Management Report:

Improvements Are Needed to Enhance the Internal Revenue Service's Internal Control over Financial Reporting

GAO-18-393R: Published: May 7, 2018. Publicly Released: May 7, 2018.

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What GAO Found

During its audit of the Internal Revenue Service's (IRS) fiscal years 2017 and 2016 financial statements, GAO identified a new control deficiency involving the timely correction and posting of tax transactions to taxpayer accounts that contributed to IRS's continuing material weakness in internal control over unpaid assessments as of September 30, 2017. GAO also identified another new deficiency related to the monitoring of internal control activities for safeguarding taxpayer receipts and associated information. Although not considered material weaknesses or significant deficiencies, these new deficiencies nonetheless warrant IRS management's attention.

GAO is making 2 new recommendations to address the control deficiency that contributed to IRS's continuing material weakness in internal control over unpaid assessments and 3 new recommendations to address the control deficiency related to monitoring of internal control activities for safeguarding taxpayer receipts and associated information. Further, GAO found that IRS had completed corrective action on 14 of the 41 recommendations from its prior financial audits that remained open as of September 30, 2016. As a result, IRS currently has 32 GAO recommendations to address--the previous 27 open recommendations and the 5 new recommendations 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 2017 and 2016 financial statements for which GAO did not already have any recommendations outstanding. This report provides new recommendations to address these internal control deficiencies and also presents the status, as of September 30, 2017, of IRS's corrective actions taken to address GAO's recommendations from its prior financial audits that remained open as of September 30, 2016.

What GAO Recommends 

GAO is making five recommendations related to the new control deficiencies. These recommendations are intended to improve IRS's internal controls over financial reporting as well as to bring IRS into conformance with its own policies and Standards for Internal Control in the Federal Government. IRS stated that it is committed to implementing appropriate improvements to ensure that it maintains sound financial management practices. IRS agreed with GAO's five recommendations and described planned actions to address each recommendation.

For more information, contact Cheryl E. Clark at (202) 512-9377 or clarkce@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: IRS agreed with this recommendation. IRS stated that during fiscal years 2018 and 2019, its Wage and Investment, Criminal Investigation, and Small Business/Self-Employed organizations, as well as the Office of Appeals, will research and determine the reasons why IRS's existing policies and procedures intended to follow-up on, resolve, and record its unpostable transactions timely were not fully effective in achieving these objectives.

    Recommendation: The Acting Commissioner of Internal Revenue should ensure that the appropriate IRS officials research and determine why IRS's existing policies and procedures intended to timely follow up on, resolve, and record unpostable transactions were not fully effective in achieving these objectives. (Recommendation 18-01)

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Open

    Comments: IRS agreed with this recommendation. IRS stated that during fiscal years 2018 through 2020, its Criminal Investigation, Wage and Investment, and Small Business/Self-Employed organizations, as well as the Office of Appeals will design and implement, based on research related to unpostable transactions, any necessary corrective actions to reasonably assure that IRS effectively resolves and records unpostable transactions timely, including the establishment of clearly defined timeframes in the Internal Revenue Manual by which unpostable transactions should be corrected and the appropriate related oversight and review processes.

    Recommendation: The Acting Commissioner of Internal Revenue should ensure that the appropriate IRS officials, based on IRS's research and determination, design and implement the corrective actions necessary to reasonably assure that IRS effectively resolves and records unpostable transactions in a timely manner, including establishing clearly defined time frames in the Internal Revenue Manual (IRM) by which the IRS operating divisions should correct unpostable transactions and appropriate related oversight and review processes. (Recommendation 18-02)

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Open

    Comments: IRS agreed with this recommendation. IRS stated that by March 2019, its Wage and Investment organization will develop and implement policies in the Internal Revenue Manual (IRM) for conducting and monitoring the submission processing internal control review. These policies should include or be accompanied by procedures to (1) assess and update the review questions and cited IRM criteria to reasonably assure that they align with the controls under review; (2) periodically evaluate and document a review of the error threshold methodology to assess its current validity based on changes to the operating environment; (3) report findings identified in the Findings and Corrective Actions Report; and (4) assess and monitor (a) safeguarding internal control activities across all work shifts, particularly during peak seasons; (b) safeguarding internal control activities for the appropriate use and destruction of hardcopy taxpayer information; and (c) the results of relevant functional level reviews.

    Recommendation: The Acting Commissioner of Internal Revenue should ensure that the appropriate IRS officials develop and implement policies in the IRM for conducting and monitoring the Submission Processing internal control review. These policies should include or be accompanied by procedures to (1) assess and update the review questions and cited IRM criteria to reasonably assure they align with the controls under review; (2) periodically evaluate and document a review of the error threshold methodology to assess its current validity based on changes to the operating environment; (3) report findings identified in the Findings and Corrective Actions Report; and (4) assess and monitor (a) safeguarding internal control activities across all work shifts, particularly during peak seasons, (b) safeguarding internal control activities for the appropriate use and destruction of hard copy taxpayer information, and (c) the results of relevant functional level reviews. (Recommendation 18-03)

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Open

    Comments: IRS agreed with this recommendation. IRS stated that by August 2018, its Facilities Management and Security Services organization will issue an Internal Revenue Manual (IRM) interim guidance memo establishing policy for conducting and monitoring the Audit Management Checklist (AMC) review, including (1) periodically monitoring the review results; (2) clarifying the frequency that various facilities should conduct the AMC reviews and any process change that could affect the timing of reviews, such as changes to personnel, operational processes, or information technology; and (3) reasonably assuring that corrective actions for all identified deficiencies are tracked until fully implemented. In addition, by July 2020, its Facilities Management and Security Services organization will add guidance to the applicable IRM establishing policy for conducting and monitoring the AMC reviews as described in the IRM interim guidance.

    Recommendation: The Acting Commissioner of Internal Revenue should ensure that the appropriate IRS officials develop and implement policies in the IRM for conducting and monitoring the Audit Management Checklist review. These policies should include or be accompanied by procedures for IRS management responsible for establishing policies related to safeguarding controls to (1) periodically monitor the results of the review; (2) clarify the minimum requirements for how frequently the review should be completed at its various facilities while considering factors that may affect the most appropriate timing of these reviews, such as changes in personnel, operational processes, or information technology; and (3) reasonably assure that corrective actions for all identified deficiencies are tracked until fully implemented. (Recommendation 18-04)

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Open

    Comments: IRS agreed with this recommendation. IRS stated that by August 2018, its Facilities Management and Security Services organization will issue an Internal Revenue Manual (IRM) interim guidance memo establishing requirements for conducting an All Events History Report (AEHR) review and providing guidance on how it should be performed, including (1) periodically monitoring the review results and (2) reasonably assuring that corrective actions for all identified deficiencies are tracked until fully implemented. In addition, by August 2020, its Facilities Management and Security Services organization will update IRM 10.2.14, Methods of Providing Protection, to add guidance for conducting the AEHR reviews as described in the IRM interim guidance.

    Recommendation: The Acting Commissioner of Internal Revenue should ensure that the appropriate IRS officials develop and implement policies in the IRM for conducting and monitoring the All Events History Report review. These policies should include or be accompanied by procedures for IRS management responsible for establishing policies related to safeguarding controls to (1) periodically monitor the results of the review and (2) reasonably assure that corrective actions for all identified deficiencies are tracked until fully implemented. (Recommendation 18-05)

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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