Pursuant to a legislative requirement, GAO provided information on the Internal Revenue Service's (IRS) internal controls and financial management systems.

GAO noted that: (1) IRS' internal control system remains plagued by weaknesses that adversely affect the agency's ability to safeguard assets from material loss, ensure material compliance with relevant laws and regulations, and ensure that material misstatements do not occur in its financial statements; (2) left uncorrected, these weaknesses significantly increase the risk that future financial statements of both IRS and the entire federal government as well as other IRS reports may not be reliable and that losses to the government could occur; (3) IRS' general ledger cannot distinguish categories of unpaid assessments to determine the portion that represents actual taxes receivable of the federal government; (4) IRS also does not have a detailed listing, or subsidiary ledger, for tracking and accumulating unpaid assessments; (5) these weaknesses resulted in tens of billions of dollars in adjustments to correct misclassifications and eliminate duplicate transactions; (6) IRS also continues to lack adequate documentation to support its unpaid assessments; (7) controls over service center cash and checks received directly from taxpayers are not sufficient to adequately reduce the exposure to loss; (8) between 1995 and 1997, IRS identified $5.3 million in actual or alleged embezzlement by service center employees; (9) some refunds should not have been issued and some refunds were issued for incorrect amounts in fiscal year (FY) 1997; (10) control deficiencies also make IRS vulnerable to issuing duplicate refunds to the same person; (11) IRS is unable to determine the specific amount of revenue it collects for three of the federal government's four largest revenue sources at time of collection because it does not obtain the information necessary to do so; (12) during FY 1997, IRS did not distribute excise tax receipts to the relevant trust funds based on collections as required by the Internal Revenue Code; (13) IRS officials have indicated that they implemented a method in June 1998 for certifying excise tax distributions based on collections; (14) IRS' general ledger cannot routinely generate reliable and timely financial information; (15) as a result, in FY 1997 IRS' systems did not comply with the Federal Management Improvement Act of 1996; and (16) these weaknesses illustrate the extent to which IRS still has extensive work ahead of it to fully address and resolve its internal control and financial management system deficiencies.

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