GAO Identifies Weak Links in IRS' Internal Controls

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By Ken Berry

It hasn't been a very good week for the IRS. First, a firestorm has erupted over its efforts to target conservative "tea party" groups applying for tax-exempt status. Now the Government Accountability Office (GAO) has released a new report saying that the IRS has to improve its internal controls.

The GAO examined financial statements of the IRS for fiscal year 2012 (FY 2012) spanning October 1, 2011, through September 30, 2012. It concluded that IRS controls for estimating federal tax receivables and other unpaid tax assessments weren't effectively implemented to ensure proper accounting. The GAO also identified six lower-profile internal control "deficiencies" found in FY 2012: 

1. The internal controls don't ensure that deceased taxpayers are identified in a timely manner and that refunds are properly issued. In a sample of refunds sent to deceased taxpayers, the GAO found 88 percent were invalid, many of them resulting from the ongoing problem of identity theft.

2. Policies and procedures aren't effectively designed to ensure that individuals who can authorize the issuance of manual refunds were properly appointed to do so. 

3. Policies and procedures don't appropriately restrict the IRS technicians' system providing access to change taxpayer account information.

4. The internal controls don't adequately ensure the IRS fully allocated costs or correctly classified all user fee exchange revenue within its Integrated Financial System (IFS). The IRS uses the IFS to prepare its Statement of Net Cost.

5. The controls can't ensure IRS personnel have recorded an obligation for goods and services prior to taking delivery of them from a contractor or a federal agency.

6. Policies and procedures aren't effectively implemented for calculating quarterly excise tax revenues to be distributed to the Airport and Airway Trust Fund and the Highway Trust Fund.

The new GAO report revealed the IRS had completed corrective action on twenty-three of the sixty-nine recommendations from prior financial audits and related work by the end of FY 2012. So now the IRS must address a total of sixty recommendations (the "open" forty-six recommendations plus fourteen new recommendations included in the new report).

And what does the IRS have to say about the report? It agreed with all fourteen of the GAO recommendations with an explanation: "We continue to make significant progress in addressing internal control deficiencies and financial management as evidenced by thirteen consecutive years of clean audit opinions on our financial statements", said IRS Acting Commissioner Steven T. Miller in his response to the report. "During fiscal year 2012, IRS strengthened controls over information security, refund disbursements, and release of federal tax liens." But there's more work that has to be done. 

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