Management Report: Improvements Are Needed to Enhance the Internal Revenue Service's Internal Control over Financial Reporting
GAO-16-457R
Published: May 18, 2016. Publicly Released: May 18, 2016.
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Highlights
What GAO Found
During its audit of the Internal Revenue Service’s (IRS) fiscal years 2015 and 2014 financial statements, GAO identified several deficiencies in IRS’s internal control over financial reporting that while not considered to be material weaknesses or significant deficiencies either individually or collectively, nonetheless warrant IRS management’s attention. These control deficiencies relate to the following:
- verification of manually classified unpaid tax assessments,
- adjudication approval for applicants,
- accountability over duress alarms,
- oversight at taxpayer assistance centers,
- initiation and monitoring of manual refunds,
- certification of manual refunds,
- quality review over input corrections,
- accounting for missing and unverified assets,
- accuracy and completeness of tangible property and equipment,
- accounting for assets in the general ledger,
- authorization of asset disposals,
- accuracy of future lease payment amounts for noncancelable operating leases, and
- verification of payroll adjustments.
GAO is making 17 new recommendations to address these deficiencies in IRS’s internal control over financial reporting. Further, GAO found that IRS had completed corrective action on 17 of the 42 recommendations from GAO’s prior financial audits that remained open at the beginning of GAO’s fiscal year 2015 audit.As a result, IRS currently has 42 GAO recommendations that need to be addressed—the 25 prior open recommendations as well as the 17 new ones GAO is making in this report.
Why GAO Did This Study
The purpose of this report is to present those internal control deficiencies identified during GAO’s audit of IRS’s fiscal years 2015 and 2014 financial statements for which GAO did not already have any recommendations outstanding. The control deficiencies presented in this report are not considered to be material weaknesses or significant deficiencies; nonetheless, they warrant IRS management’s attention. This report provides new recommendations to address these internal control deficiencies and also presents the status, as of September 30, 2015, of IRS’s corrective actions taken to address GAO’s recommendations, detailed in GAO’s previous management reports, that remained open at the beginning of GAO’s fiscal year 2015 audit.
Recommendations
This report provides 17 recommendations pertaining to the new control deficiencies. These recommendations are intended to improve IRS’s internal controls over its financial management and accountability of resources as well as bring IRS into conformance with its own policies and the Standards for Internal Control in the Federal Government. IRS stated that it remains committed to implementing appropriate improvements to ensure that IRS maintains sound financial practices. IRS agreed with GAO’s 17 recommendations and described actions it has taken or planned to take to address each recommendation.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to establish and implement formal policies and procedures to annually review unpaid tax assessments that are manually classified to determine whether the classification is correct for the current fiscal year. |
On July 26, 2016, IRS issued a memorandum documenting a policy and procedures for the Revenue Transactional Analysis Section to annually review unpaid assessments that are manually classified. IRS also incorporated these in its fiscal year 2016 Unpaid Assessments Methodology. IRS's actions sufficiently address our recommendation.
|
| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to establish a process to prevent Employment Operations staff from allowing potential employees to enter on duty without favorable determinations of suitability by Personnel Security adjudicators. |
During fiscal year 2019, we verified that the determinations of suitability procedures IRS established in fiscal year 2018 included an enhanced quality review process for Employment Operations staff to ensure that all new hires are cleared and approved before being allowed to enter on duty. IRS's actions sufficiently address our recommendation.
|
| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to establish a policy and procedures requiring IRS officials to review and address situations in which it is later discovered that an employee deemed unsuitable for employment during the prescreening process was erroneously allowed to enter on duty. |
During fiscal year 2019, we verified that the guidance IRS established in fiscal year 2018 details procedures for IRS officials to address situations where employees deemed unsuitable for employment during the hiring prescreening process were erroneously allowed to enter on duty. IRS's actions sufficiently address our recommendation.
|
| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to develop and provide training, on a recurring basis, to all Facilities Management and Security Services specialists and managers involved in the duress alarm validation and testing process to reinforce the related policies and procedures. |
During fiscal year 2018, Facilities Management and Security Services (FMSS) developed a mandatory annual training course for all physical security specialists and managers involved in the duress alarm validation and testing process to reinforce related alarm policies and procedures. During fiscal year 2019, we reviewed training records of FMSS physical security specialists and managers involved in the duress alarm validation and testing process and verified that the employees completed the required alarm training. IRS's actions sufficiently address our recommendation.
|
| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to develop job aids that provide detailed written guidance for TAC (1) group managers for use in answering TSRRD review questions effectively and (2) territory managers that explicitly outline the requirements for reviewing TSRRD submissions. |
In September 2016, the Wage and Investment organization developed a job aid that provides specific written guidance for TAC group managers to use in answering TSRRD review questions and outlines the territory managers' requirements for reviewing TSRRD submissions. IRS's actions sufficiently address our recommendation.
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| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to establish and implement a policy requiring recurring training for TAC group and territory managers on their TSRRD responsibilities, including detailed instructions for completing responses to questions in TSRRD and for reviewing TSRRD submissions for accuracy and completeness. This training should be updated for changes in TSRRD questions over time and be provided to new TAC group and territory managers soon after they are hired or appointed. |
In January 2017, IRS updated the Internal Revenue Manual (IRM) to require that Taxpayer Assistance Center (TAC) group and territory managers receive annual training on TAC Security and Remittance Review Database (TSRRD) responsibilities. In June 2017, IRS attested that all managers completed the annual TSRRD training for fiscal year 2017. IRS noted that if there is a change to the TSRRD process between the dates of the annual training, managers will be notified of any changes via email. In addition, if the procedures are affected, the IRM and TSRRD job aid will be updated to reflect any changes. IRS's actions sufficiently address our recommendation.
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| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to determine the reason(s) why staff did not always comply with IRS's established policies and procedures related to initiating, monitoring, and reviewing the monitoring of manual refunds and, based on this determination, establish a process to better enforce compliance with these requirements. |
During fiscal year 2019, IRS determined that a fully automated process to perform monitoring of manual refunds is the optimal solution to address, at an enterprise level, deficiencies associated with relying on employees to monitor refunds in process and take appropriate action when they encounter potential duplicate or erroneous refund conditions. In addition, IRS plans to develop business requirements and request programming through the Unified Work Request. However, IRS told us that it placed corrective actions on hold because of limited resources. As a result, we determined that IRS had not completed its corrective actions as of September 30, 2023, and that this recommendation remains open.
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| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to enhance the training program provided to COs to address all the job responsibilities related to certifying manual refunds for payment, including the required review of supporting documentation for manual refunds. |
During fiscal year 2019, IRS (1) developed and delivered a mandatory training course to certifying officers (CO) on their roles and responsibilities, which includes the requirement to review manual refund supporting documentation and (2) updated the Internal Revenue Manual to require that COs complete this training annually. IRS's actions sufficiently address our recommendation.
|
| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to issue a written reminder to quality review units responsible for reviewing the work of ICO tax examiners reiterating the existing quality review requirement to select and review cases, on a weekly basis, worked by each ICO tax examiner. |
In March 2016, IRS issued a written reminder to IRS quality review units responsible for reviewing the work of ICO tax examiners reiterating the existing quality review requirements, including the selection and review of cases on a weekly basis. IRS indicated that it will reissue this reminder periodically, as needed. IRS's action sufficiently addresses our recommendation.
|
| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to identify the cause of and implement a solution for dealing with the periodic backlogs of ICO inventory that is hampering the performance of quality reviews. |
During fiscal year 2020, IRS updated its IRM to remove the requirement to perform quality reviews of at least four cases per week for each employee. However, the updated IRM still requires a quality review of at least 260 cases for each employee during the year. In addition, IRS created plans for dealing with backlogs, which included using seasonal employees, overtime, cross-training, and transferring work to other SPCs. During our fiscal year 2022 review of ICO's performance of its quality reviews at IRS's Austin SPC, we found no exceptions to IRS's implementation of these updated procedures. As a result, we concluded that IRS's corrective actions as of September 30, 2022, were adequate to close this recommendation.
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| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to establish policies for (1) how long an asset can remain in missing status before it is removed from P&E reported on the financial statements and (2) how long assets can go unverified during the annual inventory process before they are identified as missing in the property management system. |
IRS issued AM064, Asset Management Policy Directive to Identify Uncertified Class A and Class B Assets as Missing in KISAM, effective October 1, 2016. The directive states that assets not verified or certified for more than two inventory cycles should be identified as "missing" in IRS's property management system. In November 2016, IRS established the Missing Assets Financial Reporting Assessment procedure, which states that assets in "missing" status for 1 year or more should be removed from the property and equipment reported on IRS's financial statements. IRS's actions sufficiently address our recommendation.
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| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to establish and implement procedures to reasonably assure that missing assets are timely removed from the financial statements when applicable. |
In November 2016, IRS established the Missing Assets Financial Reporting Assessment procedure, which includes procedures for identifying assets that have been in missing status in the property management system for 1 year or more and removing them from the property and equipment reported on IRS's financial statements. We verified that IRS conducted a missing assets analysis as of September 30, 2017, and determined that the net book value of the missing assets as of September 30, 2017, was immaterial. Thus, no adjustments to the financial statements were necessary. IRS's actions sufficiently address our recommendation.
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| Internal Revenue Service | The IRS Commissioner should direct the appropriate officials to establish and implement monitoring procedures designed to reasonably assure that the key detailed information for tangible capitalized P&E is properly recorded and updated in the KISAM system. |
IRS established the Asset Management Program Monitoring and Review procedure, effective October 1, 2016, for performing quarterly sample reviews of IT assets in KISAM. In September 2017, IRS also revised the IRM to require FMSS territory managers or section chiefs to review KISAM key data elements for non-IT assets to verify that they are correct and updated. We assessed IRS's corrective actions addressing this recommendation and concluded that IRS's corrective actions as of September 30, 2022, were adequate to close this recommendation.
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| Internal Revenue Service | The IRS Commissioner should direct the appropriate officials to design a process to reasonably assure the adequacy of detailed supporting information for tangible P&E amounts recorded in the general ledger. |
As of December 2017, IRS implemented an Asset Accounting Module (AAM) as part of the Integrated Financial System, which functions as a subsidiary ledger containing asset records supporting the amounts recorded in the general ledger for the various P&E asset classes. During our fiscal year 2018 walk-throughs, we observed and confirmed with IRS officials that AAM had been fully implemented. During our interim testing, we verified that IRS conducts (1) reconciliations between all P&E asset balances in its general ledger and the AAM P&E balances and (2) reviews to reasonably assure that the current year tangible P&E acquisitions recorded in the general ledger are also recorded in AAM and KISAM. In addition, we reviewed AAM and KISAM asset records for tangible P&E selected during our acquisitions interim testing and did not identify any exceptions. IRS's actions sufficiently address our recommendation.
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| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to update IRS policies and procedures for managerial reviews of disposal activities to explicitly instruct managers to assess whether disposal actions are approved by those authorized to do so and that approval is obtained prior to the disposal of assets. |
In September 2016, IRS issued AWSS-01-0916-0001, Interim Guidance for IRM 1.14.4, Personal Property Management, to require the FMSS territory manager or section chief to perform quarterly sample reviews of disposal activities to verify that disposal actions are approved prior to the disposal of assets and by an approving authority (i.e., the FMSS territory manager or section chief). To facilitate the quarterly review, the interim guidance states that IRS FMSS Headquarters Property and Asset Management staff should (1) provide instructions and submission due dates for the review to the territories, (2) provide disposal sample data for each territory, (3) evaluate the territories' completed disposal sample review, and (4) provide the results of their evaluation to the territories. IRS's actions sufficiently address our recommendation.
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| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to establish and implement detailed written procedures for calculating future lease payments for noncancelable operating leases that are reported in the notes to the financial statements. The procedures should (1) include steps for considering any ad hoc clauses that may have specific termination dates and (2) include a requirement for supervisory review to provide reasonable assurance of the accuracy of future lease payment amounts for noncancelable operating leases. |
In October 2016, IRS established and implemented procedures for calculating future lease payments for noncancelable operating leases that are reported in the notes to its financial statements. The procedures include (1) steps for considering any ad hoc clauses that may have specific termination dates and (2) a requirement for supervisory review to reasonably assure the accuracy of future lease payment amounts for noncancelable operating leases. We did not identify any exceptions during our fiscal year 2017 review of IRS's noncancelable operating lease schedules. IRS's actions sufficiently address our recommendation.
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| Internal Revenue Service | The IRS Commissioner should direct the appropriate IRS officials to update IRS's accounting code guide for payroll adjustments to include detailed steps for human resources specialists to verify that submitted payroll adjustments processed by NFC are processed correctly, including against the correct pay period and fiscal year. |
In March 2016, IRS updated its accounting code guide for payroll adjustments to include detailed steps for human resources specialists to verify that submitted payroll adjustments processed by NFC are processed correctly, including against the correct pay period and fiscal year. IRS's action sufficiently addresses our recommendation.
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Financial statement auditsFiscal yearInternal controlsLease terminationReporting requirementsStandardsTangible assetsTax administration systemsTax refundsTaxesTaxpayersCorrective actionFinancial reporting