In November 2003, we issued our report on the results of our audit of the Internal Revenue Service's (IRS) financial statements as of and for the fiscal years ending September 30, 2003 and 2002, and on the effectiveness of its internal controls as of September 30, 2003. We also reported our conclusions on IRS's compliance with significant provisions of selected laws and regulations and on whether IRS's financial management systems substantially comply with requirements of the Federal Financial Management Improvement Act of 1996. A separate report on the implementation status of recommendations from our prior IRS financial audits and related financial management reports including this one will be issued shortly. The purpose of this report is to discuss issues identified during our fiscal year 2003 audit regarding internal controls and accounting procedures that could be improved for which we do not presently have any recommendations outstanding. Although not all of these issues were discussed in our fiscal year 2003 audit report, they all warrant management's consideration.

During fiscal year 2003, we identified a number of internal control issues that adversely affected safeguarding of tax receipts, budgeting, operating costs, and financial reporting. These issues concern (1) enforcement of lockbox bank contractor policies, (2) courier service requirements, (3) lockbox bank management reviews, (4) candling, (5) safeguarding of taxpayer receipts and information at IRS field offices and service center campuses, (6) physical security, (7) deobligation of funds, (8) overpayments to employees' Thrift Savings Plan (TSP) accounts, (9) financial statement disclosures, and (10) interim performance measures.

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