by Roger Russell

The Internal Revenue Service is vulnerable to theft and impaired reliability of current financial information needed to make decisions, according to a General Accounting Office audit.

“Continued weaknesses expose the IRS to unnecessary risk of loss and increase taxpayer exposure to losses from financial crimes committed by individuals who inappropriately gain access to confidential personal information,” warned the GAO report.

The GAO report, issued as a follow up to its annual audit of IRS financial statements, makes recommendations to address any weaknesses and also addresses open weaknesses identified in previous audits. According to the report:

● The weaknesses in controls to safeguard taxpayer receipts and data, although short-term in nature, increase taxpayer exposure to losses from financial crimes.

● Of 98 recommendations related to financial management, the GAO is closing 20, while 78 remain open. Thirty-six of those were made during the past six months.

● The report also faults the IRS for the number of recommendations made over two years ago that haven’t yet been completed. It notes that the recommendations were considered “short term” when they were made, but have not yet been closed.

“After our audit is complete, we go through it and review what the IRS has done to address our recommendations from a prior year,” said Steven Sebastian, director of IRS financial management issues at the GAO and principal author of the report.

“The audit is conducted after the end of the fiscal year on September 30,” said Sebastian.  “We typically follow up in the spring and detail what the IRS has done in its follow up of our recommendations.”

The GAO conducted its first audit of the IRS’s financial statements in response to legislation passed in 1990, according to Sebastian.

Although the IRS continues to make progress in addressing property and equipment issues, the report said, a number of them can only be resolved through implementation of an integrated property management system. This won’t be done until March 2005, according to the IRS.

The report said that of 78 “still open” recommendations, the majority relate to one of two broad issues: a material weakness in the IRS’s property and equipment management, or a weakness in controls intended to safeguard taxpayer receipts and data.

The majority of open recommendations address controls intended to safeguard taxpayer receipts and data. The GAO considers all of these to be short-term in nature. “For example,” it said, “lockbox banks with contracts to process taxpayer receipts continued to hire staff and allow them access to taxpayer receipts and data before the results of their fingerprint checks were received and approved, and the IRS was unable to ensure that the taxpayer receipts and data it receives are properly accounted for and safeguarded.”

A previous recommendation on offers-in-compromise processing recommended that the IRS monitor pending offers and require supervisors to follow up with staff to determine, within six months, whether to accept or reject the offer. The IRS has responded that the Centralized Offer in Compromise operation, which began in August 2001, has worked to reduce field inventory by 20,000 cases, and that performance is improving toward the goal of closing cases within six months.

The GAO isn’t the only watchdog with an eye on the IRS. Just last month, the IRS Oversight Board issued its own report, noting that the IRS was suffering from falling resources along with a rise in opportunities for manipulation and error in return processing. The Oversight Board, created by the Restructuring and Reform Act of 1998, called for greater resources for the IRS and a less complex tax system.

“The Oversight Board report looks at the state of IRS efforts to improve service to taxpayers, and concerns regarding declining enforcement trends,” said Sebastian. “The GAO is specifically concerned with weaknesses in financial management and steps [taken] to improve them.”

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