The Internal Revenue Service's efforts to update its systems need to be ramped up a notch or two if the agency is to remain compliant with federal law, according to a new report from the Government Accountability Office (formerly the General Accounting Office).
The GAO conducted a financial audit of the tax agency's fiscal 2004 statements. It noted that the IRS, while making significant strides in modernizing its internal processes, is deficient in several key operating areas - areas that could leave the agency prone to further inefficiencies and possibly compromise taxpayer data.
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The IRS was commended for meeting its reporting deadline in a very timely manner while simultaneously implementing its new Integrated Financial System, a process that the agency says will eliminate many of the weaknesses spelled out in the GAO report. Despite such praise, the GAO stated that this speedy reporting was gained via "extensive compensating procedures."
Among the IRS's chief vulnerabilities or "material weaknesses" spelled out in the GAO document are:
- Weaknesses in controls over the financial reporting process, resulting in the IRS (a) not being able to prepare reliable financial statements without extensive compensating procedures and (b) not having current and reliable ongoing information to support management decision making and to prepare cost-based performance measures;
- Weaknesses in controls over unpaid tax assessments, resulting in the IRS being unable to properly manage unpaid assessments and leading to increased taxpayer burden;
- Weaknesses in controls over the identification and collection of tax revenues due the federal government and over the issuance of tax refunds, resulting in lost revenue to the federal government and potentially billions of dollars in improper payments;
- Weaknesses in information security controls, resulting in increased risk of unauthorized individuals being allowed to access, alter, or abuse proprietary IRS programs and electronic data and taxpayer information.
In addition, the GAO found what it called "reportable conditions" that cause deficiencies in certain procedures. For example, the auditors found a lack of controls over hard-copy tax receipts and taxpayer data, something that can potentially result in the tampering or loss of this vital information. The GAO also said there were deficiencies in controls over property and equipment, which prevent the agency from maintaining reliable and timely information on plant and equipment throughout the year.
Furthermore, the report concludes that the IRS's problems run even deeper.
As agency resources for enforcement have declined, its workload in this area has actually increased. This resulted in declining trends in the agency's enforcement statistics. The IRS needs to have current information on compliance from all tax groups.
According to the report: "IRS continues to lack accurate, useful, and timely financial information and sound controls with which to make fully informed decisions and to ensure ongoing accountability, which is the end goal of the CFO Act."
The agency is actually relying on data that is largely from the late 1980s. If it wishes to properly enforce the tax laws, current data is required. The GAO does acknowledge that the IRS has begun the process of gathering more recent statistical information on certain tax cohorts.
Any effort by this agency to overhaul itself is a mammoth task when one considers the massive amount of information with which it deals. It is only when the IRS fully addresses these problems that it will truly obtain the level of efficiency required of it.
And to its credit, the IRS is trying.
The tax agency anticipates that the new Integrated Financial System will be fully operational in January 2005, despite the GAO's doubts. (The release of IFS was delayed several times.)
Already, the IRS has expanded its e-filing system, making it available to corporations. It has also begun processing individual tax returns on its new Customer Account Data Engine. The new data engine will replace the agency's antiquated master file system, a time-consuming process involving magnetic tape files. However, GAO cautions that any malfunction in these systems can negatively affect the integrity of the IRS's financial records.
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