs and
activities, including comparing the efficiency and effectiveness of
various existing enforcement collection strategies, staffing levels,
and proposed changes.
We acknowledge that IRS faces challenges in integrating the use of
full cost data into its routine decision-making processes, especially
the use of ROI performance metrics within IRS's enforcement business
units. We also recognize that such integration will involve combining
the use of ROI metrics with other factors, such as the fairness of its
implementation of the tax code and the impact on voluntary compliance
into its decision-making processes. However, including the use of ROI
performance metrics 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 efficiently and effectively. Achieving the full
integration of ROI data into routine as well as strategic decision
making throughout the agency will require sustained leadership from
senior IRS executives and throughout the agency.
Safeguarding Taxpayer Receipts and Associated Information:
Although levels of electronic filing of tax and information returns
have been steadily increasing, IRS continues to face 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. During our financial audits, including our fiscal year 2011
audit, we continue to identify deficiencies in IRS's internal control
over safeguarding of taxpayer receipts and information which, while
not individually or in the aggregate constituting a significant
deficiency or material weakness, nonetheless are sensitive matters
requiring attention. We have made numerous recommendations to address
these issues,[Footnote 20] to which IRS has been responsive.
Nonetheless, 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, 2011,
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, 2011,
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 21]
* 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 legal
provisions: 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; Full-Year Continuing
Appropriations Act, 2011, which incorporates, by reference, certain
provisions of the Financial Services and General Government
Appropriations Act, 2010; Federal Employees' Compensation Act; Civil
Service Retirement Act; and the Tax Relief Unemployment Insurance
Reauthorization and Jobs Creation Act of 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, by management, and by 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 conformity 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 legal provisions 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, 2011. 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 it was
pleased that we recognized its progress in strengthening controls.
Specifically, IRS noted that we recognized it had (1) established
enterprise-wide security initiatives that improved management's
ability to measure the state of controls, (2) developed cross-
functional working groups with knowledge of internal systems and the
ability to assess risk areas, and (3) made improvements in performance
measures and the timely release of tax liens. IRS also commented that
it had continued to make improvements in the areas of cash management,
cost allocations, upward and downward adjustments to prior year
obligations, and undelivered orders. Our prior audits identified
deficiencies in each of these areas.
Further, while IRS acknowledged that challenges remain, IRS also
stated it had a solid management team 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.
We will evaluate the effectiveness of IRS's corrective actions during
our audit of IRS's fiscal year 2012 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 4, 2011:
[End of section]
Management Discussion and Analysis:
The Internal Revenue Service:
FY 2011 Management Discussion and Analysis:
At A Glance:
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,
oversight of tax-exempt organizations, as well as tax credits such as
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 Business and International:
* 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 2011 Statistics:
Total Revenue Collected: $2.4 trillion;
Total Enforcement Revenue Collected: $55.2 billion;
Total Refunds: $415.9 billion;
Number of Hits on IRS.gov: 1.6 billion;
Number of Downloads from IRS.gov: 229.2 million;
Number of Returns Filed: 237 million;
“Where’s My Refund?” Usage: 77.9 million;
Number of Taxpayers Assisted: 82.9 million;
Number of Returns Filed Electronically: 126 million;
Average Individual Refund: $2,927;
Number of Customers served at Taxpayer Assistance Centers: 6.4 million.
Financial Resources:
The IRS FY 2011 budget was $12.12 billion in direct appropriations,
supplemented by $324.4 million in user fee revenue and $138.9 million
in reimbursable resources for a total operating level of $12.6 billion.
Internet:
The IRS provides tax information, taxpayer services, forms, and
publications at [hyperlink, http://www.IRS.gov].
Figure: Funding by Appropriation:
[Refer to PDF for image: pie-chart]
Enforcement: 44%;
Operations Support: 32%;
Taxpayer Service: 18%;
Business Systems Modernization: 2%;
Health Insurance Tax Credit Administration: Less than 1%;
Other: 4%.
[End of figure]
Funding by Appropriations ($ thousands):
In FY 2011, funding for the three core operating appropriations was
allocated as follows:
* Taxpayer Services [$2,274,272] funds processing tax returns and
related documents, and assistance for taxpayers in filing returns and
paying taxes due.
* Enforcement [$5,492,992] 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 [$4,075,716] 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 [$263,369] funds capital asset
acquisitions of information technology systems to modernize key tax
administration systems.
* Health Insurance Tax Credit Administration [$15,481] funds the
administration of the Health Coverage Tax Credit (HCTC).
* Other: Mandatory Appropriation (Special Funds): User Fees [$324,477]
are receipts from payment for services provided and reimbursable
agreements [$138,855].
Figure: How IRS Uses its Resources:
[Refer to PDF for image: pie-chart]
Compliance: 65%;
Filing and Account Services: 25%;
Taxpayer Assistance and Education: 8%;
Administration of Health Insurance/Tax Credit Programs: 2%.
[End of figure]
How IRS Uses its Resources:
The Statement of Net Cost reflects the use of IRS resources in
conducting its major programs. The IRS uses a cost allocation
methodology to assign support and overhead costs to each program
described below. The Statement of Net Cost reports the full cost of
these programs in accordance with the Statement of Federal
Financial Accounting Standards No. 4, “Managerial Cost Accounting.”
* Taxpayer Assistance and Education activities include taxpayer
education and outreach, tax publication issuance and distribution.
* Filing and Account Services activities include filing tax returns,
maintaining customer accounts, and processing taxpayer information.
* Compliance activities include pre-filing agreements, document
matching, examination, collection, and criminal investigation
activities.
* Administration of Health Insurance/Tax Credit Programs includes
costs for Earned Income Tax Credit (EITC) and HCTC program activities.
The following table shows FY 2011 and 2010 data on the use of IRS
resources by major programs:
Use of Resources ($ thousands):
Program: Taxpayer Assistance and Education;
FY 2011: $1,132,508;
FY 2010: $793,492.
Program: Filing and Account Services;
FY 2011: $3,365,832;
FY 2010: $3,527,840
Program: Compliance;
FY 2011: $8,763,891;
FY 2010: $9,330,435.
Program: Administration of Health Insurance/Tax Credit Programs;
FY 2011: $208,716
FY 2010: $249,577.
[End of table]
Internal Revenue Service:
Management Discussion and Analysis:
For the Fiscal Year Ended September 30, 2011:
Return Preparer Initiative:
One of the most important initiatives that the IRS has undertaken in
recent memory is the return preparer initiative, which is now being
implemented. In September 2010, the IRS launched the new online PTIN
(Preparer Tax Identification Number) application system. The system is
up and running with over 735,000 preparers already registered in the
system. More than just an identification number, the PTIN registration
process gives the IRS an important and better line of sight into the
return preparer community than the IRS has ever had before. It allows
for leveraging information to better communicate, analyze trends, spot
anomalies, and potentially detect fraud. The registration process will
help IRS build, in several years, a publicly accessible database of
preparers who are authorized to prepare returns. This is an extremely
important tool for consumers as they will be able to search the
database to ensure that their preparer is registered. In 2011, the IRS
also:
* Amended Circular 230 to create a new registered tax return preparer
credential, extend ethical rules to all paid preparers, create new rules
applicable to continuing education providers, broadened the definition
of practice to include return preparation, and numerous other
revisions.
The IRS provided return preparer initiative outreach and education by
arranging to have agency officials make presentations and provide
outreach at key stakeholder events and use a range of communication
tools for sharing information.
The IRS also maintains an enforcement presence in the return preparer
community.
FY 2011 accomplishments include:
* Completing 240 undercover visits.
* Conducting 93 Knock and Talk visits with identified at-risk
preparers.
* Initiating 378 Return Preparer Program (RPP) investigations.
* Achieving 163 RPP convictions.
* Issuing 10,000 letters and visiting more than 5,000 preparers for
noncompliance with multiple areas of concern that include EITC, e-
file, and certified acceptance agents.
Fiscal Year (FY) 2011 Performance:
In FY 2011, the IRS achieved an overall success rate of 84% in meeting
or exceeding the targets for 27 of its 32 performance measures, a 27%
increase compared to FY 2010. Two of the five measures that fell below
the target were within 1% of the target. Detailed information on
performance is contained in Appendix B, Performance Measurement
Data; and Appendix C, Explanation of Shortfalls.
Figure: Actual Performance Measures:
[Refer to PDF for image: vertical bar graph]
FY 2010:
Taxpayer Service: 83%;
Enforcement: 56%;
Business Systems Modernization: 50.
FY 2011:
Taxpayer Service: 83%;
Enforcement: 89%;
Business Systems Modernization: 50.
[End of figure]
Collections related to enforcement activities totaled $55.2 billion
for FY 2011, a 17% increase over FY 2005.
Figure: IRS Enforcement Revenue ($ Billions):
[Refer to PDF for image: vertical bar graph]
FY05: $47.3;
FY06: $48.7;
FY07: $59.2;
FY08: $56.4;
FY09: $48.9;
FY10: $57.6;
FY11: $55.2.
[End of figure]
Research studies and analytics provide measures of taxpayer compliance
and the tax gap, which influences taxpayer compliance and IRS
enforcement activities. In FY 2011, the National Research Program
(NRP) completed individual reporting compliance studies that will be
used to update tax gap estimates scheduled to be released in FY 2012.
Updated estimates also incorporate an enhanced methodology to
calculate the individual income tax nonfiling gap. NRP also delivered
data for the S-corporation reporting compliance study and updated
payment compliance estimates for tax years 2006 through 2009. For the
first time in 30 years, the IRS also began designing a corporate income
tax reporting compliance study to obtain valuable information on the
compliance behaviors of corporate filers. The study will cover a sample
of corporate returns from tax year 2010.
The IRS continues to improve its methods to identify noncompliance. In
FY 2011, the Compliance Data Warehouse (CDW), an IRS system that
integrates tax data from numerous sources to enable quick and easy
access by IRS researchers via third-party tools, was named the 2011
Best Practices Awards winner, in the category of government/non-profit,
by the Data Warehousing Institute. CDW was honored for demonstrating
best practices in business intelligence, data warehousing, or related
areas of data management. This is the fourth industry award for CDW in
the last four years.
[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:
The IRS assists taxpayers with meeting their federal tax obligations
by providing alternative service delivery methods. In FY 2011, the IRS:
* Launched a Toll-Free telephone line giving callers direct access to
the automated transcript application and implemented a new web
application on IRS.gov that allows taxpayers to order copies of
previously filed and processed tax returns. Over 1.96 million taxpayers
ordered transcripts in FY 2011.
* Provided 100 Facilitated Self-Assistance (FSA) kiosks at 37 Taxpayer
Assistance Centers (TAC). FSA kiosks are selfserve computer terminals
connected to the internet that allows taxpayers to help themselves to
the IRS tax-related services found on IRS.gov. More than 41,500
taxpayers used this service.
* Posted Volunteer Income Tax Assistance site locations on IRS.gov,
which in prior years was only available via the IRS toll-free number.
There were almost 168,000 hits to the listing on IRS.gov.
* Extended hours of service in more TAC sites, attracting more than
16,000 taxpayers.
End of side bar]
Improve Service to Make Voluntary Compliance Easier:
Providing taxpayers top-quality service and helping them understand and
meet their tax responsibilities remain top priorities for the IRS. In
FY 2011, the IRS met or exceeded 83% (10 of 12) of the Taxpayer
Service performance targets.
During FY 2011, the IRS updated forms to help taxpayers comply with
filing requirements, converted forms for visually impaired taxpayers,
translated more tax products into multiple languages, and reduced
telephone wait time. Expanding information on IRS.gov and social media
sites provides information in alternative mediums taxpayers are looking
for. For the second year, the IRS worked with its banking partners to
offer refunds on pre-paid debit cards so taxpayers without bank accounts
could receive their refunds quicker.
Highlights of the 2011 Filing Season:
The IRS delivered another successful filing season in 2011, rising to
challenges posed by tax legislation enacted in late December 2010. The
IRS took the necessary steps to minimize disruptions for taxpayers and
ensure a smooth filing season. Results of the 2011 filing season
included:
* Processing over 144.7 million individual returns and issuing more
than 109.3 million refunds totaling $345.0 billion compared to 109.5
million refunds totaling $366 billion for the same period in 2010.
* Achieving a 70.1% telephone level of service, while answering 34.2
million assistor calls.
* Answering 42.3 million automated calls, a 20.5% increase from 2010.
* Responding accurately to 93.4% of tax law questions and 96% of
account questions received via the telephone.
* Processing over 2.7 million free file returns.
* Processing 45,499 savings bond requests, an increase of 103.3%
from 2010, totaling $11.2 million.
The IRS electronic filing program offers a more efficient and secure way
for taxpayers to file more accurate returns and get their refunds
quicker.
In FY 2011, for the first time, the IRS e-file program processed more
than 100 million individual e-filed returns in a single season and
passed the one billion mark for individual tax returns processed since
the program began in 1986. Encouraged by the record-breaking results
in electronic filing, President Obama used the IRS as a model for how
federal agencies can successfully provide customer-friendly technology
to the public. Filing season results targeting electronic filing
included:
* Individual returns electronically filed increased to 76.9% up from
69.3% in 2010, with total returns reaching 111.3 million.
* Home-Computer filing increased to 39.6 million returns, up from 34.6
million in 2010.
* Business returns were filed electronically at a rate of 31.8%, up from
25.5% in 2010.
* Tax professional use of e-file increased 15% from the previous year,
reaching 71.7 million returns.
The IRS continued to increase the amount of tax information and
services provided to taxpayers through IRS.gov. In FY 2011, the IRS
received a Compuware Gomez “Best of the Web” award, which recognized
IRS.gov as one of the best websites in government for performance and
quality and first in consistency. In FY 2011, taxpayers used IRS.gov
to:
* View web pages. Web pages were viewed over 1.6 billion times.
* Check on refunds. More than 77.9 million taxpayers used “Where’s
My Refund?” an increase of 16.4% from 2010.
* Get forms and publications. Over 229 million tax products were
downloaded, an increase of 7.5% from 2010.
* Link to EFTPS. The Electronic Federal Tax Payment System (EFTPS)
processed more than 129.8 million electronic tax payments totaling
over $2 trillion.
* Get answers. More than 241,962 taxpayers accessed the Interactive
Tax Assistant in order to receive answers to tax law questions.
[Side bar:
Taxpayer Service through Social Media:
The IRS expanded and refined the use of social media and technology to
meet the needs of taxpayers. By employing social media, the IRS was
able to reach taxpayers with important service and compliance
messages. Social media outlets used include:
* YouTube, to post informative videos on many tax topics in multiple
languages, including American Sign Language. In FY 2011, videos were
viewed almost 1.2 million times.
* Twitter, to tweet on the latest news and information for taxpayers
in both English and Spanish. Tweets were also produced to provide tax
guidance and other information to return preparers and other tax
professionals. The IRS had more than 25,000 Twitter followers in FY
2011.
* ITunes, where 17 podcasts were available for a total of 18,226
downloads. Topics covered included:
- Earned Income Tax Credit;
- Last Minute Tax Tips;
- Flexible Spending Arrangements.
In FY 2011, the IRS released the IRS2GO Smartphone application, which
lets taxpayers interact with the IRS using their mobile Apple and
Google Android devices. This new Smartphone application engages
taxpayers where they want and when they want it, allowing them to
check the status of their refund and get easy to understand tax tips
beyond traditional channels. During the 2011 filing season, IRS2Go
averaged 4 out of 5 stars in hundreds of reviews and had more than
360,000 downloads.
End of side bar]
Taxpayer Education and Outreach:
The IRS continues to improve and expand on its outreach and
educational services through partnerships with state taxing authorities,
volunteer groups, and other organizations. Free tax assistance was
provided for the elderly, disabled, and limited English proficient
individuals and families at various Volunteer Income Tax Assistance
(VITA) and Tax Counseling for the Elderly (TCE) sites. In FY 2011, more
than $18 million in VITA and TCE Grants were awarded to a total of 210
organizations, a 23% increase in the number of organizations from 2010.
Assistors at more than 9,000 VITA and TCE Grant sites across the nation
prepared more than one million tax returns.
The IRS conducted "Open House” events, both during and after the filing
season. At these events taxpayers could get help with preparing current
and prior year federal and state tax returns, resolving account and
balance due issues, and making Installment Agreement arrangements.
Taxpayers took advantage of:
* Two open house events held during the filing season at 96 Taxpayer
Assistance Center (TAC) locations. More than 16,300 taxpayers were
helped and more than 4,300 returns were prepared.
* One open house event was held after the filing season at 74 TAC
locations. More than 4,000 taxpayers participated.
In the struggling economy, more and more individual taxpayers face
financial hardship. In FY 2011, the IRS took steps to assist these
individuals by implementing a Fresh Start initiative. Fresh Start helps
taxpayers who owe money by providing greater access to installment
agreements and easing regulations on lien filing. The changes included:
* Increasing the dollar threshold at which liens are generally issued.
* Making it easier for taxpayers to obtain lien releases after paying a
tax bill.
* Withdrawing liens in most cases where a taxpayer enters into a Direct
Debit Installment Agreement.
* Creating easier access to Installment Agreements for struggling small
businesses.
* Expanding a streamlined Offer in Compromise program to cover more
taxpayers.
[Side bar: Improving Taxpayer Experience:
The IRS continually looks for ways to improve tax products and the
services provided to taxpayers to make the return filing process a
positive experience. Actions taken in FY 2011 include:
* Launching a Multilingual Gateway to provide a user-friendly website
that offers tax information in Chinese, Korean, Vietnamese, and
Russian.
* Expanding the preparation of State income tax returns from 27 to 35
states, adding Kentucky, Michigan, Minnesota, Nebraska, New Jersey,
Ohio, Pennsylvania, and Virginia.
* Enrolling almost 11,500 new participants in the Health Coverage Tax
Credit (HCTC) program, handling 202,000 calls, making over $170 million
in payments, and posting over $6 million in reimbursement credits to
HCTC participants accounts.
* Implementing the HCTC ePayment Processing System to allow taxpayers
to make payments electronically and receive immediate acknowledgment
of the payment, eliminating the need to call the Program Office to
verify receipt. More than 44,300 payments totaling $12.8 million were
received via this web-based, self-service tool.
* Expanding Paper Check Conversion nationwide to all 401 TACs, allowing
paper checks to be converted to electronic transactions. The conversion
improves the payment process and expedites resolution to taxpayer
account issues. In FY 2011, 3.6 million remittances were processed for
more than $7.8 billion.
* Partnering with the Bureau of Public Debt and the Department of the
Treasury to allow taxpayers to purchase savings bonds for others
from their tax refunds and adding an option to receive the balance of
their tax refund in the form of a paper check.
End of side bar]
The Earned Income Tax Credit (EITC) is one of the Federal Government’s
largest benefit programs, providing help to low-income wage earners.
In FY 2011, the IRS once again reached out to taxpayers eligible for
this tax credit through its 5th EITC Awareness Day. Efforts included
660 separate outreach activities like news conferences, news releases,
newsletters, and e-mails. Through these efforts:
* Nationwide coverage was achieved at national and local events
through 16 English and 15 Spanish satellite media tour broadcasts,
reaching an audience of 1.8 million.
* Print media conference calls in English and Spanish hit over 2.4
million in circulation.
* Nationwide radio interviews in English and Spanish reached over
1,300 affiliate markets.
* Two EITC Saturdays were held at 170 TACs in order to help taxpayers
complete their returns and make payments. As a result, more than
15,000 taxpayers were assisted with over 5,100 returns being prepared.
In FY 2011, the IRS released redesigned notices in multiple languages.
In April, the Center for Plain Language awarded the IRS the Grand Prize
ClearMark Award for its efforts to produce easy-to-understand taxpayer
notices. Notice redesign efforts included:
* Completing design/redesign of 104 notices, representing 72% of the
more than 220 million notices sent each year, to provide a clear,
simple explanation of the purpose of the notice and what actions the
taxpayer must take to resolve the issue.
* Providing corresponding IRS.gov web links for each notice attracting
989,985 visits. The links provide more information on the notice,
answer common questions, and provide tips to help taxpayers with
tax filings in the future. Higher volume notices were also translated
into five languages (Spanish, Chinese, Korean, Vietnamese, and
Russian).
[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 17%, from FY 2005 to
FY 2011, yielding a 4.6 to 1 return on investment based on the $55.2
billion in enforcement revenue with a budget of $12.12 billion.
* Completed 4,697 criminal investigations, an 8.6% increase over FY
2010.
* Closed over three million collection cases.
* Completed 50,139 tax-exempt and government entities compliance
contacts.
* The Federal Payment Levy Program (FPLP) collected $614 million in FY
2011, a decrease of 0.6%, and has collected over $3.26 billion since
implementation in 2000.
End of side bar]
Enforce the Law to Ensure Everyone Meets Their Obligation to Pay Taxes:
Just as service is essential to enhance voluntary compliance, so is
enforcement. IRS programs like examination and collection ensure that
taxpayers pay what they owe and assist those individuals who may have
trouble meeting their tax liability because of hardship situations.
Highlights of Enforcement Performance:
The IRS met 89% (16 of 18) enforcement performance measures in
FY 2011.
The IRS has shown progress in several key enforcement programs
including increases in:
* High income audits, 14.5%.
* Small business audits (assets <$10 million), 8.6%.
* Automated Underreporter contact closures, more than 8.5%.
* Collection case closures, 6.7%.
* Tax Exempt and Government Entities compliance contacts, 21%.
* Large corporate audits, 3.4%.
The IRS made significant strides in cracking down on international tax
evasion, striking a landmark deal with the government of Switzerland,
that for the first time, provided information on thousands of Americans
hiding assets in Swiss bank accounts. In FY 2011, the IRS continued to
work cases resulting from the 2009 Offshore Voluntary Disclosure
Program (OVDP) that encouraged taxpayers with hidden offshore assets
and income to voluntarily come back into the tax system. There were
approximately 15,000 voluntary disclosures from individuals who came in
under the OVDP resulting in approximately $2.2 billion in additional
tax, interest, and penalties. Since the 2009 Program closed, an
additional 3,000 voluntary disclosures from individuals with bank
accounts from around the world have been received; prompting the IRS
to announce a special Offshore Voluntary Disclosure Initiative (OVDI)
in February 2011. The OVDI has an increased penalty framework whereby
participating taxpayers must file all original and amended returns and
include payment for taxes, interest, and accuracy-related penalties by
the September 9, 2011, ending date.
The 2011 OVDI resulted in over 12,000 applications being afforded a
penalty structure as outlined in the February announcement, many of
which involve significant amounts of previously unpaid tax. However,
collecting additional revenue for past offenses is not the only vital
consideration, but more importantly is the success in bringing thousands
of U.S. taxpayers back into the system so they properly report and pay
their taxes on their offshore accounts for years to come.
[Side bar:
International Tax Compliance:
As part of the overall strategy to improve offshore compliance, in FY
2011, the IRS realigned its former Large and Mid-size Business
Division into the new Large Business and International (LB&I) Division
with the intent of strengthening international tax compliance and
promoting greater collaboration across the IRS on matters relating to
global tax administration.
In addition, the IRS created the Office of International Operations
whose mission is to develop and support domestic and international
criminal investigations and critical IRS programs through an expanded
international workforce and increased sharing of information within
IRS and with external bodies, such as other law enforcement entities
and foreign nations. With the LB&I realignment and the creation of the
Office of International Operations, the IRS has formed a cohesive team
dedicated to the highly specialized international arena and to the
development of new leads in ongoing criminal tax and financial crimes
investigations.
FY 2011 results included the Deutsche Bank being order to pay over
$400 million for taking part in fraudulent tax shelters that allowed
clients to hide billions of dollars overseas, and the Department of
Justice being granted permission to summon HSBC of India and the UBS AG
to gain information on U.S. taxpayers using their accounts to evade
U.S. tax obligations.
Foreign Bank and Financial Accounts:
The Bank Secrecy Act (BSA) and Currency Transaction Reporting (CTR)
Operations have implemented a multifaceted approach to improve the
customer experience and service regarding Foreign Bank and Financial
Accounts (FBAR) preparation and filing. The IRS created a FBAR hotline
which allows international callers the ability to reach a customer
service representative to assist with understanding the preparation
and filing of FBAR reports. In FY 2011, the IRS also:
* Revised Publication 4261, “Do You Have a Foreign Financial Account?”
* Created a short video publicizing new FBAR regulations posted to the
IRS Video Portal.
* Delivered a one-hour live webinar.
End of side bar]
The IRS continued to implement strategies to address international
issues in the tax-exempt arena as well, including expanding education to
internal and external audiences, improving intra-governmental
coordination, expanding IRS presence in U.S. territories, and enhancing
compliance measures using customer-tailored strategies. In addition, the
following actions were completed in FY 2011:
* Issuing guidance on foreign issues and assisting other U.S. territory
tax departments.
* Increasing international examination activities, closing over 197
examination returns compared to 75 in FY 2010.
* Collaborating with other government agencies to train immigration
agents.
* Continuing participation in the international Charity Regulator
Conference with representatives from England, Wales, Ireland,
Scotland, and Australia.
The IRS criminal investigation program scrutinizes egregious tax, money
laundering, currency violations, terrorist financing, and other
financial crimes that adversely affect tax administration. Using its
unique statutory jurisdiction and financial expertise, the IRS makes
significant contributions to important national law enforcement
priorities. Performance in the IRS criminal investigation program
remained high in FY 2011, as the IRS:
* Completed 4,697 criminal investigations, an 8.6% increase over 2010.
* Achieved a conviction rate of 92.7%, a 2.5 percentage point increase
over 2010.
* Maintained a Department of Justice acceptance rate of 94.5%, with a
U.S. Attorney acceptance rate of 89.9%, which compares favorably with
other federal law enforcement agencies.
* Obtained 2,350 convictions, exceeding the FY 2011 target.
In FY 2011, the IRS worked with the Department of Justice on a New
York bid rigging investigation that resulted in settlements with three
banks for a total of $97.3 million. Bidding agents steered public bond
monies to predetermined banks for investment and a non-competitive
bidding process, which misled the public and caused municipalities to
lose millions of dollars.
The IRS Accounts Management Taxpayer Assurance Program (AMTAP)
and Questionable Refund Program (QRP), which are designed to identify
and stop fraudulent return filings and refunds, continued to show
positive results in FY 2011 by:
* Using the Electronic Fraud Detection System to identify almost 1.8
million fraudulent returns and stopped over $14 billion in fraudulent
claims (AMTAP).
* Identifying 1,058 QRP schemes consisting of almost one million
individual returns.
* Detecting and preventing almost $7 billion in fraudulent QRP refunds.
* Achieving a 96.7% conviction rate, a 78.3% incarceration rate, and a
91.7% publicity rate on QRP adjudicated cases.
[Side bar:
Compliance Innovations:
In FY 2011, the IRS made its six-year old Compliance Assurance Process
(CAP) pilot program permanent. CAP allows large corporate taxpayers to
resolve tax issues prior to filing a tax return. Since the IRS started
CAP, the number of participating corporations has grown each year to
the current 140 participants. Participating corporations cite their
primary interest in CAP is the opportunity to achieve tax certainty
sooner and the focus on current issues. The IRS also announced that
the CAP program would expand to include two additional components:
A new pre-CAP program that provides interested taxpayers with a clear
roadmap of the steps required for gaining entry into CAP; and a new
CAP maintenance program intended for taxpayers who have been in CAP,
have fewer complex issues, and have established a track record of
working cooperatively.
The IRS also created a Compliance Self-Assessment Tool to assist
government entities in reviewing federal tax law and to identify
compliance issues. The document gives special attention to social
security coverage issues and provides links to sources that contain
additional information, as well as how to voluntarily disclose an
identified error and solicit a resolution.
Another innovative strategy and tool is the Industry Issue Resolution
(IIR) strategy, which addresses frequently disputed or burdensome
business tax issues that affect a significant number of taxpayers. By
issuing clear guidance, the taxpayer can reduce time and expense
associated with resolving issues during tax examinations. This issue-
focused compliance strategy improves the ability to identify and
address areas of significant noncompliance. In FY 2011, the IRS
issued guidance in the form of Regulations, Revenue Procedures, and
Industry Director Directives for the following three tax issues:
1. Unit of Property for Network Assets in the Telecommunications
Industry, a safe harbor provision.
2. Appropriate Class Life for Wireless Telecommunications Assets.
3. Vendor Markdown under Retail Inventory Method.
End of side bar]
In FY 2011, the IRS kicked-off its Prisoner Compliance program, with an
overall mission to increase prisoner tax compliance, reduce erroneous
refunds, and increase the effectiveness for the management of prisoner
tax returns. The IRS collected and consolidated prisoner information and
developed an IT application to assist in identifying prisoners and
preventing false claims. The IRS secured agreements with the Federal
Bureau of Prisons in 21 states and is in negotiations with corrections
officials in the 29 remaining states and the District of Columbia to
exchange prisoner tax information to improve the accuracy and
completeness of tax returns. During FY 2011, the IRS identified 260,806
fraudulent returns and stopped more than $2.6 billion in fraudulent
refund claims by prisoners.
The IRS ushered in a new relationship with corporate taxpayers in
FY 2011, with a major focus on creating forums and venues where issues
can be resolved faster and provide more certainty. The impetus for this
new approach stems from the simple shared belief that at the end of the
day, taxpayers and tax authorities want much of the same thing - a
balanced tax administration system that provides:
* Certainty regarding a taxpayer’s tax obligations sooner rather than
later.
* Consistent treatment across taxpayers.
* An efficient use of government and taxpayer resources by focusing
on the issues and taxpayers that pose the greatest risk of tax
noncompliance.
There are several interlocking pieces that will help advance this
transformation. It requires more transparency on both sides, a re-
tooling of the audit approach, a commitment to resolving issues
quickly, and clarifying uncertainty in the law.
The IRS now has a number of innovative, forward-thinking programs and
forums, such as the Industry Issue Resolution program, Compliance
Assurance Program, Fast Track Settlement and Uncertain Tax Positions
reporting requirements that are focused as a package on the goals of
faster issue resolution and greater certainty for those taxpayers who
want to be transparent.
[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:
* Delivered more than 200 filing season applications and modernization
projects.
* Received nearly 1.5 million Fed-State returns from 28 participating
states.
* Refreshed over 9,700 laptops and 12,700 desktops.
* Processed and mitigated emerging threats posed by more than 2,100
cyber incidents.
* Blocked more than 4,200 websites to prohibit malicious or unauthorized
software from affecting security.
The IRS energy and environmental programs scored green in all
categories on the agency sustainability and energy scorecard. In FY
2011, the IRS exceeded or met the Treasury targets in all categories
including:
* Green House Gas Consumption.
* Energy Intensity.
* Renewable Energy.
* Water Consumption.
* Petroleum Use. Reduced the number of vehicles in use as well as
invested in alternative fuel vehicles.
* Sustainable Green Buildings.
End of side bar]
Strategic Foundations: Invest For High Performance:
Business Systems Modernization (BSM):
IRS modernization efforts focus on building and deploying advanced
information technology systems, processes, and tools to improve
efficiency and productivity. In FY 2011, the IRS achieved 50 percent (1
of 2) of its Business System Modernization targets. The target for the
projects within +/-10% Cost Variance was missed as the result of initial
cost estimates being too high for one of the releases.
The following highlights the BSM accomplishments in FY 2011:
* Customer Account Data Engine (CADE). Current CADE Release 6.2
successfully deployed in January 2011, providing technical
improvements to the infrastructure and availability of the system.
CADE also facilitated a mid-season re-start in February to implement
Extender legislative changes affecting individual taxpayers. CADE
posted more than 40 million tax returns and issued more than 35.1
million refunds totaling in excess of $65.6 billion. CADE also posted
4.4 million payments submitted with taxpayer returns.
* Modernized e-File (MeF) Release 6.2 deployed in January 2011 to
deliver Business Master File (BMF) returns. The Individual Master File
(IMF) component was also delivered on schedule in January 2011. MeF
accepted almost 18.5 million returns in 2011, a 262% increase compared
to the same period in calendar year 2010. The growth was due to an
increase in electronic 1040 returns, resulting from the IRS, for the
first time, not mailing tax form packages to individuals and
businesses, and more transmitters and states developing software to
meet MeF filing requirements.
* Customer Account Data Engine 2 (CADE 2). The IRS completed logical
and physical designs for CADE 2 on time in December 2010 and April
2011, respectively. CADE 2 remains on track to deliver a daily
processing capability and single authoritative database for all
individual taxpayer records, moving the IRS away from its legacy
flatfile data storage model in January 2012.
Physical, Information, and Cyber Security:
The IRS collects a tremendous amount of sensitive information and
protecting this information is vital to maintaining the public trust.
Early detection and prevention activities take place daily to reduce
online fraud against the IRS and its taxpayers.
Monitoring, identifying, and mitigating intrusion attempts by fraudulent
sites and phishing scams, ensures the IRS protects its systems and
taxpayers from increasing and evolving online fraud schemes and helps
to reduce the number of taxpayers who fall victim to these schemes. The
general public can now report suspicious websites, emails, and phone
numbers they receive to an IRS established public inbox,
Phishing@irs.gov for further investigation and action.
During FY2011, the IRS disabled 9,272 fraudulent phishing/malware
websites, compared to 3,444 in FY2010, as well as 352 fax numbers and
534 email drop boxes.
The IRS takes the issue of identity theft seriously. In a continuous
effort to protect taxpayers’ personal information, the IRS
successfully used barcodes in notices to taxpayers in 2011 through its
Social Security Number Elimination and Reduction 2-D Barcoding Project
pilot. Instead of showing taxpayers’ entire Social Security Numbers,
the notices only showed the last four digits, leaving the rest masked
by a barcode. The project piloted 13 non-payment notices on over 11
million pieces of outgoing correspondence.
To help those who have fallen victim to identity theft and combat
federal income tax related identity theft, the IRS launched the
Identity Protection Personal Identification Number (IPPIN) pilot,
revising the 1040 series electronic tax forms to allow for the entry
of a six-digit IPPIN beginning with tax year 2010. The purpose of the
IPPIN is to avoid delays in processing and filing federal tax returns.
In January 2011, the IRS sent letters containing IPPINs to 56,000
taxpayers who had contacted the IRS and been verified as victims.
Stemming from the Austin tragedy in 2010, the IRS has taken a number
of steps to ensure the safety of over 100,000 employees and 700
facilities across the nation. In FY 2011, the IRS implemented a 10-point
security plan designed to strengthen physical security and incident
reporting capabilities. Part of the plan included conducting in-depth
security reviews of all facilities, which resulted in the
implementation of a number of measures designed to enhance security at
those facilities. In addition, the IRS established the Threat
Information and Critical Response Initiative (TIRC) to provide more
proactive responses to threats to the IRS and a more robust reporting
process. Several IRS offices partnered to create a TIRC incident
tracking tool. This tool will provide capability for a system of
record, real-time business impact analysis and reports, and employee
incident notifications.
[Side bar: Identify Theft:
For the 2011 filing season, the IRS significantly increased the number
of returns identified as fraudulent. Identity theft indicators and
business rules isolated 324,725 returns for additional screening to
validate whether the true taxpayer filed the return, a 297% increase
from the prior year. As a result, the IRS prevented over $1.3 billion
from being paid out in fraudulent refunds.
Since initiation in 2009, fraudulent returns, as a percentage of total
unposted returns, increased from 19% in 2009 to 75% in 2011.
Legitimate returns as a percentage of total unposted returns dropped
from 81% (2009) to 40% (2010) to 25% in 2011. The average number of
days to manually review a legitimate return has dropped significantly,
from 85 days (2009) to 55 days (2010) to 30 days in 2011.
IRS Implementation of the Patient Protection and Affordable Care Act
(ACA) of 2010:
The Affordable Care Act (ACA) of 2010 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 required the IRS to
take immediate action. During FY 2011, the IRS:
* Disbursed over $960 million to taxpayers with Qualifying Therapeutic
Discovery applications.
* Completed the first filing season for Small Business Health Care Tax
Credit, enhanced adoption credit and tanning tax.
* Implemented the first of the ACA industry fees (Branded Prescription
Drugs), raising $2.5 billion for Calendar Year 2011.
* Partnered with HHS on outreach, guidance, business processes, and IT
deployment relating to the insurance market reforms and insurance
exchange system.
* Identified impacted stakeholders and commenced outreach activities
on all aspects of implementation including individuals, employers,
states, insurers, tax professionals, and other third parties.
End of side bar]
Human Capital:
The IRS continued pursuing its goal of making the IRS the best place to
work in government and ensuring that five years from now, the Service
has the leadership and workforce ready for the next fifteen years.
The Workforce of Tomorrow group formed in 2009 continued its
momentum, hosting several Workforce Summits to identify actions to
further improve the IRS workplace. In FY 2011:
* Four field events held with more than 600 employees participating,
resulted in more than 2,400 ideas and actions for six focus areas
(planning a dynamic people strategy, growing future leaders, enhancing
the role of managers, valuing and retaining our people, attracting the
best, and streamlined hiring).
* Over 500 more employees shared their thoughts and ideas on the
workforce of tomorrow through an online feedback site.
In FY 2011, the IRS fully implemented its Leadership Succession Review
(LSR) process, a structured program designed to identify and develop
leaders to provide for leadership continuity and effective
organizational performance. The LSR was available to all employees who
aspire to be leaders and focused on providing learning need assessments.
The IRS also initiated an Issue Practice Group (IPG) pilot project to
tap employee technical expertise. The group is comprised of subject
matter experts that share knowledge and develop and maintain technical
expertise. The IPG project marks the beginning of a robust knowledge
management strategy that supports the IRS strategic foundation of
investing for high performance.
Attracting, recruiting, and retaining outstanding talent to achieve the
optimum mix of employee skill sets and a diverse workforce
representative of the taxpaying public was a focus in FY 2011.
Recruitment and retention accomplishments included:
* Creating a “Face of the IRS” initiative using IRS employees who
represent the workforce diversity at recruiting events to offer personal
accounts of their IRS careers in specific occupations.
* Launching a Career Pathways website to support prospective
employees. The site includes an experience calculator to assist
applicants in determining how they measure up to the basic and
specialized experience qualifications.
The IRS received a 2011 ClearMark Award from the Center for Plain
Language for its IRS Careers website. In addition, the International
Academy of Digital Arts and Sciences selected the IRS as an Official
Honoree for the 15th Annual Webby Awards, which signified the
outstanding caliber of work in the employment category.
[Side bar: Veteran Hiring and Employment:
In FY 2011, the IRS continued to support Veterans transitioning into
the civilian workforce. Veterans now comprise 22.1% of the total full-
time permanent workforce, while hiring of disabled veterans exceeded
the FY 2011 goal of 2%.
The IRS participates in several Veterans Employment Programs designed to
transform the federal government into the model employer of America’s
veterans. In FY 2011, the IRS:
* Fully implemented the Warrior Intern Program (WIP). WIP provides
returning veterans who are ill, injured, or wounded developmental
training for intern positions at the IRS. The program provides four to
six months of non-paid on-the-job training, flexible work hours, and
mentoring. WIP is designed to help veterans transition back into
civilian life by building their confidence and giving them skills they
will need to build successful careers.
* Initiated a Non-Paid Work Experience program, which allows veterans to
gain knowledge, skills, and abilities necessary to improve their odds of
obtaining permanent employment.
* Launched the Military Spouse Program, which facilitates entry of
military spouses into the Federal Civil Service. The program is
designed to minimize disruption when military families move due to
relocations and honors service members who become disabled or die
during active duty.
“Best Place to Work in Government”:
To achieve the goal of becoming the “Best Place to Work in Government,”
IRS efforts focused on having engaged employees who are respected and
challenged and whose managers support them, help them do their job,
and hold them accountable. Employee engagement scores improved with
IRS jumping from 8th out of 14 large agencies in 2008, to 3rd out of
14 in 2010. The improvement is due to higher scores in job
satisfaction, satisfaction with the overall organization, and
willingness of employees to recommend the IRS as the best place to
work.
End of side bar]
[Side bar: OMB Circular A-123, “Management’s Responsibility for
Internal Control:”
The IRS conducted the required evaluation of the effectiveness of its
internal control over financial reporting in accordance with OMB
Circular A-123. In FY 2011, the IRS:
* Tested 18 transaction processes material to Treasury’s Consolidated
Financial Statements which included:
- Ten administrative processes covering material portions of the $12.6
billion in annual administrative transactions.
- Five information system processes.
- Three custodial processes related to over $2.4 trillion in tax
revenue.
* Performed supplemental testing of the FY 2011 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 and effective.
* 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 on the results of the A-123 evaluation, the IRS provides qualified
assurance that its internal control over financial reporting was
operating effectively.
The qualified assurance is based on the fact that the IRS has two
material weaknesses in internal control over financial reporting
currently being addressed in corrective action plans. The IRS
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 issued an unqualified opinion.
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):
The IRS provides qualified assurance that the systems of management
control objectives, in accordance with 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, were achieved during FY 2011.
The systems of management control for the IRS organizations are
designed to ensure 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.
The qualified assurance is based on the fact that the IRS has two
material weaknesses in internal control over financial reporting and the
financial management systems do not substantially comply with FFMIA.
This assurance is provided relative to FMFIA Sections 2 and 4.
The IRS is monitoring the following two material weaknesses in internal
control over financial reporting and the corresponding corrective action
plans:
* Unpaid Tax Assessments;
* Information Security.
Federal Financial Management Improvement Act (FFMIA):
In order to address the Unpaid Tax Assessments Material Weakness, in
February 2011, the IRS implemented programming in the Custodial
Detail Data Base (CDDB) to improve classification when either the
business or related Trust Fund Recovery Penalty individual modules are
removed from the Unpaid Assessments inventory, and to reduce the
amount of adjustments to the financial statements. The programming
change improved classification of instances where, according to past
practice, multiple tax periods were rolled up into one module.
To address the Information Security material weakness, the IRS
commissioned cross-functional working groups with knowledge of the
IRS internal systems to evaluate and document the computer security
and compensating controls in place to address nine GAO-identified areas
considered at risk. The groups also provided evidence and assurance of
continuous monitoring and controls for IT systems owned or operated by
external entities for risks to IRS financial systems or access to
taxpayer or other sensitive information the IRS maintains. As a result
of this work, the IRS demonstrated it has controls and processes in
place to mitigate the risks for many of the nine areas, and has made
significant improvements in the other areas.
[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 IRS business operations and goals.
Specifically, the IRS inventory of FISMA reportable systems is
compliant with security requirements from OMB, the National Institute
of Standards and Technology, the Department of the Treasury, and the
IRS. These systems have compliant annual security control tests,
security authorizations, and Plans of Actions and Milestones (POA&M).
Additionally, the IRS met or exceeded all FISMA goals for 2011; this
includes timely POA&M closure and Specialized IT Security Training
received by employees.
Table:
Action: Certification and Testing of Systems;
Status: 100%.
Action: Systems Accreditation;
Status: 99%.
Action: Specialized training;
Status: 99%.
Action: Annual Awareness Training;
Status: 99%.
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:
The Computer Security Material Weakness (CSMW) Program is an
enterprise effort to resolve the weakness. The CSMW Program Office
coordinates, manages, and oversees all aspects of the program,
including quarterly and annual reporting to oversight. The CSMW Plan
was refocused toward risk management and mitigation processes and
mapped to the IRS critical business processes. This refocusing ensures
that our mitigation activities are prioritized and have the necessary
security impact on our business processes.
The IRS has established enterprise repeatable processes, continuous
monitoring activities to identify and mitigate risks, a compliance
validation and oversight program to perform self-inspections, and
executive governance that oversees and manages the progress and
application of corrective actions.
End of side bar]
Lien Release Non-Compliance Issue:
As of September 30, 2011, 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 enhanced its disaster recovery program to further ensure the
continuity and resiliency of its critical business processing systems,
completed an assessment by critical business process of its ability to
meet business requirements, and made strategic investments to improve
recovery capability. The IRS also developed disaster recovery plans for
all of the FISMA master inventory systems, implemented a centralized
repository for all business continuity plans, updated all IT contingency
plans, and executed over 400 tests and exercises.
Major Management Challenges and High-Risk Areas:
GAO and 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, 2010, memorandum titled
Management and Performance Challenges Facing the Internal Revenue
Service for Fiscal Year 2011.
* GAO High Risk Areas for IRS.
* IRS Business Systems Modernization.
* Enforcement of Tax Laws.
* TIGTA Management Challenges.
* Security.
* Modernization.
* Tax Compliance Initiatives.
* Implementing Health Care and Other Tax Law Changes.
* Providing Quality Taxpayer Service Operations.
* Human Capital.
* Erroneous and Improper Payments and Credits.
* Globalization.
* Taxpayer Protection and Rights.
* Leveraging Data to Improve Program Effectiveness and Reduce
Costs.
[Side bar: Overview of Revenue and Administrative Accounts:
The IRS FY 2011 financial statements received an unqualified audit
opinion for the twelfth consecutive year.
The Balance Sheet reflects total assets of $43 billion of which $35
billion (81.4%) are Federal Taxes Receivable, which represents amounts
expected to be collected from past due accounts. 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
$2.4 trillion in federal tax receipts.
Progress Made on Business Systems Modernization (BSM) FMFIA Material
Weakness:
In FY 2011, the IRS completed the necessary actions to support a
downgrade of the FMFIA Material Weakness for Business Systems
Modernization (BSM). Actions taken in FY 2011 in support of the
downgrade include:
* Received external accreditation for CMMI level 2.
* Delivered 4 of 4 project segments within a 10% schedule threshold.
* Delivered 4 of 4 project segments at or below cost.
* Exited CADE 2 Transition State 1 Milestone 3 (logical design) in
December 2010 and Milestone 4a (physical design) in April 2011, on
time and without conditions.
* Exited MeF R6.2 Milestone 4b on time for the 2011 Filing Season.
* Implemented current CADE Release 6.2 into production on schedule in
January 2011.
The GAO reviewed the IRS progress and agreed they will not oppose a
downgrade. The BSM FMFIA Material Weakness was downgraded on April 20,
2011.
End of side bar]
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: 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).
Financial Highlights:
Revenue and Refund Trend Information:
FY 2011 revenue receipts collected by IRS remained constant at $2.4
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 2011 tax refund activity totaled $415.9 billion, representing a
decrease of approximately 11% from FY 2010. 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 Tax Credit.
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
2008 through September 2010. The Department of the Treasury prepares
the warrants and allocations to the trust funds.
Table:
Airport & Airway Trust Fund:
Liability Quarter Ended December 2008 – September 2009:
$10,533,488,000;
Liability Quarter Ended December 2009 – September 2010:
$11,045,715.000.
Black Lung Disability Trust Fund:
Liability Quarter Ended December 2008 – September 2009: $631,138,000;
Liability Quarter Ended December 2009 – September 2010: $610,068,000.
Highway Trust Fund:
Liability Quarter Ended December 2008 – September 2009:
$36,445,773,000;
Liability Quarter Ended December 2009 – September 2010:
$36,911,353,000.
Total:
Liability Quarter Ended December 2008 – September 2009:
$47,610,399,000;
Liability Quarter Ended December 2009 – September 2010:
$48,567,136,000.
[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 2011 Financial Statements, the unpaid
assessment balance was $356 billion as of September 30, 2011, and $194
billion (54%) 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 $147 billion (41%) of unpaid assessments
and increased $9 billion (7%) from $138 billion as of September 30,
2011. About $112 billion (76%) of this balance is estimated to be
uncollectible due primarily because of the economic situations of the
taxpayers. Except for bankruptcy situations, the IRS may continue
collection actions for 10 years after the assessment. About $35
billion (24%) of taxes receivable is estimated to be collectible.
* Compliance assessments of $103 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 $106 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
governmentwide 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 Coverage Tax Credit (HCTC)
payments, Budget Formulation, Labor Forecasting and Budget Execution
decision support.
[Side bar: Integrated Financial System (IFS):
FY 2011 accomplishments include:
* Upgraded the Business Warehouse (BW) for improved performance
and reporting capabilities.
* Improved security of IFS by upgrading to Oracle 11g.
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.
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]
[End of Appendix A]
Appendix B: Performance Measurement Data:
Goal 1: Improve Service to Make Voluntary Compliance Easier:
Measure: Customer Service Representative (CSR) Level of Service;
2008: 52.8%;
2009: 70.0%;
2010: 74.0%;
2011 Target: 71.0%;
2011 Actual: 70.1%;
Measure: Customer Contacts Resolved per Staff Year;
2008: 12,634;
2009: 12,918;
2010: 10.744;
2011 Target: 12.074;
2011 Actual: 12.419.
Measure: Percent of Eligible Taxpayers Who File for EITC (CY);
2008: [A];
2009: NA;
2010: [A];
2011 Target: 75%-80%;
2011 Actual: [A].
Measure: Customer Accuracy - Tax Law Phones;
2008: 91.2%;
2009: 92.9%;
2010: 92.7%;
2011 Target: 92.7%;
2011 Actual: 93.4%.
Measure: Customer Accuracy - Customer Accounts (Phones);
2008: 93.7%;
2009: 94.9%;
2010: 95.7%;
2011 Target: 95.0%;
2011 Actual: 96.0%.
Measure: Timeliness of Critical individual Filing Season Tax Products
to the Public;
2008: 92.4%;
2009: 96.8%;
2010: 95.3%;
2011 Target: 94.0%;
2011 Actual: 96.3%.
Measure: Timeliness of Critical TE/GE and Business Tax Products to the
Public;
2008: 89.5%;
2009: 95.2%;
2010: 97.7%;
2011 Target: 91.0%;
2011 Actual: 96.4%.
Measure: Percent individual Returns Processed Electronically;
2008: 57.6%;
2009: 65.9%;
2010: 69.3%;
2011 Target: 74.0%;
2011 Actual: 76.9%.
Measure: Cost per Taxpayer Served ($) (HCTC);
2008: $16.94;
2009: $13.79;
2010: $9.52;
2011 Target: $10.00;
2011 Actual: $12.36.
Measure: Sign-Up Time (Days) - Customer Engagement (HCTC);
2008: 94.0;
2009: 91.3;
2010: 124.0;
2011 Target: 124.0;
2011 Actual: 117.0.
Measure: Percent Business Returns Processed Electronically;
2008: 19.4%;
2009: 22.8%;
2010: 25.5%;
2011 Target: 27.0%;
2011 Actual: 31.8%.
Measure: Refund Timeliness - individual (Paper);
2008: 99.1%;
2009: 99.2%;
2010: 96.1%;
2011 Target: 97.0%;.
2011 Actual: 99.4%.
Measure: Taxpayer Self Assistance Rate;
2009: 69.3%;
2010 Target: 61.3%;
2010 Actual: 64.4%;
2011 Target: 68.7%;
2011 Actual: 70.1%.
Goal 2: Enforce the Law to Ensure Everyone Meets Their Obligation to
Pay Taxes:
Measure: Examination Coverage - individual;
2008: 1.0%;
2009: 1.0%;
2010: 1.1%;
2011 Target: 1.1%;
2011 Actual: 1.1%.
Measure: Field Examination National Quality Review Score;
2008: 86.0%;
2009: 85.1%;
2010: 84.9%;
2011 Target: 83.7%;
2011 Actual: 85.98%.
Measure: Office Examination National Quality Review Score;
2008: 90.0%;
2009: 92.1%;
2010: 91.6%;
2011 Target: 90.4%;
2011 Actual: 90.4%.
Measure: Examination Quality - Industry;
2008: 88.0%;
2009: 88.0%;
2010: 87.0%;
2011 Target: 89.0%;
2011 Actual: 90.0%.
Measure: Examination Quality - Coordinated Industry;
2008: 97.0%;
2009: 95.0%;
2010 Target: 96.0%;
2010 Actual: 95.0%;
2011 Target: 96.0%;
2011 Actual: 96.0%.
Measure: Examination Coverage - Business (Corps. >$10M);
2008: 6.1%;
2009: 5.6%;
2010: 5.7%;
2011 Target: 5.3%;
2011 Actual: 6.2%.
Measure: Examination Efficiency-individual (1040);
2008: 138;
2009: 138;
2010: 140;
2011 Target: 134;
2011 Actual: 139.
Measure: Automated Underreporter (AUR) Efficiency
2008: 1,982;
2009: 1,905;
2010: 1,924;
2011 Target: 1,980;
2011 Actual: 2007.
Measure: Automated Underreporter (AUR) Coverage;
2008: 2.6%;
2009: 2.6%;
2010: 3.0%;
2011 Target: 3.3%;
2011 Actual: 3.3%.
Measure: Collection Coverage-Units;
2008: 55.2%;
2009: 54.2%;
2010: 50.1%;
2011 Target: 49.1%;
2011 Actual: 50.0%.
Measure: Collection Efficiency-Units;
2008: 1,926;
2009: 1,845;
2010: 1,822;
2011 Target: 1,824;
2011 Actual: 1,952.
Measure: Field National Quality Review Score;
2008: 79.0%;
2009: 80.5%;
2010: 80.6%;
2011 Target: 81.0%;
2011 Actual: 80.3%.
Measure: Automated Collection System (ACS) Accuracy;
2008: 95.3%;
2009: 94.3%;
2010: 95.9%;
2011 Target: 94.0%;
2011 Actual: 94.9%.
Measure: Criminal investigations Completed;
2008: 4,044;
2009: 3,848;
2010: 4,325;
2011 Target: 3,900;
2011 Actual: 4,697.
Measure: Number of Convictions;
2008: 2,144;
2009: 2,105;
2010: 2,184;
2011 Target: 2,135;
2011 Actual: 2,350.
Measure: Conviction Rate;
2008: 92.3%;
2009: 87.2%;
2010: 90.2%;
2011 Target: 92.0%;
2011 Actual: 92.7%.
Measure: Conviction Efficiency Rate ($);
2008: $315,751;
2009: $327,328;
2010: $324,776;
2011 Target: $350,000;
2011 Actual: $310,029.
Measure: TE/GE Determination Case Closures;
2008: 100,050;
2009: 96,246;
2010: 105,247;
2011 Target: 97,151;
2011 Actual: 91,205.
Strategic Foundations: Invest for High Performance:
Measure: Percent of BSM Projects within +/-10% Cost Variance;
2008: 92.0%;
2009: 60.0%;
2010: 40.0%;
2011 Target: 90.0%;
2011 Actual: 71.4%.
Measure: Percent of BSM Projects within +/-10% Schedule Variance;
2008: 92.0%;
2009: 90.0%;
2010: 100.0%;
2011 Target: 90.0%;
2011 Actual: 100.01%.
[A] The methodology for estimating the Percent of Eligible Taxpayers
Who File for EITC is being revised and data is not available for
FY 2011.
[End of table]
[End of Appendix B]
Appendix C:
Explanation of Shortfalls:
Customer Service Representative Level of Service (CSR LOS): Although
demand was 109% higher than planned, Assistor Services Provided was
9.4% over plan and Assistor Calls Answered was almost 8.0%, or 2.5
million calls greater than plan. By August 2011, paper inventories
reached over 1.2 million pieces of correspondence. In order to
continue to address the high telephone demand and significant paper
inventories, resources were realigned to respond to taxpayers’ paper
inquires. By the end of the fiscal year, the IRS achieved a LOS of
70.1%, within 1% of target, and reduced the paper end of year
inventory to 920,768.
Cost per Taxpayer Served: The primary reason for the shortfall was due
to a continued decrease in monthly taxpayers served as the American
Recovery and Reinvestment Act (ARRA) provisions expired and fewer
candidates and participants contacted the program. Higher costs can
also be attributed to an increase in costs associated with post-ARRA
transition back to a maintenance & operations environment. Staffing
adjustments were made in the summer to help curtail cost, but with
fewer candidates and a decrease in participates, the target was not
achieved.
Field Collection National Quality Review Score: In previous years,
attribute 709 - Case File Folder was reviewed in roughly 80% of cases
and scored consistently at 90% accuracy. In mid-FY 2010, NQRS began
conducting “ICS History Only” reviews which resulted in a rating of
"N/A" for attribute 709. Through the end of FY 2011, attribute 709 was
only rated in 23% of cases reviewed. Additionally, 13.8% of the cases
reviewed this year have been older than the normal Collection Field
function case closure time of six to eight months. Plans are underway to
improve the sampling and reduce the reliance on ICS History Only
reviews resulting in a more complete review process for FY 2012
coupled with further revisions to the attributes.
TE/GE Determination Case Closures: A series of factors continue to
contribute to a shortfall in determination closures. In Exempt
Organizations (EO), a shift in processing methods continues to result
in more time applied than anticipated to the intermediate processing
category. In addition, EO has shifted resources to process full
development cases, which take longer to process, in order to reduce
aging inventory. In Employee Plans, agents have shifted to work more
complex Individually Designed Plans and Preapproved Plan receipts.
Percent of BSM Projects within +/- 10% Cost Variance: Five out of
seven releases met the cost variance measure. MeF Release 7 Milestone
3 (-24%) came in under expected cost ($3.75 million) as a result of
lower than expected hardware and software costs, as well as lower
than expected contract expenditures. CADE R6.2 Milestone 4b (-15%)
came in under expected cost ($3.33 million) as a result of lower than
expected development, test, and integration costs associated with
implementing filing season and legislative changes.
[End of Appendix C]
Appendix D: Performance Measures Descriptions:
Goal 1: Improve Service to Make Voluntary Compliance Easier:
Customer Service Representative (CSR) Level of Service:
The number of toll free callers that either speak to a Customer Service
Representative or receive automated informational messages divided by
the total number of attempted calls.
Customer Contacts Resolved per Staff Year:
The number of Customer Contacts resolved in relation to time expended.
Percent of Eligible Taxpayers Who File for EITC The number of taxpayers
who claim the Earned Income Tax Credit (EITC) compared to the number of
taxpayers who appear to be eligible for the EITC.
Customer Accuracy — Tax Law Phones:
The percentage of correct tax law answers given by a live assistor on
Toll-free tax law inquiries.
Customer Accuracy — Customer Accounts (Phones):
The percentage of correct account answers given by a live assistor on
Toll-free account inquiries.
Timeliness of Critical Individual Filing Season Tax Products to the
Public:
The percentage of critical individual filing season tax products (tax
forms, schedules, instructions, publications, tax packages, and certain
notices required by a large number of filers to prepare a complete and
accurate tax return) available to the public in a timely fashion.
Timeliness of Critical TE/GE & Business Tax Products to the Public
The percentage of critical other tax products, paper and electronic,
available to the public in a timely fashion.
Percent Individual Returns Processed Electronically:
The number of electronically filed individual tax returns divided by
the total individual returns filed.
Cost per Taxpayer Served ($) (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.
[End of Appendix D]
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 2011 accomplishments,
actions identified for completion in FY 2012 and beyond, and future
challenges. These have been arranged in the order of priority as
determined by the TIGTA.
Table:
Security of the Internal Revenue Service:
Challenge/Issue: Strengthening the security infrastructure and the
applications that guard sensitive data;
Actions Taken in FY 2011 and Actions Planned or Underway:
Actions Taken:
* Improved processing of taxpayer accounts impacted by identity theft
by deploying additional account “markers” used to (1) distinguish
legitimate returns from fraudulent returns, (2) track taxpayers with
identity theft-related tax problems and issues encountered by identity
theft victims, and (3) prevent victims from facing the same problems
every year.
* Increased the number of returns identified as fraudulent. Identity
theft indicators and business rules isolated 324,725 returns for
additional screening to validate whether the true taxpayer filed the
return, a 297% increase from the prior year. As a result, the IRS
prevented over $1.3 billion from being paid out in fraudulent
refunds.
* Launched an Identity Protection Personal Identification Number
(IPPIN) pilot to ensure that taxpayers who were subject to identity
theft in the past do not encounter delays in processing their tax
returns, sending IPPINs to approximately 56,000 taxpayers for use
during the FY 2011 filing season.
* Enhanced compliance monitoring and security controls by completing the
Information Technology Security Compliance Monitoring project.
* Generated more than 500 advisories, bulletins, and alerts informing
the responsible business units and system administrators of current
vulnerabilities and threats that could have impacted the IRS
enterprise on a large scale.
* Disabled over 10,000 fraudulent IRS-related scams using the IRS name
or likeness to entice victims, including 9,272 phishing/malware
websites (with a median takedown time of 67 minutes), 352 fax numbers,
and 534 email drop boxes.
* Completed a Disaster Recovery Site in Martinsburg, WV for CI that
will provide recovery of the IT infrastructure, network, hardware,
systems, applications, and operating systems.
Actions Planned or Underway for FY 2012 and Beyond:
* Use the results of the FY 2011 IPPIN pilot to improve and expand the
IPPIN to additional taxpayers.
* Schedule virtual hardware setup, configuration, and Storage Area
Network (SAN) storage for the CI Disaster Recovery environment.
* Deploy the enterprise Authorization (e-Auth) project to provide a
framework to register individual identities and validate credentials
for electronic access to IRS systems and applications.
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, in its 2011 High Risk
Series update, continues to list the IRS Business Systems
Modernization as a high risk area;
Actions Taken in FY 2011 and Actions Planned or Underway:
Actions Taken:
* Delivered Modernized e-File (MeF) Release 6.2, the second phase of
the U.S. Individual Income Tax Return (Form 1040) implementation,
which ensured electronic tax returns were timely and accurately
processed. MeF accepted nearly 18.5 million returns, a 262% increase
compared to FY 2010.
* Deployed current Customer Account Data Engine (CADE) Release 6.2 to
deliver the 2011 filing season tax law changes affecting individual
taxpayers, and to provide technical improvements to the infrastructure
and availability of the current system.
- Posted more than 40 million tax returns and issued more than 35.1
million refunds totaling in excess of $65.6 billion.
- Processed refunds, on average, five days faster than the IMF/legacy
master files.
* Implemented a Remittance Strategy for Paper Check Conversion (RS-
PCC) system allowing paper checks to be converted into electronic
transactions, processing nearly 3.6 million checks, totaling $7.8
billion.
* Implemented an automated transcript process allowing taxpayers to
request mailing of account and return transcripts through IRS.gov
eliminating the need to contact IRS. The application processed 755,831
transcripts.
* Deployed a decision support tool that provided a centralized
repository for all critical Business Continuity and Disaster Recovery
plans.
* Completed Logical and Physical Design of CADE2 Transition State 1.
Actions Planned or Underway for FY 2012 and Beyond:
* Deploy Transition State 1 of CADE2 for Filing Season 2012, which
supports daily versus weekly processing and relational account database.
* Begin development of a strategy to consolidate all Treasury Bureaus’
IT systems at IRS data centers as part of the Data Center
Consolidation Initiative 2012 plan.
* Commence the “Send A Transcript” proof of concept, which allows
taxpayers to make online requests to send official transcripts to
banks and other financial institutions without the need to call or
complete a paper form (Form 4506).
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 offshore tax and financial
criminal activity. Address the evolving challenge of unpaid
taxes and continuing Earned Income Tax Credit (EITC) noncompliance.
Actions Taken in FY 2011 and Actions Planned or Underway:
Individuals and Businesses: Actions Taken:
* Updated Adoption Credit policies and developed training material.
Selected almost 70,000 cases with adoption credit issues for
examination.
* Completed a case selection model to use closed examination post-
refund data to determine the best First-Time Home Buyer Credit cases
for examination.
* Completed testing an enhanced Automated Underreporter (AUR) case
identification and selection analytics tool to be used in selection of
TY 2010 returns.
* Continued testing soft notices as alternatives to conducting
examinations, issuing 27,000 AUR soft notices in FY 2011. Results
showed a 46% response rate with approximately 30% of the taxpayers
filing an amended return.
* Grouped actions of the Return Preparer Initiative (RPI) into two
phases. Implemented Phase 1 of the RPI, which made it mandatory that
beginning January 1, 2011, paid return preparers register with the IRS
and use a Preparer Tax Identification Number (PTIN) to sign returns,
with over 735,000 already registered.
* Built a Return Review Program and established a task workforce to
enable expansion of IRS revenue protection and scheme detection
capabilities, improving fraud detection at the time of filing, before
the refund is released.
* Continued the matching program for Forms 1042, 1042-S, 8804, and 8805.
Created a database of Form 1042-S data reported by U.S. businesses and
third-party payers to match payments and verify the validity of
refunds before they are issued.
* Closed several athlete and entertainer return examinations received
as a result of the Offshore Voluntary Disclosure Program, with
millions of dollars of additional tax assessed.
* Identified high-risk tax return preparers using the new risk-based
scoring resulting in more than 10,000 letters being issued and more
than 5,000 preparers being visited for noncompliance with multiple
areas of concern, including Earned Income Tax Credit (EITC), e-file,
and certified acceptance agents.
* Conducted 101 Limited English Proficiency (LEP) Leveraged Small
Business Tax Workshops (LSBTW) to improve compliance; 88 in Spanish,
five Chinese dialects, one Hindi/Nepalese, and seven other LEP
proficiency LSBTWs.
* Continued testing the effects of education, compliance notices, and
telephone contacts on the accuracy of returns prepared for EITC first-
time and low-risk paid preparers.
* Expanded participation in the Compliance Assurance Process (CAP) to
improve the identification and resolution of tax issues prior to the
filing of tax returns for large corporations. In FY 2011, the number
of participants increased from 112 to 140 and included two additional
components:
- A pre-acceptance phase (Pre-CAP), which provides interested
taxpayers an opportunity to work with the IRS towards becoming
eligible for the CAP.
- A CAP maintenance phase that is intended for taxpayers who have been
in the CAP program for several years and have established a track
record of working cooperatively with the IRS.
* Continued the selection and examination of locally hired employees
of foreign embassies who did not elect to participate in settlement
initiatives. For FY 2011, 1,965 returns have been examined and closed
with over $23.4 million in additional tax assessed.
* Conducted six electronic town hall meetings that included discussing
and answering questions regarding the Quality Examination Process
(QEP) initiative that is designed to strengthen communication with
taxpayers and improve the consistency of examination practices by
better engaging taxpayers in the audit process.
* Launched multiple compliance analytics pilot projects to explore new
methods of using data and analytics to improve compliance programs.
Actions Planned or Underway for FY 2012 and Beyond:
* Continue to modify Examination case selection and modeling to
include cases where taxpayers claimed the First-Time Home Buyer Credit.
* Continue testing soft notices as alternatives to conducting
examinations in AUR case selections.
* Continue to refine case selection filters to identify high-risk
taxpayers within the global high-wealth population and further refine
the definition of high-wealth taxpayers.
* Continue to explore ways to translate the Small Business Tax
Workshop material into different languages identified as underserved
to improve compliance.
* Update the Virtual Small Business Tax Workshops (VSBTW) content to
include new tax law information and to finalize the VSBTW
International lesson.
* Emphasize to employees the importance of using the Quality
Examination Process for better communication with taxpayers and
greater taxpayer involvement throughout the examination process.
* Complete the transition of making the CAP a permanent element of the
IRS compliance strategy by launching Pre-CAP in TY 2011 followed by
the launch of the Compliance Maintenance Phase.
* Continue the selection and examination of locally-hired employees of
foreign embassies who did not elect to participate in settlement
initiatives.
* Implement a cross-functional compliance and outreach strategy to
address prisoner tax noncompliance.
* Implement Phase 2 of the Return Preparer Initiative requiring paid
return preparers, except attorneys, certified public accountants, and
enrolled agents, to pass a competency test and complete continuing
professional education of 15 hours per year.
Tax-Exempt and Government Entities: Actions Taken:
* Completed over 46% of examinations of college and university
unrelated business income and compensation issues identified by the
Colleges and Universities project that focused on unrelated business
income and executive compensation.
* Initiated a 401(k) project questionnaire on 1,200 plan sponsors and
opened examinations on 54 nonresponders.
* Conducted compliance reviews of 144 of the largest private
foundations and began examinations of 17 very large private foundations.
* Continued to participate in fraud and conspiracy investigations
conducted by the Department of Justice on municipal bond contracts
which resulted in three closing agreements, nine guilty pleas, and
indictments of ten former financial services executives.
* Addressed fraud and potential promoters of abusive transactions
involving retirement plans, including identifying potential promotions
evidenced in Form 8886 disclosures and developing a corporate strategy
to improve promoter investigation referral processing.
* Completed the statutorily-required revocation of approximately 386,000
organizations whose tax exempt status was revoked based on rules
established by the Pension Protection Act of 2006.
* Developed a Fraud Report to identify fraud schemes and monitor
operational effectiveness of fraud detection and mitigation
methodologies.
* Completed over 2,500 examinations for the National Research Program
study of employment tax compliance.
* Developed and approved recommendations to improve the staggered
determination letter process for employee plans.
Actions Planned or Underway for FY 2012 and Beyond:
* Continue to identify and address emerging international compliance
issues, including internationally sponsored pension plans, the
movement of in-kind charitable gifts offshore, and cross-border
commerce using Indian reservations and casinos.
* Complete examinations of college and university unrelated business
income and compensation issues and prepare a final report.
* Continue regular updates to the public listing of exempt
organizations that are revoked based on the Pension Protection Act of
2006.
* Continue to identify and effectively address abusive promoter
transactions by publishing new IRM information on promoter
investigations to finalize the process for reviewing potential leads.
* Improve compliance by identifying the needs of small exempt
organizations and by performing post reviews of Form 990-N filers
ineligible to file the e-postcard.
* Continue to assist the Department of Justice in developing criminal
cases and in preparing prosecutions on abusive tax-exempt bond
transactions.
* Identify non-compliant exempt organizations based upon data from the
redesigned Form 990.
* Finalize the 401(k) project report and continue work on examinations
of the questionnaire nonresponders.
* Continue to investigate potential promoters of abusive transactions
involving retirement plans.
* Implement recommendations to improve the staggered determination
letter process for employee plans, with anticipated completion in FY
2013.
Implementing Health Care and Other Tax Law Changes:
Challenge/Issue: Implementing tax law changes correctly is critical
for an effective filing season. Many programs, activities and
resources must be planned and managed effectively for successful
implementation.
Actions Taken in FY 2011 and Actions Planned or Underway:
Actions Taken:
* Delivered a successful 2011 filing season, processing 144.7 million
individual returns and issuing 109.3 million refunds totaling $345.0
billion.
* Continued to identify erroneous and fraudulent claims and schemes on
returns claiming new tax law credits.
- Implemented procedures to process the first year of the required 15-
year repayment for 2008 homebuyers who claimed the First-Time Home Buyer
Credit, including the math error authority when the repayment was not
identified on the return.
- Promoted accurate self-reporting in anticipation of the filing
season by sending approximately 1.5 million reminder notices to
taxpayers.
* Implemented early provisions of the Affordable Care Act (ACA)
including the revision of approximately 60 tax products and the
creation of three new tax forms and release of applicable guidance
related to:
- Small employer tax credit.
- Excise tax on indoor tanning services.
- Adoption Credit.
- Branded Pharmaceutical Fee.
- Qualified Therapeutic discovery credit.
- New charitable hospital requirements.
* Disbursed over $960 million to taxpayers with Qualifying Therapeutic
Discovery applications.
* Completed the first filing season for Small Business Health Care Tax
Credit, enhanced adoption credit and tanning tax.
* Implemented the first of the ACA industry fees (Branded Prescription
Drugs), raising $2.5 billion for Calendar Year 2011.
* Partnered with the Department of Health and Human Services (HHS) on
outreach, guidance, business processes, and IT deployment relating to
the insurance market reforms and insurance exchange system.
* Identified impacted stakeholders and commenced outreach activities
on all aspects of implementation, including individuals, employers,
states, insurers, tax professionals, and other third parties.
* Implemented a strategy with outreach, education, and compliance
components to administer the newly refundable Adoption Credit for TY
2010.
* Published new Internal Revenue Manual (IRM) provisions to clarify
the processes for handling rebate refund cases for tax-exempt bonds.
* Implemented new Build America Bonds and other direct-pay bonds
voluntary compliance procedures to resolve tax law violations.
Actions Planned or Underway for FY 2012 and Beyond:
* Continue to identify erroneous and fraudulent claims and schemes on
returns claiming new tax credits.
* Support the Return Preparer Strategy by working with professional
tax preparer affiliations to implement new EITC due diligence guidance
and requirements to reduce EITC errors and increasing the quality and
accuracy of EITC returns.
* Implement new Merchant Card and Security Cost Basis reporting
legislation in FY 2012.
* Continue implementing ACA related form changes, guidance, notices, and
compliance monitoring.
* Continue work on the ACA provisions with early effective dates, such
as the Small Business Health Care Tax Credit, Branded Prescription
Drug Fee, and tax-exempt hospital requirements.
* Partner with HHS on ACA outreach, guidance, business processes, and IT
deployment relating to the insurance market reforms and insurance
exchange system. Coordinate issues such as data infrastructure,
eligibility, enrollment, customer service, communications, and payment
of premium tax credits.
* Identify impacted ACA stakeholders and commence outreach activities
on all aspects of implementation, including individuals, employers,
states, insurers, tax professionals, and other third parties.
* Prepare implementation of other ACA mid-horizon provisions such as:
- Patient-Centered Outcomes Research Trust Fund (6301).
- Medical Device Manufacturer Excise Tax (1405).
- Hospital Insurance Tax on High Income Taxpayers (9015).
- Net Investment Income Tax (1402).
- Expenses Allocable to Medicare Part D (9012).
- Itemized Deduction for Medical Expenses (9013).
- Imposition of Annual Fee on Health Insurance Providers (9010).
- Executive Remuneration Paid by Certain Health Insurance Providers
(9014).
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 2011 and Actions Planned or Underway:
Actions Taken:
* Completed a new toll-free number for taxpayer transcript requests
and a new web application that allows taxpayers to order transcripts
on IRS.gov, resulting in a 708% increase in transcript completions
compared to FY 2010.
* Released the IRS2Go Smartphone application which lets taxpayers
interact with the IRS using their mobile devices. IRS2Go averaged 4
out of 5 stars in hundreds of reviews and had more than 360,000
downloads.
* Increased the number of Limited English Proficiency (LEP) products,
translating key notices into the top five LEP languages and delivering
an enhanced multilingual web site that offers an array of tax
information.
* Broadened awareness of accessible tax products that serve and
support hearing and visually impaired taxpayers, through partnership
with the Library of Congress and National Library Service for the
Blind and Physically Handicapped.
* Continued to provide extended service hours and alternative service
delivery methods to expand service to taxpayers.
- Delivered 100 Facilitated Self-Assistance kiosks at 37 Taxpayer
Assistance Centers. 41,500 taxpayers used the kiosks.
- Increased the number of locations providing extended hours of
service from 16 locations in 2010 to 36 locations in 2011.
- Posted the location of Volunteer Income Tax Assistance (VITA) and
non-AARP sites to IRS.gov, an alternative to using the toll-free
number to obtain information.
- Hosted three successful Open House events both during and after the
filing season, including one event that focused on financially
struggling taxpayers who needed a “Fresh Start.”
* Engaged partners and provided greater access to available services
through Saturday service events and other special service days like
EITC awareness days.
- National and local partners hosted 940 news conferences and news
releases highlighting EITC Awareness Day.
* Participated in 22 outreach events to educate partners and the
public about the tax treatment of the 2010 Gulf Oil Spill payments. In
the Gulf region, over 169,000 individuals and businesses received
emergency advance payments for lost income or profits in 2010.
* Continued implementation of Taxpayer Assistance Blueprint (TAB)
service improvements, including:
- Modified the IRS.gov home page layout to improve visitors’
experiences.
- Established a separate phone line containing informational messages
on the major provisions of the ACA.
- Expanded traditional TAC services to 31 volunteer locations.
* Implemented new quality initiatives at TACs and volunteer return
preparation sites using sampling reviews of selected returns to
determine the accuracy of returns prepared.
* 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 2012 and Beyond:
* Implement the changes necessary to support the roll-out of Customer
Accounts Data Engine 2 (CADE 2).
* Continue to engage IRS partners to disseminate information and
simplify forms and the tax filling process.
* Release an updated version of IRS2Go with improved functionality.
* Increase the number of Limited English Proficiency (LEP) products.
* Continue to engage partners in support of special service days and
outreach efforts with advocacy groups that serve and support the
visually and hearing impaired.
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 2011 and Actions Planned or Underway:
Actions Taken:
* Implemented the Criminal Investigation (CI) pilot of the Accelerated
Leadership Program to test a “fast track” training program for
identified high potential candidates.
* Continued efforts to finalize a strategy for the IRS to become the
Best Place to Work in Government, including holding several 2011
Workforce of Tomorrow Summits.
* Implemented the Hiring Reform initiative.
- Transitioned from a “reinvestigation” background investigation
program to a “one-stop shop” with streamlined and efficient services
that significantly reduced the time required for background
investigations by 30 days.
* Improved technology and communication tools to enhance recruitment
and deliver a more diverse applicant pool.
- A "Face of the IRS" (FOTI) initiative was created that provides
opportunities for IRS employees to provide potential candidates with
realistic job perspectives at recruiting events.
- Increased awareness of IRS recruiting practices and job openings by
using social media tools and participating in social networks such as
the GovLoop Recruitment 411 blog, Facebook, Twitter, and LinkedIn.
- Deployed the IRS Second Life Careers Island of conference centers,
with video and slide show displays for use by IRS stakeholders and a
Career Explorer Fit Check Tool, allowing one to determine one's "fit"
for IRS occupations based on an analysis of experience and skill sets.
* Continued an emphasis on veteran hiring, with veterans comprising 7%
of total hires in FY 2011.
* Implemented the Warrior Intern Program (WIP), previously piloted in
FY 2010, and the Non-Paid Work Experience (NPWE) program, conducted in
partnership with the Department of Defense and Veteran Affairs, to
provide qualified veterans with quantifiable work experience at the
IRS through non-paid internship opportunities.
* Continued improvements to the Leadership Succession Review process,
focusing on providing learning needs assessments, including
implementing a new Leadership Competency Model, with four core
competencies and 13 supporting behaviors.
* Established a Telework Program Office and expanded telework
opportunities to over 36,000 employees to further enhance recruitment,
development, and retention of employees.
Actions Planned or Underway for FY 2012 and Beyond:
* 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.
* Explore new technologies to conduct pre-screening of applicants and
rapidly bring critical hires on board.
* Educate internal and external IRS stakeholders on recruitment by
providing the Careers Pathway website tool to assist applicants and
career development outreach to enhance internal recruitment efforts.
* Build a diverse talent management pipeline by deploying low cost
recruitment strategies.
* Develop and document an IRS-wide approach to ensure effective
monitoring on the adequacy of the acquisition workforce.
Erroneous and Improper Payments and Credits:
Challenge/Issue: Reduce improper payments that include base compliance
activities and redesign efforts;
Actions Taken in FY 2011 and Actions Planned or Underway:
Actions Taken:
* Protected over $3.7 billion in revenue through EITC enforcement
efforts, including the examination of almost 484,000 original and
amended returns claiming EITC, almost 1.2 million document matching
reviews, and 300,000 math error process corrections.
* Used the Electronic Fraud Detection System to identify almost 1.8
million fraudulent returns and stopped over $14 billion in fraudulent
claims.
* Increased EITC paid preparer due diligence visits; resulting in a
100% increase in the number of preparers penalized over FY 2010 and
proposed penalties of more than $10.6 million.
* Improved the accuracy of EITC returns by refining EITC paid preparer
treatment activities, including doubling the number of due diligence
audits, increasing visits by revenue and criminal investigation agents
by 50%, and increasing educational and compliance notices t0 first-
time and experienced preparers by 25%, to influence the accuracy of
EITC returns filed.
- Completed four expedited injunctions, stopping preparers from filing
future erroneous claims and preventing over $60 million in erroneous
payments.
- Penalized over 90% of preparers audited, proposing $10.6 million in
penalties.
* Increased marketing and outreach efforts for the 5th EITC Awareness
Day to increase overall participation, targeting the underserved and
distressed taxpayers affected by the economic downturn. Provided
Public Service Announcement campaigns in English and Spanish,
utilizing TV, radio, and print ads with almost 43,000
airings/insertions.
* Used social media, including Twitter, Facebook, and My Space, to
reach over 57,000 people.
- Generated more than 600 activities in support of EITC Awareness Day,
including news conferences and releases, email blasts, and newsletters.
- Provided assistance at local IRS offices to over 15,000 taxpayers
during two EITC Saturdays during the filing season.
- Increased EITC dollars distributed by 1.4% over the same period in
2010.
* Completed activities for year six of the EITC Return Preparer Study,
including:
- Analyzed short-term outcomes, including penalties assessed and
collected, and return accuracy.
- Conducted the annual lessons learned case review and identified
program improvements for FY 2012.
* Identified outreach and education opportunities for known patterns of
noncompliance using AUR data.
* Initiated a test on Additional Child Tax Credit (ACTC) returns with
dependent issues not selected for examination to assist in developing
the ACTC compliance strategy moving forward.
* Required documentation to accompany returns claiming the Adoption
Credit to reduce fraud, and developed new cross-functional procedures
to minimize delays in return processing.
Actions Planned or Underway for FY 2012 and Beyond:
* Hold a sixth annual EITC Awareness Day to increase eligible taxpayers’
awareness, stakeholder partnerships, and media coverage.
* Implement the requirement that EITC paid preparers attach Form 8867,
Paid Preparer’s Earned Income Credit Checklist, to their clients’
returns to encourage preparer compliance with EITC due diligence
requirements.
* Continue to focus on EITC paid preparer treatments, including due
diligence audits, visits by agents, streamlined injunctions, and
educational and compliance notices to first-time and experienced
preparers to influence the accuracy of EITC returns filed.
- Analyze short-term outcomes, including penalties and the accuracy of
returns.
* Assess the 2011 EITC marketing/awareness campaigns that target EITC
eligible and noncompliant populations to refine/focus efforts to
increase overall participation and improve compliance.
* Pilot a streamlined statutory notice process to cover more credits
and undertolerance refunds by providing the IRS with upstream and
downstream cost data, revenue protection data, and data on taxpayer
treatment.
* Identify opportunities to increase upfront detection of fraudulent
refunds and identify related treatment streams.
* Expand capabilities to accept the return of erroneous refunds from
banks and other financial institutions.
* Utilize AUR data to improve Identity Theft procedures and to inform
taxpayers, practitioners, AUR employees, and IRS stakeholders of the
issues related to identity theft.
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 2011 and Actions Planned or Underway:
Actions Taken:
* Completed realignment of the IRS international operations by
integrating international expertise into the new Large Business and
International organization.
* Improved income estimation calculations for examination.
* Conducted examinations of taxpayers who applied under the Offshore
Voluntary Disclosure Program.
- Initiated the FY 2011 Offshore Voluntary Disclosure Initiative
(OVDI), a continuation (second phase) of the FY 2009 OVDP.
- Conducted examinations of noncompliant taxpayers identified in
conjunction with the John Doe bank summons process.
* Continued to combat international illicit money networks and
professional money launderers via the Global Illicit Financial Team by
further developing policies, targeting criteria, and case development
procedures.
* Reviewed OVDP applications and interviewed taxpayers who identified
financial institutions that engaged in activities in the U.S. that
facilitated taxpayers’ noncompliance.
* Coordinated joint audits and strengthened relations with foreign tax
administrations, including seeking additional opportunities to improve
and expand the Joint Audit initiative with foreign tax administrations
and taxpayers.
* Continued to ensure that residents of Puerto Rico properly pay U.S.
Self-Employment Tax on their earnings.
- For tax year 2009 (worked in FY11), issued 25,634 soft letters
requesting a total of $11 million of additional tax.
- Also examined 12,880 non-filers for tax year 2009, resulting in
additional taxes of $25.6 million.
* Addressed emerging tax-exempt compliance issues including
internationally sponsored pension plans, the movement of in-kind
charitable gifts offshore, crossborder commerce using Indian
reservations, and foreign bank account reporting for charities.
* Produced three tailored webinars for stakeholders on payments to
foreign persons by government entities, international activities of
charitable organizations, and international issues that impact
employee plans.
* Responded to tax treaty exchange requests from India and Australia
on tax-exempt issues received through the Joint International Tax
Shelter Information Centre.
* Shared global issues impacting retirement plans with the Department
of Labor, the Pension Benefit Guaranty Corporation, U.S. territories,
and foreign governments.
* Identified and investigated several large international financial
crime cases generally perpetrated by organized crime syndicates.
Actions Planned or Underway for FY 2012 and Beyond:
* Continue 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 non-filers.
* Continue to enhance relationships with treaty partners and
international organizations to improve international compliance.
* Continue to identify and address emerging tax-exempt compliance
issues, including internationally sponsored pension plans, the
movement of in-kind charitable gifts offshore, and cross-border
commerce using Indian reservations and casinos.
- Ensure that charities adhere to requirements for foreign bank
accounts.
- Expand coordination of employment tax compliance with foreign
countries.
* Continue to combat international illicit money networks and
professional money launderers via the Global Illicit Financial Team by
further developing policies, targeting criteria, and case development
procedures.
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 2011 and Actions Planned or Underway:
Actions Taken:
* Implemented Phase 1 of the Return Preparer Initiative which required
paid return preparers to register with the IRS and use a Preparer Tax
Identification Number (PTIN) to sign returns. In the first year,
735,000 have already registered.
* Identified high risk tax return preparers using new risk-based
scoring, resulting in more than 10,000 potential noncompliance letters
being issued and more than 5,000 preparers visited to address multiple
areas of concern including EITC filings, e-file, and questionable
certified acceptance agents.
* Engaged in compliance, enforcement, and outreach efforts as part of
the Return Preparer Implementation Project, with specific emphasis on
the impact of the new registration requirements on Foreign Preparers.
* Produced 104 redesigned/new notices, including the Taxpayer
Delinquent Account collection notices, containing new language to help
taxpayers more clearly understand the collection process and available
payment options.
* Continued efforts to remove or redact Social Security Numbers from
outgoing taxpayer correspondence.
- Initiated a pilot project to replace the printed SSN on taxpayer
notices with a two-dimensional barcode. The project will pilot on 13
non-payment notices, masking taxpayer SSNs on over 11 million pieces
of outgoing correspondence, leaving only the last four digits of the
SSN visible.
- Developed a strategy to mask the SSN with the 2-D Barcode on payment
notices and developing a process to read 2-D Barcodes and extract
information for payment processing.
* Continued to reinforce culture of taxpayer protection and nights
through leadership messages at all levels of the organization.
Actions Planned or Underway for FY 2012 and Beyond:
* Improve IRS assistance services to taxpayers who are victims of
identity theft outside the tax system, but who encounter IRS issues
because of that theft.
* Continue to engage in compliance, enforcement, and outreach efforts
as part of the Return Preparer Implementation Project, with a specific
emphasis on the impact of the new registration requirements on Foreign
Preparers.
* Continue efforts to remove or redact Social Security Numbers from
outgoing correspondence, including masking the SSN with the 2-D
Barcode on payment notices and developing a process to read 2-D
Barcodes and extract information for payment processing.
* Continue to redesign notices and produce new notices containing
language that clearly explains the collection process and available
payment options.
Leveraging Data to Improve Program Effectiveness and Reduce Costs:
Challenge/Issue: The absence of accurate and complete management
information hinders the IRS’s ability to produce timely, accurate and
useful information needed for day-today decisions.
Actions Taken in FY 2011 and Actions Planned or Underway:
Actions Taken:
* Started an initiative to develop standard operating procedures that
will address the need for storage, the length of storage, and the
future use of stored property.
* Updated procedures used by the business units to calculate their
unemployment trust fund (UTF) administrative expenses, required audit
files are maintained for a minimum of 3 years; and instituted periodic
Chief Financial Officer (CFO) reviews of the business units UTF
expense submissions and supporting documentation.
* Continued using the managerial cost accounting system to conduct
cost-benefit analyses that provides timely, accurate, and useful data
for decision making by business units.
* Expanded the use of cost accounting information to improve program
effectiveness, including the analysis of programs within the Chief
Financial Officer (CFO) function, the notice process, Combined Annual
Wage Reporting/Federal Unemployment Tax Act (CAWR/FUTA) and 6020(b)
programs, and certain criminal investigation processes.
* Implemented a number of cost savings initiatives as part of the
Postage and Printing cost reduction strategy, including the
elimination of tax packages for individual taxpayers and the
elimination/reduction of direct mailing of a number of tax packages to
businesses. These eliminations/reductions have resulted in
postage and printing cost savings in excess of $20 million.
* Deployed the paper check conversion technology to 401 TACs to
process checks through electronic transmission. The project improved
reporting systems, reduced the amount of time to process checks that
were previously mailed to central locations for processing, and
reduced lost remittances from transshipments.
* Enhanced electronic receipt of background investigation cases
through eDelivery, resulting in a cost savings of $820,621 and
significant improvements in data communications with the Office of
Personnel Management (OPM).
* Closed of the Atlanta Submission Processing center, the fifth such
closure in recent years, reflecting the success of the IRS e-File
program, and the reduced need for paper processing.
Actions Planned or Underway for FY 2012 and Beyond:
* Continue to review internal operations, conducting additional cost
benefit analyses and development of performance measures to improve
program evaluation and decision making.
* Integrate W-2 data received from the Social Security Administration
into pre-refund data matching systems to use in compliance activities.
* Enhance the Prisoner Data file creation process by developing a
model to cleanse electronic prisoner data files received from the
Federal Bureau of Prisons/state departments of corrections, and
implement a better means to collect and validate prisoner data to
summarize data errors that can be corrected by prison bureaus.
[End of Appendix E]
[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 2011 and 2010
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 and refunds
disbursed.
Internal Revenue Service:
Balance Sheet:
As of September 30, 2011 and 2010:
(In Millions)
Assets:
Intragovernmental:
Fund Balance with Treasury (Note 2):
2011: $2,608;
2010: $2,562.
Due from Treasury (Note 6):
2011: $3,981;
2010: $4,133.
Other Assets (Note 3):
2011: $126;
2010: $136.
Total Intragovernmental:
2011: $6,715;
2010: $6,831.
Cash and Other Monetary Assets (Notes 4, 6):
2011: $321;
2010: $295.
Federal Taxes Receivable, Net (Notes 5, 6):
2011: $35,000l
2010: $35,000.
Property and Equipment, Net (Note 7):
2011: $1,213;
2010: $1,060.
Other Assets (Note 3):
2011: $19;
2010: $12.
Total Assets:
2011: $43,268;
2010: $43,198.
Liabilities:
Intragovernmental:
Due to Treasury (Note 5):
2011: $35,000;
2010: $35,000.
Other Liabilities (Note 8):
2011: $231;
2010: $235.
Total Intragovernmental:
2011: $35,231;
2010: $35,235.
Federal Tax Refunds Payable:
2011: $3,981;
2010: $4,133.
Other Liabilities (Note 8):
2011: $2,048;
2010: $2,003.
Total Liabilities:
2011: $41,260;
2010: $41,371.
Net Position:
Unexpended Appropriations:
2011: $1,471;
2010: $1,531.
Cumulative Results of Operations:
2011: $537;
2010: $296.
Total Net Position:
2011: $2,008;
2010: $1,827.
Total Liabilities and Net Position:
2011: $43,268;
2010: $43,198.
[End of table]
The accompanying notes are an integral part of these statements.
Internal Revenue Service:
Statement of Net Cost:
For the Years Ended September 30, 2011 and 2010:
(In Millions)
Program: Taxpayer Assistance and Education;
Gross Cost:
2011: $1,132;
2010: $793.
Earned Revenue:
2011: ($12);
2010: ($7).
Net Cost of Program:
2011: $1,120;
2010: $786.
Program: Filing and Account Services:
Gross Cost:
2011: $3,366;
2010: $3,528.
Earned Revenue:
2011: ($78);
2010: ($70).
Net Cost of Program:
2011: $3,288;
2010: $8,953.
Program: Compliance:
Gross Cost:
2011: $8,764;
2010: $9,331.
Earned Revenue:
2011: ($388);
2010: ($378).
Net Cost of Program:
2011: $8,376;
2010: $8,953.
Program: Administration of Tax Credit Programs;
Gross Cost:
2011: $209;
2010: $250.
Earned Revenue:
2011: [Empty];
2010: [Empty].
Net Cost of Program:
2011: $209;
2010: $250.
Net Cost of Operations (Note 11):
2011: $12,993;
2010: $13,447.
[End of table]
Internal Revenue Service:
Statement of Changes in Net Position:
For the Years Ended September 30, 2010 and 2009:
(In Millions)
Beginning Balances:
2011: Cumulative Results of Operations: $296;
2011: Unexpended Appropriations: $1,531;
2010: Cumulative Results of Operations: $237;
2010: Unexpended Appropriations: $1,675.
Budgetary Financing Sources:
Appropriations Received:
2011: Unexpended Appropriations: $12,150;
2010: Unexpended Appropriations: $12,154.
Appropriations Transferred In/Out:
2011: Unexpended Appropriations: [Empty];
2010: Unexpended Appropriations: [Empty].
Other Adjustments:
2011: Unexpended Appropriations: ($136);
2010: Unexpended Appropriations: ($153).
Appropriations Used:
2011: Cumulative Results of Operations: $12,074;
2011: Unexpended Appropriations: ($12,074);
2010: Cumulative Results of Operations: $12,145;
2010: Unexpended Appropriations: ($12,145).
Other Financing Sources:
Imputed Financing:
2011: Cumulative Results of Operations: $1,182;
2010: Cumulative Results of Operations: $1,390.
Transfers In/Out Without Reimbursement:
2011: Cumulative Results of Operations: $30;
2010: Cumulative Results of Operations: $35.
Transfers to General Fund:
2011: Cumulative Results of Operations: ($52);
2010: Cumulative Results of Operations: ($64).
Total Financing Sources:
2011: Cumulative Results of Operations: $13,234;
2011: Unexpended Appropriations: ($60);
2010: Cumulative Results of Operations: $13,506;
2010: Unexpended Appropriations: ($144).
Net Cost of Operations:
2011: Cumulative Results of Operations: ($12,993);
2010: Cumulative Results of Operations: ($133,447).
Net Change:
2011: Cumulative Results of Operations: $241;
2011: Unexpended Appropriations: ($60);
2010: Cumulative Results of Operations: $59;
2010: Unexpended Appropriations: ($144).
Ending Balances:
2011: Cumulative Results of Operations: $537;
2011: Unexpended Appropriations: $1,471;
2010: Cumulative Results of Operations: $296;
2010: Unexpended Appropriations: $1,531.
[End of table]
Internal Revenue Service:
Statement of Budgetary Resources:
For the Years Ended September 30, 2011 and 2010:
(In Millions)
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1:
2011: $816;
2010: $887.
Recoveries of Prior Year Unpaid Obligations:
2011: $121;
2010: $90.
Budget Authority:
Appropriations:
2011: $12,475;
2010: $12,444.
Spending Authority from Offsetting Collections:
2011: $185;
2010: $151.
Nonexpenditure Transfers, Net:
2011: [Empty];
2010: [Empty].
Permanently Not Available:
2011: ($136);
2010: ($153).
Total Budgetary Resources:
2011: $13,461;
2010: $13,419.
Status of Budgetary Resources:
Obligations Incurred:
2011: $12,571;
2010: $12,603.
Unobligated Balance — Available (Note 2):
2011: $292;
2010: $241.
Unobligated Balance — Not Available (Note 2):
2011: $598;
2010: $575.
Total Status of Budgetary Resources:
2011: $13,461;
2010: $13,419.
Change in Obligated Balance:
Obligated Balance, Net, Brought Forward, October 1:
2011: $1,752;
2010: $1,587.
Obligations Incurred:
2011: $12,571;
2010: $12,603.
Gross Outlays:
2011: ($12,481);
2010: ($12,324).
Recoveries of Prior Year Unpaid Obligations, Actual:
2011: ($121);
2010: ($90).
Change in Uncollected Customer Payments from Federal Sources:
2011: $3;
2010: ($24).
Obligated Balance, Net, End of Period:
2011: $1,724;
2010: $1,752.
Net Outlays:
Gross Outlays:
2011: $12,481;
2010: $12,324.
Offsetting Collections:
2011: ($189);
2010: ($127).
Distributed Offsetting Receipts:
2011: ($285);
2010: ($283).
Net Outlays:
2011: $12,007;
2010: $11,914.
[End of table]
Internal Revenue Service:
Statement of Custodial Activity:
For the Years Ended September 30, 2011 and 2010:
(In Billions)
Revenue Activity:
Collections of Federal Tax Revenue (Note 13):
Individual Income, FICA/SECA, and Other:
2011: $2,102;
2010: $1,989.
Corporate Income:
2011: $243;
2010: $278.
Excise:
2011: $49;
2010: $47.
Estate and Gift:
2011: $9;
2010: $20.
Railroad Retirement:
2011: $5;
2010: $5.
Federal Unemployment:
2011: $7;
2010: $6.
Total Collections of Federal Tax Revenue:
2011: $2,415;
2010: $2,345.
Increase in Federal Taxes Receivable, Net:
2011: [Empty];
2010: $6.
Total Federal Tax Revenue:
2011: $2,415;
2010: $2,351.
Distribution of Federal Tax Revenue to Treasury:
2011: $2,415;
2010: $2,345.
Increase in Amount Due to Treasury:
2011: [Empty];
2010: $6.
Total Disposition of Federal Tax Revenue:
2011: $2,415;
2010: $2,351.
Net Federal Revenue Activity:
2011: [Empty];
2010: [Empty].
Federal Tax Refund Activity:
Total Refunds of Federal Taxes (Note 14):
2011: $416;
2010: $467.
Appropriations Used for Refund of Federal Taxes:
2011: ($416);
2010: ($467).
Net Federal Tax Refund Activity:
2011: [Empty];
2010: [Empty].
[End of table]
The accompanying notes are an integral part of these statements.
Internal Revenue Service:
Notes to the Financial Statements:
For the Years Ended September 30, 2011 and 2010:
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 of Internal Revenue 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 IRS consists of organizations and major programs which administer
the nation’s tax laws and annually collects over 90 percent of the
revenues funding the Federal government.
Organizations:
Operating 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 (SBSE) administers compliance activities for small
businesses, self-employed individuals and others with income from
sources other than wages. Tax-Exempt and Government Entities (TEGE)
oversees and assists employee plans, tax exempt organizations, and
government entities in complying with tax laws and regulations. Large
Business and International (LB&I) serves corporations, subchapter S
corporations, and partnerships with assets greater than $10 million on
complicated issues involving tax law and accounting principles, and
conducts business in an expanding global environment.
Functional Divisions:
The five functional divisions are Appeals, Criminal Investigation,
Communications and Liaison, Taxpayer Advocate Service and the IRS
Office of 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
Office of Chief Counsel reports to the Secretary of the Treasury.
Support Divisions:
The eight support divisions are Modernized 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 of 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. Intragovernmental 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 telecommunication services,
payroll processing, security and employee programs. 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:
Section 6404 of the Internal Revenue Code (26 USC), authorizes the
Commissioner of the IRS to abate certain paid or unpaid portions of
assessed taxes, interest, and penalties. Abatements occur for a number
of reasons and are a standard part of the tax administration process.
Abatements may be allowed for qualifying corporations claiming net
operating losses which create a credit when carried back and applied
against a prior year’s tax liability. Additionally, abatements can
correct previous assessments from enforcement programs, eliminate
taxes discharged in bankruptcy, reduce or eliminate taxes encompassed
in offers in compromise, eliminate penalty assessments for reasonable
cause, eliminate contested assessments made due to mathematical or
clerical errors and eliminate assessments contested after the
liability has been satisfied. Abatements may 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.
Table:
Asset Class: ADP equipment;
Capitalization Threshold: Capitalized regardless of acquisition cost.
Asset Class: Non-ADP equipment;
Capitalization Threshold: Assets with bulk cost of $50 thousand or
greater.
Asset Class: Furniture;
Capitalization Threshold: Capitalized regardless of acquisition cost.
Asset Class: Investigative equipment;
Capitalization Threshold: Assets with bulk cost of $50 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 with an estimated cost of
$5 million per year or $50 million over the life cycle.
Asset Class: Leasehold Improvements;
Capitalization Threshold: Improvements with bulk cost of $50 thousand
or greater.
Asset Class: Assets under capital lease;
Capitalization Threshold: Assets with bulk cost of $50 thousand or
greater.
[End of table]
ADP Equipment includes related commercial off-the-shelf (COTS)
software with a bulk cost of $50 thousand or greater. 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. Prior to fiscal year (FY) 2011,
the IRS capitalized COTS software and leasehold improvements
regardless of cost, and furniture, non-ADP equipment and investigative
equipment with an individual asset cost of $5 thousand or greater.
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 yearend
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; 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 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 submitted to Congress. Administrative Expenses-Recovery Act
supports the funding for the administration of new and expanded tax
credit programs of the American Recovery and Reinvestment Act of 2009
(ARRA). Health Insurance Tax Credit Administration provides funding
for health insurance and refundable tax credits to qualified
individuals. Beginning with calendar year 2010, the IRS administers
various tax provisions included in the Affordable Care Act of 2010
(ACA).
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.
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 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
before returns are filed to assist them in preparing correct returns.
Primary activities include interpretations, preparing and
disseminating tax publications and information, taxpayer education
programs, researching customer needs, pre-filing agreements and
determinations, and initiatives to promote electronic tax filing.
Exchange revenues include user fees from enrolled agent and actuary
fees, and reimbursable revenues from services provided to other
Federal agencies.
Filing and Account Services performs account maintenance functions of
processing tax returns, recording tax payments, issuing refunds, and
maintaining taxpayer accounts. The scope extends to all tax returns
and taxpayer accounts regardless of type and method of filing. Program
activities include providing field assistance in preparing tax returns
and supplying tax forms to the public. Exchange revenues include user
fees from photocopy and income verification fees, and reimbursable
revenues from services provided to other Federal agencies.
Compliance administers compliance activities after a return is filed
in order to identify and correct possible errors or underpayments.
This program includes issuing agreements, rulings and determinations,
automated and field collection activities, appeals and tax litigation,
desk and field examination of returns, international and criminal
investigations, and document matching. Earned revenues are primarily
from user fees for installment agreements, letter rulings and
determinations, return preparer fees, and reimbursable revenues from
services provided to other Federal agencies.
Administration of Tax Credit Programs administers EITC and Health
Coverage Tax Credit (HCTC) programs. EITC includes expanded customer
service, public outreach, enforcement, and research efforts to reduce
claims and erroneous filings associated with the program. EITC comprises
pre-filing, filing and account services associated with the program.
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 sources of Federal tax revenue and their
distribution to the general fund of the U.S. Treasury are reported on
the Statement of Custodial Activity.
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 for 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. In March 2009, the IRS
Commissioner announced the program would not renew the contracts with
the private debt collection agencies. Unobligated funds from prior
year collection of delinquent Federal tax liabilities have been
retained by the IRS to fund ongoing enforcement activities.
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 allocation
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.
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 11.7%
of employees’ gross pay for regular and 25.7% 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). The FEHB offers a wide variety of group plans and
coverage. The coverage is available to employees, retirees, and their
eligible family members. The cost for each plan varies and is shared
between the IRS and the employee. 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:
2011: $2,528;
2010: $2,248.
Special Funds:
2011: $343;
2010: $310.
Revolving Funds:
2011: $7;
2010: $6.
Other Funds:
2011: [Empty];
2010: ($2).
Fund Balance with Treasury:
2011: $2,608;
2010: $2,562.
Unobligated balances:
Available:
2011: $292;
2010: $241.
Unavailable:
2011: $598;
2010: $575.
Obligated Balance not yet disbursed:
2011: $1,724;
2010: $1,752.
Non-Budgetary FBWT:
2011: ($6);
2010: ($6).
Status of Fund Balance with Treasury:
2011: $2,608;
2010: $2,562.
Note 3. Other Assets:
Advances:
2011: Intra-governmental: $78;
2011: With the Public: $6;
2010: Intra-governmental: $83;
2010: With the Public: $8.
Accounts receivable, net:
2011: Intra-governmental: $45;
2011: With the Public: $11;
2010: Intra-governmental: $49;
2010: With the Public: $2.
Forfeited property held for sale:
2011: Intra-governmental: [Empty];
2011: With the Public: $2;
2010: Intra-governmental: [Empty];
2010: With the Public: $2.
Clearing accounts:
2011: Intra-governmental: $3;
2011: With the Public: [Empty];
2010: Intra-governmental: $4;
2010: With the Public: [Empty].
Other Assets:
2011: Intra-governmental: $126;
2011: With the Public: $19;
2010: Intra-governmental: $136;
2010: With the Public: $12.
Note 4. Cash and Other Monetary Assets:
Imprest Fund:
2011: $4;
2010: $4.
Other monetary assets:
2011: $317;
2010: $291.
Cash and Other Monetary Assets:
2011: $321;
2010: $295.
Note 5. Federal Taxes Receivable, Net and Due to Treasury:
(In Billions)
Federal taxes receivable:
2011: $147;
2010: $138.
Allowance for uncollectible taxes receivable:
2011: ($112);
2010: ($103).
Federal taxes receivable, net and Due to Treasury:
2011: $35;
2010: $35.
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:
2011: Intra-governmental: $3,981;
2011: With the Public: [Empty];
2010: Intra-governmental: $4,133;
2010: With the Public: [Empty];
2010: Intra-governmental: $4,133;
2010: With the Public: [Empty].
Federal taxes receivable, net:
2011: Intra-governmental: [Empty];
2011: With the Public: $35,000;
2010: Intra-governmental: [Empty];
2010: With the Public: $35,000.
Other monetary assets:
2011: Intra-governmental: [Empty];
2011: With the Public: $317;
2010: Intra-governmental: [Empty];
2010: With the Public: $291.
Non-entity Assets:
2011: Intra-governmental: $3,981;
2011: With the Public: $35,317;
2010: Intra-governmental: $4,133;
2010: With the Public: $35,291.
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: $1,517;
Accumulated Depreciation: ($1,020);
2011 Net Book Value: $497;
2010 Net Book Value: $432.
Internal use software:
Useful Cost (Years): 3 to 7:
Cost: $1,098;
Accumulated Depreciation: ($867);
2011 Net Book Value: $231;
2010 Net Book Value: $367.
Leasehold improvements:
Useful Cost (Years): 10;
Cost: $389;
Accumulated Depreciation: ($227);
2011 Net Book Value: $162;
2010 Net Book Value: $163.
Major systems
Useful Cost (Years): 7;
Cost: $422;
Accumulated Depreciation: ($422);
2011 Net Book Value: [Empty];
2010 Net Book Value: [Empty].
Internal use software — work in process:
Cost: $247;
Accumulated Depreciation: [Empty];
2011 Net Book Value: $247;
2010 Net Book Value: $60.
Vehicles:
Useful Cost (Years): 5;
Cost: $59;
Accumulated Depreciation: ($43);
2011 Net Book Value: $16;
2010 Net Book Value: $20.
Furniture and non-ADP equipment:
Useful Cost (Years): 8 to 10;
Cost: $86;
Accumulated Depreciation: ($32);
2011 Net Book Value: $54;
2010 Net Book Value: $16.
Assets under capital lease:
Useful Cost (Years): 3 to 7;
Cost: $7;
Accumulated Depreciation: ($1);
2011 Net Book Value: $6;
2010 Net Book Value: $2.
Investigative equipment:
Useful Cost (Years): 10;
Cost: $6;
Accumulated Depreciation: ($6);
2011 Net Book Value: [Empty];
2010 Net Book Value: [Empty].
Property and Equipment:
Cost: $3,831;
Accumulated Depreciation: ($2,618);
2011 Net Book Value: $1,213;
2010 Net Book Value: $1,060.
The Cost column represents the historical cost of property and
equipment, net of disposals. The cost basis for FY 2011 and FY 2010 is
$3,831 million and $3,622 million, respectively. Accumulated
depreciation for FY 2011 and FY 2010 is $2,618 million and $2,562
million, respectively. The IRS has 16 internal use software projects,
including deployed and work in process:
* 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.
* 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.
* Customer Communications is a customer service telephone system.
* Custodial Detail Database (CDDB) is the subsidiary ledger for
Redesign Revenue and Accounting System (RRACS) which provides the
functionality needed for custodial financial management and reporting.
* 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.
* Information Reporting and Document Matching (IRDM) is a business
document matching program designed to increase voluntary compliance
and accurate reporting of income through the use of third party
information reporting data.
* Integrated Financial System (IFS) is the IRS administrative
financial 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.
* Internet Refund Fact of Filing allows taxpayers to review the status
of their refund.
* Knowledge Incident/Problem Service Asset Management (KISAM) project
replaced the IRS’ asset and problem management system, Information
Technology Asset Management System.
* Modernized E-File is an electronic filing system for tax returns.
* RRACS adds enhancements to financial reporting of taxpayer receipts
and adds traceability between summary records and the detailed
subsidiary ledger (CDDB).
* Return Review Program (RRP) is an automated system designed to
maximize fraud detection at the time tax returns are filed.
* Security and Technology Infrastructure Release (STIR) is the
infrastructure for information technology security.
Deployed Internal Use Software:
(In Millions)
Current CADE:
Cost: $303;
Accumulated Depreciation: ($257);
2011 Net Book Value: $46;
2010 Net Book Value: $137.
Modernized E-File:
Cost: $269;
Accumulated Depreciation: ($175);
2011 Net Book Value: $94;
2010 Net Book Value: $106.
Integrated Financial System:
Cost: $147;
Accumulated Depreciation: ($137);
2011 Net Book Value: $10;
2010 Net Book Value: $32.
E-Services:
Cost: $141;
Accumulated Depreciation: ($141);
2011 Net Book Value: [Empty];
2010 Net Book Value: $10.
AMS:
Cost: $78;
Accumulated Depreciation: ($13);
2011 Net Book Value: $65;
2010 Net Book Value: $70.
STIR:
Cost: $76;
Accumulated Depreciation: ($76);
2011 Net Book Value: [Empty];
2010 Net Book Value: [Empty].
Customer Communications:
Cost: $25;
Accumulated Depreciation: ($25);
2011 Net Book Value: [Empty];
2010 Net Book Value: [Empty].
Enterprise Systems Management:
Cost: $16;
Accumulated Depreciation: ($16);
2011 Net Book Value: [Empty];
2010 Net Book Value: [Empty].
Internet Refund Fact of Filing:
Cost: $15;
Accumulated Depreciation: ($15);
2011 Net Book Value: [Empty];
2010 Net Book Value: [Empty].
CDDB:
Cost: $8;
Accumulated Depreciation: ($4);
2011 Net Book Value: $4;
2010 Net Book Value: $6.
Other:
Cost: $7;
Accumulated Depreciation: $7;
2011 Net Book Value: [Empty];
2010 Net Book Value: $1.
Deployed Internal Use Software:
Cost: $1,098;
Accumulated Depreciation: ($867);
2011 Net Book Value: $231;
2010 Net Book Value: $367.
Work in Process Internal Use Software:
(In Millions)
Modernized E-File:
2011: $32;
2010: $11.
KISAM:
2011: [Empty]
2010: $5.
CADE2:
2011: $175;
2010: $40.
IPS:
2011: $8;
2010: $4.
RRP:
2011: $7;
2010: [Empty]
Work in Process Internal Use Software:
2011: $247;
2010: $60.
Note 8. Liabilities:
(In Millions)
Other Liabilities:
2011:
Intragovernmental:
Accrued payroll and benefits:
2011: Current: $101;
2011: Non-Current: [Empty];
2011: Total: $101.
Accrued FECA liability:
2011: Current: $42;
2011: Non-Current: $56;
2011: Total: $98.
Accrued expense:
2011: Current: $32;
2011: Non-Current: [Empty];
2011: Total: $32.
Other Liabilities:
2011: Current: $175;
2011: Non-Current: $56;
2011: Total: $231.
With the Public:
Accrued annual leave:
2011: Current: $537;
2011: Non-Current: [Empty];
2011: Total: $537.
Actuarial FECA liability:
2011: Current: [Empty];
2011: Non-Current: $448;
2011: Total: $448.
Accrued payroll and benefits:
2011: Current: $396;
2011: Non-Current: [Empty];
2011: Total: $396.
Accrued expenses:
2011: Current: $231;
2011: Non-Current: [Empty];
2011: Total: $231.
Liability for Deposit Funds and Clearing Accounts and Custodial
Liabilities:
2011: Current: $323;
2011: Non-Current: [Empty];
2011: Total: $323.
Accounts payable:
2011: Current: $112;
2011: Non-Current: [Empty];
2011: Total: $112.
Net Capital Lease Liability:
2011: Current: $1;
2011: Non-Current: [Empty];
2011: Total: $1.
Other Liabilities:
2011: Current: $1,600;
2011: Non-Current: $448;
2011: Total: $2,048.
2010:
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.
Liabilities Not Covered by Budgetary Resources:
(In Millions)
Accrued annual leave:
2011 Intra-governmental: $98;
2011 With the Public: $985;
2010 Intra-governmental: [Empty];
2010 With the Public: $549.
Actuarial FECA liability:
2011 Intra-governmental: [Empty];
2011 With the Public: $448;
2010 Intra-governmental: [Empty];
2010 With the Public: $441.
Accrued FECA liability:
2011 Intra-governmental: $98;
2011 With the Public: [Empty];
2010 Intra-governmental: $98;
2010 With the Public: [Empty].
Liabilities Not Covered by Budgetary Resources:
2011 Intra-governmental: $98;
2011 With the Public: $985;
2010 Intra-governmental: $98;
2010 With the Public: $990.
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 net capital lease liability is $1 million as of September 30,
2011. The IRS leases ADP telecommunications equipment for toll free
call centers. These consist of a two-year lease and two seven-year
leases.
The future payments due for the equipment under the two-year lease are
$1 million and will be paid in FY 2012. The payments for the leased
equipment under the seven-year leases are made at the beginning of the
leases. There are no future payments due for the equipment under the
seven-year leases.
Operating Leases:
(In Millions)
Fiscal Year: 2012;
Lease Payment: $7.
Fiscal Year: 2013;
Lease Payment: $11.
Fiscal Year: 2014;
Lease Payment: $7.
Fiscal Year: 2015;
Lease Payment: $6.
Fiscal Year: 2016;
Lease Payment: $6.
Fiscal Year: After 2016;
Lease Payment: $8.
Total Future Lease Payments:
Lease Payment: $51.
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 may be
canceled or renewed 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, 2011 and
2010, 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, 2011 and 2010, there were
four cases and three 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.
As of September 30, 2011 and 2010, 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)
2011:
Intragovernmental Gross Cost:
Taxpayer Assistance and Education: $367;
Filing and Account Services: $1,379;
Compliance: $2,614;
Administration of Tax Credit: $46;
Total: $4,49=06.
Gross Costs with the Public:
Taxpayer Assistance and Education: $765;
Filing and Account Services: $1,987;
Compliance: $6,150;
Administration of Tax Credit: $163;
Total: $9,065.
Program Costs:
Taxpayer Assistance and Education: $1,132;
Filing and Account Services: $3,366;
Compliance: $8,764;
Administration of Tax Credit: $209;
Total: $13,471.
Intragovemmental Earned Revenue:
Taxpayer Assistance and Education: ($9);
Filing and Account Services: ($11);
Compliance: ($52);
Administration of Tax Credit: [Empty];
Total: ($72).
Earned Revenue from the Public:
Taxpayer Assistance and Education: ($3);
Filing and Account Services: ($67);
Compliance: ($336);
Administration of Tax Credit: [Empty];
Total: ($406).
Program Revenues:
Taxpayer Assistance and Education: ($12);
Filing and Account Services: ($78);
Compliance: ($388);
Administration of Tax Credit: [Empty];
Total: ($478).
Net Cost of Operations:
Taxpayer Assistance and Education: $1,120;
Filing and Account Services: $3,288;
Compliance: $8,376;
Administration of Tax Credit: $209;
Total: $12,993.
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.
Note 12. Statement of Budgetary Resources Obligations Incurred:
(In Millions)
Direct - Category B:
2011: $12,432;
2010: $12,467.
Reimbursable - Category B:
2011: $139;
2010: $136.
Obligations Incurred:
2011: $12,571;
2010: $12,603.
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 FY 2010 Statement of Budgetary
Resources and the FY 2012 President’s Budget:
(In Millions)
Statement of Budgetary Resources (SBR):
Budgetary Resources: $13,419;
Obligations Incurred: $12,603;
Distributed Offsetting Receipts: $283;
Net Outlays: $11,914.
Included on SBR, not in President's Budget: Expired Funds;
Budgetary Resources: ($300);
Obligations Incurred: [Empty];
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: ($283);
Net Outlays: $283.
Included on SBR, not in President's Budget: Allocation Transfer from
Treasury;
Budgetary Resources: ($95);
Obligations Incurred: ($86);
Distributed Offsetting Receipts: [Empty];
Net Outlays: ($88).
Included on SBR, not in President's Budget: Other;
Budgetary Resources: $2;
Obligations Incurred: $7;
Distributed Offsetting Receipts: [Empty];
Net Outlays: $2.
Included in President's Budget, not on SBR: Tax credits and interest
refunds to taxpayers;
Budgetary Resources: $112,446;
Obligations Incurred: $112,446;
Distributed Offsetting Receipts: [Empty];
Net Outlays: $112,446.
Included in President's Budget, not on SBR: Payments to informants;
Budgetary Resources: $19;
Obligations Incurred: $11;
Distributed Offsetting Receipts: [Empty];
Net Outlays: $11.
Budget of the United States Government:
Budgetary Resources: $125,491;
Obligations Incurred: $124,981;
Distributed Offsetting Receipts: [Empty];
Net Outlays: $124,568.
The FY 2013 Budget of the United States Government (President’s
Budget) presenting the actual amounts for the year ended September 30,
2011 has not been published as of the issue date of these financial
statements. The FY 2013 President’s Budget is scheduled for
publication in February 2012. A reconciliation of the FY 2010 column
on the Statement of Budgetary Resources (SBR) to the actual amounts
for FY 2010 in the FY 2012 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 $112.4 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 $983
million and $1,043 million for the periods ended September 30, 2011
and 2010, respectively.
Note 13. Collections of Federal Tax Revenue:
(In Billions)
Individual income, FICA/SECA, and other:
Tax year 2011: $1,357[A]
Tax year 2010: $704;
Tax Year 2009: $19;
Prior Years: $22;
Collections Received FY 2011: $2,102;
Collections Received FY 2010: $1,989.
Corporate income:
Tax year 2011: $166[B]
Tax year 2010: $63;
Tax Year 2009: $2;
Prior Years: $12;
Collections Received FY 2011: $243;
Collections Received FY 2010: $278.
Excise:
Tax year 2011: $36;
Tax year 2010: $13;
Tax Year 2009: [Empty];
Prior Years: [Empty];
Collections Received FY 2011: $49;
Collections Received FY 2010: $47.
Estate and gift:
Tax year 2011: [Empty];
Tax year 2010: $6;
Tax Year 2009: $1;
Prior Years: $2;
Collections Received FY 2011: $9;
Collections Received FY 2010: $20.
Railroad retirement:
Tax year 2011: $4;
Tax year 2010: $1;
Tax Year 2009: [Empty];
Prior Years: [Empty];
Collections Received FY 2011: $5;
Collections Received FY 2010: $5.
Federal unemployment:
Tax year 2011: $5;
Tax year 2010: $2;
Tax Year 2009: [Empty];
Prior Years: [Empty];
Collections Received FY 2011: $7;
Collections Received FY 2010: $6.
Collections of Federal Tax Revenue:
Tax year 2011: $1,568;
Tax year 2010: $789;
Tax Year 2009: $22;
Prior Years: $36;
Collections Received FY 2011: $2,415;
Collections Received FY 2010: $2,345.
[A] Includes other collections of $72 million.
[B] Includes tax year 2012 corporate income tax receipts of $9 billion.
Note 14. Federal Tax Refund Activity:
(In Billions)
Individual income, FICA/SECA, and other:
Tax year 2011: $1;
Tax year 2010: $303;
Tax Year 2009: $27;
Prior Years: $14;
Collections Received FY 2011: $345;
Collections Received FY 2010: $366.
Corporate income:
Tax year 2011: $6;
Tax year 2010: $17;
Tax Year 2009: $7;
Prior Years: $38;
Collections Received FY 2011: $68;
Collections Received FY 2010: $98.
Excise:
Tax year 2011: $1;
Tax year 2010: $1;
Tax Year 2009: [Empty];
Prior Years: [Empty];
Collections Received FY 2011: $2;
Collections Received FY 2010: $2.
Estate and gift:
Tax year 2011: [Empty];
Tax year 2010: [Empty];
Tax Year 2009: [Empty];
Prior Years: $1;
Collections Received FY 2011: $1;
Collections Received FY 2010: $1.
Federal Tax Refund Activity:
Tax year 2011: $8;
Tax year 2010: $321;
Tax Year 2009: $34;
Prior Years: $53;
Collections Received FY 2011: $416;
Collections Received FY 2010: $467.
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)
2011:
Fiduciary net assets, beginning of year:
2011: 20X6737: [Empty];
2011: 20X6738: $19;
2011: 20X6740: [Empty];
2011: 20X6741: [Empty];
2011: Total: $19.
Contributions:
2011: 20X6737: $17;
2011: 20X6738: $48;
2011: 20X6740: $28;
2011: 20X6741: $9;
2011: Total: $102.
Disbursements to and on behalf of beneficiaries:
2011: 20X6737: ($17);
2011: 20X6738: ($29);
2011: 20X6740: ($28);
2011: 20X6741: ($9);
2011: Total: ($83).
Increase (Decrease) in fiduciary net Assets:
2011: 20X6737: [Empty];
2011: 20X6738: $19;
2011: 20X6740: [Empty];
2011: 20X6741: [Empty];
2011: Total: $19.
Fiduciary Net Assets, end of year:
2011: 20X6737: [Empty];
2011: 20X6738: $38;
2011: 20X6740: [Empty];
2011: 20X6741: [Empty];
2011: Total: $38.
2010:
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.
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:
2011: $12,571;
2010: $12,603.
Spending authority from offsetting collections and recoveries:
2011: ($306);
2010: ($241).
Distributed offsetting receipts:
2011: ($285);
2010: ($284).
Transfers to General Fund:
2011: ($52);
2010: ($64).
Imputed financing:
2011: $1,182;
2010: $1,390.
Transfers in/out without reimbursement:
2011: $30;
2010: $35.
Total:
2011: $13,140;
2010: $13,440.
Resources that do not fund net cost of operations:
Changes in goods, services and benefits ordered but not yet received or
provided:
2011: $60;
2010: ($56).
Costs capitalized on the balance sheet:
2011: ($308);
2010: ($249).
Budgetary offsetting collections and receipts:
2011: $2;
2010: ($1).
Costs that do not require resources In current period:
Depreciation and amortization;
2011: $352;
2010: $361.
Increase (Decrease) in unfunded liabilities;
2011: ($5);
2010: $33.
Revaluation of assets and liabilities;
2011: $15;
2010: $16.
Other:
2011: ($263);
2010: ($97).
Total:
2011: $99;
2010: $313.
Net Cost of Operations:
2011: $12,993;
2010: $13,447.
In accordance with Statement of Federal Financial Accounting Standards
No. 7 (SFFAS No. 7),
Accounting for Revenue and Other Financing Sources and Concepts for
Reconciling Budgetary and
Financial Accounting, a reconciliation is required for the
relationship between the budgetary resources
obligated during the period for the programs and operations of the IRS
to the net cost of operations.
The budgetary accounting reports the obligations and outlays of
financial resources to acquire or
provide goods and services. The accrual basis of accounting reports
the net cost of resources used.
[End of section]
Required Supplementary Information:
Internal Revenue Service:
Required Supplementary Information - Unaudited:
For the Years Ended September 30, 2011 and 2010:
Schedule of Budgetary Resources by Major Budget Accounts:
(In Millions)
2011:
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1;
Taxpayer Service: $93;
Enforcement: $91;
Operations Support: $210;
Other Appropriations: $422;
Total: $816.
Recoveries of Prior Year Unpaid Obligations;
Taxpayer Service: $13;
Enforcement: $23;
Operations Support: $75;
Other Appropriations: $10;
Total: $121.
Budget Authority: Appropriations;
Taxpayer Service: $2,279;
Enforcement: $5,504;
Operations Support: $4,083;
Other Appropriations: $609;
Total: $12,475.
Budget Authority: Spending Authority from Offsetting Collections;
Taxpayer Service: $35;
Enforcement: $101;
Operations Support: $47;
Other Appropriations: $2;
Total: $185.
Nonexpenditure Transfers, Net;
Taxpayer Service: $148;
Enforcement: $14;
Operations Support: $35;
Other Appropriations: ($197);
Total: [Empty].
Permanently Not Available;
Taxpayer Service: ($48);
Enforcement: ($39);
Operations Support: ($41);
Other Appropriations: ($10);
Total: ($136).
Total Budgetary Resources;
Taxpayer Service: $2,522;
Enforcement: $5,694;
Operations Support: $4,409;
Other Appropriations: $836;
Total: $13,461.
Status of Budgetary Resources:
Obligations Incurred;
Taxpayer Service: $2,453;
Enforcement: $5,614;
Operations Support: $4,137;
Other Appropriations: $367;
Total: $12,571.
Unobligated Balance — Available;
Taxpayer Service: $25;
Enforcement: $19;
Operations Support: $121;
Other Appropriations: $127;
Total: $292.
Unobligated Balance — Not Available;
Taxpayer Service: $44;
Enforcement: $61;
Operations Support: $151;
Other Appropriations: $342;
Total: $598.
Total Status of Budgetary Resources;
Taxpayer Service: $2,522;
Enforcement: $5,694;
Operations Support: $4,409;
Other Appropriations: $836;
Total: $13,461.
Change In Obligated Balance:
Obligated Balance, Net Brought Forward, October 1;
Taxpayer Service: $200;
Enforcement: $411;
Operations Support: $961;
Other Appropriations: $180;
Total: $1,752.
Obligations Incurred;
Taxpayer Service: $2,453;
Enforcement: $5,614;
Operations Support: $4,137;
Other Appropriations: $367;
Total: $12,571.
Gross Outlays;
Taxpayer Service: ($2,449);
Enforcement: ($5,569);
Operations Support: ($4,02);
Other Appropriations: ($381);
Total: ($12,481).
Recoveries of Prior Year Unpaid Obligations, Actual;
Taxpayer Service: ($13);
Enforcement: ($23);
Operations Support: ($75);
Other Appropriations: ($10);
Total: ($121).
Change in Uncollected Customer Payments from Federal Sources;
Taxpayer Service: [Empty];
Enforcement: $5;
Operations Support: ($1);
Other Appropriations: ($1);
Total: ($3).
Obligated Balances, Net End of Period;
Taxpayer Service: $191;
Enforcement: $438;
Operations Support: $940;
Other Appropriations: $155;
Total: $1,724.
Net Outlays:
Gross Outlays;
Taxpayer Service: $2,449;
Enforcement: $5,569;
Operations Support: $4,082;
Other Appropriations: $381;
Total: $12,481.
Offsetting Collections;
Taxpayer Service: ($35);
Enforcement: ($106);
Operations Support: ($46);
Other Appropriations: ($2);
Total: ($189).
Distributed Offsetting Receipt;
Taxpayer Service: [Empty];
Enforcement: [Empty];
Operations Support: [Empty];
Other Appropriations: ($285);
Total: ($285).
Net Outlays;
Taxpayer Service: $2,414;
Enforcement: $5,463;
Operations Support: $4,036;
Other Appropriations: $94;
Total: $12,007.
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.
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 2011, the total
estimated payout (including principal and interest) for claims pending
judicial review by the Federal courts is $8.1 billion and by Appeals
is $7.5 billion. In FY 2010, the total estimated payout (including
principal and interest) for claims pending judicial review by the
Federal courts was $8.8 billion and by Appeals was $8.0 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.
The Treasury Department made an administrative determination to accept
the position that certain medical residents who received stipends be
exempted from FICA taxes for periods before April 1, 2005. As of
September 30, 2011, the IRS has estimated unpaid refund claims of
approximately $3.7 billion. In accordance with Federal accounting
standards, these claims have not been recorded in the financial
statements because certain administrative processes had not yet been
completed by the end of FY 2011.
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:
2011: $356;
2010: $330.
Compliance assessments:
2011: ($103);
2010: ($93).
Write-offs:
2011: ($106);
2010: ($96).
Gross Federal taxes receivables:
2011: $147;
2010: $138.
Allowance for uncollectible taxes receivable:
2011: ($112);
2010: ($103).
Federal taxes receivable, net:
2011: $35.
2010: $35.
The IRS cannot reasonably estimate the allowance for uncollectible
amounts pertaining to its compliance assessments, and thus cannot
determine their net realizable value or the value of the preassessment
work-in-process.
To eliminate double-counting, the compliance assessments reported
above exclude trust fund recovery penalties, totaling $2 billion and
$3 billion as of September 30, 2011 and 2010, 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:
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
credits. There exists a separate class of tax credits which is fully
payable to the taxpayer, even if the credit exceeds the tax liability.
These types of credits, designated as refundable, provide greater
economic benefits because the taxpayer realizes the full benefit of
the credit, regardless of the 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) and the Patient Protection and Affordable Care Act of 2010
(PPACA).
Stimulus Credit:
In 2008, the Economic Stimulus Act provided taxpayers with a one-time
rebate. These rebates were remitted to individuals who filed a 2007
tax return and met certain eligibility requirements. Although payments
under this program were substantially completed by 2010, some earlier
payments were returned to the IRS in 2011. These 2011 negative
disbursements are reflected as such in the accompanying payment
schedule.
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 have sufficient income to meet
regular tax return filing requirements.
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.
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 ten 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 earlier if 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).
The ARRA 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.
Corporate Alternative Minimum Tax (AMT) Credit:
Section 168(k)(4) allows a taxpayer to elect to claim a refundable
credit for certain unused research credits in lieu of the special
depreciation allowance for eligible property.
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.
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 (BAB):
BABs 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.
Qualified Zone Academy Bonds (QZAB) and Qualified School Construction
Bonds (QSCB):
Congress created QZABs and QSCBs to help schools raise funds to
renovate and repair buildings, invest in equipment and current
technology, develop more challenging curricula, and train teachers.
The tax credit portion of these bonds depends on the issuance date of
the bonds, the number of bonds outstanding and their redemption. The
total volume cap for these bonds is $4 billion for the QZABs while the
QSCBs do not have a volume cap.
Qualified Energy Conservation and New Clean Renewable Energy Bonds:
Qualified Energy Conservation Bonds (QECB) may be issued by state,
local and tribal governments to finance qualified energy conservation
projects. A minimum of 70 percent of a state’s allocation must be used
for governmental purposes, and the remainder may be used to finance
private activity projects. QECBs were originally structured as tax
credit bonds. However, the March 2010 HIRE Act (H.R. 2847 (Sec. 301))
changed QECB from tax credit bonds to direct subsidy bonds similar to
BABs. The QECB issuer pays the investor a taxable coupon and receives
a rebate from the U.S. Treasury.
New Clean Renewable Energy Bonds (CREBs) may be issued by public power
utilities, electric cooperatives, government entities (states, cities,
counties, territories, Indian tribal governments), and certain lenders
to finance renewable energy projects. CREBs were originally structured
as tax credit bonds. However, the March 2010 HIRE Act (H.R. 2847 (Sec.
301)) changed CREBs from tax credit bonds to direct subsidy bonds
similar to BABs. The issuer pays the investor a taxable coupon and
receives a rebate from the U.S. Treasury.
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 nine 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.
Adoption Tax Credit:
Individuals qualify for the adoption tax credit if they have adopted a
child and paid out-of-pocket expenses relating to the adoption. They
may claim an adoption credit of up to $13,170 (for tax year 2010) per
eligible child. The credit is phased out based on the individual’s
modified adjusted gross income.
Small Business Insurance Tax Credit:
Certain small employers will be eligible for a tax credit, provided
they contribute a uniform percentage of at least 50 percent toward
their employees’ health insurance. For nonprofit (tax-exempt)
organizations, the credit will be in the form of a reduction in income
and Medicare tax the employer is required to withhold from employees’
wages and the employer share of Medicare tax on employees’ wages.
Therapeutic Discovery Grants:
The Qualifying Therapeutic Discovery Project tax credit is provided
under new Section 48D of the Internal Revenue Code (26 USC), enacted
as part of the PPACA. The credit is a tax benefit targeted to certain
therapeutic discovery projects. Such projects must show a reasonable
potential to (1) achieve new therapies to treat unmet medical needs,
(2) detect or treat chronic or acute diseases and conditions, (3)
reduce the long-term growth of health care costs, or (4) significantly
advance the goal of curing cancer.
The following table summarizes refundable tax credits in excess of tax
liabilities and outlays paid in FY 2011 and FY 2010 (In millions):
Stimulus Credit[A];
2011: ($269);
2010: $81.
Earned Income Tax Credit[A];
2011: $55,652;
2010: $54,712.
Additional Child Tax Credit[A];
2011: $22,691;
2010: $22,659.
Health Care Tax Credit[A];
2011: $185;
2010: $205.
Individual Alternative Minimum Tax (AMT) Credit;
2011: $458;
2010: $1,034.
First-Time Homebuyer Credit[A];
2011: $2,185;
2010: $8,668.
Making Work Pay Credit and Credit for Certain Government Retirees[B];
2011: $13,905;
2010: $13,740.
Build America and Recovery Zone Bonds[B];
2011: $3,597;
2010: $1,376.
COBRA Credit;
2011: $2,191;
2010: $3,857.
American Opportunity Tax Credit;
2011: $5,604;
2010: $3,851.
Corporate Alternative Minimum Tax (AMT) Credit;
2011: $65;
2010: $86.
Qualified Zone Academy Bonds;
2011: $19;
2010: [Empty].
Qualified School Construction Bonds;
2011: $349;
2010: [Empty].
Clean Renewable Energy Bonds;
2011: $11;
2010: [Empty].
Energy Conservation Bonds;
2011: $9;
2010: [Empty].
Adoption Credit;
2011: $719;
2010: [Empty].
Small Business Health Insurance Tax Credit;
2011: $30;
2010: [Empty].
Therapeutic Discovery Grants;
2011: $960;
2010: [Empty].
Refundable Tax Credits;
2011: $108,362;
2010: $110,269.
[A] Reflects net return of payments.
[End of table]
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 4.2 percent of wages and tips up to $106,800 and an
employer matching amount of 6.2 percent bringing the total rate to
10.4 percent for calendar year 2011. In calendar year 2010, the rate
was 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
10.4 and 12.4 percent on self employment income up to $106,800 for
calendar years 2011 and 2010, respectively. 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
$572 billion and $639 billion in FY 2011 and FY 2010, respectively.
Medicare taxes collected by the IRS were estimated to be approximately
$190 billion and $182 billion in FY 2011 and FY 2010, 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
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 2009:
[Refer to PDF for image: vertical bar graph]
Adjusted gross income (AGI): Under $15,000;
Number of taxable returns (in thousands): 37,624;
AGI (in millions): $76,133;
Total income tax (in millions): $1,354;
Average AGI per return (in whole dollars): $2,024;
Average income tax per return (in whole dollars): $36;
Income tax as a percentage of AGI: 1.8%.
Adjusted gross income (AGI): $15,000 under $30,000;
Number of taxable returns (in thousands): 30.097;
AGI (in millions): $662,180;
Total income tax (in millions): $14,013;
Average AGI per return (in whole dollars): $22,002;
Average income tax per return (in whole dollars): $466;
Income tax as a percentage of AGI: 2.1%.
Adjusted gross income (AGI): $30,000 under $50,000;
Number of taxable returns (in thousands): 25,168;
AGI (in millions): $982,969;
Total income tax (in millions): $45,556;
Average AGI per return (in whole dollars): $39,056;
Average income tax per return (in whole dollars): $1,810;
Income tax as a percentage of AGI: 4.6%.
Adjusted gross income (AGI): $50,000 under $100,000;
Number of taxable returns (in thousands): 30,159;
AGI (in millions): $2,139,407;
Total income tax (in millions): $158,445;
Average AGI per return (in whole dollars): $70,938;
Average income tax per return (in whole dollars): $5,254;
Income tax as a percentage of AGI: 7.4%.
Adjusted gross income (AGI): $100,000 under $200,000;
Number of taxable returns (in thousands): 13,522;
AGI (in millions): $1,801,447;
Total income tax (in millions): $212,291;
Average AGI per return (in whole dollars): $133,223;
Average income tax per return (in whole dollars): $15,700;
Income tax as a percentage of AGI: 11.8%.
Adjusted gross income (AGI): $200,000 under $500,000;
Number of taxable returns (in thousands): 3,195;
AGI (in millions): $905,347;
Total income tax (in millions): $176,322;
Average AGI per return (in whole dollars): $283,364;
Average income tax per return (in whole dollars): $55,187;
Income tax as a percentage of AGI: 19.5%.
Adjusted gross income (AGI): $500,000 or more;
Number of taxable returns (in thousands): 729;
AGI (in millions): $1,058,948;
Total income tax (in millions): $257,958;
Average AGI per return (in whole dollars): $1,452,604;
Average income tax per return (in whole dollars): $353,852;
Income tax as a percentage of AGI: 24.4%.
Totals:
Number of taxable returns (in thousands): 140,494;
AGI (in millions): $7,626,431;
Total income tax (in millions): $865,949.
(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 2009:
[Refer to PDF for image: vertical bar graph]
Under $15,000: 1.8%;
$15,000 under $30,000: 2.1%;
$30,000 under $50,000: 4.6%;
$50,000 under $100,000: 7.4%;
$100,000 under $200,000: 11.0%;
$200,000 under $250,000: 19.5%;
$250,000 or more: 24.4%.
(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 2008 Data:
Total Assets (in thousands): Zero Assets;
Income subject to tax (in millions): $13,373;
Total income tax after credits (in millions): $3,870;
Percentage of income tax after credits to taxable income: 28.9%.
Total Assets (in thousands): $1 under $500;
Income subject to tax (in millions): $7,414;
Total income tax after credits (in millions): $1,406;
Percentage of income tax after credits to taxable income: 19.0%.
Total Assets (in thousands): $500 under $1,000;
Income subject to tax (in millions): $3,778;
Total income tax after credits (in millions): $889;
Percentage of income tax after credits to taxable income: 23.5%.
Total Assets (in thousands): $1,000 under $5,000;
Income subject to tax (in millions): $12,785;
Total income tax after credits (in millions): $3,783;
Percentage of income tax after credits to taxable income: 29.6%.
Total Assets (in thousands): $5,000 under $10,000;
Income subject to tax (in millions): $7,846;
Total income tax after credits (in millions): $2,569;
Percentage of income tax after credits to taxable income: 32.7%.
Total Assets (in thousands): $10,000 under $25,000;
Income subject to tax (in millions): $11,898;
Total income tax after credits (in millions): $3,893;
Percentage of income tax after credits to taxable income: 32.7%.
Total Assets (in thousands): $25,000 under $50,000;
Income subject to tax (in millions): $10,343;
Total income tax after credits (in millions): $3,366;
Percentage of income tax after credits to taxable income: 32.5%.
Total Assets (in thousands): $50,000 under $100,000;
Income subject to tax (in millions): $12,766;
Total income tax after credits (in millions): $4,100;
Percentage of income tax after credits to taxable income: 32.1%.
Total Assets (in thousands): $100,000 under $250,000;
Income subject to tax (in millions): $23,043;
Total income tax after credits (in millions): $7,445;
Percentage of income tax after credits to taxable income: 32.3%.
Total Assets (in thousands): $250,000 under $500,000;
Income subject to tax (in millions): $30,685;
Total income tax after credits (in millions): $9,108;
Percentage of income tax after credits to taxable income: 29.9%.
Total Assets (in thousands): $500,000 under $2,500,000;
Income subject to tax (in millions): $107,715;
Total income tax after credits (in millions): $31,935;
Percentage of income tax after credits to taxable income: 29.6%.
Total Assets (in thousands): $2,500,000 or more;
Income subject to tax (in millions): $736,507;
Total income tax after credits (in millions): $156,087;
Percentage of income tax after credits to taxable income: 21.2%.
Total Assets (in thousands):
Income subject to tax (in millions): $978,153;
Total income tax after credits (in millions): $228,523;
Percentage of income tax after credits to taxable income: 23.4%.
(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:
During our audit of the Internal Revenue Service's (IRS) fiscal years
2011 and 2010 financial statements, we identified material weaknesses
[Footnote 22] in internal control over unpaid tax assessments[Footnote
23] and information security, a significant deficiency[Footnote 24] in
internal control over the processing of tax refunds, and a
noncompliance with legal provisions in IRS's management of the release
of federal tax liens.
In evaluating the materiality of identified deficiencies in internal
control to determine whether they represent a material weakness or
significant deficiency, the auditor assesses the risk and magnitude of
potential misstatements that may not be prevented or be timely
detected and corrected by the entity's internal control due to the
existence of the identified deficiency or combination of deficiencies.
Because the judgments of financial statement users encompass not only
the amounts and disclosures contained in the financial statements but
are also made in light of surrounding circumstances, materiality
judgments necessarily involve both quantitative and qualitative
considerations. Quantitative considerations refer to the dollar
magnitude of actual or potential misstatements. Qualitative
considerations include the sensitivity of the circumstances and
perceived importance surrounding the actual or potential misstatement
and the significance of the financial statement element(s) affected by
the actual or potential misstatement. After considering both
quantitative and qualitative factors, we concluded, as discussed
below, that deficiencies we identified in IRS's internal control over
unpaid tax assessments and information security constitute material
weaknesses.
Material Weaknesses:
During our audits of IRS's fiscal years 2011 and 2010 financial
statements, we identified material weaknesses in IRS's internal
control over unpaid tax assessments and information security. These
material weaknesses, which we also reported on last year, 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 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. We reported on each of these deficiencies last year
[Footnote 25] and in prior audits.
Unpaid Tax Assessments:
During fiscal year 2011, we continued to find serious deficiencies in
IRS's internal control over unpaid tax assessments. Specifically, we
continued to find (1) IRS's reported balances for taxes receivable and
other unpaid tax assessments[Footnote 26] were not traceable from its
general ledger system for tax administration-related transactions (the
Redesign Revenue Accounting Control System, or RRACS),[Footnote 27] 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 on its unpaid tax assessments, and (3) IRS
experienced errors and delays in recording taxpayer information,
payments, and other tax assessment-related activities.
Similar to our findings in prior years,[Footnote 28] IRS's balance for
federal taxes receivable, which comprised over 80 percent of IRS's
total assets as reported on its fiscal year 2011 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[Footnote 29] 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, IRS could not
trace adjusted account balances to its detailed supporting records.
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, and unable 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 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.
However, IRS cannot yet use CDDB as its subsidiary ledger for
recording transaction-based tax debt information to its RRACS general
ledger in a manner that ensures reliable internal and external
reporting on the status of unpaid tax assessments. While CDDB analyzes
and classifies master file tax debt transactions into the various
financial reporting categories, IRS found that the analysis and
classification continues to contain material inaccuracies.
Specifically, through the use of its statistical sampling and
estimation process, IRS identified errors necessitating almost $9
billion in adjustments to the 2011 fiscal year-end gross taxes
receivable balance produced by CDDB. Accordingly, IRS must continue to
use a resource-intensive statistical sampling and estimation process
to adjust the amounts for taxes receivable and other unpaid tax
assessments produced by its systems in order to derive reliable
amounts for internal and external reporting. This process took IRS
several months to complete and required a multibillion-dollar
adjustment to the fiscal year 2011 year-end taxes receivable balance
in its general ledger. Once adjusted, the taxes receivable balance in
the 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
of unpaid tax assessments in accordance with federal accounting
standards.
During our fiscal year 2011 audit, we continued to identify 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.
Such systemic deficiencies involve CDDB not correctly classifying
account modules[Footnote 30] because 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 a number of the cases
we reviewed, a taxpayer filed a tax return but did not pay the entire
amount of the self-reported tax liability, which results in the amount
owed, including related penalties and interest, being classified as
taxes receivable.[Footnote 31] IRS later assessed additional taxes
against the taxpayer through its Automated Underreporter (AUR) program
for the same tax period.[Footnote 32] However, these taxpayers did not
agree to the additional AUR tax assessment. Consequently, the
additional AUR tax assessment, along with any related penalties and
interest, should have been classified as a compliance assessment.
[Footnote 33] Instead, CDDB classified the total outstanding balance
in the account module 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. Consequently, IRS had to manually reclassify a portion of
the balance from these account modules to compliance assessments.
In another example, CDDB was unable to process and properly classify
related account modules associated with unpaid payroll taxes when IRS
had (1) designated a business as defunct,[Footnote 34] (2) assessed a
trust fund recovery penalty (TFRP)[Footnote 35] against an officer of
the business for a specific tax period,[Footnote 36] and (3) assessed
the same individual a TFRP from a different business for the same tax
period. In a number of cases we reviewed, a business filed a Form 941
tax return reporting payroll taxes for a particular tax period, but
did not pay the full amount of the self-reported tax. IRS assessed a
TFRP against an officer of the business in relation to the unpaid
payroll taxes for the particular tax period. However, because the
business became defunct, IRS's only recourse was to pursue collection
on the TFRP from the officer. In this situation, CDDB should have (1)
classified the outstanding TFRP against the officer as taxes
receivable, (2) 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 (3) classified any remaining balance
from the business's unpaid payroll tax account module that is above
the TFRP amount as a write-off. However, in these cases, IRS had also
assessed the same corporate officer a TFRP related to another business
for the same tax period. Because there were two separate TFRP tax
assessments recorded on the officer's master file account module for
the same tax period, CDDB was unable to process and correctly classify
the related account modules. As a result of the programming
deficiency, CDDB defaulted to classifying the business's outstanding
payroll tax account as taxes receivable and classifying the
individual's 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
individual, 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 adjustments to reduce the
balance on the business account in order to report the correct balance
of taxes receivable.
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 2011 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 and place additional
burden on taxpayers who either have already paid taxes owed or who owe
significantly lower amounts than IRS's records indicate.
In a number of cases we reviewed, IRS erroneously recorded information
in its master files that indicated the taxpayer had agreed with an
unpaid tax assessment. Such errors included IRS (1) recording that the
taxpayer agreed with an examination tax assessment when, in fact, the
taxpayer had not agreed, (2) recording that a taxpayer had entered
into an installment agreement to pay off the outstanding balance when,
in fact, the taxpayer had not entered into such an agreement with IRS,
and (3) recording payments in the wrong account module of
taxpayers.[Footnote 37] Erroneous entry of information indicating
taxpayer agreement resulted in CDDB misclassifying these account
modules as taxes receivable. Because there was no actual agreement by
the taxpayer to the outstanding tax assessment in these cases, IRS had
to reclassify these account modules as compliance assessments. In
another example, we found that IRS made a data entry error when
recording information from a taxpayer's partnership tax return that
resulted in a tax assessment against the taxpayer for approximately
$10.5 million when the taxpayer had reported a tax liability of $1
million. IRS's error created a balance due within the account and led
to IRS erroneously issuing a notice to the taxpayer requesting payment
for over $10 million. When the taxpayer received the notice, the
taxpayer researched the issue, determined that it was the result of an
IRS error, and contacted IRS to report IRS's error. Although IRS
subsequently corrected the information in the taxpayer's account
module, the identification and resolution of the error placed a
significant burden on the taxpayer.
Not properly recording payments to all related taxpayer accounts
associated with unpaid payroll taxes continued to adversely affect the
accuracy of IRS's records. As we previously reported,[Footnote 38]
IRS's systems were unable to automatically link the account
information between a business and the responsible officers, as well
as account information between related officers assessed a TFRP for
the same business.[Footnote 39] Consequently, transactions recorded in
one account that should have been reflected in other related accounts
were not automatically recorded. If the business or one of its
officers paid some or all of the outstanding payroll tax or related
TFRP, IRS's systems were unable to automatically reflect the payment
as a reduction to the outstanding liability in the related accounts.
IRS has taken a number of corrective actions in response to this
deficiency. For example, in April 2010, IRS began conducting its own
periodic testing of TFRP payment processing to identify and address
the root cause of errors and delays. In addition, in 2008, IRS
completed the implementation of the Automated Trust Fund Recovery
(ATFR) system, which interfaces with the business and individual
master files[Footnote 40] to facilitate the linking of payment
information to related parties. One of the key objectives of ATFR is
to automatically record a reduction to the outstanding liability of
related taxpayer accounts when either the business or any one of the
responsible officers makes a payment. However, as of February 2011,
IRS reported that ATFR can automatically credit the outstanding tax
liability of related taxpayer accounts for only about:
57 percent of TFRP payments IRS processes through ATFR.[Footnote 41]
The remaining 43 percent of TFRP payments require some form of manual
intervention in order to credit the outstanding tax liability on
related taxpayer accounts because these payment transactions are too
complex for ATFR to automatically credit related accounts without
human verification.
While IRS's actions have improved the accuracy and timeliness of
recording trust fund recovery penalty payments to related parties, our
work in fiscal year 2011 continued to find deficiencies in this
process, leading to errors in taxpayers' accounts. In our testing of
93 statistically selected payments received in the first 6 months of
fiscal year 2011 that were recorded on TFRP accounts, we found four
instances in which IRS did not properly record payments received on
all related taxpayer accounts due to ineffective controls. Based on
our testing, we are 95 percent confident that up to 9.6 percent of
TFRP payment transactions in the first 6 months of fiscal year 2011
that were posted on TFRP accounts could contain inaccuracies.[Footnote
42] On the basis of these results, we concluded that IRS's controls
for ensuring the accuracy and timeliness of recording TFRP payments to
all related parties remain ineffective.
Furthermore, the processing delays and errors we continued to find
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 on any taxpayers attempting to sell
property or apply for commercial credit.[Footnote 43]
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 in its financial statements
and required supplementary information. IRS identified misclassified
tax assessment records when reviewing a sample of unpaid tax
assessment cases during fiscal year 2011. To address these errors, it
recorded adjustments to affected accounts to reflect the correct
account 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 a multibillion dollar
adjustment to the year-end balance of gross taxes receivable generated
by CDDB in order to produce a reliable taxes receivable balance for
external reporting on its balance sheet for fiscal year 2011. Absent
the use of this statistical estimation process, the various fiscal
year 2011 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 from taxpayer accounts 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. We
issued a report in 2010 discussing the existing deficiencies in
internal control in this area and made recommendations to address
those issues.[Footnote 44]
Information Security:
IRS relies extensively on computerized systems to process and report
its financial transactions and to support its mission-related
operations. Ensuring that financial transactions and related taxpayer
and other sensitive information are adequately safeguarded to prevent
inadvertent or deliberate alteration, improper disclosure,
modification, or destruction requires effective information system
controls. Ineffective information system controls over the automated
aspects of financial transaction processing can jeopardize the
accuracy, completeness, and timeliness of financial information used
by management and increase the risk that sensitive agency and taxpayer
information may be compromised. These deficiencies also increase the
risk that errors or irregularities may affect IRS's financial
information and not be detected and corrected in time to prevent
material misstatement of IRS's financial statements or other internal
and external reports.[Footnote 45]
During fiscal year 2011, IRS management devoted attention and
resources to addressing the agency's information security controls.
The agency developed enterprise-wide security initiatives that are
designed to improve its controls and provide management with the
ability to measure the state of IRS's controls. For example, IRS
formed cross-functional working groups with knowledge of the IRS
internal systems to address identified areas considered at risk.
Nevertheless, the agency made limited progress in correcting
information security weaknesses we identified in previous audits. IRS
addressed approximately 15 percent of the 105 open recommendations
that we had previously reported. For example, IRS took action to
address recommendations related to (1) encrypted data transfers for
its Integrated Financial System (IFS),[Footnote 46] thereby decreasing
the risk that malicious users could capture sensitive information; (2)
upgraded domain name system servers, thereby decreasing the risk that
known vulnerabilities may not be mitigated; and (3) improved the
infrastructure supporting RRACS, thereby decreasing the risk of
exposure to unauthorized access or manipulation through the
exploitation of known vulnerabilities.
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, significant risks
remain in the procurement system. Specifically, access control
weaknesses persist, and database software maintenance has not yet been
performed. The agency's strategy to address these weaknesses is to
replace the existing system. However, implementation of the
replacement system has been repeatedly delayed and is not expected
until the third quarter of fiscal year 2012. In addition, IRS
continued to use unencrypted protocols for network devices and
transfer of sensitive data. Also, certain database security controls
were not yet in place for systems such as IFS, and the Electronic
Federal Payment Posting System (EFPPS).[Footnote 47] Further, several
physical security-related issues remain unresolved, including issues
concerning management validation of access to restricted areas,
proximity cards allowing inappropriate access, and unlocked cabinets
containing network devices.
IRS has acknowledged that maintaining effective information security
controls, at the individual system or component level in its large
internal network, presents significant challenges. During fiscal year
2011, the agency cited actions taken to implement additional controls
designed to partially compensate for and mitigate the risks associated
with previously identified information security weaknesses, including
issues related to its internal network, database, and mainframe
security; procurement and administrative accounting applications; and
internal control monitoring.
However, our tests of these additional controls during our fiscal year
2011 audit revealed that they were not always operating as intended or
were not effective in compensating for the associated weaknesses. For
example:
* Enterprise Security Audit Trails (ESAT). IRS initiated a program,
ESAT, to centrally collect and analyze user activity recorded in audit
logs from application programs. However, this program was not yet
implemented for many of the agency's key financial applications,
including the procurement system, during fiscal year 2011. In
addition, although ESAT was partially implemented for IFS, financial
staff did not receive timely information on system activity for at
least 4 months during fiscal year 2011.
* Automated tools used to test compliance with agency policy. The
agency uses automated tools to test compliance with IRS's security
policies for its three major computing environments--Windows, UNIX,
and mainframes. However, the UNIX tool does not test whether
appropriate security patches have been applied, and the mainframe tool
only tests compliance with a limited subset of the agency's policies.
Thus, results from IRS's use of these tools do not provide management
the information necessary to allow it to arrive at appropriate
conclusions about the security status of these systems.
* Host-based intrusion detection systems. IRS deployed host-based
intrusion detection systems (HIDS) for monitoring servers supporting
financial applications. However, during our fiscal year 2011 audit, we
found that while the HIDS are configured to detect patterns of
activity consistent with network security incidents, the current
configurations do not provide controls specific to the applications.
* Enterprise continuous monitoring (eCM). IRS established the eCM
program to augment the agency's 3-year cycle of system testing
required as part of the security assessment and authorization (SA&A)
process with an annual test of a subset of the SA&A controls for each
system.[Footnote 48] Although the systems we reviewed had undergone
either SA&A or eCM testing, we concluded that the tests IRS performed
for eCM were too limited to provide appropriate compensating controls
for specific areas. For example, the most recent eCM review of IFS did
not include tests of access controls, and other tests relied heavily
on reviews of plans and policies rather than actual system tests. In
one case, testers concluded that encryption was in place by reviewing
a diagram and interviewing staff rather than performing system testing.
* Business process controls. Although the agency employs controls in
its business processes to help ensure the accuracy of financial
information, these controls did not always compensate for certain
information security weaknesses as intended. For example,
reconciliations, if they are to be effective in compensating for
deficiencies in information security controls, must rely on data from
independent automated systems. However, we found that some of the
reconciliations IRS referred us to as compensating for such control
deficiencies, such as the comparison of tax payments and tax refunds
against IRS's accounting systems, relied on data derived from, and the
information security controls associated with, a single computer
system. Consequently, weaknesses in the information security controls
for this system reduce the reliability of these reconciliations to
serve as an effective compensating control.
* System used to authorize access. IRS identified its automated system
for authorization of system access as a mitigating control for known
information security weaknesses. However, control weaknesses in this
automated system limit its effectiveness as an additional control. In
addition, the process for system authorization was not always working
as intended. For example, the agency's monthly review of access for
the procurement system revealed that users had been granted access
without using the authorization system.
Without effective mitigating or compensating controls for the
associated weaknesses, IRS lacks reasonable assurance as to the
accuracy of financial information or the adequate protection of
sensitive taxpayer information.
During our fiscal year 2011 audit, we identified additional
deficiencies in internal control over information security that, along
with previously identified deficiencies that remain unresolved,
jeopardize the confidentiality, integrity, and availability of
information processed by IRS's key systems. Our testing performed
during this audit identified additional weaknesses of approximately
the same significance as those we identified in prior audits. For
example, we found:
* a key application used for processing tax payment information
employs a system design that exposes the configuration used to control
logon to alterations by its users, allowing circumvention of the
application's controls; additionally, insecurely configured software
used to support this application exposed it to unauthorized users;
* servers supporting important financial management applications were
not patched in a timely manner;
* a major system used to facilitate user access to IFS relied upon
operating system software that was no longer supported by its vendor
and was not receiving security updates, leaving these servers and
systems exposed to known vulnerabilities; and:
* a system used to process tax accounts had database and server
weaknesses similar to weaknesses identified in previous audits for
other systems that exposed the system and data to unauthorized access.
Although management has demonstrated a commitment to addressing
unresolved weaknesses and has created layers of compensating and
mitigating controls, an underlying reason for the identified
deficiencies is that the agency has not yet fully implemented key
components of its comprehensive information security program. IRS has
provided a comprehensive framework for its information security
program and has initiatives underway to further enhance its security
posture. For example, during fiscal year 2011, IRS continued to
implement a Security Compliance and Posture Monitoring and Reporting
program to measure, monitor, and report compliance with security
controls. However, key components of its information security program,
such as system testing and remediation, have not yet been fully or
effectively implemented. For example, we identified significant, but
readily detectable, weaknesses in the design and implementation of
access controls for a key financial system of which IRS was unaware,
despite this system having undergone IRS's SA&A testing process. In
addition, IRS continues to face challenges in carrying out its
policies requiring validation that its corrective actions have
effectively addressed previously reported recommendations for
correcting identified weaknesses. We continued to identify weaknesses
that IRS informed us it had addressed. For example, IRS informed us
that it had addressed 29 of the 105 previously reported information
systems security-related recommendations we made. However, we
determined that 13 (about 45 percent) of the 29 recommendations had
not yet been fully resolved. This was due in part to the fact that
while 6 of the 29 recommendations related to multiple systems, IRS had
not yet implemented corrective actions for all of the affected
systems. Until IRS takes additional steps to implement more-
comprehensive testing and effective validation processes and to
implement effective corrective actions to address the identified
vulnerabilities, 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.
Considered collectively, the unresolved deficiencies from prior
audits, combined with less-than-fully effective compensating and
mitigating controls and the additional control deficiencies identified
in fiscal year 2011, impair IRS's ability to ensure that its financial
and taxpayer information is secure from internal threats and increase
the potential that (1) errors or irregularities in IRS's financial
transactions may not be prevented or detected and corrected in time to
prevent material misstatement to IRS's financial statements and other
internal and external financial reports and (2) the confidentiality of
taxpayer information may not be adequately safeguarded. We plan to
issue a separate report to IRS on the information security control
deficiencies we identified during fiscal year 2011 and the status of
actions to address previous recommendations. We will also issue a
limited distribution report to IRS that addresses certain details that
have been omitted from this report due to the sensitivity of the
information.
Significant Deficiency:
In addition to the material weaknesses, we identified a significant
deficiency in IRS's internal control over tax refund disbursements
during our fiscal year 2011 audit.
Tax Refund Disbursements:
Each year, IRS disburses hundreds of billions of dollars of tax
refunds. In fiscal years 2011 and 2010, IRS disbursed refunds totaling
$416 billion and $467 billion, respectively. In recent years, we have
reported[Footnote 49] a number of deficiencies in IRS's internal
control over the processing of tax refunds. In our fiscal year 2010
audit, we concluded that several of these deficiencies collectively
represented a significant deficiency in the design or operation of
internal control. In fiscal year 2011, we continued to identify
similar deficiencies in internal control over manual tax refunds
[Footnote 50] as well as additional related issues not previously
identified. We also continued to find deficiencies in IRS's internal
control over processing First-time Homebuyer Credit (FTHBC) claims.
[Footnote 51] The persistence of the internal control deficiencies,
coupled with the material magnitude of tax refunds disbursed, have led
us to conclude that, collectively, these deficiencies in internal
control continue to constitute a significant deficiency in IRS's
internal control over tax refund disbursements. This significant
deficiency increases the risk that IRS may pay duplicate or otherwise
erroneous tax refunds to which individuals or businesses are not
entitled and which IRS must devote additional resources attempting to
recover, with no assurance of success.
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 2011 are as follows:
* Employees at the IRS locations we visited were not effectively
monitoring taxpayer accounts during manual refund processing to
identify duplicate tax refunds in process and prevent their
disbursement. Effective monitoring is critical because IRS's automated
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 at the IRS locations we visited were not effectively
documenting actions to monitor tax refund processing. Appropriate
documentation is necessary to provide verifiable evidence that
appropriate tax refund monitoring is conducted.
* Training for employees responsible for processing manual tax refunds
was not effective at the IRS locations we visited. We found that many
of the staff we spoke to who were responsible for initiating manual
refunds or performing related centralized monitoring had not received
appropriate related training. In addition, Unit Security
Representatives, who perform important security duties for IRS's
Integrated Data Retrieval System,[Footnote 52] did not complete either
the required initial training prior to assuming their responsibilities
nor the required annual refresher training at the IRS locations we
visited. Effective training is critical to ensure that employees
responsible for these important functions are proficient in their
responsibilities.
Over the years, we have made numerous recommendations for corrective
actions to address these deficiencies.[Footnote 53] IRS has devoted
significant resources to its efforts to resolve them, and has
successfully implemented a number of our recommendations.
Nevertheless, many of the underlying deficiencies have continued to
persist. In addition to these deficiencies, we identified new
deficiencies in internal control over manual tax refunds during our
fiscal year 2011 audit. Specifically, we found instances in which
manual refund initiators initiated manual refunds without supervisory:
approval. In addition, the Internal Revenue Manual[Footnote 54]
requires manual refund initiators to perform research on taxpayers'
accounts to verify that there are no outstanding balances or pending
automated refunds in process on the account before issuing a manual
refund. However, we found instances where employees were not
effectively performing this research; during our testing, we observed
cases in which erroneous refunds were recorded in taxpayers' accounts
but were not detected and corrected in time to prevent the
disbursement of an erroneous refund because the manual refunds
initiators did not carry out the required research.
In fiscal year 2011, IRS continued its implementation of a service-
wide corrective action plan (CAP) to address the deficiencies in
internal control over refunds that we and the Treasury Inspector
General for Tax Administration (TIGTA) reported,[Footnote 55] and to
strengthen existing internal controls designed to eliminate or reduce
duplicate tax refunds. The specific actions detailed in the CAP, if
effectively implemented, have the potential to significantly improve
IRS's internal control over refunds. In this regard, effectively
communicating CAP corrective actions to the staff responsible for
executing them is critical to effective implementation. However, we
reviewed the CAP IRS provided to us in January 2011 and found that it
did not always clearly identify the specific IRS units that were
expected to perform the tasks specified in the plan. Specifically, the
CAP did not specify which IRS units were responsible for implementing
the corrective action related to the manual refunds process
improvements contained in the plan. Such lack of clarity can
contribute to confusion as to the roles and responsibilities for
implementing the plan, and lead to inaction on the part of those IRS
staff members whom the CAP authors expected to complete the tasks
described in the plan. In addition, as part of our testing of the
internal controls over manual refunds in June 2011, we reviewed the
implementation of many of the corrective actions contained in the CAP
that, according to the version of the CAP we reviewed, had either been
completed or were scheduled to have been completed by that time.
[Footnote 56] In doing so, we interviewed manual refund initiators at
the four service center campuses we visited who had key roles in
implementing some of the CAP's corrective actions we reviewed. We
found that the initiators were not aware of these corrective actions;
consequently, they were not yet in place at these IRS locations. For
example, the individuals we interviewed were not aware of the:
* significance of an account indicator designed to prevent duplicate
manual refunds by alerting manual refund initiators that a manual
refund had been processed previously; and:
* Accept/Reject Criteria Job Aid guidance or the Treasury Check
Information System tool, or both, which were designed to reduce
duplicate refunds by providing enhanced research capabilities to those
staff that initiate and process manual refunds.
In addition, the CAP specifies that all manual refunds initiated by
the Submission Processing (SP) unit are to be centrally
monitored,[Footnote 57] in addition to being monitored by individual
manual refund initiators. As we discussed in our report on our audit
of IRS's fiscal year 2010 financial statements, this approach, coupled
with other planned corrective actions, has the potential to improve
internal control over manual refunds if effectively implemented.
[Footnote 58] However, at one service center we visited, we found that
the SP unit did not maintain a list of the manual refund initiators
that were initiating manual refunds in the SP unit and would therefore
be subject to the centralized monitoring. This increases the risk that
the centralized monitoring process may not consider all of the manual
refunds initiated by the SP unit. As a result of these issues we found
relating to the CAP, we concluded that the corrective actions IRS had
identified as completed or scheduled to be completed by June 2011 in
the version of the CAP we were provided were not always effectively
implemented by that date.[Footnote 59]
In addition to the persistent internal control issues affecting manual
tax refunds, we continued to find deficiencies in IRS's internal
controls over processing FTHBC claims, which resulted in instances of
erroneous tax refund disbursements. In 2010, the FTHBC expired for the
majority of taxpayers, which resulted in a significant reduction in
the volume and amount of FTHBCs filed in fiscal year 2011.[Footnote
60] During fiscal year 2011, taxpayers filed about 635,000 FTHBC
claims totaling about $4.3 billion, while in fiscal year 2010,
taxpayers had filed over 2.2 million FTHBC claims totaling about $16
billion. While the volume of FTHBCs has significantly decreased, we
continued to find deficiencies in IRS's internal control over FTHBC
claims processing. From the over 626,000 FTHBCs that IRS allowed
between October 1, 2010, and June 30, 2011, we statistically selected
a random sample of 45. For each case we selected, we 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. On the basis of our testing, we found 13 cases
in which the IRS allowed erroneous FTHBCs. Specifically, we found:
* five cases in which a taxpayer was allowed to claim long-time
resident status[Footnote 61] although the taxpayer did not provide the
required documentation[Footnote 62] to support the claim,
* six cases in which IRS allowed FTHBCs for purchases made after April
30, 2010, although the taxpayer did not submit a copy of the required
binding contract,
* one case in which IRS allowed a taxpayer to claim long-time resident
status for a purchase made after April 30, 2010, although the taxpayer
did not submit a copy of the required binding contract, and:
* one case in which IRS allowed a FTHBC to a taxpayer claiming long-
time resident status even though the taxpayer purchased the home prior
to the date IRS should have allowed the credit on this basis.
In each of the cases described above, an erroneous tax refund was
disbursed to the taxpayer.
On the basis of our work, we estimated that as much as 39.3 percent
[Footnote 63] of FTHBCs IRS allowed between October 1, 2010, and June
30, 2011, may have been in error. 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. These errors
in FTHBC processing occurred primarily because procedures developed to
process the FTHBCs were not consistently followed.
Although the volume of FTHBC claims filed by taxpayers during fiscal
year 2011 was significantly smaller than in fiscal year 2010, the
results of our review indicate that in fiscal year 2011, erroneous
FTHBCs were still being allowed by IRS, potentially resulting in
erroneous refunds being disbursed.
In a September 2009 report,[Footnote 64] we suggested to Congress that
it consider providing IRS authority to use prior years' tax return
information to ensure taxpayers do not improperly claim the credit in
multiple years because it did not have the authority to implement a
mechanism to check for such improper claims. The next month, we
testified about significant implementation and compliance challenges
IRS faces related to the FTHBC.[Footnote 65] Congress subsequently
passed the Worker, Homeownership, and Business Assistance Act of
2009,[Footnote 66] which granted IRS authority to check for obvious
noncompliance with certain FTHBC provisions, including whether a
taxpayer claimed the credit in a prior year. We calculated that use of
this authority resulted in IRS saving approximately $93 million in
fiscal year 2010.[Footnote 67]
Nonetheless, the deficiencies in internal control over tax refund
disbursements discussed above resulted in IRS disbursing erroneous tax
refunds and increased the risk of erroneous tax refund payments beyond
those we identified.
Compliance Issues:
Our tests of IRS's compliance with selected provisions of legal
provisions 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 obtain a
statutory lien against the property of any taxpayer who neglects or
refuses to pay all assessed federal taxes.[Footnote 68] 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 69] In response, IRS has taken a
number of actions over the years to improve its lien release
processing, including the creation of a comprehensive action plan to
address the various causes for lien release delays we identified, as
well as those identified through its own reviews. Over the past
several years, IRS has steadily completed actions on this plan and
identified additional actions to improve lien release timeliness. For
example, it completed various system enhancements to improve the
timeliness of recognizing when a taxpayer has fully satisfied the
outstanding tax liability. IRS also continues to perform targeted
reviews of areas where processing delays were identified in the past.
While IRS's actions have improved the timeliness of its lien releases,
our work in fiscal year 2011 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. During
our annual audits prior to fiscal year 2006, 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. Beginning in fiscal year 2006, IRS began performing its
own test of the effectiveness of its lien release process as part of
its implementation of requirements in the revised Office of Management
and Budget (OMB) Circular No. A-123[Footnote 70] and we began
reviewing these 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 2011, we noted that IRS's testing identified
two instances in which it did not release the applicable federal tax
lien within the statutorily mandated 30 days.[Footnote 71] On the
basis of this sample of unpaid tax assessment cases resolved in the
first 6 months of fiscal year 2011 for which it had filed a tax lien,
IRS estimated that it did not release liens within 30 days for 3.4
percent of the cases. IRS is 95 percent confident that the percentage
of cases in which it did not release the lien within 30 days does not
exceed 10.3 percent. On the basis of these results, we concluded that
the potential noncompliance in the tested population exceeded the
amount IRS designated as acceptable for its test.[Footnote 72]
As identified by IRS, the delay in lien releases was caused by
processing delays and errors. In one case, IRS did not timely update
the taxpayer's account to reflect that the taxpayer had been
discharged of the taxes in bankruptcy court. In the other case, IRS
needed more than one attempt to correctly post the taxpayer's
satisfying payment onto the taxpayer's master file account module. In
fiscal year 2000, we issued a report discussing the 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 73] While the actions IRS has
taken to improve lien release timeliness has improved the
noncompliance rate over prior years, IRS has not yet completed all
actions to fully address this recommendation. Until IRS addresses the
remaining deficiencies that result in lien release delays, 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 2011, 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) 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 (USSGL) at the transaction
level. In its fiscal year 2011 Federal Managers' Financial Integrity
Act of 1982 assurance statement to the Department of the Treasury, IRS
reported the same conclusion.
In fiscal year 2011, 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, 2011.
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 74] 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 supplementary information
related to uncollected taxes--compliance assessments, and write-offs--
as required by the standard.
As discussed previously, in fiscal year 2010, IRS implemented RRACS,
which brought IRS's system into conformance with the requirements of
the USSGL. During our 2011 audit, we determined that the posting model
utilized by RRACS substantially conformed with the USSGL requirements
and we verified that IRS's tax-related transactions were recorded in
accordance with the USSGL at the transaction level. During 2011, 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, and those adjustments were posted to RRACS
in substantial conformance with the USSGL. However, 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 a deficiency in internal control 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 that 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 75]
[End of section]
Appendix II: Management's Report on Internal Control over Financial
Reporting:
Department Of The Treasury:
Internal Revenue Service:
Commissioner:
Washington, D.C. 20224:
November 4, 2011:
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, 2011, 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, 2011, IRS internal control over financial
reporting was effective.
Signed by:
Douglas H. Shulman:
Commissioner:
November 4, 2011
Signed by:
Pamela J. LaRue:
Chief Financial Officer:
November 4, 2011:
[End of section]
Appendix III: Comments from the Internal Revenue Service:
Department Of The Treasury:
Internal Revenue Service:
Commissioner:
Washington, D.C. 20224:
November 7, 2011:
Mr. Steven J. Sebastian:
Director:
Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Sebastian:
Thank you for the opportunity to comment on the draft report titled,
Financial Audit: IRS's Fiscal Years 2011 and 2010 Financial
Statements. We are pleased that the Internal Revenue Service (IRS)
received an unqualified opinion on the combined financial statements
for the twelfth consecutive year. The unqualified opinion demonstrates
that the IRS accurately accounts for approximately $2.4 trillion in
tax revenue receipts, $416 billion in tax refunds, and $12 billion in
IRS appropriated funds.
We are pleased the Government Accountability Office (GAO) recognized
our progress in strengthening information security controls, through
the establishment of enterprise-wide security initiatives improving
management's ability to measure the state of controls. The GAO also
noted our efforts in developing cross-functional working groups with
knowledge of internal systems and the ability to assess risk areas. We
look forward to working with the GAO in our efforts to continue to
improve these controls.
We are also pleased that the GAO recognized the improvements made in
performance measures and the timely release of tax liens. In addition,
the IRS continues to make improvements in the areas of cash
management, cost allocations, upward and downward adjustments to prior
year obligations, and undelivered orders. The IRS is dedicated to
continuing to improve financial management and internal controls as
evidenced by our A-123 activities that incorporated testing
transaction processes material to the Department of the Treasury's
consolidated financial statements, including the testing of 10
administrative processes related to $12.6 billion in administrative
transactions and three custodial tax processes related to $2.4
trillion in tax revenues.
I want to recognize the 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 H. 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 deficiency in internal control 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. Materiality
represents the magnitude of an omission or misstatement of an item in
a financial report that, when considered in light of surrounding
circumstances, makes it probable that the judgment of a reasonable
person relying on the information would have been changed or
influenced by the inclusion or correction of the item.
[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 the attention of 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); see also the Government Management Reform Act of 1994, Pub.
L. No. 103-356, 108 Stat. 3410 (Oct. 13, 1994), codified, in relevant
part, as amended, at 31 U.S.C. § 3515(c). Under the authority of 31
U.S.C. § 3515, the Office of Management and Budget (OMB) requires IRS
to issue annual audited financial statements that are separate from
those of the Department of the Treasury. Although the CFO Act
designates the agency's Inspector General, or, where applicable, an
independent external auditor, as the responsible auditor of an
agency's financial statements, the act also gives GAO the authority to
perform such audits at its discretion. Based on that authority, we
audit IRS's financial statements because of the significance of IRS's
tax collections to the consolidated financial statements of the U.S.
Government, which GAO is required to audit. See 31 U.S.C. § 331(e)(2).
[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 represent 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.
[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 deficiency in internal control 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. Materiality
represents the magnitude of an omission or misstatement of an item in
a financial report that, when considered in light of surrounding
circumstances, makes it probable that the judgment of a reasonable
person relying on the information would have been changed or
influenced by the inclusion or correction of the item.
[8] 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 the attention of those charged
with governance.
[9] 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).
[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] To claim the FTHBC, a taxpayer must be either a first-time
homebuyer or a "long-time resident." For purposes of the FTHBC, an
eligible taxpayer is (1) a first-time homebuyer who did not own a
principal residence during the 3 years ending on the purchase date of
his/her home or (2) a homebuyer who meets the requirements for long-
time resident status. A long-time resident is a taxpayer who has owned
and used the same residence as a principal residence for any 5-
consecutive-year period during the 8-year period ending on the date of
the purchase of a subsequent principal residence. 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 2 years after the credit was
claimed. Section 1006 of 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. 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] The allowance for uncollectible amounts is IRS's estimate of
taxes receivable that it may not be able to collect. 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 on the financial statements. Rather they are reported as
write-offs and compliance assessments, respectively, in required
supplementary information to IRS's financial statements.
[13] 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.
[14] We have reported these deficiencies and recommendations to
address them in various management and 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-11-536]
(Washington, D.C.: June 22, 2011).
[15] [hyperlink, http://www.gao.gov/products/GAO-11-536] and GAO,
Information Security: IRS Needs to Enhance Internal Control over
Financial Reporting and Taxpayer Data, [hyperlink,
http://www.gao.gov/products/GAO-11-308] (Washington, D.C.: Mar. 15,
2011).
[16] Tax law requires IRS to release a federal tax lien within 30 days
after the date the tax liability is fully satisfied or has become
legally unenforceable, or the Secretary of the Treasury has accepted a
bond for the assessed tax. See 26 U.S.C. § 6325(a).
[17] Pub. L. No. 104-208, div. A, § 101(f), title VIII, 110 Stat.
3009, 3009-389 (Sept. 30, 1996).
[18] FASAB Statement of Federal Financial Accounting Concepts 1,
Objectives of Federal Financial Reporting, as codified in FASAB
Statements of Federal Financial Concepts and Standards, Pronouncements
as Amended (Washington, D.C.: June 30, 2010).
[19] To date, IRS's ROI calculations have limitations that reflect the
challenges of estimating ROIs. For example, they do not include
benefits of improved voluntary compliance. In addition, the
"investment" or costs should ideally recognize not only IRS's costs
but also any costs borne by others. IRS's ROI estimates provide useful
information but, given the limits of current data, are not complete
estimates of benefits and costs.
[20] We have reported these deficiencies and recommendations to
address them in various management and status of recommendations
reports to IRS. See [hyperlink,
http://www.gao.gov/products/GAO-11-536].
[21] 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 amounts 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.
[22] 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 deficiency in internal control 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. Materiality
represents the magnitude of an omission or misstatement of an item in
a financial report that, when considered in light of surrounding
circumstances, makes it probable that the judgment of a reasonable
person relying on the information would have been changed or
influenced by the inclusion or correction of the item.
[23] 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).
[24] 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.
[25] GAO, Financial Audit: IRS's Fiscal Years 2010 and 2009 Financial
Statements, [hyperlink, http://www.gao.gov/products/GAO-11-142]
(Washington, D.C.: Nov. 10, 2010).
[26] 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.
[27] 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.
[28] [hyperlink, http://www.gao.gov/products/GAO-11-142].
[29] 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.
[30] A taxpayer may have multiple account modules within IRS's master
files under a unique taxpayer identification number, that is, 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.).
[31] 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.
[32] AUR is designed to identify underreported income by matching
taxpayer-reported information against information submitted to IRS by
third parties, such as interest or dividend information submitted by
financial institutions.
[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] 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.
[35] 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).
[36] The tax period for reporting payroll taxes is a 3-month period
referred to as a "quarter." For example, the quarter ended March 31
includes the months of January, February, and March.
[37] According to federal accounting standards, taxpayer agreement to
an outstanding tax liability establishes the outstanding balance as a
tax receivable for financial reporting purposes. When there is no
other evidence of taxpayer agreement, such as the filing of a tax
return, IRS programmed CDDB to interpret a series of payments on an
account module to indicate agreement by the taxpayer. When a taxpayer
has unpaid tax assessments for multiple tax periods, criteria in the
Internal Revenue Manual establishes the order in which IRS should
apply these payments.
[38] 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).
[39] See footnote 14 for explanation of the relationship between a
business and responsible officers assessed a TFRP for that business.
[40] IRS records the payroll tax assessments against businesses on its
business master file, which contains tax records of corporations and
other businesses. IRS records the TFRP assessments against officers on
the individual master file, which contains tax records of individual
taxpayers.
[41] According to IRS, about 18 percent of total TFRP payment
transactions are not processed through ATFR at all but are instead
manually processed. Such payments relate to TFRP assessments that IRS
recorded prior to August 2001 using procedures that prevent ATFR from
recognizing related accounts in IRS's master files.
[42] When evaluating statistical results, GAO compares the projected
upper error limit to the acceptable error rate set for the test. For
this test, we set the acceptable error rate at 5 percent. While the
projected most likely error is 4.3 percent, we are 95 percent
confident that the upper error limit does not exceed 9.6 percent.
Because the error rate in the tested population could be as high as
9.6 percent, we concluded that the errors in the tested population
exceed the amount we designated as acceptable.
[43] This issue is discussed further in the Compliance Issues section
of this report.
[44] [hyperlink, http://www.gao.gov/products/GAO-10-565R].
[45] As discussed above, measurements of materiality encompass both
quantitative and qualitative considerations. Quantitative
considerations refer to the dollar magnitude of actual or potential
misstatements, while qualitative considerations encompass surrounding
circumstances which, in the judgment of the auditors, may
significantly elevate financial statements users' perceptions of the
importance of actual or potential misstatements and deficiencies in
internal control. The deficiencies in internal control over
information security discussed in this report increase the risk that
errors or omissions may occur and not be timely detected and
corrected, which even if not quantitatively material, may nevertheless
be considered qualitatively material due to the sensitive nature of
the underlying information and its importance to financial statement
users.
[46] IFS is IRS's administrative accounting system, which the agency
uses to account for 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.
[47] EFPPS processes electronic tax payment information transmitted
from Treasury Financial Agents contracted through Treasury's Financial
Management Service and then processes those payments for posting to
the taxpayers' accounts.
[48] Security authorization is the official management decision given
by a senior organizational official to authorize operation of an
information system and to explicitly accept the risk to organizational
operations and assets, individuals, other organizations, and the
nation based on the implementation of an agreed-upon set of security
controls. Authorization decisions are based on the results of security
assessments. At IRS, the SA&A process occurs once every 3 years unless
there is a significant change to the system.
[49] GAO, Management Report: Improvements Needed to Enhance the
Internal Revenue Service's Internal Controls and Operating
Effectiveness, [hyperlink, http://www.gao.gov/products/GAO-11-494R]
(Washington, D.C.: June 21, 2011); [hyperlink,
http://www.gao.gov/products/GAO-10-565R]; Management Report:
Improvements Needed in IRS's Internal Controls, [hyperlink,
http://www.gao.gov/products/GAO-09-513R] (Washington, D.C.: May 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.: Apr. 27,
2005).
[50] The preponderance of tax refunds is 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.
[51] 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 2 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 expanded 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.
[52] The Integrated Data Retrieval System is one of the key systems
IRS uses to process taxpayer data; the training Unit Security
Representatives receive covers how they should carry out their duties
in order to properly fulfill their security obligations.
[53] GAO, Internal Revenue Service: Status of GAO Financial Audit and
Related Financial Management Report Recommendations, [hyperlink,
http://www.gao.gov/products/GAO-11-536] (Washington, D.C.: June 22,
2011).
[54] The Internal Revenue Manual is the official source for IRS
policies, directives, guidelines, procedures, and delegations of
authority which direct the agency's operation.
[55] TIGTA is a component of the Department of the Treasury
responsible for audits and investigations of the IRS. In fiscal year
2011, TIGTA issued a number of audit reports citing deficiencies in
various aspects of IRS's refund processing, including refundable
credits such as FTHBC, refunds paid to prisoners, and refunds paid to
individuals not authorized to work in the United States. See TIGTA,
Administration of the First-time Homebuyer Credit Indicates a Need for
Improved Controls Over Refundable Credits, Reference Number 2011-41-
035 (Mar. 31, 2011); Control Weaknesses Over Amended Returns Allowed
Some Inappropriate Claims for First Time Home Buyer Credit to be
Allowed, Reference Number 2011-41-057 (June 24, 2011); Significant
Problems Still Exist With Internal Revenue Service Efforts to Identify
Prisoner Tax Refund Fraud, Reference Number 2011-40-009 (Dec. 29,
2010); and Individuals Who Are Not Authorized to Work In the United
States Were Paid $4.2 Billion in Refundable Credits, Reference Number
2011-41-061 (July 7, 2011).
[56] Some CAP corrective actions involved tasks which, by their
nature, did yield independently verifiable evidence.
[57] When a unit performs central monitoring, an employee is
responsible for monitoring all of the manual refunds initiated in that
unit.
[58] [hyperlink, http://www.gao.gov/products/GAO-11-142].
[59] Subsequent to our testing, IRS revised the CAP to (1) be more
clearly communicated to the employees responsible for performing the
procedures; (2) develop service-wide training for monitoring manual
refunds; and (3) be monitored by management to measure its
effectiveness. We will follow up during our fiscal year 2012 audit to
assess the effectiveness of the revised CAP.
[60] In order to claim the credit, taxpayers had until April 30, 2010,
to purchase a home and claim the FTHBC or they had to have entered
into a binding contract prior to May 1, 2010, to close on a home by
September 30, 2010. These taxpayers had the option of claiming the
FTHBC on their 2009 or 2010 return. In addition, members of the
uniformed services, Foreign Service, or intelligence community meeting
certain criteria have an additional year to purchase a home and
qualify for the credit. These taxpayers may claim the credit on their
2010 or 2011 tax return.
[61] To claim the FTHBC, a taxpayer must be either a first-time home
buyer or meet the requirements of "long-time resident" status. A long-
time resident is defined as a taxpayer who has owned and used the same
residence as a principal residence for any 5-consecutive-year period
during the 8-year period ending on the date of the purchase of a
subsequent principal residence. See 26 U.S.C. § 36(c)(6).
[62] In order to claim long-time resident status, the taxpayer must
submit copies with his/her tax return of one of the following for 5
consecutive years of the 8-year period ending on the purchase date of
the new main home: (1) prior year mortgage interest payments, (2)
property tax records, (3) Form 1098 issued by a mortgage company, or
(4) homeowner's insurance records.
[63] We are 90 percent confident that as much as 39.3 percent of these
credits may have been in error.
[64] GAO, Tax Administration: Opportunities Exist for IRS to Enhance
Taxpayer Service and Enforcement for the 2010 Filing Season,
[hyperlink, http://www.gao.gov/products/GAO-09-1026 (Washington, D.C.:
Sept. 23, 2009).
[65] GAO, First-time Homebuyer Tax Credit: Taxpayers' Use of the
Credit and Implementation and Compliance Challenges, [hyperlink,
http://www.gao.gov/products/GAO-10-166T] (Washington, D.C.: Oct. 22,
2009).
[66] Pub. L. No. 111-92, 123 Stat. 2984 (Nov. 6, 2009).
[67] These dollar savings could be understated because they do not
include all returns claiming the FTHBC.
[68] 26 U.S.C. §§ 6321, 6322. The lien becomes effective when it is
"perfected," (i.e., obtains priority and validity) in relation to
creditors, future purchasers, and other persons who might have
interests in the same property when it is filed with a designated
office, such as a courthouse in the county where the taxpayer's
property is located. See 26 U.S.C. § 6323.
[69] [hyperlink, http://www.gao.gov/products/GAO-11-142].
[70] OMB's revised Circular No. A-123, Management's Responsibility for
Internal Control, became effective on October 1, 2005. App. 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.
[71] The time between satisfaction of the liability and release of the
lien in these two cases was 36 and 41 days.
[72] When evaluating statistical results, GAO and IRS compare the
projected upper error limit to the acceptable error rate set for the
test. In this case, the acceptable noncompliance rate is 5 percent
while the projected upper error limit is 10.3 percent. Consequently,
IRS and we concluded that IRS continued to be noncompliant with the
lien release provisions of the Internal Revenue Code.
[73] 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).
[74] 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
Statements of Federal Financial Concepts and Standards, Pronouncements
as Amended (Washington, D.C.: June 30, 2010).
[75] Section 803(c)(4) of FFMIA requires that the Department of the
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
Department of the Treasury official who shall be responsible for
bringing its systems into substantial compliance by that date.
[End of section]
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