The Internal Revenue Service continues to have problems with its internal controls and financial management systems, according to a new report from the Government Accountability Office.

The GAO acknowledged in its financial audit that the IRS's fiscal 2008 and 2007 financial statements were fairly presented in all material respects, but noted that "serious internal control and financial management systems deficiencies continued to make it necessary for IRS to rely on resource-intensive compensating processes to prepare its balance sheet."

Because of these and other deficiencies, the IRS did not, in GAO's opinion, maintain effective internal controls over financial reporting or compliance with laws and regulations, "and thus did not provide reasonable assurance that losses, misstatements and noncompliance with laws and regulations material in relation to the financial statements would be prevented or detected on a timely basis."

However, the GAO acknowledged that the IRS continued to make significant strides in addressing its financial management challenges and material weaknesses in internal control. In particular, the GAO singled out the IRS's progress in addressing problems with the collection of unpaid taxes and issuance of improper refunds. The IRS has also improved in the past year its internal controls over safeguarding hard-copy taxpayer receipts and data at the primary submission-processing locations.

But problems remained with the IRS's control over financial reporting, management of unpaid tax assessments and information security. The GAO saw improvements in controls over revenue collection and refund issuance, but still noted problems with the IRS's enforcement collection activities. The GAO also found that the IRS was not always in compliance with the law concerning the timely release of tax liens.

The report criticized the IRS's continued use of obsolete financial management systems and said, "The challenges adversely affect the IRS's ability to fulfill its responsibilities as the nation's tax collector because it is unable to routinely obtain comprehensive, timely, accurate and useful information for day-to-day decision-making."

The GAO also warned that as the IRS progresses toward more automated financial management processes, the weaknesses in controls over information security and other systems could have serious implications for the GAO's ability to determine whether the IRS's financial statements are fairly stated.

The IRS responded that it was dedicated to improving financial management and cited several initiatives and related benefits, including the establishment of an Office of Online Fraud Detection. It also noted that it has a solid management team in place to address remaining financial management challenges. "Improving information security continues to be a priority for the IRS," said IRS Commissioner Douglas Shulman.

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