IRS gets clean audit, but problems linger, says GAO

The Internal Revenue Service has an unusual problem when reporting its financial statements: Many of its numbers are secret.

This poses extra challenges for the agency, which is required by 1990 Chief Financial Officers Act to file audited financial statements every year, forcing the tax-collecting behemoth to publicly report on its complicated system. In a new report, the Government Accountability Office gave the IRS a clean audit for the fifth consecutive year, but also described serious problems with internal controls, financial management and compliance with regulatory statutes. IRS financial management has been on GAO's list of programs vulnerable to waste, fraud and abuse since 1995.

"One of the things the IRS is not able to do is routinely put out reliable information," said Steve Sebastian, director of financial management and assurance for the GAO and lead director of the report.

The report stated IRS "did not provide reasonable assurance that losses, misstatements and noncompliance with laws … would be prevented or detected on a timely basis." If the agency was doing something wrong, according to GAO, the mistake could go unnoticed. For an agency that collects about $2 trillion annually in tax revenue, or 95 percent of government revenues, mistakes could mean significant losses and inaccurate data for the government.

Despite the high stakes, fixing the reporting problems isn't easy. "Taxpayer information is protected and privileged," said Tabetha Mueller, spokeswoman for the House Government Reform Subcommittee on Government Efficiency and Financial Management, which means the IRS needs a custom-made financial reporting system. "There's probably no other organization in the world that could use a program like what they need," she added.

So far, implementing a modern reporting system has eluded the agency. "IRS' most serious remaining problems are caused by its inadequate automated systems, and these problems will continue to exist until its systems are replaced," the report noted.

The IRS maintains separate databases for collecting personal taxpayer information and financial reporting, said Terry Lemons, spokesman for the agency. The financial reporting system, which is being replaced by a new system called Integrated Financial System, takes only the aggregate numbers from the individual system. "No individual information gets entered into IFS," said Lemons. "There's no issue in terms of taxpayer confidentiality."

The fact that the two systems must be kept separate increases the chances of mistakes, said GAO's Sebastian. "Your master file does not flow and is not integrated with the management system," he said.

The system that collects individual taxpayer information, which uses technology dating back to the 1960s, is also slowly being replaced by a new system, called the Customer Account Data Engine. When both systems are fully operational, which could take several years, the information gathered from CADE will be passed through a third system, the Custodial Accounting Project, and entered into IFS. The GAO report noted delays in the implementation of both new systems.

In a letter accompanying the report, IRS generally agreed with GAO's assessment, and pointed toward its modernization efforts. "The IFS is a key component of eliminating the remaining material weakness in financial reporting," wrote John Dalrymple, deputy commissioner for operations support at the IRS. While agency officials said IFS should be in use by the first-quarter of fiscal 2005, GAO reported that "full operational capacity of IFS is several years away and its success if far from assured."

Still, the clean audit represents significant progress for the agency. And GAO, which audits IRS annually, is not an easy grader.

"They are the toughest auditor in the world," said Mueller.