This audit was initiated to assess the Internal Revenue Service’s (IRS) compliance with the Federal Financial Management Improvement Act of 1996 (FFMIA) requirements for preparing a remediation plan to correct identified financial management weaknesses.

Our audit objective was to review the current remediation plan to ensure that all FFMIA deficiencies reported in the Fiscal Years (FY) 1997 and 1998 IRS Financial Statement Audit reports were addressed, the remediation plan was prepared in accordance with the FFMIA and Office of Management and Budget (OMB) guidance, and the plan was consistent with other Treasury Bureau plans. This review was conducted as part of an agency-wide review of all Treasury bureaus. The Treasury Inspector General for Tax Administration (TIGTA) reviewed the IRS, and the Treasury Office of Inspector General (OIG) reviewed the remaining bureaus.

Our audit work was performed in the National Office, Office of the Chief Financial Officer (CFO). This audit was performed in February and March 2000 in accordance with Government Auditing Standards.

We will be conducting a more detailed follow-on review to evaluate the effectiveness of the remedies and the progress the IRS is making in implementing the remediation plan.

Major contributors to this report are listed in Appendix I. Appendix II contains the Report Distribution List.

The FFMIA emphasizes certain financial management system requirements that are established by Executive Branch policies. The Act also establishes new requirements for auditors to report on agency compliance with these basic requirements and for agency heads to correct deficiencies within a certain time period.

Each agency is required to implement and maintain financial management systems that comply substantially with federal financial management systems requirements, applicable federal accounting standards, and the United States Government Standard General Ledger at the transaction level. Further, if the head of the agency determines that the agency’s financial management systems do not comply with the above requirements, the head of the agency, in consultation with the Director of the OMB, shall establish a remediation plan. The remediation plan should include resources, remedies, and intermediate dates necessary to bring the agency’s financial management systems into substantial compliance.

The General Accounting Office (GAO) and the Treasury OIG have identified numerous internal control weaknesses in the IRS’ financial operations during their audits of the annual financial statements. The GAO reported material weaknesses in the IRS’ reporting of unpaid assessments, refunds, property and equipment, and accounting for liabilities and accrued expenses. Based on the above material weaknesses, the IRS’ financial systems did not substantially comply with the FFMIA requirements, and the IRS was required to prepare a remediation plan.

As required by the FFMIA, the IRS prepared a remediation plan. The plan was separated into the two major components of the IRS’ financial systems--Custodial and Administrative. The Department of the Treasury developed a standard template to be used by its bureaus to ensure consistency. The CFO modified the format of the standard template to meet its unique needs. The Department reviewed and approved this modification.

The remedies included in the plan were developed by the organizations that would be most responsible for correcting them. For example, weaknesses related to the IRS’ computer modernization plans were the responsibility of the Chief Information Officer. Each organization is responsible for identifying applicable remedies, resources, and target dates, as well as tracking the status of the weakness. Each designated IRS organization is also responsible for reporting the implementation status of each weakness to the CFO.

The overall methodology used by the CFO to develop the remediation plan was reasonable and is consistent with the Department of the Treasury’s standard template. The remedies that are included in the remediation plan appear to be sound, directly address the reported weaknesses, and provide long-term solutions.

However, the remediation plan does not fully comply with the requirements of the FFMIA in all instances. Specifically, the plan does not include or is not clear on all reported weaknesses, target dates were not always identified or exceeded the three-year time frame without the OMB’s concurrence, and resource commitments were not always identified or were unclear.

The GAO reviewed the remediation plan during its FY 1999 IRS financial statement audit and reported that two weaknesses identified in prior reports were either not incorporated or not clearly incorporated. The plan does not address the inability to report cost accounting information. Further, the plan does not clearly address the lack of a general ledger that complies with the United States Government Standard General Ledger. Our audit work confirmed the non-inclusion and lack of clarity of these two weaknesses.

The FFMIA requires that a remediation plan be established once the head of the agency determines that the agency’s financial management systems are not in compliance. Additionally, OMB Circular A-11, Preparing and Submitting Budget Estimates, states that initiatives comprising an agency’s FFMIA remediation plan must be identified and include resources, remedies, and target dates to bring the agency into compliance. In response to the financial statement audit reports, the IRS agreed with the weaknesses identified and that the IRS’ financial management systems were not in compliance.

The CFO’s staff advised TIGTA that the prior year weakness concerning cost accounting information was inadvertently omitted from the remediation plan and the weakness concerning the United States Government Standard General Ledger was not clearly presented in the plan. The CFO stated that he will ensure that these weaknesses, along with any new weaknesses identified from the FY 1999 financial statement audit, are clearly incorporated in the next quarterly update of the remediation plan.

By not clearly including all reported financial management weaknesses in the remediation plan, the IRS cannot assure itself that it will be able to bring its financial management systems into compliance with the requirements of the FFMIA.

We identified weaknesses that do not meet the preparation requirements of the FFMIA in that some target dates for the remedies were not identified or exceeded the three-year time frame without concurrence from the OMB. The remediation plan identifies 47 weaknesses (38 custodial and 9 administrative). Eight weaknesses identified from the custodial plan had target dates that were indicated as "to be determined" or were set past the three-year limit. In the administrative plan, a target date for one of the weaknesses was indicated as "ongoing."

The issues concerning target dates not including the requisite level of detail or exceeding the three-year requirement, without OMB concurrence, have been communicated in the past. The Treasury Deputy CFO conducted a review of the remediation plan that was submitted after the FY 1997 audit and identified the same issues.

Section 803 (c)(4) of the FFMIA states that a remediation plan shall bring the agency’s financial management systems into substantial compliance within three years, otherwise concurrence of the extension must be requested from the Director of the OMB. In addition, if compliance cannot be achieved within the required time frame, the agency must designate an official who is responsible for bringing the agency’s financial management systems into compliance.

The CFO’s staff advised that, due to the complexity of certain remedies, the subject target dates were not specifically identified. Also, while the Department of the Treasury is ultimately responsible for obtaining the OMB’s concurrence for all remedies that exceed the three-year limit, the CFO did not communicate in writing to the Department the need to obtain such concurrence. The Deputy CFO, however, advised that discussions were held at the Departmental level on this matter.

By not identifying specific target dates for all remedial actions and setting target dates that exceed the three-year limit without the OMB’s concurrence, the IRS cannot assure itself that remedial actions will timely address and correct reported financial management weaknesses.

We identified 11 weaknesses from the custodial plan for which resources were not determined or were unclear. Further, no resources were indicated for any of the nine weaknesses listed in the administrative plan. As a result, 20 of the 47 weaknesses lacked resource commitments.

The OMB Circular A-11 states that initiatives comprising an agency’s FFMIA remediation plan must be identified and include resources, remedies, and target dates to bring the agency into substantial compliance.

In discussions we held with the CFO’s staff, they indicated that resources were not identified for several remedies because the required resources were unknown.

The lack of resources included in the plan has been communicated in the past. The Treasury Deputy CFO conducted a review of the remediation plan that was submitted after the FY 1997 audit and identified the same issue.

By not determining the extent of resources needed to fully implement remedial actions, the IRS cannot effectively evaluate the commitments needed to correct cited weaknesses and avoid further non-compliance with the requirements of the FFMIA.

1. The CFO should ensure all weaknesses identified in the financial statement audit reports are included in the remediation plan, and are clearly stated.

Management’s Response: CFO management will include the lack of cost accounting information in subsequent remediation plans until this non-compliance is adequately addressed. However, they believe the IRS’ lack of a standard general ledger is adequately addressed in their plan. Management’s complete response to the draft report is included as Appendix III.

Office of Audit Comment: Although IRS management responded that they believed the issue of the standard general ledger was adequately addressed in their remediation plan, they did add an additional item (# 40) to the plan, which specifically addresses the cited weakness and also satisfies our recommendation on clarity.

2. The CFO should ensure that target dates are identified for all remedial actions and that the Department of the Treasury is promptly notified in writing of all target dates that exceed the three-year limit so that the Department can seek concurrence from the Director of the OMB.

Management’s Response: CFO management will identify target dates for remedial actions. Also, many of the target dates established in the plan exceed three years, and OMB concurrence has not been obtained as required by the FFMIA. However, they have been unable to identify the procedure for securing OMB approval and have raised this issue with the Department and the OMB.

3. The CFO, in consultation with IRS officials responsible for the corresponding weaknesses, should determine the resources needed to fully implement all remedial actions.

Management’s Response: CFO management is taking actions to ensure that resources necessary to remedy FFMIA non-compliance are addressed in greater detail in their plans.

Overall, the IRS remediation plan is reasonable and is consistent with the Department of the Treasury’s standard template. However, the remediation plan does not fully comply with FFMIA requirements. Specifically, all reported weaknesses were not included or not clearly included in the plan, target dates were not identified or exceeded the three-year time frame without the OMB’s concurrence, and resource commitments were not always identified or were unclear.

Without fully complying with FFMIA remediation plan preparation requirements, the IRS cannot ensure that all financial management weaknesses are adequately and timely resolved.

Maurice S. Moody, Associate Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs)

John Wright, Director

Thomas Brunetto, Audit Manager

Jill Moore, Senior Auditor

Melinda Pope, Senior Auditor

Dawn Smith, Senior Auditor

Andrew Harvey, Auditor

Deputy Commissioner Operations C:DO

Chief Financial Officer CFO

Chief, Management and Finance M

National Taxpayer Advocate C:TA

Office of the Chief Counsel CC

Office of Management Controls CFO:A:M

Director for Legislative Affairs CL:LA

Director, Office of Program Evaluation and Risk Analysis M:O

Audit Liaison: Chief Financial Officer CFO

The response has been removed due to its size. To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.