Consequently, the accounts receivable reported on the fiscal year 1995 financial statements could not be relied on.

Improving IRS' accounts receivable reporting in the short term would require IRS to

analyze its inventory of uncollected assessments to determine ways to resolve issues concerning the financial management system's underlying data limitations;

reliably determine the estimated amount of accounts receivable that is collectible; and

review and update current policies and procedures for maintaining documentation supporting accounts receivable, and where necessary, train employees to properly record detailed taxpayer transactions.

By fiscal year 1998, federal accounting standards will require IRS to design its financial management system to analyze all outstanding amounts to properly identify and report valid accounts receivable and the amount expected to be collected. As required by federal accounting standards, the system should track all activity affecting IRS' accounts receivable balance, including collections as a result of enforcement efforts, tax abatements, and aging of receivables. Federal accounting standards also require IRS to provide dollar information about its compliance assessments and encourage IRS to record

as revenue an estimate of the recoverable amount of such assessments.

ACCOUNTING FOR ADMINISTRATIVE

OPERATIONS HAS IMPROVED BUT

PROBLEMS REMAIN

Each year, IRS incurs billions of dollars in operating expenses to (1) process tax returns and provide taxpayer assistance, (2) enforce tax laws, (3) develop and maintain information systems, and (4) provide administration and management. IRS' reported operating costs for each fiscal year from 1992 through 1995 are shown in figure 7.

Figure 7: IRS' Reported Operating Costs for Fiscal Years 1992
Through 1995 (Dollars in billions)

For fiscal year 1995, IRS reported $8.1 billion in operating costs, including $5.3 billion for payroll and other personnel costs and $2.8 billion for the cost of goods and services, such as rent, printing, and acquiring and maintaining automatic data processing equipment. Figure 8 shows the percentages of IRS' total fiscal year 1995 operating costs that were reported to be incurred for payroll and nonpayroll costs.

Figure 8: IRS' Reported Payroll and Nonpayroll Costs for
Fiscal Year 1995

Our first financial audit identified serious problems in accounting for and reporting on IRS administrative operations, which resulted in IRS making improvements in these areas. In fiscal year 1993, IRS implemented a new system to account for its administrative operations, which should correct some of the problems in accounting for administrative operations our financial audits have identified and reported. In addition, IRS now uses the payroll services provided by the Department of Agriculture's National Finance Center. However, IRS continues to have significant problems accounting for certain administrative operations and these problems must be resolved before we will be able to render an opinion on IRS' annual financial statements.

Figure 7: IRS' Reported Operating Costs for Fiscal Years 1992
Through 1995 (Dollars in billions)

For fiscal year 1995, IRS reported $8.1 billion in operating costs, including $5.3 billion for payroll and other personnel costs and $2.8 billion for the cost of goods and services, such as rent, printing, and acquiring and maintaining automatic data processing equipment. Figure 8 shows the percentages of IRS' total fiscal year 1995 operating costs that were

reported to be incurred for payroll and nonpayroll costs.