The Internal Revenue Service did not maintain effective internal control over financial reporting as of Sept. 30, 2015, because of a continuing material weakness in internal control over unpaid tax assessments, according to a new report from the Government Accountability Office.
The problem was mainly caused by financial system limitations and errors in taxpayer accounts that rendered IRS's systems unable to readily distinguish between taxes receivable, compliance assessments, and write-offs in order to properly classify these components for financial reporting purposes, according to the GAO. These deficiencies necessitated the use of a compensating estimation process to determine the amount of taxes receivable, the most material asset on the IRS’s balance sheet. Through this compensating process, the IRS made over $9 billion in adjustments to the 2015 fiscal year-end gross taxes receivable balance produced by its financial systems.
To address this material weakness, in fiscal year 2015, the IRS took a significant step in developing a long-term corrective action plan. However, the plan does not include milestones or related dates for most of the actions, according to the report, so it is unclear when the IRS will fully address the issues that cause significant inaccuracies in the unpaid tax assessments information maintained in its accounting systems.
During fiscal year 2015, the IRS continued to make important progress in addressing other deficiencies in internal control over its financial reporting systems, the report acknowledged. However, the GAO identified continuing and new deficiencies in internal control over information security, including missing security updates, insufficient audit trails and monitoring for certain key systems, and use of weak passwords, that collectively constituted a significant deficiency in the IRS's internal control over financial reporting systems. Until the IRS takes the necessary steps to fully address these control deficiencies over its financial reporting systems, the GAO warned its financial and taxpayer data will remain at increased risk of inappropriate and undetected use, modification, or disclosure.
In addition to its internal control deficiencies, the reported noted the IRS faces significant ongoing financial management challenges related to safeguarding the large volume of sensitive hard copy taxpayer receipts and associated information, significant invalid refunds based on identity theft, and implementing the tax provisions of the Patient Protection and Affordable Care Act.
“The difficulties confronting IRS in its efforts to effectively manage each of these challenges are further magnified by the need to do so in an environment of diminished budgetary resources,” said the report.
In commenting on a draft of the report, IRS commissioner John Koskinen wrote, “The IRS is dedicated to continuing to improve its financial management, internal controls and information technology security posture.”
He noted that the IRS has finalized a long-term Unpaid Assessments plan along with other actions to ensure controls related to the Affordable Care Act and the Foreign Account Tax Compliance Act are in place. He also pointed out that the GAO gave the IRS an unmodified opinion on its combined financial statements for the 16th consecutive year demonstrating that the IRS accurately accounts for approximately $3.3 trillion in tax revenue receipts, $403 billion in tax refunds, and $11 billion in IRS appropriated funds.
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