United States Government Accountability Office GAO November 2010 Report to the Secretary of the Treasury _part2 pot

Page 10 GAO-11-142 IRS’s Fiscal Years 2010 and 2009 Financial Statements




rely on its general ledger system for tax transactions and underlying
subsidiary records to report federal taxes receivable, compliance
assessments, and write-offs in accordance with federal accounting
standards without significant compensating procedures,
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(2) lack of
transaction traceability for the reported balance in taxes receivable that
com
prises over 80 percent of IRS’s total assets as of September 30, 2010,
and an effective transaction-based subledger for unpaid tax assessment
transactions, and (3) inability to effectively prevent or timely detect and
correct errors in taxpayer accounts. These internal control deficiencies are
caused primarily by IRS’s continued reliance on software applications that
were not designed to provide the accurate, complete, and timely
transaction-level financial information that management needs to make
well-informed decisions or to accumulate and report financial information
in accordance with federal accounting standards. These problems are
likely to continue to exist until these software applications are either
significantly enhanced or replaced. Successfully addressing these issues is
vital and is one of the goals of IRS’s ongoing systems modernization effort.
Material Weakness in
Internal Control over
Information Security
During fiscal year 2010, IRS continued to have a material weakness in its
internal control related to its management of information systems security.
IRS made progress during fiscal year 2010 in addressing several

information security weaknesses identified in our previous audits.
Specifically, IRS (1) upgraded key Integrated Financial System (IFS)
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servers, (2) discontinued the use of unencrypted protocols for the servers
supporting its procurement system, and (3) limited access to certain key
financial documents used for input into IFS. Nevertheless, persistent,
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Federal accounting standards classify unpaid tax assessments into one of the following
three categories for reporting purposes: federal taxes receivables, compliance assessments,
and write-offs. Federal taxes receivable are taxes due from taxpayers for which IRS can
support the existence of a receivable through taxpayer agreement or a favorable court
ruling. Compliance assessments are tax assessments where neither the taxpayer nor the
court has affirmed that the amounts are owed. Write-offs represent unpaid tax assessments
for which IRS does not expect further collections because of factors such as the taxpayer’s
death, bankruptcy, or insolvency. Of these three classifications of unpaid tax assessments,
only federal taxes receivable, net of an allowance for uncollectible amounts, are reported on
the financial statements.
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IFS is IRS’s administrative accounting system, which IRS uses to facilitate core financial
management activities, including general ledger, budget formulation, accounts payable,
accounts receivable, funds management, cost management, and financial reporting. IFS
does not process or report IRS’s tax related transactions including tax revenues, tax
refunds, and taxes receivable.
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