980062=199910064es

TREASURY INSPECTOR GENERAL

FOR TAX ADMINISTRATION

THE INTERNAL REVENUE SERVICE CAN IMPROVE ITS

PROCESS FOR ACCURATELY AND TIMELY REPORTING

REVENUE ACCOUNTING ACTIVITIES

August 1999

Reference No. 199910064

Executive Summary

The Internal Revenue Service (IRS) has implemented an adequate system of internal controls to ensure that revenue accounting transactions are recorded accurately. However, the IRS can improve its preparation and approval processes for revenue accounting reports to ensure accurate and timely reporting of revenue accounting activities to internal and external stakeholders. Further, the IRS can strengthen its process for approving indemnity agreement requests to reduce the risk of double collection for the same tax assessment.

Management Oversight and Guidance Is Sufficient to Ensure the Accurate Recording of Revenue Accounting Transactions

The accurate and complete recording of IRS revenue accounting transactions is critical to ensure factual reporting of financial data to stakeholders. To ensure that the recording of revenue accounting data is complete and accurate, the IRS provides guidance and oversight through monthly operational reviews; periodic assistance visits; the issuance of Program Letters; and, frequent communication and contact on program issues.

Management Controls Are Not Effective to Ensure that Revenue Accounting Reports Are Accurate and Timely Issued

The accuracy and timeliness of IRS revenue accounting reports are critical in ensuring both internal and external stakeholders have current financial information available to make key economic and investment decisions. However, IRS management oversight is not adequate to provide reasonable assurance that significant errors and omissions are identified and corrected before the revenue accounting reports are issued.

This ineffective control environment can be attributed to the following conditions:

The managerial review and approval process did not identify misstatements contained in reports prior to issuance. Reports containing significant misstatements due to both calculation and transcription errors were approved and issued to internal and external stakeholders. For example, the wrong line amounts were transcribed from a source document causing refunds reported on the Federal Unemployment Tax Act (FUTA) report to be overstated by over $3.5 billion. Further, procedures and guidelines were not always followed correctly. For example, the Exempt Organizations amount reported on the Gross Revenue Receipt report was overstated by more than $29 million because an erroneous amount was included.
Procedures or guidelines did not always provide detailed instructions as to required documentation, or the organized maintenance of such documentation, to either support analyses or provide sufficient information for accurate managerial review and approval. Further, documentation maintained was not readily available or easily located.
Procedures did not always provide specific due dates for forwarding information and reports within the IRS National Office Accounting Branch. Some reports were approved and forwarded to the appropriate parties after the established due dates.

In addition, some report analysts were new to their positions, which exacerbated the weaknesses in the internal control environment.

Management Controls Are Not Effective to Ensure that Indemnity Agreement Requests Are Properly and Timely Processed

An indemnity agreement is an arrangement between a financial institution and the IRS where the financial institution agrees to reimburse the IRS when a negotiable instrument purchased by a taxpayer has not been negotiated. If indemnity agreement requests are not processed properly, the IRS runs the risk of collecting twice for the same tax assessment. The double payment will generate a refund to the taxpayer, thus causing undue burden on the taxpayer to contact the IRS on a tax matter he or she previously thought was settled.

IRS management has not taken the appropriate steps to ensure indemnity agreement requests are developed and processed in accordance with established guidelines. Requests did not always contain appropriate authorizations, were not always properly controlled, and case files were not sufficiently documented to evidence work performed.

Summary of Recommendations

To improve procedures for preparing and approving revenue accounting reports generated in the IRS National Office and the processing of indemnity agreement requests, we made recommendations to:

Establish a formal review process.
Ensure that the responsible analysts receive adequate training.
Ensure that all report preparation procedures contain sufficient guidance.
Ensure that all related report documentation is maintained in a central location.
Establish and enforce due dates for all time-sensitive reports.
Ensure that indemnity agreement processing and review procedures are followed.

Management’s Response: IRS management agreed with our recommendations and plans to institute an additional level of independent review and validation of all issued reports, provide training to report analysts, update desk procedures concerning due dates and approval processes, consolidate report files, monitor the submission of reports by required due dates, and review all indemnity agreement cases for proper processing. Management’s complete response to the draft report is included as Appendix VI.