The following article is provided courtesy of CCH, Inc.
In a lengthy report, "Internal Revenue Service: Recommendations to Improve Financial and Operational Management" (GAO-01-42) dated Nov. 17, the General Accounting Office (GAO) offered 80 recommendations--43 previously suggested and 37 new. Realizing it would be difficult for the IRS to implement all of the recommendations at once, the GAO identified high priority and short-term and long-term recommendations.
From the IRS's perspective, the most controversial recommendation was that it should submit cost/benefit analyses to Congress for any requested increases in appropriations for enforcement and collection activities, such as for the automated underreporter program. While agreeing that such analyses would be helpful in its strategic planning, the IRS feared that disclosure of sensitive information to the public would be not be appropriate.
The IRS's failure to pursue a growing number of taxpayers owing taxes could "result in billions of dollars in outstanding amounts going uncollected and adversely affect future compliance," the GAO said. For tax years 1996 to 1998, the IRS did not follow up on 30 million discrepancies identified under the automated underreporter program. No estimate of foregone revenues was available. The GAO urged the IRS to collect more data on its effort to reduce earned income tax credit fraud.
IRS data showed that collections from delinquent taxpayers fell during the past three fiscal years: $6.0 billion in 1997; $5.3 billion in 1998; and $4.4 billion in 1999. The number of revenue officers declined from 7,008 in fiscal year 1997 to 6,378 in fiscal year 1999. There were significant decreases in collections activity. Lien filings were 544,000 in 1997; 383,000 in 1998; and 168,000 in 1999. Levy notifications were 3.7 million in 1997; 2.5 million in 1998; and 504,000 in 1999. Seizures plummeted: 10,090 in 1997; 2,307 in 1998; and 161 in 1999.
The GAO report was a follow-up to its report on the results its audit of the IRS's fiscal year 1999 financial statements (TAXDAY, 2000/03/02, A.2). The report covered matters relating to the IRS's fiscal year 1999 appropriation of $8.5 billion, as well as issues relating to $1.9 million in federal tax collections, tax refunds of $185 billion and $21 billion in unpaid tax assessments.
Long-standing material weaknesses in the IRS's systems and internal controls fell into four basic categories: (1) fundamentally deficient operational and financial systems; (2) inadequate internal controls, policies and procedures; (3) policies and procedures that are not consistently followed; and (4) inadequate operational and financial information to guide resource allocation decisions.
These weaknesses affected the IRS's 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.
The GAO highlighted a few of its recommendations as needing immediate attention:
(1) Greater accuracy in taxpayer account records. The GAO found error rates of 45% on accounts owing trust fund recovery penalties that could affect 80,000 taxpayers. The business and officer account information is not adequately linked in the IRS's systems, sometimes resulting in multiple assessments long after the account has been paid.
(2) Security over taxpayer receipts and data. The GAO found that employees of the IRS and its lockbox banks failed to fully investigate workers before they began work. The IRS identified 45 actual or alleged employee thefts of tax receipts at its field offices and lockbox banks totaling over $1 million in fiscal year 1999.
(3) Controls over the release of federal tax liens. The GAO found that, in 26% of cases, the IRS did not release liens within 30 days of taxpayers' paying off the balance of taxes owed. In some cases, master file information was not transmitted to the automated lien system.
The GAO report provided examples of IRS operational failures. The IRS erroneously assessed a penalty of nearly $250 million against a partnership for failure to promptly file its return. Instead of computing the penalty for two partners, the IRS used 999,000 as the number of partners. The IRS had to pay $430,000 in interest for a nine-month delay in paying a $9.2 million refund to a taxpayer that had filed an amended return.
In fiscal year 1999, the IRS added $1 billion to its property and equipment balance based on statistical sampling. In past years, the IRS excluded over $250 million of systems development costs and $65 million of assets under capital leases. The GAO found errors in the IRS's statement of financing that would have caused misstatements totaling about $1.3 billion if the IRS had not corrected the error.
The IRS continued to be unable to determine the specific amount of revenue it collected for Social Security, Hospital Insurance and individual income taxes, as well as collections attributable to excise taxes payable to trust funds. These conditions existed primarily because the information needed appears on tax returns filed and processed after the tax deposits are made. In addition, the IRS did not perform account reconciliations, forcing balances to agree with the Treasury Department's records.
In conclusion, the GAO observed, "The substantial deficiencies in the IRS's internal controls and underlying systems and processes continued to preclude it from reporting reliable, timely and routine information critical for effectively managing its operations." The IRS used time-consuming "workaround" processes and procedures to report certain year-end information, only some of which was reliable.
By Cindy Zirkle, CCH News Staff