with something here that something else depends on. And so it is a way to manage your sub-level people that may have been too cavalier in just sort of dismissing, well, this is another plan for the people that are in here for 3 or 4 years, and we will not bother to change this too much right now. We will not get with it as much as we should. So it gives you a good management tool, too, to get down there and dig out some of these people that are not implementing the things that you send downhill as directives from on high that never really get put into effect down there. So we may want to talk a little bit more about this and we will end the hearing now. We will have additional questions for you. Thank you all very much. Mr. DOLAN. Thank you. Senator GLENN. The hearing stands in recess. [Whereupon, at 11:55 a.m., the Committee was adjourned.] OVERSIGHT OF THE INTERNAL REVENUE THURSDAY, JUNE 6, 1996 U.S. SENATE, COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC. The Subcommittee met, pursuant to notice, at 10:10 a.m., in room 342, Dirksen Senate Office Building, Hon. Ted Stevens, Chairman of the Committee, presiding. Present: Senator Stevens. OPENING STATEMENT OF CHAIRMAN STEVENS Chairman STEVENS. I am told that Senator Glenn has a breakfast meeting and has been slightly delayed, so let me start this off and he will be with us in a few minutes. We are going to conduct the third in a series of oversight hearings to try to gain some understanding about the Internal Revenue Service's capability to modernize for the 21st Century and want to focus on the IRS financial management issues today. I understand that GAO has determined that the IRS does not have an auditable valid financial statement and we want to hear about that today. We have spent now about $3 billion modernizing the computer systems of the Internal Revenue Service and we want to know if you can tell us how much has been collected in taxes and if we can account for what has been spent for that modernization endeavor. I do not think there is an agency that means as much to Americans. This agency insists that we keep our books straight, we keep our records, and we maintain auditable accounts so that they can come tell us whether we have been honest and fair with the government. I think that the IRS has to set the same example, as a matter of fact, even more so, by holding itself to even higher financial auditable standards than it applies to taxpayers. The role of the branch audit is to identify if an agency is pushing off its problems to the future with the hope that there will be funds to fix the problems when those problems become unmanageable at a later date. That is just not acceptable. We want to hear from you whether there are significant unfunded requirements that exist in this computer and software problem, and I guess there is more than one problem, so these problems, I should say. Also, I am interested in the overall problem associated with the year 2000, which there has been a lot written about. I had some advice from a very distinguished thinker who told me to forget about that, that the computers will go away before the year 2000 gets here. So the way technology is tumbling, maybe we are all (141) worrying about that year 2000 too much. But I do want to know if the IRS has contemplated the costs that might be associated with the year 2000 problem, and if there are such costs envisioned in their unique entity, where they intend to get the monies to pay for them. The first panel here is Ms. Valerie Lau, the Treasury Department Inspector General. We are glad to have you here. We also have Greg Holloway, the Director of the Government-Wide Audits of the General Accounting Office. We will have a second panel, Tony Musick of the Internal Revenue Service, the Chief Financial Officer. I would suggest that we proceed. I do not know who would like to go first. I think we ought to listen to you first, Ms. Lau, if that is all right. TESTIMONY OF VALERIE LAU,1 INSPECTOR GENERAL, U.S. DEPARTMENT OF THE TREASURY Ms. LAU. I would be happy to. Chairman Stevens, thank you. I am very pleased to be here with you today to discuss IRS financial management issues. My office has generally approached IRS issues through the lens of the oversight function. The Inspector General Act provides my office with oversight authority for the IRS Chief Inspector's Office, which performs the primary role of auditing IRS's internal matters. In addition, my office has the authority to directly audit any IRS issues that warrant our attention. So far, I believe the work undertaken or in progress by the Chief Inspector and the General Accounting Office have provided extensive coverage of IRS's financial management activities. I have been careful, therefore, to avoid duplicating audit effort. Accordingly, I have directed my office's efforts to those areas most in need of Inspector General oversight. Today, I will discuss four efforts. First, FMFIA, or the Federal Managers' Financial Integrity Act. Seeing to it that the weaknesses identified in the FMFIA process have been classified properly has required some assertiveness_by the IRS Chief Inspector's Office, which I have fully supported. Let me explain. Management's conclusions concerning FMFIA compliance are based on self-evaluations, which, by their nature, are not exact and expose the process to subjectivity. In its 1995 assurance letter to the Secretary, IRS characterized the problems it is facing with TSM as an area of concern while the Chief Inspector's Office recommended TSM be classified as a material weakness. This may seem subtle, but the difference between an area of concern and a material weakness could be the deciding factor in whether or not IRS can provide reasonable assurance to the President and the Congress. One year earlier, a similar disagreement occurred. In that instance, the Department did not report TSM as a material weakness but did include a statement in its assurance letter noteing my office's position that TSM was a material risk requiring close monitoring by senior departmental and IRS management. This issue 1 The prepared statement of Ms. Lau appears on page 233. was also highlighted in my April 1995 semiannual report to Congress. With the 1995 FMFIA cycle, however, I am pleased to report that our position was accepted by both the Commissioner and the Secretary. TSM is identified as a material weakness in the Department's 1995 assurance letter. Second, we have reviewed the effectiveness of the Department's oversight of TSM. This review is conducted from fall 1994 to spring 1995. Our report called for improvements in the Department's oversight. The Department has since taken a number of steps to strengthen its effectiveness. Third, we conducted a follow-up review of IRS actions to correct problems with employee browsing of taxpayer information. In 1994, we reported to the Chairman of this Committee that the Chief Inspector's efforts to address this problem had been extensive. Our follow-up report issued in March of this year summarizes the Service's progress in implementing our recommendation. We found that the IRS had taken action to prevent further abuses. We made seven additional recommendations regarding systems security. IRS management agreed with our recommendations and detailed corrective actions, both planned and already completed. We believe that those actions, when fully implemented, will correct the problems we noted. Fourth and last, we have been working closely with the Chief Inspector's Office and with GAO in forming partnership arrangements. This summer, we will jointly audit the 1996 IRS financial statements. I have every confidence that this combined effort will contribute to continued progress in resolving IRS's financial management problems. Also, together with the Chief Inspector's Office, we recently completed an analysis of the internal controls over the processing and issuance of income tax refunds totaling more than $96 billion for 1994. Mr. Chairman, this concludes my statement. Thank you. Chairman STEVENS. Thank you. We will get back to that. Mr. Holloway, will you identify for the record the people you have with you, please? TESTIMONY OF GREGORY M. HOLLOWAY, DIRECTOR, GOVERNMENT-WIDE AUDITS, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, U.S. GENERAL ACCOUNTING OF. FICE; ACCOMPANIED BY DIANNE GUENSBERG, ASSISTANT DIRECTOR, GOVERNMENT-WIDE AUDITS, AND ELEANOR LONG, AUDIT MANAGER, GOVERNMENT-WIDE AUDITS, U.S. GENERAL ACCOUNTING OFFICE Mr. HOLLOWAY. Thank you for this opportunity to come before you to talk about the results of our audit and the financial management issues that we found. I have with me this morning Dianne Guensberg, who is our Assistant Director and has the principal responsibility for the performance of the audit of the Internal Revenue Service on my right, and on my left, I have Eleanor Long, who is our most senior man 1The prepared statement of Mr. Holloway appears on page 240. |