# Provide America’s taxpayers top-quality service by helping them understand and meet > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3A2d79a25a30036693 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text 5 2 0 2 AGENCY FINANCIAL REPORT IRS MISSION Provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all. IRS VALUES ► Honesty and Integrity: We uphold the public trust in all that we do; we are honest and forthright in all of our internal and external dealings. ► Respect: We treat each colleague, employee, and taxpayer with dignity and respect. ► Continuous Improvement: We seek to perform the best that we can today, while embracing change, so that we can perform even better in the future. ► Openness and Collaboration: We share information and collaborate, recognizing that we are a team. ► Personal Accountability: We take responsibility for our actions and decisions and learn and grow from our achievements and mistakes. THE ICONIC IRS EAGLE LOGOMARK The original Internal Revenue Service (IRS) Eagle logomark was designed in 1965. The IRS Eagle logomark, commonly referred to as the eagle, is the cornerstone of the identity of the IRS. While the logotype and name have been used in different ways over the history of the organization, the IRS Eagle logomark has remained unchanged. The eagle is a national symbol of the United States (U.S.). In the IRS Logo, the eagle is combined with imagery illustrating the scales of justice, to convey that the Service’s operations will be conducted in fair and honest ways, and the olive branch, a symbol of peace and conciliation. TABLE OF CONTENTS 1 29 73 ii About this Report iii Message from the Chief Executive Officer MANAGEMENT’S DISCUSSION AND ANALYSIS 2 About the IRS 6 Performance Overview 16 Enterprise Risk Management 18 Analysis of Financial Statements 23 Analysis of Systems, Controls, and Legal Compliance FINANCIAL INFORMATION 30 Message from the Chief Financial Officer 32 Independent Auditor’s Report 40 Enclosure: IRS Response to the Independent Auditor’s Report 41 Financial Statements 47 Notes to the Financial Statements 70 Required Supplementary Information OTHER INFORMATION 74 Section A: Summary of Financial Statement Audit and Management Assurances 76 Section B: Tax Burden, Tax Gap, and Tax Expenditures 81 Section C: Management and Performance Challenges 104 Section D: Grants Programs 105 Section E: Refundable Tax Credits and Other Outlays 112 Section F: Social Security and Medicare Taxes 113 APPENDICES 114 Appendix A: Glossary of Acronyms 115 Appendix B: Awards and Acknowledgements  i INTRODUCTION | IRS FY 2025 AGENCY FINANCIAL REPORT ABOUT THIS REPORT This Agency Financial Report presents the IRS financial information in relation to its mission and entrusted resources for the Fiscal Year (FY) 2025 reporting period (October 1, 2024 to September 30, 2025). It highlights select accomplishments and opportunities in implementing programs that promote the IRS’s mission. This financial report is available on www.irs.gov/about-irs/irs-financial-reports. cial-reports The IRS, as a bureau within the Department of the Treasury (Treasury), presents this report in accordance with Office of Management and Budget’s (OMB) Circular A-136, Financial Reporting Requirements. This report includes OMB Circular A-136 core principles and requirements applicable to a component entity. This report is titled Agency Financial Report to be consistent with similar reports in the U.S. government. How This Report is Organized The Agency Financial Report consists of the following major sections: Section 1: Management’s Discussion and Analysis (Unaudited) Provides a high-level overview of the IRS’s history, mission, and organizational structure; strategic framework and programmatic performance; enterprise risks; analysis of financial statements; analysis of systems, controls, and legal compliance; and management assurances related to the IRS’s internal controls. U.S. generally accepted accounting principles issued by the Federal Accounting Standards Advisory Board require the Management’s Discussion and Analysis be presented as required supplementary information to the financial statements. Section 2: Financial Information Includes a message from the Chief Financial Officer (CFO); Independent Auditor’s Report and IRS response; audited financial statements and accompanying notes; and unaudited required supplementary information. Section 3: Other Information (Unaudited) Contains the following sections: Summary of the Financial Statement Audit and Management Assurances; Tax Burden, Tax Gap, and Tax Expenditures; Management and Performance Challenges; Grants Programs; Refundable Tax Credits and Other Outlays; and Social Security and Medicare Taxes. Treasury reports on Payment Integrity in its Agency Financial Report (home. treasury.gov/about/budget-financial-reporting-planning-and-performance/agency-financial-report). For information on Payment Integrity, see PaymentAccuracy.gov (www.paymentaccuracy.gov). ii About this Report INTRODUCTION | IRS FY 2025 AGENCY FINANCIAL REPORT MESSAGE FROM THE CHIEF EXECUTIVE OFFICER On behalf of my dedicated colleagues at the IRS, I am honored to present the Agency Financial Report for FY 2025. This report provides an assessment of the IRS’s financial position and condition and demonstrates how we are using the resources entrusted to us to serve the American people. The tax relief provided by the One Big Beautiful Bill Act forms the cornerstone of the administration’s economic agenda. Our employees are working to ensure that the historic benefits of this landmark legislation, including No Tax on Tips, No Tax on Overtime, and new deductions for seniors and families, are delivered to the American people timely and as intended. To continue our strategic investment in America’s financial future, our focus in FY 2025 centered on three priorities: Data-Driven Enforcement The IRS is using artificial intelligence and advanced analytics to identify high-risk areas of non-compliance and fraud with greater accuracy. By modernizing information systems and sharing data across platforms, we are better equipped to prevent identity theft, detect fraudulent filings, and enforce the law. Thanks to this data-driven approach, our skilled enforcement and revenue personnel can focus their efforts on higher-value work. Simplified, Digital-First Taxpayer Experience Our goal is to create a seamless customer experience where taxpayers can interact with the IRS with the same ease they expect from the private sector. This includes a significant expansion of the IRS Online Account for taxpayers to manage their affairs securely, as well as the improvement of taxpayer guidance and resources. While digital tools are the priority, our exceptional service levels in the 2025 filing season prove our enduring commitment to providing personal support by phone and in person to any taxpayer who needs or prefers it. Unyielding Commitment to Taxpayer Privacy Protecting sensitive taxpayer data is paramount. We are continuously strengthening our cybersecurity defenses and enforcing the strictest protocols to ensure that taxpayer information is secure from all threats and that the IRS operates with the integrity the American people demand and deserve. The IRS supports the U.S. economy by collecting individual, corporate, payroll, and other taxes that fund critical government programs, including national defense, infrastructure, healthcare, social security, and other fundamental services. This past year, the IRS has operated under an additional mandate: to serve as a key partner in the administration’s vision for a modern, efficient, and responsive government. Our mission has been to bolster the administration’s pro-growth economic agenda by administering the nation’s tax laws with unparalleled efficiency, integrity, and a steadfast commitment to taxpayer service. Message from the Chief Executive Officer iii INTRODUCTION | IRS FY 2025 AGENCY FINANCIAL REPORT The results of this new approach are clear and compelling: In FY 2025, the IRS collected more than $5.3 trillion in revenue, processed over 271 million tax returns and forms, and issued approximately 113 million refunds totaling nearly $358 billion. These figures reflect not only the strength of the American economy but also the skill and dedication of our workforce in fulfilling our important statutory responsibilities. This culminated in what has been widely recognized as the most successful filing season in years. We achieved an 87% level of service on our main telephone lines with the average taxpayer waiting just three minutes to speak with an IRS representative. These are more than just statistics – they represent millions of Americans who received fast, effective assistance without the frustration of long delays. This new standard of service was achieved not by spending more, but by spending smarter. In FY 2025, we conducted a comprehensive review of our technology portfolio and eliminated approximately $2 billion in wasteful information technology spending by renegotiating contracts and addressing long-standing inefficiencies like unused, auto-renewed software licenses. Crucially, these savings were realized with minimal disruption to our core mission. Outdated paper processes impose significant costs on the IRS, and we are taking steps to reduce that burden. Through targeted policy changes, automation, and process redesign, we are focused on reducing these costs over time and delivering a more efficient, modern IRS. We are demonstrating that a government agency can deliver world-class service while being a responsible steward of taxpayer dollars. However, current progress represents a foundational step. Our efforts will now focus on implementing advanced technological solutions, enhancing operational efficiency, and delivering superior service to the taxpayer. I am proud to report that for the 26th consecutive year, the IRS has received an unmodified audit opinion on its financial statements. The IRS also received an unmodified opinion on internal control over financial reporting. We continue to strengthen management controls and make progress toward remediating the unpaid assessments significant deficiency in internal control over financial reporting to meet all U.S. financial systems compliance and conformance objectives as outlined in the Management’s Discussion and Analysis – Analysis of Systems, Controls, and Legal Compliance. Based on the results of our internal control evaluations, I can provide reasonable Compliance assurance that the performance and financial information in this report is complete and accurate. The IRS is at a pivotal moment. We are transforming our operations, embracing new technology, and fostering a culture of efficiency and accountability. We continue to invest in our workforce to better equip them to serve the American people in an ever-changing digital environment. Our success depends on disciplined, data-driven decision-making, and a strong commitment to results. I am honored to lead this vital work, and I am confident that we are building an IRS every American can trust to fulfill its mission. Sincerely, Frank J. Bisignano Chief Executive Officer of Internal Revenue January 12, 2026 iv Message from the Chief Executive Officer MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS About the IRS ����������������������������������������������������������������������������������������������������������������������������� 2 Performance Overview �������������������������������������������������������������������������������������������������������������� 6 Enterprise Risk Management ��������������������������������������������������������������������������������������������������16 Analysis of Financial Statements �������������������������������������������������������������������������������������������18 Analysis of Systems, Controls, and Legal Compliance ����������������������������������������������������������23  1 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT ABOUT THE IRS The IRS is one of the oldest bureaus in the U.S. government and is entrusted with a vital responsibility—to serve the nation by administering tax laws with integrity, fairness, and efficiency. As the steward of the tax system, the IRS plays a critical role in upholding public trust, ensuring compliance, and modernizing operations to meet the evolving needs of taxpayers. Visit the IRS History Timeline at www.irs.gov/irs-history-timeline www.irs.gov/irs-history-timeline. In FY 2025, the IRS collected over $5.3 trillion in taxes, which represents a vast majority of the revenue that supports the U.S. government’s operations. Some Key Tax Statistics in FY 2025 Include: 271M 113M $3,173 $5.3T FEDERAL TAX RETURNS AND FORMS PROCESSED TOTAL INDIVIDUAL REFUNDS COLLECTED IN GROSS TAXES $93.8B ENFORCEMENT REVENUE COLLECTED AVERAGE INDIVIDUAL REFUND Note: These statistics are from October 1, 2024, through September 30, 2025. The average individual refund amount includes refunds issued in FY 2025 for all tax years and excludes refundable tax credits and other outlays. 2 About the IRS MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT Mission and Organization The IRS’s mission is to provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities while enforcing the law with integrity and fairness to all. The IRS’s core operations include collecting taxes, processing tax returns, assisting taxpayers, enforcing tax laws, and investigating tax crimes. The extensive IRS portfolio also includes tax-exempt organizations, tax-exempt bonds, refundable tax credits, and other specialized programs. The IRS’s organizational structure features a Commissioner, Chief Executive Officer, Deputy Commissioner, and four IRS chief positions. This closely resembles the private sector model of organizing around customers with similar needs. View the most current IRS organization and leadership structure at (www.irs.gov/about-irs/irs-organization). Constitution Lobby, Internal Revenue Service Building, 1111 Constitution Ave. N.W., Washington D. C. About the IRS 3 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT TAXPAYER Taxpayers have the right to... Be Informed: Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes. Quality Service: Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service. Pay No More than the Correct Amount of Tax: Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly. Challenge the IRS’s Position and Be Heard: Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position. Appeal an IRS Decision in an Independent Forum: Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers generally have the right to take their cases to court. 4 About the IRS MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT BILL OF RIGHTS Finality: Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit. Privacy: Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing. Confidentiality: Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information. Retain Representation: Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation. A Fair and Just Tax System: Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels. About the IRS 5 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT PERFORMANCE OVERVIEW IRS Performance Framework The Government Performance and Results Act of 1993 and the Government Performance and Results Act Modernization Act of 2010 require the IRS to have a performance framework that focuses on the IRS’s priorities with measurable outcomes supported by evidence and data-driven decision making. This framework enables internal and external stakeholders the ability to review an organization’s health while understanding decision-making and resource allocation. In keeping with this legislation, Treasury and the IRS are developing new strategic plans for FY 2026-2030, which will be published in FY 2026. The IRS’s plan will focus on improving stewardship of taxpayer dollars through modernization of service, privacy, and collections, in alignment with the efforts and priorities of the administration and Treasury. For FY 2025, the IRS’s performance is captured within three major programs aligned to the Statement of Net Cost. The non-production costs associated with the voluntary separation programs, including deferred resignation programs and voluntary separation incentives, are presented in the Statement of Net Cost. Major Programs • Service to the Taxpayer • Enforcement of Tax Legislation • Transformation of Business Systems Service to the Taxpayer Gross Cost: $7,243 million Service to the Taxpayer includes activities and programs such as pre-filing assistance; account management and assistance; processing tax returns and related documents; offering filing and account services; producing media and publications; and providing education and resources to taxpayers. This area also encompasses oversight and delivery of customer service including telephone and face-to-face assistance; tax return processing for all taxpayers; and compliance activities. It also provides an independent channel, through taxpayer advocacy, to assist taxpayers with resolving issues that cannot be addressed through normal IRS channels, while working to protect taxpayer rights, identify systemic challenges, and recommend improvements that enhance fairness and efficiency in tax administration. The IRS delivered a successful 2025 filing season, which began on January 27, 2025, and ended April 19, 2025. Highlights included the following: Phone Services • Responded to 8.9 million Accounts Management phone calls. • Accomplished an average wait time of three minutes. • Achieved a Customer Service Representative Level of Service of 87%. • Offered the customer callback feature to about 2.6 million taxpayers, saving taxpayers over 742,000 hours of phone hold time. 6 Performance Overview MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT Online Services/Self-Assistance • Achieved a 6% increase in customer satisfaction among visitors to IRS.gov. In-Person Services • Extended in-person hours at Taxpayer Assistance Center locations across the nation (including evening and Saturday hours), providing more than 15,000 extra service hours, ensuring more flexibility and convenience to hard-working taxpayers. Tax-Return Processing • For select returns, delivered automated 1040X amended return processing, which reduced processing time from 16 weeks to 3 days, with faster refunds and improved service reliability for taxpayers. Taxpayer Publications/Education • Successfully delivered 97.3% of Critical Individual Filing Season Tax Products on time, along with 97.1% of tax products for Tax Exempt and Government Entities and Business Tax Products. Fraud Prevention • Used new filters as screening criteria to detect potential identity theft and prevent the issuance of fraudulent refunds. Tax returns identified by these filters are held during processing until the IRS can verify the taxpayer’s identity. As of May 2025, the IRS confirmed more than 91,000 identity theft tax returns and prevented the issuance of approximately $1 billion in fraudulent refunds. In FY 2025, the IRS continued to expand secure, self-service options for taxpayers, tax professionals, and businesses. Online Accounts, Tax Pro Online Accounts, and Business Tax Accounts gave users more ways to access tax records, make payments, and manage authorizations. The IRS also introduced new online tools, such as electronic form signing and multilingual support, to reduce phone wait times and streamline service. The Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs continued to provide vital free tax preparation services nationwide. The IRS awarded grants to 312 organizations through the Volunteer Income Tax Assistance program and 40 through the Tax Counseling for the Elderly program. The Volunteer Income Tax Assistance program and the Tax Counseling for the Elderly program supported more than 2,000 local tax preparation sites, serving underserved communities across the country. With the contribution of over 76,000 certified volunteers, local tax preparation sites prepared more than 2.8 million returns, delivered an estimated 2 million refunds, and achieved a national accuracy rate of 95.8%. The IRS also made progress in modernizing Taxpayer Assistance Centers. A new scheduling tool enabled customer service representatives to book appointments around the clock, including evenings and weekends. Real-time tracking improved visibility into taxpayer interactions, while a new ‘Walk Up Experience’ feature helped manage in-office traffic. The IRS also began using text messaging to send appointment reminders, along with self-service options to cancel or reschedule visits. In June 2025, every Taxpayer Assistance Center was upgraded with mobile hotspots to reduce disruptions from network outages. Performance Overview 7 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT Beyond these improvements, the IRS continued to make services faster and more reliable. Automation reduced the time needed to process amended returns from 16 weeks to just 3 days, giving customer service representatives better access to return status and resulting in taxpayers to receive refunds more quickly. The IRS also launched new initiatives to present internal data more effectively, improving the speed and accuracy of phone and live chat assistance. Together, these changes are bringing IRS services closer to the level of convenience and efficiency that taxpayers expect from private industry. Building on these efforts, the IRS is positioning itself for future success by redirecting resources from lower-priority programs, restructuring operations, and aligning investments with the FY 2026 President’s Budget. The IRS is currently implementing key tax provisions from the One Big Beautiful Bill Act in time for the 2026 filing season, modernizing tax systems and processes to deliver a modern taxpayer experience, enhancing both self-service and live assistance, and continuing to assist taxpayers by preventing and addressing fraud, scams, and identity theft. Service to the Taxpayer Performance Measures The IRS exceeded 5 out of 7 of its key performance measures for Service to the Taxpayer. Table 1: Summary of key performance measure results for FY 2025. 2025 Target 2025 Actual Customer Service Representative Level of Service1 60.0% 60.5% Level of Service(A)2 65.0% 69.1% 89.0% 86.3% 87.0% 85.2% Timeliness of Critical Individual Filing Season Tax Products to the Public 91.0% 97.3% Timeliness of Critical TE/GE & Business Tax Products to the Public6 89.0% 97.1% Enterprise Self-Assistance Participation Rate7 94.0% 96.6% Key Performance Measures Customer Accuracy – Tax Law (Phones) 3 Customer Accuracy – Accounts (Phones)4 5 Target met, or trending in the desired direction. Target not met, or not trending in the desired direction. The relative success rate of taxpayers that call for Customer Account Services seeking assistance from a Customer Service Representative. Customer Service Representative Level of Service includes telephone lines answered by Accounts Management Customer Service Representatives only. Customer service representatives answered around 18.6 million calls in FY 2025. Customer service representative phone demand, which includes services offered and disconnects, was around 33.7 million. In FY 2025, around 13.8 million taxpayers were offered a callback and 62.1% accepted. This resulted in around 4.1 million hours saved for the taxpayer, providing a better experience. The level of service for the 2025 filing season was 87.0%. 2 The relative success rate of taxpayers that call for Accounts Management Customer Account Services seeking assistance from a Customer Service Representative or through an Automated application during open hours. Customer Service Representative Level of Service (Automation) includes telephone lines answered by Accounts Management Customer Service Representatives only. Automated Accounts Management calls answered in the Integrated Customer Communication Environment, and Accounts Management informational messages completed in Interactive Applications that permit taxpayers using a touch-tone telephone to select an application to resolve tax account issues, obtain tax information, or otherwise direct themselves to the appropriate source of assistance. 3 The number of correct answers given by a live assistor on Toll-free tax law inquiries divided by the total number of inquiries, shown as a percentage. In FY 2025, the new hires received accounts and tax law training. Customer Accuracy – Tax Law (Phones) finished below the target because FY 2025 new hires were charged in accuracies on account-related call received on tax law applications, affecting the overall accuracy rate. 1 8 Performance Overview MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT The number of correct answers given by a live assistor on Toll-free account inquiries divided by the total number of inquiries, shown as a percentage. Customer Accuracy – Accounts (Phones) finished below the target given the complexity of incoming calls increased, while less complex phone inquiries declined in part due to increased taxpayer self-help services and online efficiencies. 5 The number of Critical Individual Filing Season tax products available to the public seven calendar days before the official IRS start of the individual filing season divided by the total number of products, shown a percentage. No major tax legislation was passed that affected filing season preparation. 6 The number of Critical Tax Exempt/Government Entities and Business tax products available to the public seven calendar days before the official IRS start of the individual filing season divided by the total number of products, shown as a percentage. No major tax legislation was passed that affected filing season preparation. 7 The number of taxpayer self-assisted services completed divided by the total number of services, shown as a percentage. 4 DID YOU KNOW? One Big Beautiful Bill Act The One Big Beautiful Bill Act has a significant effect on federal taxes, credits and deductions. It was signed into law on July 4, 2025, as Public Law 119-21. Some provisions that went into effect in 2025 cover: • Income tax, credits, and deductions • Family and dependent credits • Business credits and deductions • Investment and community development • Clean energy • Tax exempt entities and charitable giving Find more details at: www.irs.gov/newsroom/one-bigbeautiful-bill-provisions Enforcement of Tax Legislation Gross Cost: $12,214 million Enforcement of Tax Legislation includes the examination of domestic and international tax returns; administrative and judicial settlement of taxpayer appeals of examination findings; technical rulings; monitoring of employee pension plans; determination of qualifications for organizations seeking tax-exempt status; enforcement of statutes relating to the detection and investigation of criminal violations of tax laws; identification of under-reporting of tax obligations; securing unfiled tax returns; and collection of unpaid accounts. The IRS continues to advance its enforcement priorities through a balanced approach that strengthens compliance, enhances taxpayer service, and protects the integrity of the tax system. These priorities are operationalized through enterprise-level planning and workforce readiness. The IRS is focused on carrying out key parts of recent tax legislation and modernizing operations through integrating advanced data analytics and digital tools to improve service delivery and streamline compliance processes. Performance Overview 9 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT Promoting voluntary compliance remains a core part of the IRS mission. The IRS supports taxpayers and tax professionals through education, early detection, prevention efforts, and options to resolve issues. At the same time, the IRS enforces tax laws fairly and consistently to help ensure a level playing field and maintain public trust in the tax system. To guide future enforcement efforts, the IRS is developing the FY 2026 Enterprise Compliance Plan. This plan will outline key strategies that support the IRS’s broader information technology modernization efforts, including the use of advanced analytics to detect anomalies and select cases, streamlined case management across program areas to boost efficiency and collaboration, and targeted investments in workforce training and technology to help employees meet evolving demands and challenges. The IRS is aligning its organizational structure to support strategic goals, optimize staffing levels, and use team-based models to improve flexibility and responsiveness. At the same time, the IRS is investing in programs to help employees adapt to new tools, processes, and expectations. These efforts are part of a broader strategy to improve compliance outcomes while building a modern, data-driven, and taxpayer-focused environment. Enforcement of Tax Legislation Performance Measures The IRS exceeded 3 out of 7 of its key performance measures for Enforcement of Tax Legislation. Table 2: Summary of key performance measures results for FY 2025. 2025 Target 2025 Actual 37.2% 38.8% 91 71 6,786 3,692 3,174 1,589 Exam Starts – Large Corporations (Assets >= $250M) 1,375 1,483 Criminal Investigations Completed6 2,500 2,850 Conviction Rate7 92.0% 89.0% Key Performance Measures Collection Coverage1 Examination Efficiency – Individual2 Exam Starts – High-Income Individuals 3 Exam Starts – Partnerships4 5 Target met, or trending in the desired direction. Target not met, or not trending in the desired direction. The volume of collection work disposed divided by the total volume of collection work available, shown as a percentage. Restart of Delinquent Return Notices resulted in a substantial increase of notices being issued throughout FY 2025. New Balance Due and Delinquent Return Notices were issued on a consistent schedule throughout FY 2025, resulting in a constant flow of inventory and dispositions from notices. 2 The sum of all individual 1040 returns closed by Small Business/Self-Employed, Taxpayer Services, and Large Business and International (Field Exam and Correspondence Exam programs) divided by the total full-time equivalent expended in relation to those individual returns. Examination Efficiency – Individual finished below the target due to the significant staffing changes caused by the deferred resignation programs and the separation of probationary employees requiring the reassignment of inventory and canceled training. 3 The number of examinations of individual returns started during the fiscal year with a total positive income of $10 million and above. Exam Starts – High-Income Individuals finished below the target was primarily due to significant staffing changes as a result of the deferred resignation programs and the separation of probationary employees. 1 10 Performance Overview MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT The number of partnership examinations started during the fiscal year. Exam Starts – Partnerships finished below the target largely due to significant staffing changes as a result of the deferred resignation programs and the separation of probationary employees. 5 The number of examinations of large corporate returns started during the fiscal year reporting assets of $250 million and above. Exam Starts – Large Corporation finished above the target due to On-the-job instructors returning to their regular large corporate cases after a significant number of probationary employees did not return after June 2025. This upward trend is expected to continue during FY 2026 as the remaining probationary employees complete training and continue to be assigned large corporate work. 6 The total number of subject criminal investigations completed during the fiscal year, including those that resulted in prosecution recommendations to the Department of Justice as well as those discontinued due to a lack of prosecution potential. Criminal Investigations completed finished above the target due to a shift towards more illegal non-tax investigations, which tend to have a lower cycle time, as well as an influx of new agents initiating case inventory. Hiring authority in recent years has allowed IRS Criminal Investigations to remain consistent in its recruiting, hiring, and training efforts, and as a result has contributed to better-than-expected performance results in FY 2025. 7 The total number of convictions divided by the total number of adjudicated criminal cases, shown as a percentage. Conviction Rate finished below the target because IRS Criminal Investigations does not prosecute its own cases and depends on the ability of the Department of Justice and U.S. Attorney’s office to accept its cases for prosecution and move such cases through the courts. 4 DID YOU KNOW? Tax Relief in Disaster Situations Find information on the most recent tax relief provisions for taxpayers affected by disaster situations. The current list of eligible localities and other details for each disaster are available on our Around the nation page at www.irs.gov/newsroom/tax-relief-in-disaster-situations. www.irs.gov/newsroom/tax-relief-in-disaster-situations Transformation of Business Systems Gross Cost: $1,038 million The IRS is modernizing its business systems while maintaining the core operations that keep the organization running smoothly. This includes delivery of technology services that support tax administration for both employees and the public, and planning for and investing in new systems. At the same time, essential support functions such as workplace safety, facilities, human capital, policy, communications, finance, strategic planning, research, and procurement form the backbone of the IRS. Together, these efforts ensure that resources are used effectively, employees are aligned with organizational goals, and technology upgrades are integrated into daily operations. This combination of modern information technology systems and strong support functions positions the IRS for long-term success. Primary activities include: • Expanding secure, self-service online account capabilities to give taxpayers, businesses, and tax professionals 24/7 access to their tax information. • Improving individual tax processing technologies to ensure faster, more accurate returns, and resolutions. • Modernizing case and workload management tools to increase efficiency and reduce administrative burden. • Advancing protections to safeguard sensitive financial data for both taxpayers and IRS systems. Performance Overview 11 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT The IRS also made great progress by expanding digital scanning and e-filing capabilities to reduce backlog and speed up processing. The IRS achieved online and mobile accessibility for 21 additional non-tax forms, bringing the total to 71 available for online submission. In FY 2025, the IRS transformation efforts continued with the planning and phased development of several strategic initiatives that will modernize the IRS’s technology infrastructure and core operations. The IRS is working to substantially complete most key modernization initiatives within the next two years. Efforts are focused on expanding automation, strengthening data integration, and improving system interoperability to better support both taxpayer services and internal compliance operations. Modernized platforms will enable authorized employees to access secure real-time taxpayer data, which improves service quality while safeguarding privacy. They include: • The Unified Application Program Interface initiative is being developed to create a standardized foundation for enterprise data integration. This framework will allow for consistent, secure access to datasets across IRS applications. The Unified Application Program Interface is intended to enhance data discoverability, accelerate system development, and improve information sharing across IRS programs. • Through the Zero Paper initiative, the IRS is preparing to reduce the physical handling of incoming tax documents. The IRS plans to shift paper submissions to third-party processing sites, where documents will be scanned and converted to metadata using artificial intelligence and robotic automation. These structured data packages will be securely transmitted into IRS systems, reducing paper inventory, cutting processing times, and enabling more accurate data ingestion. • The IRS is also building the Developer Experience Platform, which will standardize and automate software development, testing, and deployment across the enterprise. The Developer Experience Platform is intended to support faster delivery of applications, reduce troubleshooting time, and ensure consistent architecture patterns across information technology projects. This approach is expected to boost development agility while reinforcing system security and scalability. These initiatives, combined with ongoing efforts to enhance cybersecurity, modernize infrastructure, and expand digital intake, underscore the IRS’s commitment to becoming more agile, resilient, and data-driven. Looking ahead, the IRS will continue to transform its business systems to deliver a more modern, secure, and responsive tax system. Over the next several years, the IRS will advance digitalization, expand the use of automation, and integrate data platforms to improve both taxpayer service and internal operations. Priority efforts include building better interoperability across core systems, investing in scalable cloud solutions, and reinforcing cybersecurity to protect sensitive information. The IRS will also expand real-time data access and continue replacing legacy systems with modern platforms that support innovation and resilience. These efforts will ensure the IRS can adapt quickly to new challenges, reduce costs through technology, and provide taxpayers with a seamless, reliable, and secure experience. 12 Performance Overview MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT Transformation of Business Systems Performance Measures The IRS exceeded 1 out of 4 of its key performance measures for Transformation of Business Systems. Table 3: Summary of key performance measure results for FY 2025. 2025 Target 2025 Actual Rentable Square Feet per Person1 229 230 Percent of Aged Hardware2 20.0% 13.1% Percent of Reportable Information Technology Investments Within +/- 10% Cost Variance at the Investment Level3 90.0% 60.0% Percent of Reportable Information Technology Investments Within +/- 10% Schedule Variance at the Investment Level4 90.0% 30.0% Key Performance Measures Target met, or trending in the desired direction. Target not met, or not trending in the desired direction. The amount of rentable square feet the IRS maintains per person requiring space. Rentable Square Feet per Person is driven in the positive direction by either a decrease in square footage, increase in staffing or a combination of both. Rentable Square Feet per person missed the target due to changing priorities of the last fiscal year, which led the IRS to reevaluate its current space usage and needs. The IRS is committed to reviewing its space reduction efforts for the upcoming fiscal year. 2 The quantity of information technology hardware in operation past its useful life divided by the total hardware in use, shown as a percentage. Percent of Aged Hardware finished ahead of the target of 20%. The IRS made steady progress every quarter to reduce the amount of old hardware. The IRS started the year with a higher percentage of outdated equipment and replaced or retired older technology efficiently. 3 The number of reportable IT investments within +/-10% variance between planned total cost and projected/actual cost within a fiscal year divided by the total number of reportable information technology investments in that fiscal year, shown as a percentage. Percent of Reportable Information Technology Investments Within +/- 10% Cost Variance at the Investment Level fell below the target because less than six of ten reportable investments were within the cost variance threshold at the close of the FY 2025. 4 The number of reportable IT investments within +/- 10% variance between planned days and projected/actual days within a fiscal year divided by the total number of reportable information technology investments in that fiscal year, shown as a percentage. Three of ten reportable investments were within the schedule variance threshold at the close of FY 2025. Percent of Reportable Information Technology Investments Within +/- 10% Schedule Variance at the Investment Level fell below the target because several IRS IT investments fell outside the normal ±10% schedule variance largely due to shifting procurement and funding timelines, and the early or adjusted completion of work across programs. The IRS is using these insights to further enhance monitoring and strengthen performance going forward. 1 DID YOU KNOW? 70th Anniversary of the April 15 Filing Deadline The annual deadline for filing federal income tax returns was moved from March 15 to April 15 in 1955 to give both taxpayers and the IRS more time to prepare and process returns. This date has remained a consistent fixture in the U.S. financial calendar since then. Performance Overview 13 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT Verification and Validation of Performance Data The IRS requires complete, accurate, and reliable performance data to assess progress toward its strategic objectives and program outcomes to make good management decisions. All performance results in the FY 2025 Agency Financial Report are considered preliminary. The IRS will publish the actual results in the FY 2027 IRS Congressional Budget Justification & Annual Performance Report and Plan, which is generally published after the State of the Union Address to IRS.gov at www.irs. gov/about-irs/budget-documents. gov/about-irs/budget-documents The IRS’s approach to verification and validation of performance data to improve accuracy and reliability is based upon the following: 1. The IRS reviews performance measures through its annual performance assessment process with Treasury. This assessment includes reviewing the extent to which currently reported performance measures support the strategic plan and priorities and identifying or developing new performance measures to fill any gaps. 2. IRS business units use a standard template to document detailed information for each perfor- mance measure. The IRS includes these measure templates in its comprehensive data dictionary, which it maintains corporately and updates annually. For each measure, the data dictionary includes information like: • Definition • Business unit • Formula/methodology for computation • Responsible Official • Source of the data • Data limitations • Management controls 3. The responsible official for the measure assesses the completeness, consistency, timeliness, and quality of the data, whether the documented procedures for gathering the data were followed, and ensures management controls are in place. The heads of office are accountable for their performance results. These positions vary by business unit. 4. The CFO’s Strategic Planning office reviews quarterly and year-end performance measure results before sharing the results with the senior executive team and/or publishing them in Treasury and IRS documents. The Strategic Planning office also independently reviews the performance measure targets and accompanying documentation. If anomalies occur, the Strategic Planning office informs the business unit, which makes any necessary adjustments. Leadership reviews all target adjustments as part of the budget development and review process. 5. As part of managing the portfolio of enterprise performance measures, the Strategic Planning office conducts ad-hoc meetings with business units to discuss topics such as oversight, responsibilities of ownership, guidance on measurement and reporting, and organizational change. 6. At the end of each fiscal year, the business units who are involved in the collection and reporting of these measures receive a notification from the Strategic Planning office, reminding them of their responsibility for: • Ensuring quality and accuracy of the performance data. • Reviewing and following Internal Revenue Manual guidelines when proposing new or modifying existing measures. 14 Performance Overview MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT • Ensuring sufficient controls are in place for proper and accurate reporting of performance results. These procedures help to provide assurances that the performance data and internal controls reported by the IRS are sufficiently complete, accurate, and reliable. Detailed guidance on the appropriate use and application of performance information appears in Internal Revenue Manual 1.5.1: The IRS Balanced Performance Measurement System (www.irs.gov/irm/part1/irm_01-005-001). DID YOU KNOW? Online Account Expansion An IRS Online Account makes it easy for people to quickly get the tax planning information they need. In 2025, the IRS added the ability for taxpayers to use their IRS Online Account to view and download the following key tax documents: • Form W-2, Wage and Tax Statement • Form 1095-A, Health Insurance Marketplace Statement • Form 1099-NEC, Nonemployee Compensation The IRS added more information return documents to the IRS Online Account. Taxpayers can now also view and keep track of the following critical tax records: • Form 1099-DIV, Dividends and Distributions • Form 1099-SA, Distributions From an HSA, Archer MSA or Medicare Advantage MSA • Form W-2G, Certain Gambling Winnings • Form 1099-INT, Interest Income • Form 1099-MISC, Miscellaneous Income • Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. For more information, visit: www.irs.gov/newsroom/ irs-reminds-taxpayers-to-access-or-create-an-irsonline-account-today Performance Overview 15 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT ENTERPRISE RISK MANAGEMENT In compliance with the OMB Circular A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control, the IRS conducts an annual Enterprise Risk Assessment and develops an Enterprise Risk Profile. The Enterprise Risk Profile articulates the IRS’s top risks and opportunities to achieve its goals and objectives. The assessment considered internal and external factors that may affect the achievement of IRS’s goals. Over the next 12 months the IRS will operate in an environment shaped by both risks and opportunities. The Enterprise Risk Profile highlights risk areas such as implementation of legislation, modernization, taxpayer service, and enforcement. These risks are affected by critical risk drivers including the budget, aging technology infrastructure, ongoing restructuring, workload, and workforce. The IRS continues to monitor and manage these risks as part of its ongoing efforts to ensure a successful 2026 filing season. The IRS is using innovation and technology to improve taxpayer service, maintain taxpayer privacy, enhance operations and enforcement, modernize its workforce, protect data, and safeguard revenue. The IRS is committed to mitigating the associated risks while achieving its core mission of tax administration. The top IRS Enterprise Risks over the next 12 months are: Enforcement Capabilities: The risk that ineffective enforcement activities (technology, processes, and people) may impact compliance, erode trust and confidence in the tax administration system, and hinder the IRS’s ability to meet its mission. Taxpayer Service: The risk that the inability to provide taxpayer services efficiently and effectively may result in taxpayers’ inability to meet their tax obligations, a greater need for enforcement activities post-filing, loss of revenue, and erosion of trust and confidence in the IRS. Workforce Readiness: The risk that IRS may not have a workforce equipped with the expertise, experience, and resources to meet evolving needs, which may negatively impact service to taxpayers, business operations, revenue collection, and efficient delivery of the IRS mission. Implementation of Legislation and Other Requirements: The risk that failure to timely and effectively implement complex legislation and non-statutory requirements may adversely impact the IRS’s ability to fulfill core mission, enhance service delivery, and more effectively enforce the tax law. Fraudulent Scams and Schemes: The risk that bad actors perpetrate fraudulent scams and schemes to exploit tax laws, IRS procedures, technology, and other critical items, which may result in loss of revenue, erosion of confidence and trust in the IRS, and undue burden on taxpayers. Information Technology Modernization: The risk that failure to timely modernize information technology systems, including adopting artificial intelligence, could inhibit efficiency and effectiveness of IRS operations, delay modernization of taxpayer service, and affect the IRS’s efforts to strengthen cybersecurity protections. Data Security: The risk that the inability to protect sensitive data may result in unauthorized access, disclosure, misuse, improper modification, or destruction creating additional burden on the taxpayer and eroding public trust. 16 Enterprise Risk Management MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT Cybersecurity: The risk that increased complexity and sophistication of cyber threats may result in unauthorized access, data loss, fraud, or denial of service. FY 2026 IRS Enterprise Risk Profile • Enforcement Capabilities: The ineffective enforcement activities (technology, processes, people). • Taxpayer Service: The inability to provide taxpayer services efficiently and effectively. • Workforce Readiness: The failure of not having workforce equipped with the expertise, experience, and resources to meet evolving needs. • Implementation of Legislation and Other Requirements: The failure to timely and effectively implement complex legislation and non-statutory requirements. • Fraudulent Scams and Schemes: The inability to address bad actors perpetrating fraudulent scams and schemes to exploit tax laws, IRS procedures, technology, etc. • Information Technology Modernization: The failure to timely modernize information technology systems, including adopting Artificial Intelligence. • Data Security: The inability to protect sensitive data. • Cyber Security: The inability to address increased complexity and sophistication of cyber threats. Enterprise Risk Management 17 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT ANALYSIS OF FINANCIAL STATEMENTS Financial Management Highlights The IRS’s financial statements are prepared to report the financial position, financial condition, and results of operations, consistent with the requirements of 31 U.S. Code Section 3515(b). The financial statements are prepared from records of the IRS in accordance with federal generally accepted accounting principles and the formats prescribed by OMB. Reports used to monitor and control budgetary resources are prepared from the same records. The IRS is a component entity of the Treasury. The IRS is responsible for the administration of tax laws and the custodial collections of taxes for the U.S. government. The IRS responsibilities are divided into two distinct financial management categories: administrative and custodial. Administrative accounts are included as appropriations and offsetting collections in the Statement of Budgetary Resources. These resources are also reflected as assets, liabilities, revenues, expenses, and the net position of the IRS. Custodial accounts include activity in support of tax collections. The IRS collects the majority of receipts supporting the U.S. government’s operations. Tax receipts are accounted for in designated custodial accounts as presented on the Statement of Custodial Activity. Custodial assets are included on the Balance Sheet for Fund Balance with Treasury; Due from the General Fund of the U.S. Government; Federal Taxes Receivable, Net; and Other Receivables, Net. Custodial Liabilities are included on the Balance Sheet as Due to the General Fund of the U.S. Government; Federal Tax Refunds Payable; Other Liabilities; and Other Payables. The financial highlights provide an overview of the IRS’s financial position, net cost of operations, budgetary resources, and custodial activities. Audited financial statements with accompanying notes, including the independent auditor’s report, are presented in the Financial Information section of this report. The chart below highlights IRS’s FY 2025 financial data. (In Millions) 2025 Total Assets $140,264 Total Liabilities $111,800 Net Cost of Operations $21,191 Total Budgetary Resources $43,378 Total Custodial Revenues $5,313,762 18 Analysis of Financial Statements MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT Analysis of the Balance Sheet The Balance Sheet displays amounts of future economic benefits owned or available for use (assets), amounts owed (liabilities), and the residual amount (net position) at the end of the fiscal year. As of September 30, 2025, assets totaled $140,264 million, a reduction of $71,927. Assets are comprised of Federal Taxes Receivable, Net of $91,415 million; Fund Balance with Treasury of $41,484 million; Due from the General Fund of the U.S. Government of $4,238 million; and Other of $3,127 million. Other assets consist primarily of Property and Equipment, Net. Fund Balance with Treasury was primarily reduced this fiscal year by a $20,200 million rescission of previously received surplus enforcement funds. Federal Taxes Receivable, Net decreased by $47,805 million in FY 2025. Additional information on Federal Taxes Receivable, Net can be found in Note 4. Federal Taxes Receivable, Net in the Financial Information section of this report. 2.2% 3.0% 65.2% 29.6% FY 2025 Federal Taxes Receivable, Net Fund Balance with Treasury Due from the General Fund of the U.S. Government Other $140,264 Assets ($ in Millions) As of September 30, 2025, liabilities totaled $111,800 million, a reduction of $45,873 million. Liabilities include Intragovernmental (Due to the General Fund of the U.S. Government, and Other Liabilities), and Other than Intragovernmental (Federal Tax Refunds Payable, Federal Employee Benefits Payable, Other Liabilities, and Other Payables). Intragovernmental liability representing funds to be distributed to the General Fund decreased by $49,159 million in FY 2025, primarily as a result of the Federal Taxes Receivable, Net that will be transferred to the General Fund when collected. The increase of $3,154 million in Other than Intragovernmental – Other Liabilities is attributed to an increase in unidentified cash collections for federal tax deposits due to the executive order requiring federal tax payments be made electronically. Additional information for Federal Employee Benefits Payable and Other Liabilities can be found in Note 8. Federal Employee Benefits Payable and Note 9. Other Liabilities. Liabilities 3.8% 1.2% 6.2% 88.8% FY 2025 $111,800 Liabilities ($ in Millions) Analysis of Financial Statements Intragovernmental Other Federal Tax Refunds Payable Federal Employee Benefits Payable 19 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT Analysis of the Statement of Net Cost The Statement of Net Cost presents the annual cost of operating the IRS’s three major programs: Service to the Taxpayer, Enforcement of Tax Legislation, and Transformation of Business Systems. As a result of the deferred resignation programs and voluntary separation incentives, costs that cannot be traced, assigned, or allocated to segments and their outputs are presented as Cost Not Assigned to Programs on the statement. Net Cost of Operations includes gross cost less earned revenue from user fees and reimbursable agreements. In FY 2025 the net cost of operations totaled $21,191 million. The cost not assigned to programs caused a reduction of gross cost by major programs as follows: Enforcement of Tax Legislation of $894 million, Service to the Taxpayer of $314 million, and Transformation of Business Systems of $37 million. $1,245 $7,179 $1,033 $11,734 FY 2025 Enforcement of Tax Legislation Service to the Taxpayer Cost Not Assigned to Programs Transformation of Business Systems $21,191 Net Cost ($ in Millions) Analysis of Total Budgetary Resources IRS operations are financed through appropriations, spending authority from offsetting collections, and unobligated balances carried forward. Custodial appropriations for taxpayer refunds, refundable tax credits, and other outlays are not available to the IRS for operational expenditures and are not included in the Combined Statement of Budgetary Resources. Total Budgetary Resources of $43,378 million are reported for FY 2025, a reduction of $25,590 million. The rescission of $20,200 million of enforcement funding in FY 2025 is the primary contributor of the decrease in budgetary resources. This also created a negative appropriation balance on the Combining Statement of Budgetary Resources by Major Budget Account in the Required Supplementary Information section. $1,363 $3,390 $1,278 $13,387 FY 2025 $19,418 Obligations ($ in Millions) 20 Personnel Salaries & Benefits Contractual Services Rent, Communications, Utilities, and Miscellaneous Property and Equipment Analysis of Financial Statements MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT The IRS incurred obligations of $19,418 million in FY 2025, a net increase of $838 million compared to the previous year. Personnel Salaries and Benefits increased by $1,330 million, Property and Equipment increased by $221 million, and Contractual Services decreased by $672 million. Analysis of Custodial Revenues The Statement of Custodial Activity presents custodial revenues (federal tax collections), and dispositions of custodial revenues. Total Custodial Revenues for FY 2025 are $5,313,762 million, and consist of six major tax categories. 2025 ($ in Millions) CUSTODIAL REVENUES PERCENTAGE AMOUNT Individual 88.3% $4,689,620 Corporate 9.1% $486,384 Excise 1.7% $90,612 Estate and Gift 0.6% $31,111 Railroad Retirement 0.1% $7,258 Federal Unemployment 0.2% $8,777 The Statement of Custodial Activity also presents refunds and outlays disbursed by the IRS on behalf of the U.S. government. Total Refunds of Federal Taxes and Outlays include refunds of tax overpayments, interest payments, and disbursements for refundable tax credits. For additional information on refundable tax credits and outlays, refer to Other Information – Section E: Refundable Tax Credits and Other Outlays. Outlays Unpaid Assessments Under federal accounting standards, federal taxes receivable are unpaid tax assessments where the taxpayer or court has agreed to the amount. Unpaid assessments not agreed to by taxpayers or the courts are categorized as compliance assessments; those that have no future collection potential are categorized as write-offs. Compliance assessments and write-offs are not included on the Balance Sheet as Federal Taxes Receivable, Net. (In Millions) As of September 30, 2025 UNPAID ASSESSMENTS Federal Taxes Receivable $361,340 Compliance Assessments 86,142 Write-Offs 92,836 Total Unpaid Assessments Analysis of Financial Statements $540,318 21 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT During FY 2025, total unpaid assessments decreased 4.54% or $25,701 million primarily due to a decrease in Gross Federal Taxes Receivable. The 7.31% decrease in Gross Federal Taxes Receivable was associated with Internal Revenue Code Section 965(h) payments received from taxpayers, which decreased unpaid transition taxes on foreign earnings pursuant to Internal Revenue Code Section 965(h) by $48,751 million. For additional information, refer to the Required Supplementary Information section, Federal Taxes Receivable, Net. Net The total unpaid assessment balance consists of delinquent and nondelinquent balances. These balances are owed by taxpayers who file returns without sufficient payment and/or assessed amounts through the IRS’s enforcement programs (refer to Note 1.G. Federal Taxes Receivable, Net and Note 4. Federal Taxes Receivable, Net). Net Delinquent balances are past due while nondelinquent balances are Internal Revenue Code Section 965(h) amounts, for repatriated foreign earnings, due at a future point in time. Unpaid Assessments Other consists of uncollected branded prescription drugs fees and delinquent miscellaneous accounts. As of September 30, 2025 (In Millions) FEDERAL TAXES RECEIVABLE, GROSS Nondelinquent Internal Revenue Code Section 965(h) Unpaid Assessments $28,117 Delinquent Unpaid Assessments 329,865 Delinquent Restitution Based Unpaid Assessments 3,132 Unpaid Assessments Other 226 Federal Taxes Receivable, Gross $361,340 Collectability Modeling and Economic Conditions Delinquent unpaid assessments collectability reflects existing economic conditions of the taxpayers’ ability to pay. Indicators of financial health were reviewed by CFO analysts for publicly traded businesses with large dollar Internal Revenue Code Section 965(h) amounts due. The analysis determined that large dollar Internal Revenue Code Section 965(h) taxpayers are primarily in a favorable long-term economic position to make their future payments. Federal Taxes Receivable, Net, excludes the estimated uncollectible amounts of $269,925 million as of September 30, 2025. Examples of uncollectible taxes include taxpayers who agree to owing taxes but are unlikely to pay and businesses with extreme financial hardships. Overall collectability combines separate collectability calculations for Internal Revenue Code Section 965(h) amounts and components of delinquent taxes receivable. Estimated Collectability: Federal Taxes Receivable Gross and Net As of September 30, 2025 (In Millions) Collectability Gross Net Nondelinquent Unpaid Assessments 94.1% $28,117 $26,470 Delinquent Unpaid Assessments 19.5% 333,223 64,945 $361,340 $91,415 Federal Taxes Receivable, Gross and Net 22 Analysis of Financial Statements MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT ANALYSIS OF SYSTEMS, CONTROLS, AND LEGAL COMPLIANCE Federal Managers’ Financial Integrity Act of 1982 Background The Federal Managers’ Financial Integrity Act of 1982 requires executive branch agencies to establish and maintain internal control and financial systems to provide reasonable assurance that: • Obligations and costs comply with applicable laws. • Funds, property, and other assets are safeguarded against waste, loss, unauthorized use, or misappropriation. • Revenues and expenditures applicable to agency operations are properly recorded and accounted for to permit the preparation of accounts and reliable financial and statistical reports, and to maintain accountability over the assets. OMB Circular A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control, provides implementing guidance for the Federal Managers’ Financial Integrity Act of 1982 and defines management’s responsibility for establishing and assessing internal controls. OMB Circular A-123 also requires federal agencies to adhere to the Government Accountability Office’s (GAO) Standards for Internal Control in the Federal Government, and to evaluate and report on the effectiveness of the organization’s internal controls based on 17 principles. The purpose of this guidance is to improve accountability and effectiveness of programs and operations through implementation of enterprise risk management practices and by establishing, maintaining, and assessing internal control effectiveness. In May 2025, GAO updated the Standards for Internal Control in the Federal Government to focus on risks related to fraud, improper payments, information security, and the implementation of new or substantially changed programs. The IRS will implement these changes in FY 2026. The Management Controls Executive Steering Committee is the IRS’s internal control oversight body and exercises its governance authority over significant annual internal control processes. The committee briefs senior leaders regarding any significant deficiencies. Executives from different divisions provide periodic updates on the status of any deficiencies and any related current or pending audits. Analysis of Controls The Chief Executive Officer’s Assurance Statement is supported by a comprehensive risk-based internal control evaluation plan that adheres to Treasury guidance. This plan includes a methodology that identifies and documents key controls and provides for the assessment and testing of those controls to provide reasonable assurance that they are designed, implemented, and operating effectively. As part of the evaluation process, the IRS conducts the following activities: • Internal Control Managerial Assessments certified by the business unit’s head of office. • The GAO Evaluation Tool consisting of an evaluation of the Standards for Internal Control in the Federal Government 17 Principles. • OMB Circular A-123, Appendix A, Internal Control Testing of Key Financial and Non-financial Transactions. • Quality Assurance Reviews (managerial, operational, quality, security, and program evaluation). • Internal Control Reviews consisting of program assessments of IRS programs. Analysis of Systems, Controls, and Legal Compliance 23 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT Internal Control Over Financial and Non-Financial Reporting In accordance with OMB Circular A-123, Appendix A, Management of Reporting, and Data Integrity Risk, the IRS assessed internal controls over financial reporting. The IRS applied the annual Treasury guide for assessing internal controls in accordance with OMB Circular A-123, Appendix A, to evaluate the design, implementation, and operating effectiveness of key internal controls for material transactions to support reliable financial reporting. Based on the results of this assessment, the IRS can provide reasonable assurance regarding the effectiveness of its internal control over financial reporting as of September 30, 2025. Furthermore, the IRS tested internal controls over non-financial reporting to ensure the overall data quality and reliability of the information used to make decisions. Non-financial reporting subject to internal control testing includes reports that meet the following criteria: • Supports critical decision-making and evaluation of performance by IRS executives. • Considered high-level in that it might garner significant attention from media and/or oversight groups. • Driven by statutory requirements or the need for integrity, accountability, or transparent government data. • Responsive to IRS plans at strategic, operational, or other various levels. • Used and relied upon by other government agencies that might reduce the public’s trust and confidence in the IRS if they were to include inaccuracies. Federal Financial Management Improvement Act of 1996 The Federal Financial Management Improvement Act of 1996 requires federal agencies to implement and maintain financial management systems that comply substantially with federal financial management systems requirements, applicable federal accounting standards, and the U.S. Standard General Ledger at the transaction level. Section 803(c)(1) of the act requires an annual determination of substantial compliance with Section 803(a) based on review of relevant factors. To support this determination, the IRS uses the implementation guidance established by OMB Circular A-123, Appendix D, Management of Financial Management Systems – Risk and Compliance, to determine whether the IRS’s financial management systems comply substantially with federal financial management system requirements, applicable federal accounting standards, and the U.S. Standard General Ledger at the transaction level. The assessment process includes the use of the Federal Financial Management Improvement Act Compliance Determination Framework in OMB Circular A-123, Appendix D, which is a risk- and evidence-based assessment model that leverages existing audits, evaluations, and reviews that auditors and IRS management already perform. In applying the Federal Financial Management Improvement Act Compliance Determination Framework, the IRS assesses available information from audit reports and other relevant and appropriate sources, such as the IRS Federal Information Security Modernization Act of 2014 compliance activities, to determine whether the financial management systems comply substantially with the Federal Financial Management Improvement Act of 1996. The IRS also assesses improvements and ongoing efforts to strengthen financial management systems and the impact of instances of noncompliance on overall financial management system performance. Based on the 24 Analysis of Systems, Controls, and Legal Compliance MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT results of the overall assessment, the IRS concluded that its financial management systems did not substantially comply with federal financial management system requirements as of September 30, 2025, due to the significant deficiency in internal control over financial reporting related to unpaid assessments. This deficiency relates to limitations in the ability of IRS’s financial management systems to classify unpaid assessments and report taxes receivable in accordance with federal accounting standards. The IRS continues to implement a strategy to downgrade the unpaid assessments significant deficiency. Financial Management Systems The IRS developed its financial management systems to provide timely and accurate data and to comply with applicable laws and regulations, while protecting the data and systems through the design, implementation, and monitoring of strong internal controls. The IRS’s objectives are to continuously improve its financial management systems by implementing enhancements that expand and streamline financial transaction processing, analysis, and reporting, while operating in a robust security environment. The IRS’s financial management systems generate the IRS’s financial statements and provide IRS business units data to execute their missions. The IRS’s financial management systems comprise two major components, the Redesigned Revenue Accounting Control System and the Integrated Financial System. The Redesigned Revenue Accounting Control System is a custom-built software database used to account for and summarize all IRS revenue tax transactions and activities. The IRS uses it to record, control, account for, reconcile, and balance all revenue accounting activity, including tax payment collections, refund disbursements, tax receivables, appropriation warrants, refundable tax credits, and other transactional revenue activities on behalf of the U.S. government. The system supports the IRS revenue responsibilities over the accuracy and completeness of tax collections, disbursements, and related activities in its financial reports and records. The Integrated Financial System comprises three SAP® software components: the Enterprise Resource Planning Central Component, Procurement for Public Sector, and Business Warehouse. Integrated Financial System interfaces with multiple internal and external systems, such as the Invoice Processing Platform, ConcurGov (travel), MoveLINQ® (relocation), and National Finance Center (payroll) systems. An integrated financial system provides the IRS with comprehensive automated functionality that supports both financial and administrative program management processes, including core financials, procurement, intragovernmental transactions, purchase card activities, and budget formulation and execution. The IRS’s Integrated Financial System also provides cumulative reporting capabilities by merging data from all sub-systems in Business Warehouse. During FY 2025, IRS continued implementing system improvements including: • Expanded Government Invoicing functionalities in the Integrated Financial System. • SAP® and Business Warehouse software upgrades. • System-wide legislative, technical, and cybersecurity upgrades. Analysis of Systems, Controls, and Legal Compliance 25 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT The IRS will build on the progress made in FY 2025, guided by a clear vision that includes examination of service provider products in the Financial Management Quality Service Management Office marketplace that improves networks to enhance information sharing, deliver better service, and utilize data-driven planning for workforce needs. Within the next several years, the IRS plans to continue the enhancement of its financial management systems including: • The Integrated Financial System’s functional capability for its core financials, tax receivables, procurement, and budgetary systems by continuing to plan and implement a multi-year initiative. • Building core systemic functionality to support financial accounting program changes related to the Employee Retention Credit and Excise Tax Transfers Act of 2025 within the One Big Beautiful Bill Act. • Implementing the remaining segments of Government Invoicing functionality. • Implementing the Government Services Administration’s Go.Gov travel system. • Implementing OneStream Budget formulation, plan development, and forecasting tool. Other Laws The Management Controls Executive Steering Committee provides oversight and governance for the design, implementation, and monitoring of controls to comply with legal and regulatory requirements. The IRS is required to comply with several legal and regulatory requirements, including the Antideficiency Act. The IRS is not aware of any violations of the Antideficiency Act. The Digital Accountability and Transparency Act of 2014 expands upon the Federal Financial Accountability and Transparency Act of 2006 by adding account-level reporting and requiring the U.S. government to collectively standardize the reportable financial data elements. In FY 2025, the IRS provided consistent reviews of the Digital Accountability and Transparency Act of 2014 compliance for the following processes: • Completeness of financial and award data (daily) • Management accountability on reliability and validity of financial and award data (quarterly) • Quality Assurance Review (monthly) • Verification and Validation (monthly) • System Interface and Certification (monthly) The Federal Information Security Modernization Act of 2014 requires federal agencies to develop, document, and implement an entity-wide program to protect government information and information systems that support the operations and assets of the IRS. The IRS continues to work diligently to adopt the best cybersecurity practices and strategies to improve information technology security. 26 Analysis of Systems, Controls, and Legal Compliance MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT Management Assurances Chief Executive Officer’s Statement of Assurance The IRS’s management is responsible for managing risks and maintaining effective internal control and financial management systems to meet the objectives of the Federal Managers’ Financial Integrity Act of 1982. We conducted our assessment of risk and internal controls in accordance with Office of Management and Budget Circular A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control. Based on our assessment, we can provide reasonable assurance that, in accordance with Section 2 of the Federal Managers’ Financial Integrity Act of 1982, the IRS’s internal control over operations, reporting, and compliance with laws and regulations were operating effectively as of September 30, 2025. This includes the effective operation of internal control over financial reporting, which was considered as part of our assessment. We can also provide reasonable assurance that, as of September 30, 2025, the IRS’s financial management systems conform with the requirements of Section 4 of the Federal Managers’ Financial Integrity Act of 1982, with the exception of the federal financial management systems requirement discussed below. The Federal Financial Management Improvement Act of 1996 Section 803(a) requires agencies to implement and maintain financial management systems that comply substantially with federal financial management systems requirements, applicable federal accounting standards, and the U.S. Standard General Ledger at the transaction level. We conducted our evaluation of financial management systems for compliance with the Federal Financial Management Improvement Act of 1996 in accordance with Office of Management and Budget Circular A-123, Appendix D. Based on our assessment, we can provide reasonable assurance that, as of September 30, 2025, the IRS complied substantially with applicable federal accounting standards and the U.S. Standard General Ledger at the transaction level. However, the IRS did not comply substantially with federal financial management systems requirements because of a significant deficiency related to unpaid assessments. As a result of this significant deficiency, we determined that the IRS’s financial management systems did not comply substantially with the Federal Financial Management Improvement Act of 1996. We continue to make progress in remediating this deficiency and remain committed to focusing management’s attention and resources on appropriate corrective actions. Overall, we continue our efforts to ensure high standards, minimize internal control weaknesses and meet federal financial management systems requirements. Additional information on the deficiency can be found in Other Information – Section A: Summary of Financial Statement Audit and Management Assurances, of this report. Assurances Frank J. Bisignano Chief Executive Officer of Internal Revenue January 12, 2026 Analysis of Systems, Controls, and Legal Compliance 27 MANAGEMENT’S DISCUSSION AND ANALYSIS | IRS FY 2025 AGENCY FINANCIAL REPORT IRS Management’s Report on Internal Control Over Financial Reporting The IRS’s internal control over financial reporting is a process effected by those charged with governance, management, and other personnel. The objectives of this process are to provide reasonable assurance that: (1) transactions are properly recorded, processed, and summarized to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use or disposition, and (2) transactions are executed in accordance with provisions of applicable laws, including those governing the use of budget authority, regulations, contracts, and grant agreements, noncompliance with which could have a material effect on the financial statements. IRS management is responsible for designing, implementing, and maintaining effective internal control over financial reporting relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. IRS management evaluated the effectiveness of the IRS’s internal control over financial reporting as of September 30, 2025, based on the criteria established under Title 31 U.S. Code Section 3512(c) and (d) (commonly known as the Federal Managers’ Financial Integrity Act of 1982). Based on that evaluation, we conclude that as of September 30, 2025, the IRS’s internal control over financial reporting was effective. The IRS has a significant deficiency in its internal control over financial reporting for unpaid assessments, which we are actively addressing. Frank J. Bisignano Chief Executive Officer of Internal Revenue January 12, 2026 28 Dottie A. Romo Chief Operating Officer January 12, 2026 Anthony S. Chavez Chief Financial Officer January 12, 2026 Analysis of Systems, Controls, and Legal Compliance FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT FINANCIAL INFORMATION Message from the Chief Financial Officer ������������������������������������������������������������������������������30 Independent Auditor’s Report �������������������������������������������������������������������������������������������������32 Enclosure: IRS Response to the Independent Auditor’s Report ���������������������������������������������40 Financial Statements ���������������������������������������������������������������������������������������������������������������41 Notes to the Financial Statements ������������������������������������������������������������������������������������������47 Required Supplementary Information ������������������������������������������������������������������������������������70  29 FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT MESSAGE FROM THE CHIEF FINANCIAL OFFICER On behalf of the dedicated financial management professionals at the IRS, I am honored to present the FY 2025 Agency Financial Report. This report serves as a comprehensive overview of the IRS’s commitment to financial stewardship and the responsible management of taxpayer resources to support the IRS mission of providing America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all. As the principal financial management advisor to the IRS Commissioner and Chief Executive Officer, the CFO’s mission is leading IRS financial management and compliance oversight operations with integrity and accountability through expert planning and execution. The CFO organization is guided by Treasury’s strategic priorities to create affordable abundance, improve stewardship of taxpayer dollars, and improve the efficiency and effectiveness of Treasury operations. Below are accomplishments for FY 2025 that exemplify these priorities. Financial Reporting Excellence As the primary revenue collector for the U.S. government, the IRS’s financial management operations reported approximately $5.3 trillion in tax collections, $639 billion in tax refunds and outlays, and $91 billion in Federal Taxes Receivable, Net. For the third consecutive year, the IRS’s Agency Financial Report was awarded AGA’s Certificate of Excellence in Accountability Reporting. IRS also received the best-in-class award for “outstanding messages” from the IRS Commissioner and Chief Financial Officer that “exemplify a commitment to customer service.” These achievements demonstrate the CFO organization’s ethos for continuous improvement and underscore the dedication to upholding the highest standards of accountability. Effective Compliance Oversight In addition to responsible financial management, strong internal controls are essential to preserving the public trust. The IRS has received an unmodified opinion on its financial statements for the 26th consecutive year. Our external auditors also issued an unmodified opinion on the overall effectiveness of our internal controls over financial reporting. The IRS continues making progress to remediate the remaining significant deficiency in internal control over financial reporting related to unpaid assessments. This demonstrates the IRS’s overall commitment to continuous improvement and fiduciary responsibility. Key Modernization Efforts The CFO organization’s modernization efforts have expanded to embrace a wider range of technologies, enhancing efficiency, accuracy, and data analytics capabilities. We are leveraging artificial intelligence to automate complex document analysis, ensuring compliance with new financial standards while significantly reducing manual review times. Robotic process automation continues to be a key tool for streamlining high-volume data entry, which standardizes workflows and minimizes errors. Additionally, we implemented automated invoice reports and notifications to vendors, eliminating the need for manual notices on paper invoices. We also automated manual 30 Message from the Chief Financial Officer FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT assessments, deposits, and refunds, streamlining operations accounting for billions of dollars in transactions and effectively eliminating a significant number of manual journal entries. These advancements provide our teams with reliable data, enhance our operational resilience, and enable us to make smarter data-driven decisions that maximize the impact of every dollar spent. Empowered Workforce Our people are the key to our success. Their efforts in delivering comprehensive, reliable, and timely financial, budgetary, and accounting services are critical to supporting the IRS mission. CFO continues to invest in workforce development to ensure the organization is well-equipped to deliver exceptional results. We implemented new and improved training programs and offered career development forums – such as the CFO Learning Lab – which provided our employees opportunities to hone their skills and remain adaptable in the ever-evolving landscape of financial management. The IRS remains steadfast in its core mission and values and will continue to serve the American people with integrity, precision, and purpose. The CFO’s core values of character, fidelity, and optimism drive our unwavering commitment, professionalism, and hard work to meet the IRS mission. We look forward to progressing in our strategic goals, building on a strong foundation to meet the evolving needs of the nation, taxpayers, and the IRS. Sincerely, CORE VALUES • Character: The unwavering conviction to do what is right. • Fidelity: Steadfast loyalty to our mission, our colleagues, and the public trust. CHI EF FIN ANC IA L OFF I CE R Anthony S. Chavez Chief Financial Officer January 12, 2026 • Optimism: The forward-looking, positive outlook that challenges are opportunities to innovate. • STRATEGIC OBJECTIVES Modernization: Innovate and improve our operations. • Message from the Chief Financial Officer Partnership: Be a trusted advisor to internal and external stakeholders. • Empowered Workforce: Provide our employees the tools, resources, and opportunities they need for success. 31 FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT INDEPENDENT AUDITOR’S REPORT 441 G St. N.W. Washington, DC 20548 Independent Auditor’s Report To the Chief Executive Officer of the Internal Revenue Service In our audits of the fiscal year 2025 financial statements of the Internal Revenue Service (IRS), we found • IRS’s financial statements as of and for the fiscal year ended September 30, 2025, are presented fairly, in all material respects, in accordance with U.S. generally accepted accounting principles; • although internal controls could be improved, IRS maintained, in all material respects, effective internal control over financial reporting as of September 30, 2025; and • no reportable noncompliance for fiscal year 2025 with provisions of applicable laws, regulations, contracts, and grant agreements we tested. The following sections discuss in more detail (1) our report on the financial statements and on internal control over financial reporting, which includes an emphasis-of-matter paragraph related to federal taxes receivable, a section on required supplementary information (RSI), 1 and a section on other information included with the financial statements; 2 (2) our report on compliance with laws, regulations, contracts, and grant agreements; and (3) agency comments. Report on the Financial Statements and on Internal Control over Financial Reporting Opinion on the Financial Statements In connection with fulfilling our requirement to audit the consolidated financial statements of the U.S. government, and consistent with our authority to audit statements and schedules prepared by executive agency components, we have audited IRS’s financial statements because of the significance of IRS’s tax collections to the consolidated financial statements of the U.S. government. 3 IRS’s financial statements comprise the balance sheet as of September 30, 2025; the related statements of net cost, changes in net position, budgetary resources, and custodial activity for the fiscal year then ended; and the related notes to the financial statements. In our opinion, IRS’s financial statements present fairly, in all material respects, IRS’s financial position as of September 30, 2025, and its net cost of operations, changes in net position, budgetary 1The RSI consists of Management’s Discussion and Analysis and the Required Supplementary Information section, which are included with the financial statements. 2Other information consists of information included with the financial statements, other than the RSI and the auditor’s report. 3See 31 U.S.C. §§ 331(e)(2), 3515, 3521(g), (i). Pursuant to the authority of 31 U.S.C. § 3515, the Office of Management and Budget (OMB) requires IRS to issue annual audited financial statements that are separate from those of the Department of the Treasury or that are presented separately in the department’s audited, consolidated financial statements. See Office of Management and Budget, Audit Requirements for Federal Financial Statements, OMB Bulletin 24-02, app. B (July 29, 2024). 32 Independent Auditor’s Report FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT GAO’s Independent Audit Report resources, and custodial activity for the fiscal year then ended in accordance with U.S. generally accepted accounting principles. Opinion on Internal Control over Financial Reporting We also have audited IRS’s internal control over financial reporting as of September 30, 2025, based on criteria established under 31 U.S.C. § 3512(c), (d), commonly known as the Federal Managers’ Financial Integrity Act of 1982 (FMFIA). In our opinion, although certain internal controls could be improved, IRS maintained, in all material respects, effective internal control over financial reporting as of September 30, 2025, based on criteria established under FMFIA. Our fiscal year 2025 audit continued to identify a significant deficiency 4 in internal control over financial reporting concerning IRS’s unpaid assessments. 5 We considered this significant deficiency in determining the nature, timing, and extent of our audit procedures on IRS’s fiscal year 2025 financial statements. Although the significant deficiency in internal controls over unpaid assessments did not affect our opinion on IRS’s fiscal year 2025 financial statements, misstatements may occur in unaudited financial information reported internally and externally by IRS because of this significant deficiency. In addition, because of the significant deficiency in internal controls over unpaid assessments that existed during fiscal year 2025, IRS’s financial management systems did not comply substantially with federal financial management systems requirements as required by the Federal Financial Management Improvement Act of 1996. 6 In addition to the significant deficiency in internal controls over unpaid assessments, we also identified other deficiencies in IRS’s internal control over financial reporting that we do not consider to be material weaknesses or significant deficiencies. Nonetheless, these deficiencies warrant IRS management’s attention. We have communicated these matters to IRS management and, where appropriate, will report on them separately. 4A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 5An unpaid assessment is an enforceable claim against a taxpayer for which specific amounts are due, have been determined, and the person(s) or entities from which a tax is due have been identified. See implementing guidance in Internal Revenue Manual § 1.34.4.1.6 (1) p, Terms/Definitions (May 15, 2025). 6Section 803(a) of the Federal Financial Management Improvement Act of 1996 (FFMIA), which is reprinted in 31 U.S.C. § 3512 note, requires that certain federal agencies, including Treasury, implement and maintain financial management systems that comply substantially with federal financial management systems requirements, applicable federal accounting standards, and the U.S. Government Standard General Ledger at the transaction level. While IRS’s financial management systems did not comply substantially with federal financial management systems requirements, IRS’s financial management systems did comply substantially with federal accounting standards and the U.S. Government Standard General Ledger at the transaction level. As a Treasury component, IRS is not required to be assessed separately; however, it is included in Treasury’s agencywide FFMIA assessment. Since IRS is a significant component of Treasury, we conducted this assessment to support the audit of the Treasury agencywide financial statements. See Office of Management and Budget, Management of Financial Management Systems – Risk and Compliance, OMB Circular No. A-123, app. D, § VII.A (Dec. 23, 2022). Independent Auditor’s Report 33 FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT GAO’s Independent Audit Report Significant Deficiency in Internal Controls over Unpaid Assessments During fiscal year 2025, the systems IRS uses to account for federal taxes receivable and other unpaid assessment balances continued to have limitations. Because of these limitations, IRS’s systems were unable to provide the timely, reliable, and complete transaction-level financial information necessary to enable IRS to appropriately classify and report unpaid assessment balances. 7 As in prior years, 8 IRS used a manually driven statistical estimation process to compensate for the effects of its system limitations and other deficiencies on a material portion of its federal taxes receivable balance to help ensure that this balance was free from material misstatement. 9 During fiscal year 2025, IRS recorded summary-level adjustments totaling about $17.8 billion to correct the effects of continued classification errors in its underlying data that it identified during its estimation process. While using this process to determine a material portion of taxes receivable has enabled IRS to produce reliable related balances for year-end reporting, it does not provide IRS management with readily available, reliable unpaid assessment information daily throughout the year for effectively managing unpaid assessment balances. While not collectively considered a material weakness, IRS’s ongoing control deficiencies related to unpaid assessments are important enough to merit attention by those charged with governance of IRS. Therefore, these issues collectively represent a significant deficiency in IRS’s internal control over financial reporting as of September 30, 2025. Continued management commitment and sustained efforts are necessary to build on the progress made to date and to fully address IRS’s remaining unresolved issues concerning the management and reporting of unpaid assessments. Basis for Opinions We conducted our audits in accordance with U.S. generally accepted government auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audits of the Financial Statements and Internal Control over Financial Reporting section of our report. We are required to be independent of IRS and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our 7Federal accounting standards classify unpaid assessments into one of the following three categories for reporting purposes: federal taxes receivable, compliance assessments, and write-offs. Federal taxes receivable are taxes due from taxpayers that IRS can support through the existence of a taxpayer agreement, such as filing of a tax return without sufficient payment, or a court ruling in favor of IRS. Compliance assessments are proposed tax assessments where neither the taxpayer (when the right to disagree or object exists) nor a court has affirmed that the amounts are owed. Write-offs represent unpaid assessments for which IRS does not expect further collections because of factors such as the taxpayer’s death, bankruptcy, or insolvency. Federal accounting standards require that IRS report only federal taxes receivable, net of an allowance for uncollectible taxes receivable, on the financial statements. See Statement of Federal Financial Accounting Standards No. 7, Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting (May 10, 1996). See also implementing guidance in Internal Revenue Manual, § 1.34.4, Unpaid Assessments (May 15, 2025). 8GAO, Financial Audit: IRS’s FY 2024 and FY 2023 Financial Statements, GAO-25-107202 (Washington D.C.: Nov. 7, 2024). 9In fiscal year 2025, IRS’s reported federal taxes receivable consisted of a combination of two distinct types of taxes receivable with different internal control and accounting processes in place: amounts derived from (1) IRS’s unpaid assessments statistical estimation process and (2) the Section 965(h) repatriation of foreign earnings provision of the Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, § 14103, 131 Stat. 2054, 2195-2208 (Dec. 22, 2017), which is codified at 26 U.S.C § 965. 34 Independent Auditor’s Report FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT GAO’s Independent Audit Report audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Emphasis-of-Matter: Federal Taxes Receivable This matter deserves emphasis to put the information in IRS’s financial statements into context. As discussed in note 1.G., Federal Taxes Receivable, Net, taxes receivable consist of unpaid assessments (taxes, associated penalties, and interest) due from taxpayers. The existence of a receivable is supported by a taxpayer agreement, such as filing of a tax return without sufficient payment, or a court ruling in favor of IRS. Consistent with federal accounting standards, IRS’s financial statements do not include an estimate for the annual tax gap—the difference between the amount of tax that taxpayers owe and the amount they actually pay voluntarily and on time, 10 nor do they include information on tax expenditures. 11 Further detail on the tax gap and tax expenditures, as well as the associated dollar amounts, is provided in the unaudited other information included with the financial statements. Our opinion on IRS’s financial statements is not modified with respect to this matter. Responsibilities of Management for the Financial Statements and Internal Control over Financial Reporting Management is responsible for • the preparation and fair presentation of the financial statements in accordance with U.S. generally accepted accounting principles; • preparing, measuring, and presenting the RSI in accordance with U.S. generally accepted accounting principles; • preparing and presenting other information included in IRS’s financial report, and ensuring the consistency of that information with the audited financial statements and the RSI; • designing, implementing, and maintaining effective internal control over financial reporting relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; • assessing the effectiveness of internal control over financial reporting based on the criteria established under FMFIA; and • its assessment about the effectiveness of internal control over financial reporting as of September 30, 2025, included in the accompanying Management’s Report on Internal Control over Financial Reporting on page 28. 10In October 2022, IRS released its most recent estimate of the tax gap, which covered tax years 2014–2016. IRS estimated the average annual gross tax gap to be $496 billion for each of those years. IRS also estimated that $68 billion would be collected through enforcement actions or late payments, leaving a net annual tax gap of $428 billion. In October 2024, IRS estimated a gross tap gap for tax year 2022 of $696 billion. IRS also estimated that $90 billion would be collected through enforcement actions or late payments, leaving a net tax gap of $606 billion. 11Tax expenditures are provisions of the Internal Revenue Code (Title 26, U.S. Code) that reduce taxpayers’ tax liability and therefore the amount of tax revenue paid to the government. Examples include tax credits, deductions, exclusions, exemptions, deferrals, and preferential tax rates. Independent Auditor’s Report 35 FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT GAO’s Independent Audit Report Auditor’s Responsibilities for the Audits of the Financial Statements and Internal Control over Financial Reporting Our objectives are to (1) obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and whether effective internal control over financial reporting was maintained in all material respects and (2) issue an auditor’s report that includes our opinions. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit of the financial statements or an audit of internal control over financial reporting conducted in accordance with U.S. generally accepted government auditing standards will always detect a material misstatement or a material weakness when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements, including omissions, are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit of financial statements and an audit of internal control over financial reporting in accordance with U.S. generally accepted government auditing standards, we: 36 • Exercise professional judgment and maintain professional skepticism throughout the audits. • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. • Obtain an understanding of internal control relevant to our audit of the financial statements in order to design audit procedures that are appropriate in the circumstances. • Obtain an understanding of internal control relevant to our audit of internal control over financial reporting, assess the risks that a material weakness exists, and test and evaluate the design and operating effectiveness of internal control over financial reporting based on the assessed risk. Our audit of internal control also considered IRS’s process for evaluating and reporting on internal control over financial reporting based on criteria established under FMFIA. We did not evaluate all internal controls relevant to operating objectives as broadly established under FMFIA, such as those controls relevant to preparing performance information and ensuring efficient operations. We limited our internal control testing to testing controls over financial reporting. Our internal control testing was for the purpose of expressing an opinion on whether effective internal control over financial reporting was maintained, in all material respects. Consequently, our audit may not identify all deficiencies in internal control over financial reporting that are less severe than a material weakness. • Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. • Perform other procedures we consider necessary in the circumstances. Independent Auditor’s Report FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT GAO’s Independent Audit Report We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the financial statement audit. Definition and Inherent Limitations of Internal Control over Financial Reporting An entity’s internal control over financial reporting is a process effected by those charged with governance, management, and other personnel. The objectives of internal control over financial reporting are to provide reasonable assurance that • transactions are properly recorded, processed, and summarized to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition, and • transactions are executed in accordance with provisions of applicable laws, including those governing the use of budget authority, regulations, contracts, and grant agreements, noncompliance with which could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements due to fraud or error. We also caution that projecting any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Required Supplementary Information U.S. generally accepted accounting principles issued by the Federal Accounting Standards Advisory Board (FASAB) require that the RSI be presented to supplement the financial statements. Such information is the responsibility of management and, although not a part of the financial statements, is required by FASAB, which considers it to be an essential part of financial reporting for placing the financial statements in appropriate operational, economic, or historical context. We have applied certain limited procedures to the RSI in accordance with U.S. generally accepted government auditing standards. These procedures consisted of (1) inquiring of management about the methods used to prepare the RSI and (2) comparing the RSI for consistency with management’s responses to our inquiries, the financial statements, and other knowledge we obtained during the audit of the financial statements, in order to report omissions or material departures from FASAB guidelines, if any, identified by these limited procedures. We did not audit and we do not express an opinion or provide any assurance on the RSI because the limited procedures we applied do not provide sufficient evidence to express an opinion or provide any assurance. Other Information IRS’s other information contains a wide range of information, some of which is not directly related to the financial statements. This information is presented for purposes of additional analysis and is not a required part of the financial statements or the RSI. Management is responsible for the other information included in IRS’s financial report. The other information comprises the following sections of the IRS Fiscal Year 2025 Agency Financial Report: Introduction, Message from the Chief Financial Officer, Other Information, and Appendices. Other information does not include the financial statements and our auditor’s report thereon. Independent Auditor’s Report 37 FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT GAO’s Independent Audit Report Our opinion on the financial statements does not cover the other information, and we do not express an opinion or any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and consider whether a material inconsistency exists between the other information and the financial statements, or the other information otherwise appears to be materially misstated. If, based on the work performed, we conclude that an uncorrected material misstatement of the other information exists, we are required to describe it in our report. Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements In connection with our audit of IRS’s financial statements, we tested compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements consistent with our auditor’s responsibilities discussed below. Results of Our Tests for Compliance with Laws, Regulations, Contracts, and Grant Agreements Our tests for compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements disclosed no instances of noncompliance for fiscal year 2025 that would be reportable under U.S. generally accepted government auditing standards. However, the objective of our tests was not to provide an opinion on compliance with laws, regulations, contracts, and grant agreements applicable to IRS. Accordingly, we do not express such an opinion. Basis for Results of Our Tests for Compliance with Laws, Regulations, Contracts, and Grant Agreements We performed our tests of compliance in accordance with U.S. generally accepted government auditing standards. Responsibilities of Management for Compliance with Laws, Regulations, Contracts, and Grant Agreements IRS management is responsible for complying with laws, regulations, contracts, and grant agreements applicable to IRS. Auditor’s Responsibilities for Tests of Compliance with Laws, Regulations, Contracts, and Grant Agreements Our responsibility is to test compliance with selected provisions of laws, regulations, contracts, and grant agreements applicable to IRS that have a direct effect on the determination of material amounts and disclosures in IRS’s financial statements, and perform certain other limited procedures. Accordingly, we did not test compliance with all provisions of laws, regulations, contracts, and grant agreements applicable to IRS. We caution that noncompliance may occur and not be detected by these tests. Intended Purpose of Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements The purpose of this report is solely to describe the scope of our testing of compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements, and the results of that testing, and not to provide an opinion on compliance. This report is an integral 38 Independent Auditor’s Report FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT GAO’s Independent Audit Report part of an audit performed in accordance with U.S. generally accepted government auditing standards in considering compliance. Accordingly, this report on compliance with laws, regulations, contracts, and grant agreements is not suitable for any other purpose. Agency Comments In commenting on a draft of this report, IRS stated that it was pleased to receive an unmodified opinion on its financial statements. IRS also commented that it is dedicated to promoting the highest standards of financial management and accountability and will continue to work to provide accurate reporting and improve internal controls. The complete text of IRS’s response is reproduced in the enclosure. Dawn B. Simpson Director Financial Management and Assurance January 12, 2026 Independent Auditor’s Report 39 FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT ENCLOSURE: IRS RESPONSE TO THE INDEPENDENT AUDITOR’S REPORT DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, DC 20224 FRANK J. BISIGNANO CHIEF ExECUTIVE OFFICER January 13, 2026 Ms. Dawn B. Simpson Director Financial Management and Assurance U.S. Government Accountability Office 441 G Street, NW Washington, DC 20548 Dear Ms. Simpson: Thank you for the opportunity to comment on the draft report titled Financial Audit: IRS's FY 2025 Financial Statements. We are pleased the IRS received an unmodified opinion on its combined financial statements. The unmodified opinion demonstrates that the IRS accurately accounts for tax revenue receipts, tax refunds, and IRS appropriated funds. In addition, we continued to make noteworthy progress in resolving open recommendations. The IRS's ability to produce reliable financial statements each year is due to the efforts of our outstanding personnel. We are dedicated to promoting the highest standards of financial management and accountability, and we look forward to working with the GAO to continue providing accurate reporting and improving our internal controls. Sincerely, Chief Executive Officer 40 Enclosure: IRS Response to the Independent Auditor’s Report FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT FINANCIAL STATEMENTS Audited, See Accompanying Auditor’s Report The financial statements have been prepared to report the financial position and results of operations of the IRS, pursuant to the requirements of the Chief Financial Officers Act of 1990, the Government Management Reform Act of 1994, and OMB Circular A-136, Financial Reporting Requirements. The responsibility for the integrity of the financial information included in these statements is with the management of the IRS. The audit of the IRS financial statements was performed by GAO. The IRS financial statements for FY 2025 are described below: • The Balance Sheet presents the assets, liabilities, and net position. • The Statement of Net Cost presents the gross costs incurred less exchange revenue earned from activities, cost not assigned, and the net cost of operations. • The Statement of Changes in Net Position presents the change in net position resulting from the net cost of operations, budgetary financing sources other than exchange revenues, and other financing sources. • The Combined Statement of Budgetary Resources presents the Budgetary Resources, the Status of Budgetary Resources, and the Outlays, Net. Additional detail by major budget accounts is available in Required Supplementary Information. • The Statement of Custodial Activity presents the sources of non-exchange federal tax revenues collected and disposition of refunds and outlays disbursed. Financial Statements 41 FINANCIAL INFORMATION | IRS FY 2025 AGENCY FINANCIAL REPORT Balance Sheet As of September 30, 2025 (In Millions) ASSETS Intragovernmental Fund Balance with Treasury (Notes 2, 3) $41,484 Accounts Receivable, Net 43 Advances and Prepayments 7 Other Assets Due from the General Fund of the U.S. Government (Note 2) Total Intragovernmental 4,238 45,772 Other than Intragovernmental Cash and Other Monetary Assets 4 Accounts Receivable, Net Federal Taxes Receivable, Net (Notes 2, 4, 7) Other Receivables, Net Property and Equipment, Net (Note 5) Advances and Prepayments Total Other than Intragovernmental Total Assets 91,415 15 3,044 14 94,492 $140,264 LIABILITIES Intragovernmental Other Liabilities Due to the General Fund of the U.S. Government (Note 7) $99,005 Other Liabilities (Note 9) 219 Total In [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A2d79a25a30036693. Public record. Not legal advice.