IRS Financial Management Systems Have Problems

The Internal Revenue Service’s financial management systems are unlikely to comply with federal laws at least until 2014, according to a new report.

The report, by the Treasury Inspector General for Tax Administration, noted that the Federal Financial Management Improvement Act of 1996, or FFMIA, requires that federal financial management systems provide accurate, reliable, and timely financial management information to government managers.

In November 2010, the Government Accountability Office reported that the IRS's financial management systems do not comply with FFMIA requirements. Specifically, the IRS does not post tax-related transactions in conformance with federal government requirements, and its records lack adequate traceability for taxes receivable.

The IRS also has material weaknesses in its internal controls over both information security and unpaid assessments. The information security material weakness compromises the accuracy and availability of the IRS's financial information and places sensitive information regarding taxpayers and IRS operations at risk, TIGTA noted. The unpaid assessments material weakness affects the IRS's ability to effectively manage unpaid taxes, penalties and interest.

Another recent GAO report that was released earlier this month also found material weaknesses and deficiencies in internal controls at the IRS. The report noted, however, that the IRS has made progress in improving its internal control and financial management since the first financial statement audit in 1992.

As required by FFMIA, TIGTA assessed the status of the IRS's efforts to meet its target dates for remediating its noncompliance. In their remediation plan, IRS officials stated that they plan to close this material weakness over unpaid assessments by Nov. 30, 2014, pending successful implementation of the Customer Account Data Engine Release 2, or CADE 2. However, TIGTA found that the IRS's FFMIA remediation plan did not include any remediation actions and costs for CADE 2.

Because CADE 2 is the key piece of the IRS's strategy to address its material weakness related to unpaid assessments, TIGTA believes these actions should be included in the remediation plan. The IRS was also unable to provide supporting documentation for certain resource estimates for the CADE 2, totaling $697.2 million. Until the IRS updates its FFMIA remediation plan with actions related to its CADE 2 strategy, TIGTA will be unable to fully assess its overall progress in resolving noncompliance with its financial management systems.

“The IRS’s continued noncompliance with FFMIA will need to be closely monitored,” said TIGTA Inspector General J. Russell George in a statement. "Complete and reliable financial information is critical to the IRS's ability to accurately report on the results of its operations to both internal and external stakeholders, including taxpayers.”

TIGTA recommended that the IRS include necessary actions and costs associated with the implementation of CADE 2 in future FFMIA remediation plans and ensure the remediation plans contain complete and accurate information for nonsecurity items.

The IRS agreed with TIGTA’s recommendations except the recommendation that the IRS include all necessary actions and costs associated with the implementation of CADE 2 in its FFMIA remediation plan.