Internal Control Failings At The IRS Contribute to Over $100 Billion in Improper Payments

|||Internal Control Failings At The IRS Contribute to Over $100 Billion in Improper Payments

Internal Control Failings At The IRS Contribute to Over $100 Billion in Improper Payments

July 2014

The U.S. Government Accountability Office (“GAO”) recently issued “Management Report: Improvements Are Needed to Enhance the Internal Revenue Service’s Internal Controls”, describing how the Internal Revenue Service (“IRS”) continues to have internal control deficiencies, both new and old. The purpose of the report is to present internal control deficiencies identified during the GAO’s audit of IRS’s fiscal years 2013 and 2012 financial statements.

The GAO identified new internal control deficiencies specific to 2013, including:

  • Ineffective monitoring of the internal controls at external service organizations who process financial data on behalf of the IRS
  • Time cards processes that fail to ensure that employees are only paid for the hours actually worked
  • Inadequate monitoring of receipt and acceptance of goods and services in the procurement system
  • Asset acquisition and disposal process that does not reasonably assure that (1) assets acquired were timely and accurately recorded in its asset management system, (2) adequate documentation and approval were obtained prior to asset disposal, and (3) assets disposed of did not contain confidential taxpayer or sensitive information
  • Failure to ensure the validity and proper disbursement of refunds to deceased taxpayers

The report provides 17 recommendations to address these new internal control issues the GAO identified, all of which were agreed to by the IRS. It also presents the 2013 status of the IRS’s corrective actions to address 60 previous recommendations from the 2012 audit. As of September 30, 2013, IRS had completed corrective action on 26 of those 60 recommendations.

This breakdown of internal controls is a contributing factor to another recently reported problem at the federal government level, namely the over $100 billion of improper payments in 2013. Such errors included tax credits for those not entitled to them, unnecessary Medicare payments, and unemployment benefits for “under the table” workers, among others. Shockingly, these types of mistakes have topped $100 billion in each of the past five years (although the government noted that the current amount is less than the $121 billion peak in 2010).

While the deficiencies and recommendations described above are specific to the government operations investigated, many of the same deficiencies exist at public or private companies. Such entities would similarly benefit from improvement of internal controls over their financial management and accountability for resources. Some of the more universally applicable recommendations by the GAO include:

  • Proper oversight of external service providers
  • Establishing and implementing written procurement procedures to monitor the receipt and acceptance functions for accuracy and timeliness
  • Ensuring the safety of assets by requiring that assets obtained are timely and accurately recorded and asset disposals are approved in advance by those with authority to do so
  • Ensuring hard drives of disposed assets are wiped clean of sensitive information prior to their disposition
  • Manually reviewing reports for the existence of duplicates, unexpected dates or amounts, or other unusual activity

Implementation and regular review of the adequacy of a system of internal controls is critical to preventing and detecting fraud.  Such processes deter fraudulent activity by decreasing the perceived opportunity to commit fraud and provide information to quickly identify it, if it should occur.   As the problems at the federal level demonstrate, many small fraudulent acts can quickly add up when left unchecked.

Fulcrum Inquiry performs internal control assessments and forensic accounting services.

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