| Vol.
I, No. 7 | May
Day / Mother's Day | Apr.
20th, 2001 |
Business
& Finance
Small Business Resources . Think
You Might Have Trouble with an IRS Audit?
Then Consider How GAO
Audits of the IRS Went in
Auditing the Auditors Well,
another Tax Day has come & gone. ... But in the spirit of that
day, we thought it might be interesting -- in a sort of 'turn about is fair
play' way -- to consider auditing the IRS for a change.If you missed February's
article on avoiding an IRS audit, you may want to check it out. But
that's what got us to thinking: In the case of the IRS, the answer,
of course, is the GAO -- the Government Accounting Office. And what
they've found might astound you. For example, on Leap Day of last year,
the GAO released a report on the IRS's books. The results, distressingly
similar to the GAO audit of the IRS the year before, continued to show that the
IRS doesn't even come close to living up the standards it sets for the rest of
us. The day of the report, Representative Sue Myrick of NC issued her
own report, calling the IRS audit "shocking," and went on to
say: - "The IRS couldn’t even balance its own checkbook,
and then tried to cook its books to make everything work out."
The
report estimated that some $51 million could not be adequately accounted
for. Of course, compared to the nearly $1.9 trillion in taxes the IRS
collects, the 'missing money' may seem like relatively small potatoes, at
about 0.00268%. But the fact that the shortcomings were
substantially the same as those cited in the prior year's audit suggests that
the IRS may not be able to comply no matter how hard it tries. In an
interim report on "Custodial Financial Management" issued in August of
'99, the GAO had already found continuing and significant weaknesses in IRS
practices. A GAO summary of the interim report noted: - "The
Internal Revenue Service (IRS) continues to be plagued by serious internal
control weaknesses that have led to disbursements of fraudulent and other
questionable tax refunds, IRS employees stealing taxpayer receipts, and
errors or delays in posting payments to taxpayers' accounts."
What
follows are just some of the other findings of GAO audits of the IRS during the
past few years. To view the full documents, you can click on the links
which appear after the titles of the GAO reports at the end of each
listing. The documents are available in plain TEXT, or the Adobe Acrobat
PDF format. ...- October
1998: "IRS' internal control system remains plagued by
weaknesses that adversely affect the agency's ability to safeguard assets
from material loss, ensure material compliance with relevant laws and
regulations, and ensure that material misstatements do not occur in its
financial statements; ... IRS' general ledger cannot distinguish categories
of unpaid assessments to determine the portion that represents actual taxes
receivable of the federal government; ... IRS also does not have a detailed
listing, or subsidiary ledger, for tracking and accumulating unpaid
assessments; ... IRS also continues to lack adequate documentation to
support its unpaid assessments; ... controls over service center cash and
checks received directly from taxpayers are not sufficient to adequately
reduce the exposure to loss; ... between 1995 and 1997, IRS identified $5.3
million in actual or alleged embezzlement by service center employees; ...
IRS is unable to determine the specific amount of revenue it collects for
three of the federal government's four largest revenue sources at time of
collection because it does not obtain the information necessary to do so;
... IRS' general ledger cannot routinely generate reliable and timely
financial information ..." [Internal Revenue Service: Immediate and
Long-Term Actions Needed To Improve Financial Management (Letter Report,
10/30/98, GAO/AIMD-99-16). -- TEXT,
PDF]
. - March
1999: "... pervasive weaknesses in the design and operation
of IRS' financial management systems, accounting procedures, documentation,
recordkeeping, and internal controls, including computer security controls,
prevented IRS from reliably reporting on the results of its administrative
activities; ... IRS' major accounting, reporting, and internal control
deficiencies include: (a) an inadequate financial reporting process that
resulted in IRS' inability to reliably prepare several of the required
principal financial statements; (b) the lack of a subsidiary ledger to
properly manage unpaid assessments, which has resulted in both taxpayer
burden and lost revenue to the government; (c) deficiencies in preventive
controls over tax refunds that have permitted the disbursement of millions
of dollars of fraudulent refunds; (d) a failure to reconcile its fund
balance to Treasury records during Fy 1998; (e) the inability to properly
safeguard or reliably report its property and equipment; (f) vulnerabilities
in computer security that may allow unauthorized individuals to access,
alter, or abuse proprietary IRS programs and data, and taxpayer information;
(g) vulnerabilities in controls over tax receipts and taxpayer data that
increase the government's and the taxpayers' risk of loss or inappropriate
disclosure of sensitive taxpayer data; and (h) an inability to provide
assurance that its budgetary resources are being properly accounted for,
reported, and controlled; (5) these weaknesses, as they relate to IRS'
administrative activities, prevented GAO from rendering an unqualified
opinion on five of IRS' six principal financial statements ..."
[Financial Audit: IRS' Fiscal Year 1998 Financial Statements (Letter Report,
03/01/99, GAO/AIMD-99-75).-- TEXT,
PDF]
. - August
1999: "Serious financial management system limitations and
internal control weaknesses prevented the Internal Revenue Service (IRS)
from reliably reporting on the results of its administrative activities for
fiscal year 1998 and from having reliable financial information for managing
its operations. These deficiencies are long-standing, many being reported in
GAO's first financial audit of IRS for fiscal year 1992. Comparable to an
individual reconciling his or her checkbook to a bank statement, IRS'
records on its available funds should be reconciled to the Treasury
Department's records monthly. In fiscal year 1998, however, IRS did not
reconcile its administrative fund balance with Treasury's accounts. IRS did
not promptly record some types of expenditures against appropriations. IRS'
systems were unable to generate detailed subsidiary records of its accounts
payable and outstanding obligations. IRS' property and equipment was
probably materially understated because of several deficiencies in its
recording of property and equipment. IRS lacked adequate review procedures
to oversee and manage the accounting and financial reporting process. GAO
found significant errors and omissions in IRS' draft financial statements
involving, in some cases, hundreds of millions of dollars [italics
added]. IRS acknowledges these weaknesses and plans to improve its financial
data for its administrative accounts. However, past efforts to correct these
problems have been ineffective. Future success depends on sustained
attention by senior IRS management. Left uncorrected, the internal control
weaknesses cited by GAO will continue to hinder IRS' ability to manage its
financial operations and routinely prepare reliable and timely financial
information." [Internal Revenue Service: Serious Weaknesses Impact
Ability to Report on and Manage Operations (Letter Report, 08/09/1999,
GAO/AIMD-99-196).-- TEXT,
PDF]
. - November
2000: "During fiscal year (FY) 1999, the Internal Revenue
Service (IRS) made a number of improvements to address some of the financial
management issues that GAO raised in previous reports. However, serious
internal control and financial and weaknesses continue to affect the
agency's ability to effectively manage operations and produce reliable
financial information during FY 1999. These weaknesses specifically affect
IRS' ability to: (1) manage unpaid assessments; (2) disburse taxpayer
refunds; (3) safeguard manual tax receipts and taxpayer information; (4)
account for property and equipment; (5) account for appropriated funds; and
(6) collect and report financial data. These problems resulted from: (1)
deficient operational and financial systems; (2) inadequate internal
controls; and (3) policies and procedures that were not being consistently
followed. The improvements that have been made to date focus on ad hoc work-arounds
intended to obtain immediate results for the limited purpose of reporting
reliable annual financial statement information, but they have not corrected
underlying long-term systems deficiencies. In addition, IRS has been unable
to develop and maintain reliable and timely cost/benefit information to
evaluate the relative merits of its various tax collection and enforcement
activities. Until IRS' management makes more systemic, short- and long-term
corrections, it will continue to lack the performance information it needs
to effectively manage its operations, and losses to the federal government
and the burden to the taxpayers will likely continue." [Internal
Revenue Service: Recommendations to Improve Financial and Operational
Management (Chapter Report, 11/17/2000, GAO/GAO-01-42). -- TEXT,
PDF]
Granted,
the amount of money that passes through the IRS is staggering. But if the
IRS, with all of its employees & resources, cannot even comply with basic
business requirements, how can small businesses, much less the individual
taxpayer, be expected to? . *******
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