Major Management Challenges at the Department of the Treasury

In the January 2003 performance and accountability report on the Department of the Treasury (Treasury), GAO identified specific performance and management challenges. GAO pointed out that many of these challenges are long-standing, that sustained management attention will be needed to correct the underlying weaknesses and implement needed improvements, and that Treasury's efforts to address these challenges may take several years. Since January 2003, GAO has continued to monitor the steps taken by Treasury to address these challenges and has issued a number of reports and testimonies on the department's progress. GAO found that Treasury has made some progress, but challenges remain. Major management challenges facing the U.S. Customs Service (Customs) were included in GAO's January 2003 Treasury report. With the move of Customs to the Department of Homeland Security (DHS), this year's discussion of those issues can be found on the DHS major management challenges Web page .

Treasury faces several different challenges in modernizing its largest bureau, the Internal Revenue Service (IRS) , including improving service to taxpayers, improving enforcement of the tax laws, developing and using meaningful performance measures, and improving IRS financial management. The root of many of these challenges can be found in IRS's antiquated computer systems, while much of IRS's potential for overcoming them lies in its multiyear Business Systems Modernization (BSM) program. Since January 2003, IRS has made progress, though more remains to be done. Both enforcement of tax laws and BSM are high-risk areas. For additional information, see High-Risk Series: An Update ( GAO-05-207 ).

Many measures of service to taxpayers, such as access to telephone assistance, have shown improvement since January 2003, with IRS meeting many of its performance goals. However, IRS did not improve in all dimensions of service and lacks sufficient data to evaluate quality in others. In particular, GAO continues to have concerns about the accuracy of IRS's answers to tax law questions. GAO has made several recommendations to IRS regarding service to taxpayers since January 2003, including recommendations to improve IRS's quality monitoring for specific taxpayer services.

The Commissioner of Internal Revenue has made strengthening enforcement a high priority, but IRS has not yet materially reversed enforcement declines. Enforcement staffing is still down from 1990s levels and while individual audit rates have increased in recent years, they are also still below where they were in the 1990s. IRS has initiatives under way to improve enforcement in key areas such as the Earned Income Tax Credit and abusive tax schemes. IRS is also currently completing research into taxpayer compliance that will likely lead to improved targeting of enforcement resources. GAO recommendations concerning IRS enforcement of the tax laws include more systematic planning of enforcement program improvement efforts and improved monitoring of specific enforcement efforts.

Since January 2003, GAO has continued to express concerns that although IRS has made increasing resources devoted to enforcement a priority, the increases have not been achieved. Although IRS achieved some efficiency gains in other areas, unbudgeted expenses and other operational workload increases have meant that IRS has not been able to shift resources into enforcement, despite budget requests that were almost fully funded in recent years .

IRS has developed 48 action issues related to its BSM effort and is taking action to resolve them and to address GAO's recommendations related to BSM and financial management. More remains to be done, however, and IRS continues to face program management problems—affecting cost, schedule, and performance—that have plagued past modernization efforts and that continue to affect IRS's ability to successfully modernize its operational and financial management systems. IRS also continues to run the risk that persistent weaknesses in information systems security may compromise the privacy of taxpayer information.

A key to Treasury's ability to effectively carry out its mission both at the department level and as fiscal agent for the U.S. government is sound financial management , including preparing information about the federal government's finances that is routinely available and reliable. Treasury received unqualified opinions on its departmentwide financial statements for fiscal years 2000 through 2004. In addition, for fiscal years 2002 through 2004, Treasury accelerated the issuance of its audited financial statements and issued them 6 weeks after the end of the fiscal year. However , Treasury continues to face challenges in its ongoing efforts to improve the reliability of its financial management systems, and to correct internal control weaknesses that GAO and Treasury's Office of Inspector General (OIG) have identified. Without reliable financial systems and information, as well as sound internal controls, Treasury cannot be sure that the information it has is sufficient to manage day-to-day operations, measure the results of agency and governmentwide operations, account for resources, collect taxes and other debts owed the federal government, or safeguard assets. Many of Treasury's most serious and intractable financial management weaknesses at the department level are primarily due to IRS's antiquated computer systems mentioned above. Since January 2003, GAO has made numerous recommendations relating to (1) improving controls over IRS's safeguarding of tax receipts, budgeting, operating costs, excise tax distributions, and financial reporting process; (2) Treasury's process for preparing the U.S. government's consolidated financial statements; and (3) improving the collection of certain nontax delinquent debt.

Certain material weaknesses related to financial systems (including information system security), fundamental record keeping and financial reporting, and incomplete documentation have prevented the U.S. government from obtaining an opinion on the reliability of its financial statements for the 8 years that GAO has reported on these statements. As preparer of the U.S. government's financial statements, Treasury's Financial Management Service (FMS) has key responsibility for leading efforts to address some of these problems—in particular, the lack of adequate systems, controls, and procedures to properly prepare the U.S. government's consolidated financial statements. During fiscal year 2004, Treasury made progress in laying the foundation to address certain long-standing material deficiencies in preparing the consolidated financial statements. Foremost is the ongoing development of a new system, the Governmentwide Financial Reporting System (GFRS), to collect agency financial statement information directly from federal agencies' audited financial statements rather than using federal agencies' U.S. Government Standard General Ledger data as Treasury had done in previous years to compile the consolidated financial statements. The goal of the new system is to be able to directly link information from federal agencies' audited financial statements to amounts reported in the consolidated financial statements, a concept that GAO strongly supports. Once Treasury is able to achieve this, it would eliminate a major impediment to GAO being able to audit the consolidated financial statements . In performing much of Treasury's role as primary fiscal agent for the federal government, FMS continues to make progress in addressing financial management issues related to implementing the requirements of the Debt Collection Improvement Act of 1996 (Pub. L. No. 104-134). In addition, FMS continues to take actions to improve its controls over information systems used to help it process collections and disbursements made on behalf of the federal government.

Although the Treasury OIG and GAO have reported that progress has been made in addressing certain financial management issues, sustained attention and priority by top management continues to be required for Treasury to fully address its financial management challenges.

Related GAO Products

Modernizing the Internal Revenue Service

Service and Enforcement

Earned Income Tax Credit: Implementation of Three New Tests Proceeded Smoothly, But Tests and Evaluation Plans Were Not Fully Documented. GAO-05-92 . Washington, D.C.: December 30, 2004.

Tax Administration: IRS Improved Performance in the 2004 Filing Season, But Better Data on the Quality of Some Services Are Needed . GAO-05-67 . Washington, D.C.: November 15, 2004.

Tax Administration: IRS Should Take Steps to Improve the Accuracy of Schedule K-1 Data . GAO-04-1040 . Washington, D.C.: September 30, 2004.

IRS' Efforts to Evaluate the Section 1203 Process for Employee Misconduct and Measure Its Impacts on Tax Administration . GAO-04-1039R . Washington, D.C.: September 27, 2004.

Tax Administration: IRS Needs to Consider Options for Revising Regulations to Increase the Accuracy of Social Security Numbers on Wage Statements . GAO-04-712 . Washington, D.C.: August 31, 2004.

Taxpayer Information: Data Sharing and Analysis May Enhance Tax Compliance and Improve Immigration Eligibility Decisions . GAO-04-972T . Washington, D.C.: July 21, 2004.

Tax Debt Collection: IRS Is Addressing Critical Success Factors for Contracting Out but Will Need to Study the Best Use of Resources . GAO-04-492 . Washington, D.C.: May 24, 2004.

Internal Revenue Service: Assessment of Fiscal Year 2005 Budget Request and 2004 Filing Season Performance . GAO-04-560T . Washington, D.C.: March 30, 2004.

Internal Revenue Service: Individual Taxpayer Identification Numbers Can Be Improperly Obtained and Used . GAO-04-529T . Washington, D.C.: March 10, 2004.

Tax Administration: IRS Issued Advanced Child Tax Credit Payments on Time but Should Study Lessons Learned . GAO-04-372 . Washington, D.C.: February 17, 2004.

Financial Management: Some DOD Contractors Abuse the Federal Tax System with Little Consequence. GAO-04-414T . Washington, D.C.: February 12, 2004.

Financial Management: Some DOD Contractors Abuse the Federal Tax System with Little Consequence. GAO-04-95 . Washington, D.C.: February 12, 2004.

New Markets Tax Credit Program: Progress Made in Implementation, but Further Actions Needed to Monitor Compliance . GAO-04-326 . Washington, D.C.: January 30, 2004.

Tax Administration: Information on Expenses Claimed by Small Business Sole Proprietorships . GAO-04-304 . Washington, D.C.: January 23, 2004.

Tax Administration: Planning for IRS's Enforcement Process Changes Included Many Key Steps but Can Be Improved . GAO-04-287 . Washington, D.C.: January 20, 2004.

Tax Administration: More Can Be Done to Ensure Federal Agencies File Accurate Information Returns . GAO-04-74 . Washington, D.C.: December 5, 2003.

IRS's Use of Information on Taxpayers Claiming Many Allowances or Exemption From Federal Income Tax Withholding . GAO-04-79R . Washington, D.C.: November 6, 2003.

Internal Revenue Service: Challenges Remain in Combating Abusive Tax Schemes . GAO-04-50 . Washington, D.C.: November 19, 2003.

Tax Administration: IRS's 2003 Filing Season Performance Showed Improvements . GAO-04-84 . Washington, D.C.: October 31, 2003.

Tax Administration: Most Taxpayers Believe They Benefit from Paid Tax Preparers, but Oversight for IRS Is a Challenge . GAO-04-70 . Washington, D.C.: October 31, 2003.

Internal Revenue Service: Challenges Remain in Combating Abusive Tax Shelters . GAO-04-104T . Washington, D.C.: October 21, 2003.

Earned Income Credit: Qualifying Child Certification Test Appears Justified, but Evaluation Plan Is Incomplete. GAO-03-794 . Washington, D.C.: September 30, 2003.

Reliability of Information on Taxpayers Claiming Many Withholding Allowances or Exemption from Federal Income Tax Withholding . GAO-03-913R . Washington, D.C.: September 15, 2003.

Tax Administration: IRS Is Implementing the National Research Program as Planned . GAO-03-614 . Washington, D.C.: June 16, 2003.

Tax Administration: Workforce Planning Needs Further Development for IRS's Taxpayer Education and Communication Unit . GAO-03-711 . Washington, D.C.: May 30, 2003.

Tax Administration: Changes to IRS's Schedule K-1 Document Matching Program Burdened Compliant Taxpayers . GAO-03-667 . Washington, D.C.: May 30, 2003.

IRS Modernization: Continued Progress Necessary for Improving Service to Taxpayers and Ensuring Compliance . GAO-03-796T . Washington, D.C.: May 20, 2003.

Compliance and Collection: Challenges for IRS in Reversing Trends and Implementing New Initiatives . GAO-03-732T . Washington, D.C.: May 7, 2003.

Tax Administration: IRS Should Reassess the Level of Resources for Testing Forms and Instructions . GAO-03-486 . Washington, D.C.: April 11, 2003.

Internal Revenue Service: Assessment of Fiscal Year 2004 Budget Request and 2003 Filing Season Performance to Date . GAO-03-641T . Washington, D.C.: April 8, 2003.

Vehicle Donations: Taxpayer Considerations When Donating Vehicles to Charities . GAO-03-608T . Washington, D.C.: April 1, 2003.

Tax Administration: Federal Payment Levy Program Measures, Performance, and Equity Can Be Improved . GAO-03-356 . Washington, D.C.: March 6, 2003.

Tax Administration: IRS and TIGTA Should Evaluate Their Processing of Employee Misconduct under Section 1203 . GAO-03-394 . Washington, D.C.: February 14, 2003.

Tax Administration: IRS Should Continue to Expand Reporting on Its Enforcement Efforts . GAO-03-378 . Washington, D.C.: January 31, 2003.

Minimizing Inappropriate Levies in IRS's Federal Payment Levy Program . GAO-03-318R . Washington, D.C.: January 3, 2003.

Business Systems Modernization

Business Systems Modernization: IRS's Fiscal Year 2004 Expenditure Plan . GAO-05-46 . Washington, D.C.: November 17, 2004.

Business System Modernization: Internal Revenue Service Needs to Further Strengthen Program Management. GAO-04-438T . Washington, D.C.: February 12, 2004.

Business Systems Modernization: IRS Has Made Significant Progress in Improving Its Management Controls, but Risks Remain. GAO-03-768 . Washington, D.C.: June 27, 2003.

IRS Modernization: Continued Progress Necessary for Improving Service to Taxpayers and Ensuring Compliance. GAO-03-796T . Washington, D.C.: May 20, 2003.

Financial Management

Financial Audit: IRS's Fiscal Years 2004 and 2003 Financial Statements . GAO-05-103 . Washington, D.C.: November 10, 2004.

Internal Revenue Service: Status of Recommendations from Financial Audits and Related Management Reports. GAO-04-523 . Washington, D.C.: April 28, 2004.

Management Report: Improvements Needed in IRS's Internal Controls and Accounting Procedures. GAO-04-553R . Washington, D.C.: April 26, 2004.

Financial Management: Some DOD Contractors Abuse the Federal Tax System with Little Consequence. GAO-04-95 . Washington, D.C.: February 12, 2004.

Financial Management: Some DOD Contractors Abuse the Federal Tax System with Little Consequence. GAO-04-414T . Washington, D.C.: February 12, 2004.

Financial Audit: IRS's Fiscal Years 2003 and 2002 Financial Statements. GAO-04-126 . Washington, D.C.: November 13, 2003.

Management Report: Improvements Needed in Controls over IRS's Excise Tax Certification Process. GAO-03-687R . Washington, D.C.: July 23, 2003.

Internal Revenue Service: Status of Recommendations from Financial Audits and Related Financial Management Reports. GAO-03-665 . Washington, D.C.: May 29, 2003.

Management Report: Improvements Needed in IRS's Internal Controls. GAO-03-562R . Washington, D.C.: May 29, 2003.

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and Further Study of Costs and Benefits Are Needed. GAO-03-299 . Washington, D.C.: January 15, 2003.

Treasury Financial Management

Financial Audit: Process for Preparing the Consolidated Financial Statements of the U.S. Government Needs Further Improvement. GAO-04-866 . Washington, D.C.: September 10, 2004.

Fiscal Year 2003 U.S. Government Financial Statements: Sustained Improvement in Federal Financial Management Is Crucial to Addressing Our Nation's Future Fiscal Challenges. GAO-04-886T . Washington, D.C.: July 8, 2004.

Debt Collection: Opportunities Exist for Improving FMS's Cross-Servicing Program. GAO-04-47 . Washington, D.C.: October 31, 2003.

Financial Audit: Process for Preparing the Consolidated Financial Statements of the U.S. Government Needs Improvement. GAO-04-45 . Washington, D.C.: October 30, 2003.

Fiscal Year 2002 U.S. Government Financial Statements: Sustained Leadership and Oversight Needed for Effective Implementation of Financial Management Reform. GAO-03-572T . Washington, D.C.: April 8, 2003.