Summary: In November 2004, 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, 2004 and 2003, and on the effectiveness of its internal controls as of September 30, 2004. 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 2004 audit regarding internal controls that could be improved for which we do not currently have any recommendations outstanding. Although not all of these issues were discussed in our fiscal year 2004 audit report, they all warrant management's consideration.
During our fiscal year 2004 audit, we identified a number of internal control issues that adversely affected safeguarding of tax receipts and information, refunds to taxpayers, and lien resolutions. These issues concern (1) enforcement of IRS contractor background investigation policies, (2) omission of certain provisions related to contingency plans and taxpayer privacy in lockbox bank service contracts, (3) verification of lockbox bank deposits, (4) procedures for handling taxpayer receipts and information by couriers, (5) safeguarding sensitive systems and equipment in lockbox banks, (6) candling procedures, (7) monitoring and verifying recording and transmittal of taxpayer receipts and information, (8) controls over automated refund disbursements, (9) controls over authorization of manual refunds, and (10) resolution of liens with manually calculated interest or penalties. These issues increase the risk that (1) taxpayer receipts and information could be lost, stolen, misused, or destroyed; (2) improper refunds to taxpayers could be disbursed; and (3) liens could be released before taxpayers have paid the full amount of interest or penalties due.
