In its role as the nation's tax collector, the Internal Revenue Service (IRS) has a demanding responsibility for collecting taxes, processing tax returns, and enforcing the nation's tax laws. Since GAO's first audit of IRS's financial statements in fiscal year 1992, a number of weaknesses in IRS's financial management operations have been identified. In related reports, GAO has recommended corrective action to address those weaknesses. Each year, as part of the annual audit of IRS's financial statements, GAO not only makes recommendations to address any new weaknesses identified, but also follows up on the status of weaknesses GAO identified in previous years' audits. The purpose of this report is to assist IRS management in tracking the status of audit recommendations and actions needed to fully address them.

As in past years, IRS has continued to make improvements to address a number of financial management weaknesses. At the same time, a number of the open audit recommendations have been outstanding for an extended period of time. IRS has continued to experience delays in the implementation of the new systems intended to correct some of these long-standing deficiencies. Others, however, could be resolved with additional management attention. The continued existence of these financial management weaknesses exposes IRS to loss due to errors or theft and impairs the availability of current, accurate financial information that management needs to make decisions on a day-to-day basis. Of 118 recommendations related to financial management (consisting of 76 recommendations open as of April 2004, 9 recommendations included in GAO's January 2005 report on the timeliness of IRS lien releases, 3 recommendations included in GAO's March 2005 report on the Brookhaven Service Center Campus rampdown, and 30 new recommendations included in GAO's management report for fiscal year 2004), GAO is closing 34 due to effective actions IRS has taken to address the issues that gave rise to them. These actions were verified by GAO in the course of conducting the audit of IRS's fiscal year 2004 financial statements. Of the remaining 84 financial management recommendations GAO considers open as of the date of this report, 75 are short term (capable of being addressed within 2 years) and 9 are long term (expected to require more than 2 years to implement). IRS considers 40 (48 percent) of the 84 recommendations to be closed. GAO considers 21 of these 40 to be still open because it has not yet had an opportunity to verify the actions taken by IRS. The actions cited by IRS for these 21 recommendations are recent and were taken after GAO's financial statement audit work for the year was completed. For 18 of the 40 recommendations that IRS considers closed, GAO found that action taken by IRS has not yet been fully effective in addressing the conditions that gave rise to the recommendations. IRS disagrees with the remaining recommendation. IRS continues to exhibit a strong commitment to addressing its ongoing financial management problems and has made improvements in recent years that have resulted in the closing of many recommendations. At the same time, the continued existence of the serious financial management weaknesses that gave rise to the remaining open recommendations represents a serious obstacle that IRS needs to overcome to achieve effective financial management. IRS stated that it has begun to address the 42 new recommendations included in the report. GAO will review these corrective actions and the status of IRS's progress in implementing all open recommendations as part of the fiscal year 2005 audit.

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