FIRST TIME EVER AUDIT OF IRS EXPOSES $86 BILLION IN PHONY "RECEIVABLES"!

IRS Shamed By The Truth

Forgot to keep a log of your business-related auto mileage? Misplaced some of your entertainment expense receipts? Overvalued your business property for depreciation purposes? Try telling that to the IRS auditor and see how far you get! Year after year, the IRS has paraded before Congress, begging for ever higher appropriations for its massively expanding computer systems, all the while providing its own internally-generated (and accepted) figures. Until 1993, the IRS had never in its entire history been financially audited. On Wednesday, August 4, 1993, the General Accounting Offices (GAO) Charles A. Bowsher, Comptroller General of the United States, changed all that. Mr. Bowsher gave the following testimony before the Committee on Governmental Affairs, United States Senate. Portions of Mr. Bowshers speech have been excerpted for brevity and certain phrases have been emphasized in bold for your closer consideration.

The Controller Speaks

Mr. Chairman and members of the committee, we are pleased to be here today to discuss the results of our recently completed financial statement audits at the Internal Revenue Service (IRS) and the Customs Service and the need to accelerate government-wide financial management reform through the full and effective implementation of the Chief Financial Officers (CFO) Act of 1990. Our financial audits at IRS and Customs show that serious financial management problems exist at the Department of the Treasury. The Congress now has reliable estimates of IRS receivables and the related collectible amount, which are tens of billions of dollars less than what had been reported by the agency in the past. For instance, IRS will need to overcome a problem whereby its system cannot provide details as to amounts of specific excise taxes collected. As a result, general tax revenues inappropriately subsidized excise tax trust funds, perhaps by billions of dollars. We were unable to express an opinion on the reliability of IRS and Customs, fiscal year 1992 financial statements because critical supporting information for billions of dollars was either not available or was unreliable. Preparation of financial statements presented a substantial challenge to IRS and Customs. This undertaking was made especially difficult because their [IRS] existing systems were not designed to provide meaningful and reliable financial information needed to effectively manage and report on their operations. Compounding this problem, internal controls were not designed and implemented to effectively safeguard assets, provide a reasonable basis for determining material compliance with certain laws and regulations, and assure that there were no material misstatements in the financial statements. I will now highlight the results of our IRS and Customs audits. Serious weaknesses exist in IRS financial management, operations and control. First, I would like to discuss some of the more severe problems we identified in our audit of IRS financial statements.

IRS Significantly Overstated Receivables

After performing a detailed analysis of IRS, receivables as of June 30, 1991, we estimated that only $65 billion of about $105 billion in gross reported receivables that we reviewed were valid and that only $19 billion of the valid receivables were collectible [i.e., short 86 billion!]. At the time, IRS had reported that $66 billion of the $105 billion was collectible. Historically, IRS reports have significantly overstated its receivables primarily because IRS included duplicate and insufficiently supported assessments that it had recorded as part of efforts to identify and collect taxes due. While IRS may have a need to maintain such records for enforcement purposes, these and many erroneous assessments were not valid receivables for financial reporting purposes and should not have been included in the reported balances. In addition, IRS estimates of the collectibility of its receivables have been unreliable because, in addition to including invalid receivables, IRS relied solely on collection experience and did not group assessments according to their collection risk or consider the taxpayers current ability to pay.

Important Revenue Information Unavailable Or Unreliable

Although we were able to audit total revenue collections, we were not able to audit the components of revenue because IRS systems could not provide the detailed transactions supporting the revenue balance, which is a serious limitation. IRS systems also did not maintain and, thus, could not report the amounts of specific excise and social security taxes collected. As a result, IRS could not provide Treasury the information needed to distribute excise taxes among the general revenue fund and the various excise tax trust funds based on collections, as required by law. Similarly, IRS cannot determine the general revenue funds subsidy to the social security trust fund. As a result, IRS cannot provide information on the subsidy to congressional committees and others who may be interested in monitoring the financial condition of the social security program.

Unreliable Records For Processing Data Properly

Inventory records for IRS automated data processing (ADP) property were unreliable for managing and reporting on computer hardware and software. IRS had not instituted basic procedures to ensure that this information was current and accurate. For example, a video display terminal costing $752 was valued in the ADP inventory records at $5.6 million, and telecommunications and electronic filing equipment, which IRS valued at a total of $84.2 million, was omitted altogether.

Inadequate Controls Over Taxpayer Data

Though heavily dependent on automated systems to process and safeguard taxpayer data, IRS did not adequately control access authority given to computer support personnel or adequately monitor employee access to this information. Such weaknesses increase the risk of unintentional errors and fraud and may compromise the confidentiality of taxpayer information. For example, IRS internal reviews found that some employees had used their access to monitor their own fraudulent returns, to issue fraudulent refunds, and to inappropriately browse taxpayer accounts.

Inadequate Management Of Operating Funds

For years, IRS systems used to process and account for spending of operating funds could not provide accurate and timely information needed to manage these funds. We were unable to audit approximately $4.3 billion, or 64 percent, of the reported spending of $6.7 billion from IRS operating appropriations because IRS could not reconcile the total of detailed spending information in its outdated systems with summary amounts reported in such systems. We found, for instance, that IRS had several billion dollars in unresolved cumulative gross differences between its records and Treasurys cash records at the end of the fiscal year. Also, as of September 30, 1992, IRS had not resolved $53 million in unmatched expenditures which were in a suspense account. To clear the account, IRS arbitrarily charged the $53 million to three of its appropriations (each appropriation was allocated one-third of the amount), causing IRS reports to show that it had exceeded the budget authority for one of its appropriations. However, to eliminate the appearance that it exceeded such authority for this appropriation, IRS recorded an unsupported receivable from another appropriation. As a result of these problems, IRS made improper payments, and reports used by its managers, Treasury, OMB, and the Congress to manage and oversee IRS operations were unreliable.

IRS FMFIA Reporting

IRS did not disclose the overall severity of its internal control and accounting system weaknesses in its fiscal year 1992 report to Treasury under the Federal Managers Financial Integrity Act (FMFIA) of 1982. Without adequate disclosure the Congress and other users of the FMFIA report will not be aware of the extent of IRS weaknesses and the efforts needed to correct them. We identified material weaknesses that IRS either did not include or, in our view, did not adequately disclose. For example, the serious problems we noted in the revenue area were largely undisclosed as were the problems in the management of operating funds.

In addition, some previously identified material weaknesses that were reported as corrected still exist because IRS did not address the fundamental causes of those weaknesses or ensure that corrective actions were effective.

IRS Actions To Improve Financial Management

Prior to fiscal year 1989, IRS had put neither substantial effort nor resources into rectifying the poor state of its financial management operations and no one at IRS was responsible for ensuring the integrity and efficiency of financial management and accounting systems agency wide.

Reaching For Financial Management Reform

This leads me to the broader issue of ensuring successful government wide implementation of the CFO Act. As discussed in our December 1992 transition series report on Financial Management Issues (GAO/OCG-93-4TR), widespread financial management weaknesses are crippling the ability of our leaders to effectively run the federal government. Reducing the federal deficit requires monumentally difficult decisions. If our government is to make these decisions in an informed manner, it must have better financial information. Also, our citizens should be provided meaningful information that allows them to judge the performance of their government and controls that help guarantee fundamental accountability. Because credible financial data are not available today, public confidence in the federal government as a financial steward has been severely undermined.

Ensuring Sustained High-Level Priority Attention To Resolve Problems

Only through consistent and continuous attention from the highest levels of government and the Congress, including agency CFOs with requisite skills and experience and the needed powers and authority to got the job done, will we see the results that are possible. Without decisive action by the new administration and strong oversight and support by the Congress, efforts to reform financial management will falter. There must be a sense of urgency. Changing a government culture that has not always seen financial management as important is difficult, especially if there is not a continuity of effort or if this change is not perceived as important. In my view, the success of financial management reform is critical to any effort to reinvent government. Agencies must give high-level attention to financial management improvements.

Rebuilding Financial And Management Infrastructures

It is well acknowledged that current financial systems across government are in extremely poor condition, despite spending billions of dollars over the years on improvement efforts. IRS and Customs struggled in preparing reliable financial statements primarily because of severely weak systems. For example, the serious problems IRS faced in accounting for its receivables stemmed in large part from a system that was designed to capture information for enforcement and collection activities and was not properly tied to financial reporting. We have identified tens of billions of dollars of accounting errors that could have been avoided if there had been more discipline in following existing policies and procedures." (end)

A Personal Suggestion

Thank you, Mr. Bowsher. As a result of your hard work and candid testimony, Americans now know that the very same agency that will make your life miserable over a lost receipt for $8.60 cannot account for $86,000,000,000.00! So the next time you or a friend is summoned to an IRS audit, just tell the auditor ... "Im sorry, but my system is identical to your own ... you see, its simply not designed to provide meaningful and reliable financial information needed to effectively manage and report on my operations ... so youll just have to trust my figures!"

Yours For Liberty In Our Lifetime,

Gordon Phillips,

Founder & President: INFORM AMERICA! Natl Representative: Save-A-Patriot Fellowship E-Mail: gordon@informamerica.com V-Link: (801) 715-3890 Voice & Fax Mail & Shipping:

12 Carroll Street, Suite 1787 Westminster, MD 21157-4831

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-- What a mess. (What@mess.com), December 12, 1999

Answers

What a mess: If the computer system at IRS fails can you imagine how long it will take to unravel that Gordian Knot? Why is it taking GAO this long to show Congress the management problems? This should have been done years ago! If the worse case scenario occurs, the ripple effect in our nations financial health will suffer greatly(and therefore us).

-- Neil G.Lewis (pnglewis1@yahoo.com), December 12, 1999.

Unfortunately, this is only one side of the problem. The other side is the politicians' insatiable urge to use the tax structure as an instrument of social policy. Partly this is morally motivated (excise taxes on vices), partly it's to satisfy important pressure groups, partly it's to reward behaviors considered beneficial to the target lifestyle and punish non-beneficial behaviors, and partly it's just the urge to tinker. The tens of thousands of pages of tax rules and regulations aren't entirely dreamed up by the IRS out of thin air. And every year, Congress imposes yet another mass of new tinkerings. Over time, the IRS finds itself faced with volumes of mutually exclusive requirements, all of which have been made mandatory!

Nor would proposals like a flat tax or national income tax be anything close to impervious to such machinations. I think within a few years the slightly different sales taxes placed on the poorly- maintained list of all items for sale would become completely unmanageable. A flat tax would grow encyclopedias full of exceptions. The tax structure, sadly, will always be critical to the essential requirement to solicit campaign contributions. Even as things are, most Senators are millionaires.

The IRS, poorly managed as it is, will always be the poor schlemazel at the end of this political game of crack-the-whip. We have met the enemy and they is us.

-- Flint (flintc@mindspring.com), December 12, 1999.

What a Mess,

This is your third post in two days. Each time it references your self-serving little tax protest group. Here are my unanswered questions from an earlier thread.

...rant mode on

It is sometimes difficult to believe that so many tax protesters can just stumble upon a thread such as this one. Do you folks all work for this group? Or are you all the same poster?

Are you posting from a jail cell, or have you even put into practice these wild claims? Can you cite cases and case law where your group has actually benefited a person applying your social philosophy? Are you a not-for-profit organization? If so, are you registered as such with the IRS? If you are an NFP, what is your ratio of revenue to adminstrative costs?

...rant mode off

You can pay your taxes, or you can go jail. Then you will pay your taxes and the penalties thereon. Your choice. In the meantime, I vote for thread deletion.

Wondering,

-- Uhhmm... (JFCP81A@aol.com), December 12, 1999.

If the computer system at IRS fails can you imagine how long it will take to unravel that Gordian Knot?

As with the original Gordian Knot, the answer is: a very short time. If things go as I expect, they'll be out of "business" before April 15th.

-- Steve Heller (stheller@koyote.com), December 12, 1999.

Flint,

We cross posted. I did not mean to lump you in with what usually develops into the thread poster and his buddies advertizing their group's web site and generally congratulating each other on their cleverness.

Actually, this thread may acutally have serve a purpose if it drew a response from you. I always look forward to your well-reasoned (but often wrong-headed!) posts.

Sincerely,

-- Uhhmm... (JFCP81A@aol.com), December 12, 1999.

What he/they/it is, quite possibly, is Just Another Troll, trying to discredit the forum by contaminating it with lunatic fringe tax protester babble.

-- Ron Schwarz (rs@clubvb.com.delete.this), December 12, 1999.

Dear What a mess/la salsa,

Maybe when we assigned you to the Project Me Get It Too mission we should have told you about the TB2000 forum. You see, both your fellow agents, as well as a few real life tax protesters, have posted hundreds of articles/links about tax resistence in the 3 year history of this particular forum. So, you understand, you are posting nothing that the members of the TB2000 forum have not seen or heard before. We think it is reasonable to assume, by now, that we've caught all the fish to be found in this hole. It is obvious that most of the citizens here are pretty focused on that "bump in the road" thing that's just a scant 20 days away. They're much more interested in how to prepare and protect themselves, family, and friends than they are in how to pick a fight with the Feds at this particular time.

Besides, What a mess/la salsa, we are starting to get email complaints at HQ that you aren't labeling your threads "OT" (that means Off Topic, What a mess/la salsa), and that the natives consider it SPAM when you start several threads per day about this subject. Remember, the goal of your assignment is to "make friends", and this will not achieve our objective! Please contact your supervisor for reassignment to an alt.conspiracy newsgroup before you lose your year-end bonus!

032*

-- (freeh@fibbie.shh), December 12, 1999.

This thread is OT

please delete

-- plonk! (realaddress@hotmail.com), December 12, 1999.