The Government Accountability Office has given good marks to the Internal Revenue Service’s 2005 and 2006 financial statements, but said that the agency did have to overcome “serious internal control and financial management systems deficiencies.”

While the GAO said the statements are fairly presented in all material respects, it noted that because of the internal control issues, the IRS had to rely on “resource-intensive compensating processes to prepare its financial statements.” Without better controls in place, the GAO said that the agency’s timeliness in detecting potential problems was a risk.

The GAO did say that the IRS has made strides and mitigated several material weaknesses in its internal controls. Among those improvements:

  • The agency made significant progress in developing its cost accounting module, which was part of the first phase of the Integrated Financial System implemented during the 2005 fiscal year; and,
  • The agency also improved the reliability of its property and equipment records, and are no longer consider to be a reportable condition by the GAO.

However, because of budgetary concerns and advances in automated financial management system technologies, the IRS is no longer committed to the future releases of IFS that were once intended to resolve many of its most serious financial management issues and has not determined how to resolve issues related to the lack of integration between the system and its tax processing systems.The report concludes that solving the IRS’s financial management problems is largely dependent on the ultimate success of the agency’s ongoing systems modernization efforts. The GAO said it will continue to monitor IRS’s progress in implementing the 72 recommendations that remain open as of the date of this report. The agency agreed with the report's findings.

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