Summary: In November 2006, 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, 2006, and 2005, and on the effectiveness of its internal controls as of September 30, 2006. 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 audit of IRS's financial statements as of, and for the fiscal year ending September 30, 2006, 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 2006 audit report, they all warrant management's consideration. This report contains 21 recommendations that we are proposing IRS implement to improve its internal controls. We conducted our audit in accordance with U.S. generally accepted government auditing standards.
During our audit of IRS's fiscal year 2006 financial statements, we identified a number of internal control issues that adversely affected tax data, tax receipts, tax refunds, taxpayer penalties and fees, tax liens, and property and equipment. These issues concern: (1) encryption of off-site taxpayer data files, (2) placement of security cameras at tax return processing facilities, (3) manual refund policies and procedures, (4) refunds to taxpayers who owe payroll taxes, (5) assessment of taxpayer penalties, (6) timeliness of tax lien releases, (7) processing of Installment Agreement fees, and (8) procurement and security of property and equipment. The issues noted increase the risk that (1) taxpayer receipts and information could be lost, stolen, misused, or destroyed; (2) erroneous tax refunds could be issued; (3) taxpayers could be charged excess penalties or incorrect user fees; (4) tax liens may not be released promptly; and (5) physical assets could be stolen.
