GAO: Taxpayer information vulnerable to abuse

Two weeks after Americans turned in their taxes, the Government Accountability Office announced the tax agency lacked proper controls over taxpayer information, payments and refunds.

The report (GAO-05-247R) uncovered improper procedures that ranged from serious issues--such as failure to investigate contractor backgrounds--to less significant problems, such as the failure of some contractors to wear uniforms.

GAO said that at three of the four IRS service centers visited in the last month, certain contractors had not been subject to background checks but nevertheless were granted access to areas containing sensitive information.

"Until the IRS ensures that only contractors who have successfully met background investigation requirements have access to taxpayer receipts and sensitive information, and that service center security offices can verify that these requirements have been met, the federal government will be unnecessarily exposed to the risk of loss, theft or abuse of taxpayer receipts and information," the report stated.

Steven Sebastian, a director of financial management and assurance at GAO and author of the report, said that despite the remaining weaknesses, the IRS has made significant progress over the last decade. Sebastian said that in 1997, "controls were atrocious," and tens of millions of dollars in taxpayer receipts were couriered between locations by unarmed cyclists. Today, he said, the IRS requires secure cars with at least two drivers and prohibits them to stop anywhere.

GAO also expressed concern about the process of IRS "candling," in which taxpayer envelopes that are on the way to trash get passed over a light in order to confirm they are empty. GAO officials observed that often, the envelopes just fell into the trash and were shredded without confirmation that they were empty.

The report also said that documents and payments are not always double-checked before they are mailed out to taxpayers. Having two people complete related tasks, such as preparing and mailing envelopes, is a typical internal control that is designed to reduce the risk of waste, fraud and abuse. GAO recommended that the IRS issue new guidelines and written reminders about the need to adhere to procedures.

In a written response included with the report, the IRS generally agreed with its findings and said that some problems already have been addressed, such as the tightening up of background investigations of contractors. An IRS spokesman said the agency had no comments beyond the released response.

The report follows a November 2004 audit of IRS financial statements, which also pointed to internal control weaknesses. Its release coincided with a GAO review of the fiscal 2006 IRS budget request, which includes an 8 percent spending increase on enforcement along with a slight decrease in spending on taxpayer services. The watchdog agency recommended that the IRS explain how taxpayers would be affected by the proposed changes.