IRS's Lack of Internal Controls Puts Confidential Taxpayer Info at Risk

A couple of days ago the Government Accountability Office (GOA) released their newest report: IRS Needs to Enhance Internal Control over Financial Reporting and Taxpayer Data (GAO-11-308). Check out the GOA's findings below, or download a PDF of the full report here. This is absolutely terrifying when you think of all the personal info we give the IRS each year. Come on, IRS, get it together!

Although IRS made progress in correcting previously reported information security weaknesses, control weaknesses over key financial and tax processing systems continue to jeopardize the confidentiality, integrity, and availability of financial and sensitive taxpayer information. Specifically, IRS did not consistently implement controls that were intended to prevent, limit, and detect unauthorized access to its financial systems and information. For example, the agency did not sufficiently (1) restrict users’ access to databases to only the access needed to perform their jobs; (2) secure the system it uses to support and manage its computer access request, approval, and review processes; (3) update database software residing on servers that support its general ledger system; and (4) enable certain auditing features on databases supporting several key systems. In addition, 65 of 88—about 74 percent—of previously reported weaknesses remain unresolved or unmitigated.

An underlying reason for these weaknesses is that IRS has not yet fully implemented key components of its comprehensive information security program. Although IRS has processes in place intended to monitor and assess its internal controls, these processes were not always effective. For example, IRS’s testing did not detect many of the vulnerabilities GAO identified during this audit and did not assess a key application in its current environment. Further, the agency had not effectively validated corrective actions reported to resolve previously identified weaknesses. Although IRS had a process in place for verifying whether each weakness had been corrected, this process was not always working as intended. For example, the agency reported that it had resolved 39 of the 88 previously identified weaknesses; however, 16 of the 39 weaknesses had not been mitigated.

IRS has various initiatives underway to bolster security over its networks and systems; however, until the agency corrects the identified weaknesses, its financial systems and information remain unnecessarily vulnerable to insider threats, including errors or mistakes and fraudulent or malevolent acts by insiders. As a result, financial and taxpayer information are at increased risk of unauthorized disclosure, modification, or destruction; financial data is at increased risk of errors that result in misstatement; and the agency’s management decisions may be based on unreliable or inaccurate financial information. These weaknesses, considered collectively, are the basis for GAO’s determination that IRS had a material weakness in internal control over financial reporting related to information security in fiscal year 2010.

Hat Tip: TaxProf

Illicit Tobacco: Various Schemes Are Used to Evade Taxes and Fees

According to a new report from the U.S. Government Accountability Office, cross-border and illicit trade are undermining federal and local excises on tobacco products. Inconsistent taxes and rules across state lines will always invite abuse.

From the summary:

On June 22, 2009, Congress passed the Family Smoking Prevention and Tobacco Control Act (Pub. L. No. 111-31), which directed GAO to report on cross-border and illicit trade in tobacco products. Crossborder trade is defined in the Act as trade across a U.S. border, state, territory, or Indian country. Illicit trade is defined in the Act as any practice or conduct prohibited by law which relates to or facilitates the production, shipment, receipt, possession, distribution, sale, or purchase of tobacco products. This report is the first of two GAO products that will respond to this mandate. This report examines (1) incentives that are important for understanding cross-border and illicit trade in tobacco products; and (2) different schemes used to generate profits from cross-border and illicit trade in tobacco products. GAO interviewed government officials, industry representatives, and other subject matter experts. GAO collected and analyzed data from these sources and reviewed relevant literature.

Tobacco products face varying levels of taxation in different locations, creating opportunities and incentives for illicit trade. Cigarettes are taxed at the federal, state, and in some cases, local levels. According to industry representatives, taxes and other fees make up significant components of the final price of cigarettes, averaging 53 percent of the retail price. While the national average retail price of a pack of cigarettes was $5.95 in 2010, in New York City, a pack can cost up to $13.00 or more due to high combined state and city taxes. In contrast, a pack of cigarettes in Richmond, Virginia, can cost approximately $5.00, due to low state cigarette taxes there. The tax differential between a case of cigarettes (typically containing 12,000 cigarettes) in New York City and Richmond is over $3,000, creating incentives for illicit trade and profits. Excise taxes and other fees on tobacco products can be evaded at numerous points in the supply chain. Law enforcement officials told us another incentive to engage in this activity is the fact illicit tobacco penalties are comparatively less severe than other forms of illicit trade. According to experts we spoke with and literature we reviewed, a wide range of schemes are used by different actors to profit from illicit trade in tobacco products, mainly through the evasion of taxes. Schemes can range from individual consumers purchasing tax-free cigarettes from Internet Web sites, to larger-scale interstate trafficking of tobacco products, to smuggling cigarettes into the country by criminal organizations. For example: (1) A California distributor purchased approximately $1.4 million in other tobacco products (e.g., cigars and chewing tobacco) from an out-ofstate distributor, who disguised the shipments using falsified documents and black plastic wrapping. The California distributor then sold it to customers and failed to pay state excise taxes. (2) A criminal organization attempted to conceal two containers of counterfeit cigarettes and pass them through Customs at the Los Angeles/Long Beach port by declaring them as toys and plastic goods. (3) A manufacturer evaded Tobacco Master Settlement Agreement (MSA) escrow payments. The manufacturer underreported its cross-border sales to numerous states, including Virginia. By underreporting its sales to Virginia, the manufacturer evaded approximately $580,000 in escrow payments. Law enforcement officials reported that patterns of schemes are dynamic and identified links between illicit trade in tobacco and other crimes.

Download the full PDF report here...

GAO: IRS Telephone Help Wait-Time at 6-Year High

The Government Accountability Office released a new report (2010 Tax Filing Season: IRS's Performance Improved in Some Key Areas, but Efficiency Gains Are Possible in Others). Among the findings, the report looked at the long wait time facing taxpayers who call the IRS.

Compared to 2009, the percentage of callers seeking live assistance who received it improved in 2010 and the accuracy of answers remained high, at over 90 percent. However, the average wait time increased. Further, IRS’s annual goal for providing caller assistance was lower than any of the preceding 5 years. However, IRS lacks a standard for what constitutes good customer telephone service that could be compared to its annual goals. Such a standard would make the gap between the annual goals and the standard more transparent.

Hat tip: TaxProf Blog

GAO Sees Problems in Government’s Financial Management

Yesterday the Government Accountability Office (GAO) said it would not officially form an opinion on the federal government financial management because of widespread material control weaknesses, significant uncertainties, among other limitations.

From Accounting Today.com:

“Even though significant progress has been made since the enactment of key financial management reforms in the 1990s, our report on the U.S. government's consolidated financial statement illustrates that much work remains to be done to improve federal financial management,” Acting Comptroller General Gene Dodaro said in a statement. “Shortcomings in three areas again prevented us from expressing an opinion on the accrual-based financial statements.”

The main obstacles to a GAO opinion were: (1) serious financial management problems at the Department of Defense that made its financial statements unauditable, (2) the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government’s ineffective process for preparing the consolidated financial statements.

In addition, the GAO said last week it was unable to render an opinion on the 2010 Statement of Social Insurance because of significant uncertainties, primarily related to the achievement of projected reductions in Medicare cost growth. The consolidated financial statements discuss these uncertainties, which relate to reductions in physician payment rates and to productivity improvements, and provide an illustrative alternative projection to illustrate the uncertainties.

Dodaro also cited material weaknesses involving an estimated $125.4 billion in improper payments, information security across government, and tax collection activities. He noted that three major agencies — the DOD, the Department of Homeland Security, and the Department of Labor — did not get clean opinions. Nineteen of 24 major agencies did get clean opinions on all their statements.

Read more here

IRS Receives Passing Marks for 2006 Filing Season

According to WebCPA, the IRS improved last filing season, but still has an opportunity to further improve for this upcoming tax season. According to their report, the accuracy of answers provided by the IRS to questions from callers was at about 90 percent and the performance of the IRS's web site also improved. However, the Government Accountability Office (GAO) noted that the IRS should attempt to reduce the number of paper tax returns it processes by mandating e-filing.