IRS Flunks Government Audit

It sounds like a taxpayer's dream: The IRS was audited and struggled to explain its own financial records.

"The IRS cannot do some of the basic accounting and record-keeping tasks that it expects American taxpayers to do," said Gregory Kutz, who oversaw the audit released Monday by the congressional General Accounting Office.

GAO said chronic Internal Revenue Service problems resulted last year in millions of dollars in fraudulent refunds, failure to keep track of such basic assets as cars and computers and substandard computer security controls.

"Think of this as not balancing your checkbook with the monthly bank statement, and at the same time having a system prone to error," Kutz told the House Government Reform Committee's panel on government management at a Monday hearing.

GAO said the IRS is unable to keep track of unpaid taxes properly, which means it cannot concentrate collection efforts on the taxpayers most likely to pay. The upshot is that only about $26 billion of the $222 billion in unpaid taxes as of October 1998 are likely to be collected, with $119 billion a whopping 54 percent, to be written off.

"It's a national scandal," said Rep. Steve Horn, R-Calif., chairman of the government management subcommittee. "It seems to me you shouldn't let people off the hook like that."

IRS officials were quick to take responsibility for the problems, which they said were largely rooted in the agency's antiquated computer systems that date as far back as the Kennedy administration. They were clearly embarrassed by the report, coming as it does as the IRS is makes a high-profile attempt to become more efficient and more customer-friendly.

"I am deeply disappointed that we failed to meet our obligations," said Donna Cunninghame, the IRS' new chief financial officer. "This is unacceptable."

The GAO found the IRS did a good job of collecting $1.8 trillion in tax revenue in fiscal 1998. The main problems were found in the agency's administration of an $8.1 billion annual budget. They include:

• At least $17 million paid out in fraudulent and inappropriate refunds in the first nine months of 1998. IRS sometimes duplicates refunds or fails to compare tax returns with W-2 forms before they are mailed out within the required 45 days. Fraudulent refunds worth another $65 million were stopped by IRS investigators.

• Improper paperwork to keep track of such items as a Chevrolet Blazer, a $300,000 laser printer, laptop computers, televisions, VCRs and fax machines. Most of these were accounting errors, not thefts. The Blazer, for example, was returned to a leasing company but nobody took it off the books.

• Poor computer security, including controls on access to sensitive taxpayer information. The audit repeated past criticisms about the use of unarmed bicycle couriers to transport taxpayer checks and sluggish background checks o prospective employees with criminal pasts.

• Inadequate controls over basic financial reporting and failure to reconcile IRS balances with Treasury Department records.

"I don't see that there's been a real significant effort to deal with these financial management issues," said Rep. Jim Turner, D-Texas. "The problems seem to be running pretty deep."

Cunninghame, however, said the new management team at IRS is redoubling efforts to eliminate them. She pledged improved performance in fiscal 1999 but said the agency's computer systems must be modernized for a long-term fix.

"It will take time, and it won't be easy," she said. "The IRS must replace nearly its entire inventory of computer applications."

Last year, the IRS awarded a multibillion-dollar contract to a consortium led by Computer Sciences Corp. of El Segundo, Calif., for a modernization project expected to last 15 years. That came after several previous efforts failed at a cost of some $3.3 billion.

Written By Curt Anderson, AP Tax Writer