On the heels of continuing revelations about the Internal Revenue Service’s targeting of Tea Party groups for extra scrutiny in evaluating applications for tax-exempt status, the Government Accountability Office has released a new report finding that the IRS needs to improve its internal controls.

The GAO report is not related to the eagerly anticipated report that the Treasury Inspector General is expected to issue this week on the IRS’s evaluations of Tea Party groups and others, in which an IRS official admitted last Friday it screened the applications searching for terms like “patriot,” “conservative” and “tea party” in their names (see IRS Apologizes for Flagging Anti-Tax Groups for Extra Scrutiny and Congress Plans Hearings on IRS Scrutiny of Tea Party Groups). However, the GAO report does shed some light on IRS procedures.

During its audit of the IRS’s fiscal year 2012 financial statements, the GAO identified one new internal control deficiency that contributed to IRS's continuing material weakness in internal control over unpaid tax assessments as of September 30, 2012. Specifically, the IRS’s controls over its process for estimating the balances of federal taxes receivable and other unpaid tax assessments were not effectively implemented to ensure the proper accounting classification and dollar amounts, according to the GAO.

In addition, the GAO identified the following six less significant, new internal control deficiencies as of Sept. 30, 2012:

• Refunds disbursed to deceased taxpayers. The IRS’s internal controls were not effectively designed to ensure that deceased taxpayers were timely identified in its taxpayer records and that refunds issued to deceased taxpayers were valid.

• Authorization of manual refunds. The IRS’s procedures were not effectively designed to ensure that those individuals allowed to approve the issuance of manual refunds were properly appointed to do so.

• Computer system access rights of employees handling taxpayer receipts. The IRS's policies and procedures were not effectively designed to appropriately limit remittance perfection technicians’ system access to change taxpayer account information.

• Cost allocation and user fee classification for the statement of net cost. The IRS’s controls were not effectively designed and implemented to ensure that IRS fully allocated costs or correctly classified all user fee exchange revenue within its Integrated Financial System, which IRS uses to prepare its Statement of Net Cost.

• Recording of obligation of funds. The IRS’s policies and procedures were not effectively designed to ensure that IRS staff recorded an obligation for goods and services prior to taking delivery of them from a contractor or a performing federal agency.

• Excise tax receipt certification process. The IRS’s controls were not effectively implemented to ensure that staff properly calculated the quarterly excise tax revenues to be distributed to the Airport and Airway Trust Fund and the Highway Trust Fund. In addition, the IRS’s existing procedures were not operating effectively to ensure that changes it made to its methodology for calculating the amount of revenues to be distributed were concurred with by all affected parties within the Department of the Treasury prior to implementing the changes.

In addition, the GAO’s work showed that as of Sept. 30, 2012, IRS had completed corrective action on 23 of the 69 recommendations from the GAO’s prior financial audits and other financial management-related work that remained open at the beginning of the fiscal year 2012 financial audit.

As a result, the IRS currently has 60 recommendations that need to be addressed, which consist of the previous 46 open recommendations as well as 14 new recommendations the GAO is making in the new report.

The IRS agreed with all 14 of the GAO’s recommendations. “We continue to make significant progress in addressing internal control deficiencies and financial management as evidenced by 13 consecutive years of clean audit opinions on our financial statements,” wrote IRS Acting Commissioner Steven T. Miller in response to the report. “During fiscal year 2012, IRS strengthened controls over information security, refund disbursements, and release of federal tax liens.”

One tax expert sees the need for the IRS to make further improvements in its audits in the wake of the current uproar over its audits of Tea Party groups.

“While I agree that the IRS should not target any legal group…it does exactly this every day legally,” said Fred Slater, CPA, of the New York tax service firm MS 1040 LLC. “For instance, the IRS is going more and more to correspondence audits, which are designed and performed by clerks to review the middle- and lower-class deductions. It is intended to collect money from the people who cannot afford representation and think that the system will not abuse them. In fact, that is exactly what happens. On Schedule C or unreimbursed business expenses, audit results in the IRS claiming money due because the auditors are not trained to understand the law.  They are trained to follow their training period. If you understand the law, you understand that there are many ways to support the deductions. Unless you are willing to either transfer the case to the desk office division or file an appeal, you will end up with the IRS changing your return only because the person performing the audit is not competent.”

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