The Internal Revenue Service Has Improved Revenue Accounting
Controls Over Deposit Discrepancies
January 2000
Reference Number: 2000-10-027
This report remains the property of the Treasury Inspector General for Tax Administration (TIGTA) and may not be disseminated beyond the Internal Revenue Service without the permission of TIGTA.
January 28, 2000
MEMORANDUM FOR COMMISSIONER ROSSOTTI
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – The Internal Revenue Service Has Improved Revenue Accounting Controls Over Deposit Discrepancies
This report presents the results of our review of improvements the Internal Revenue Service (IRS) has made over deposit discrepancies. The objective of the review was to evaluate the effectiveness of IRS management’s corrective actions to resolve deposit discrepancies, obtain management approval for reversing erroneous accounting entries, and ensure only authorized employees had access to the accounting system.
In summary, we found the IRS has reduced the risks associated with the deposit process and has provided reasonable assurance that the IRS is effectively managing deposit discrepancies at its service centers. Personnel in the National Office appropriately issued procedures to require management approval to reverse erroneous accounting entries to the general ledger and review accounting system security reports.
In commenting on a draft of this report, IRS management stated that they appreciated the validation of their efforts to resolve deposit discrepancies, obtain management approval for reversing erroneous accounting entries, and ensure only authorized employees had access to the accounting system. These efforts, along with the implementation of the Interim Revenue Accounting Control System, have improved the accuracy and integrity of the revenue accounting operations. The full text of management’s comments is included as an appendix to this report.
Copies of this report are also being sent to the IRS managers who are affected by its content. Please contact me at (202) 622-6510 if you have any questions, or your staff may contact Maurice S. Moody, Associate Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs), at (202) 622-8500.
Internal Revenue Service Guidelines Were Adequately Revised
Service Center Personnel Timely Reviewed Daily and Monthly Reports to Resolve Deposit Discrepancies
Appendix I - Detailed Objective, Scope, and Methodology
Appendix II - Major Contributors to This Report
Appendix III - Report Distribution List
Appendix IV - Management Actions from Prior Audit Report
Appendix V - Management’s Response to the Draft Report
Deposit discrepancies occur when the Internal Revenue Service (IRS) service centers’ daily deposits do not reconcile with the information sent by the depository bank. We previously reported these deposit discrepancies to the IRS and it effectively implemented our recommendations for corrective action. As a result, the IRS has reduced the risks associated with the deposit process, and has provided reasonable assurance that the IRS is effectively managing deposit discrepancies at the service centers.
This audit is a follow-up to our prior report, Review of Revenue Accounting Controls Over Deposit Discrepancies (Reference Number 081705, dated January 9, 1998). Our primary objective was to evaluate the effectiveness of IRS management’s corrective actions to resolve deposit discrepancies, obtain management approval for reversing erroneous accounting entries, and ensure only authorized employees had access to the accounting system.
Results
The IRS has effectively established and implemented procedures to timely resolve deposit discrepancies at the IRS’ service centers. National Office personnel appropriately issued, and field offices implemented, procedures to require management approval for reversing erroneous accounting entries to the general ledger and managerial review of the accounting system security reports to verify only authorized employees had access to the system. In addition, management continues to emphasize the verification of unconfirmed deposit tickets.
Internal Revenue Service Guidelines Were Adequately Revised
Internal Revenue Manual and Program Evaluation changes were issued to timely resolve deposit discrepancies, as well as requiring management review and approval of general ledger reversing entries and employee access to the accounting system.
Service Center Personnel Timely Reviewed Daily and Monthly Reports to Resolve Deposit Discrepancies
Our review of 300 discrepancies totaling $77.7 million showed that 275 had been reviewed timely. Of the 25 that were over 9 days old, 5 included required documentation for actions taken. The 20 discrepancies totaling $3.9 million without adequate documentation were in 1 Service Center. These omissions occurred because the required procedures were not effectively communicated to service center employees. Service Center Accounting management took immediate corrective action after we notified them of the problem. In addition, service center employees followed up to ensure the receipt of all 61 deposits, totaling $56.1 million, in which a confirmation had not been timely received.
Service Center Management Properly Approved Reversing Entries to the General Ledger and Effectively Conducted Reviews of Accounting System Security Reports
Service Center management properly approved and documented the 98 reversing entries totaling $401 million that were made during the period September through November 1998. Service Center management also reviewed the accounting system security reports to ensure only authorized persons could access the system and there were no improper accesses.
Management’s Response: IRS management said that they appreciated the validation of their efforts to resolve deposit discrepancies, obtain management approval for reversing erroneous accounting entries, and ensure only authorized employees had access to the accounting system. These efforts, along with the implementation of the Interim Revenue Accounting Control System, have improved the accuracy and integrity of the revenue accounting operations.
Our primary objective was to evaluate the effectiveness of the Internal Revenue Service (IRS) management’s corrective actions to resolve deposit discrepancies, obtain management approval for reversing erroneous accounting entries, and ensure only authorized employees had access to the accounting system. This follow-up audit was conducted at the Andover, Kansas City, Memphis, and Ogden Service Centers from September 1998 through January 1999 in accordance with Government Auditing Standards.
To accomplish our objective, we evaluated changes to written guidelines and procedures; interviewed service center personnel and identified procedures being followed to resolve discrepancies between the IRS and the Department of the Treasury’s Financial Management Service’s (FMS) records; analyzed deposits listed on the daily and monthly reports to determine if deposit discrepancies were timely reviewed; and analyzed manual deposits to determine if depository banks were contacted after 14 days to obtain a confirmed copy of the deposit ticket.
We also determined if Service Center Accounting management documented and approved the reversal of erroneous accounting entries to the general ledger, and reviewed accounting system reports to identify any employees either having unauthorized access to the accounting system or making improper accesses.
Appendix I contains the detailed objective, scope, and methodology for our review. Appendix II contains a listing of major contributors to this report.
Service centers are responsible for reconciling IRS deposits of taxpayer payments to actual deposits received and recorded at Federal Reserve Banks. The Accounting Branch personnel record information from IRS deposit tickets to the revenue accounting system at each service center. The deposits journalized in the IRS’ accounting system are transmitted to the FMS, and those recorded by the banks are sent to the FMS through a computer system that reports federal agency deposits.
The FMS compares deposit information received from the IRS and the Federal Reserve Banks, and forwards daily discrepancy reports to the service centers. These reports identify deposit mismatches involving dates, transaction numbers, or dollar amounts, and provide for early detection of deposits that may have been lost or possibly stolen in transit. The FMS also generates monthly discrepancy reports and Department of the Treasury Statement of Difference reports.
The FMS sends a separate letter alerting the service center director if a monthly Statement of Difference net balance remains at $100,000 or more for five months, or $1 million or more for three months. These reports monitor the unresolved monthly discrepancies between the IRS and the Department of the Treasury, and show the aggregate dollar amounts requiring resolution. For example, in October 1998, the average Statement of Difference amount for the four service centers visited during our review was $10.9 million.
This audit is a follow-up to our prior report, Review of Revenue Accounting Controls Over Deposit Discrepancies (Reference Number 081705, dated January 9, 1998). Appendix IV contains management’s corrective actions in response to the following recommendations made in that report:
The IRS has effectively established and implemented procedures to timely resolve deposit discrepancies at IRS service centers. National Office personnel have appropriately issued procedures to require management approval to reverse erroneous accounting entries to the general ledger, managerial review of accounting system security reports, and continued management emphasis on verifying deposit tickets.
Internal Revenue Service Guidelines Were Adequately Revised
The National Office issued IRM and Systems Production Evaluation (PE) Report changes to timely resolve deposit discrepancies, as well as requiring management review and approval to reverse erroneous accounting entries on the general ledger and employee access to the accounting system. The changes to written guidelines required:
Service Center Personnel Timely Reviewed Daily and Monthly Reports to Resolve Deposit Discrepancies
IRS written procedures require Service Center Accounting personnel to review the discrepancy reports weekly. Service Center Accounting personnel are required to begin follow-up actions on all deposits that have not been confirmed within nine calendar days of the deposit’s prepared date. Initial follow-up is to be documented on the discrepancy report. All follow-up actions taken for deposits that are still unconfirmed five calendar days after the initial follow-up action must be documented on a history sheet.
Our review of 300 discrepancies, totaling $77.7 million and listed on daily discrepancy reports, showed that 275 had been reviewed timely. Twenty-five of the 300 were over 9 days old, with 5 showing required documentation for actions taken and 20 showing no documentation.
The 20 undocumented discrepancies totaling $3.9 million were isolated in 1 Service Center where required procedures had not been communicated to employees. After we informed the Service Center Director of the problem, she issued desk procedures to employees responsible for the reports. The Service Center Accounting unit manager was also directed to follow up monthly to ensure timely review.
Deposit discrepancy reports were reviewed timely
Federal Reserve Banks initiate and record debit vouchers to offset an IRS deposit if a deposit shortage occurs. The bank transmits the debit voucher information through a computer system to the FMS and sends a copy to the service center to journalize on the accounting system. The FMS also compares debit voucher information between the bank and the IRS accounting system. All deposit and debit voucher differences are listed on monthly reports.
IRS procedures require Interim Revenue Accounting Control System (IRACS) managers to conduct monthly follow-ups on items listed on the CASHLINK reports. (CASHLINK is a FMS system that downloads deposit record data daily to the IRACS.) Follow-up is to be documented on comprehensive history sheets. All report items are to be reconciled within six months. Our review of 56 discrepancies, totaling $38 million from recent monthly reports, showed that all had been reviewed timely.
Service Center personnel timely initiated action to validate unconfirmed deposit tickets
The IRS is required to obtain a paper-confirmed copy of each deposit ticket from the Federal Reserve Bank and match it to the memorandum copy of the ticket. Deposits that do not have both a memorandum copy and a paper-confirmed copy of the deposit ticket are considered unconfirmed. Accounting procedures require follow-up on all deposits that do not have a paper confirmation within two weeks of the deposit date.
We determined that of 223 unconfirmed deposit tickets (memorandum copy only), 61 totaling $56.1 million were more than 14 days old. However, the Service Center employees had taken action to confirm, through the depository institution or the computer system, that the Department of the Treasury had received the 61 unconfirmed deposits.
Service Center Management Properly Approved Reversing Entries to the General Ledger and Effectively Conducted Reviews of Accounting System Security Reports
When a transaction is posted to the general ledger in error, the entry must be reversed before the correct entry can be made. These entries are commonly referred to as reversing entries. IRS guidelines require supervisory approval and documentation of all reversing entries made on the accounting system.
All of the 98 reversing entries (totaling $401 million) made during September, October, and November 1998 had been properly approved and documented by management.
Another control used to safeguard the accounting system is the use of the access list and the violation report. The IRS maintains a listing of persons authorized to use the accounting system. In addition, the system shows who accessed the system and generates a violation report for any incorrect or unauthorized access.
Service Center Accounting management conducted weekly reviews, from September through November 1998, of the access list and the violation reports. No unauthorized persons were shown on the accounting system access list and the current violation reports identified no unexplained accesses.
Management’s Response: IRS management said that they appreciated the validation of their efforts to resolve deposit discrepancies, obtain management approval for reversing erroneous accounting entries, and ensure only authorized employees had access to the accounting system. These efforts, along with the implementation of the Interim Revenue Accounting Control System, have improved the accuracy and integrity of the revenue accounting operations.
The IRS has effectively strengthened service center controls. These controls have ensured timely resolution of deposit discrepancies and increased security over the accounting system.
The IRS effectively established and generally implemented procedures to timely resolve deposit discrepancies, require management approval for reversing erroneous accounting entries to the general ledger, ensure management review of security reports, and verify unconfirmed deposit tickets.
These procedures have reduced the risks associated with the deposit process and provide reasonable assurance that the IRS is effectively resolving deposit discrepancies at its service centers. The IRS’ efforts to improve controls over deposit discrepancies, along with the implementation of the IRACS, have improved the accuracy and integrity of the revenue accounting operations.
Appendix I
Detailed Objective, Scope, and MethodologyOur primary objective was to evaluate the effectiveness of Internal Revenue Service (IRS) management’s corrective actions to resolve deposit discrepancies, obtain management approval for reversing erroneous accounting entries, and ensure only authorized employees had access to the accounting system. The evaluation of deposit discrepancies excluded electronic deposits because the IRS’ corrective action was directed toward deposits physically received at the districts or service centers rather than electronically transmitted, such as Federal Tax Deposits.
To accomplish our objectives, we:
Appendix II
Major Contributors to This ReportMaurice S. Moody, Associate Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs)
Gary E. Lewis, Director
Gary L. Young, Audit Manager
Hal Schultz, Senior Auditor
Steve Vandigriff, Senior Auditor
Richard Lambrecht, Auditor
John P. Ojeda, Auditor
Tina Parmer, Auditor
Appendix III
Report Distribution ListDeputy Commissioner Operations C:DO
Chief Operations Officer OP
Chief Financial Officer M:CFO
Executive Officer for Service Center Operations OP:SC
Assistant Commissioner (Forms and Submission Processing) OP:FS
Director, Office of Program Evaluation and Risk Analysis M:O
National Director, Submission Processing OP:FS:S
Chief, Accounting Branch OP:FS:S:A
National Director for Legislative Affairs CL:LA
Office of Management Controls M:CFO:A:M
Office of the Chief Counsel CC
Director, Andover Service Center D
Director, Kansas City Service Center D
Director, Memphis Service Center D
Director, Ogden Service Center D
Appendix IV
Management Actions from Prior Audit ReportManagement Actions has been removed due to its size. To see the complete Management Actions, please go to the Adobe PDF version of this report.
Appendix V
Management’s Response to the Draft ReportResponse has been removed due to its size. To see the complete Response, please go to the Adobe PDF version of this report.