# IRS FY 2022 AGENCY FINANCIAL REPORT > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3Aeee7824db0dd18b5 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Cover/InsIde Cover FISCAL YEAR 2022 AGENCY FINANCIAL REPORT IRS FY 2022 AGENCY FINANCIAL REPORT A Cover/InsIde Cover WEBSITE INFORMATION WEBSITE INFORMATION Main Site www.irs.gov CONNECT WITH CONNECT WITHUS US Twitter www.twitter.com/IRSnews Facebook www.facebook.com/IRS Instagram www.instagram.com/IRS YouTube www.youtube.com/IRSvideos To request a printed copy of this document, or to provide comments, please send a written request to: IRS Financial Management 1111 Constitution Ave. NW K-6167 Washington, DC 20224 B IRS FY 2022 AGENCY FINANCIAL REPORT ABout thIs report ABOUT THIS REPORT this Agency Financial report (AFr) presents the Internal revenue service’s (Irs) financial information in relation to its mission and resources entrusted to it for the Fiscal Year (FY) 2022 (october 1, 2021, to september 30, 2022) reporting period. It also highlights select accomplishments and challenges in implementing programs that promote the Irs’s mission. Although the Irs is a bureau within the united states (u.s.) department of the treasury (treasury), this report is titled AFr to be consistent with similar reports in the federal government. the Irs presents this report in accordance with office of Management and Budget’s (oMB) Circular A-136, Financial reporting requirements, as a component of treasury. this report includes Circular A-136 core principles and requirements applicable to a component entity. this financial report is available on www.irs.gov/about-irs/budget-documents-and-other-resources. HOW THIS REPORT IS ORGANIZED the AFr consists of the following sections: Section 1: Management’s Discussion and Analysis supplies a high-level overview of the Irs’s history, mission and organizational structure, strategic framework, programmatic performance, enterprise risks, forward-looking information, systems, controls and legal compliance, management assurances related to the Irs’s internal controls and an overview of the Irs financial statements. More information about the Irs’s FY 2022 programs and performance will be available in the Internal revenue service progress update for FY 2022 in January 2023 (the current version is available on www.irs.gov/pub/irs-pdf/p5382.pdf). Section 2: Financial Information Includes a message from the Chief Financial officer (CFo), audited financial statements, accompanying notes, required supplementary information and the Independent Auditor’s report. Section 3: Other Information (Unaudited) Contains a summary of the financial statement audit and management assurances, management and performance challenges named by the treasury Inspector General for tax Administration (tIGtA) and the Irs management’s response thereto, refundable tax Credits and other tax outlays, Grant programs and an acronym list. treasury reports on payment Integrity and Climate–related Financial risk in its AFR (home.treasury.gov/about/budget-financial-reporting-planning-and-performance/ agency-financial-report). For payment Integrity, also see www.paymentaccuracy.gov. IRS FY 2022 AGENCY FINANCIAL REPORT i tABle oF Contents TABLE OF CONTENTS About This Report i Message from the Commissioner iii MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . . 1 About the IRS 2 History 2 Mission and Organization 3 FY 2022–2026 Strategic Framework 4 Performance Overview 5 Enterprise Risk Management 20 Analysis of Financial Statements 22 Analysis of Systems, Control and Legal Compliance 32 Management Assurances 36 Forward-Looking Information 37 FINANCIAL SECTION 39 . . . . . . . . . . . . . . . . . . . . . Message from the Chief Financial Officer 41 Independent Auditor's Report 42 Enclosure: IRS Response to the Independent Auditor's Report 50 Financial Statements 51 Notes to the Financial Statements 58 Required Supplementary Information 85 OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 89 Section A: Summary of Financial Statement Audit and Management Assurances 90 Section B: Management Challenges and IRS Response 92 Section C: Refundable Tax Credits and Other Outlays 111 Section D: Grants Programs 123 Section E: Acronym List 124 ii IRS FY 2022 AGENCY FINANCIAL REPORT MessAGe FroM the CoMMIssIoner MESSAGE FROM THE COMMISSIONER I am pleased to present the Internal revenue service Agency Financial report for FY 2022. this report provides an assessment of the Irs’s financial status and demonstrates how the Irs used entrusted resources in support of its mission to 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. the Irs strategic plan FY 2022–2026, comprising four goals (service, enforcement, people and transformation), enables us to meet the changing needs and expectations of the nation's taxpayers and tax professionals. these goals reflect a long-standing principle of putting the interests of our taxpayers first in everything we do, and it is what drives us in our mission to provide high-quality services and fairly and impartially enforce the law. our goals and objectives also support treasury’s strategic plan and governmentwide priorities. In FY 2022, we carried out our tax administration work while also continuing to implement tax changes enacted by Congress. the hard work of our dedicated employees made it possible for the Irs to collect over $4.9 trillion in gross revenues, which is nearly all of the funding that supports the federal government’s operations from the roads we drive on, national parks, space exploration, air traffic controls, support for our military and so much more. Irs employees have always gone above and beyond to sustain our operations during challenging times and the pandemic was no exception. despite our best efforts, pandemic-related issues caused record levels of activity that continue to affect our operations. We experienced unprecedented amounts of paper returns and correspondence that contributed to an extraordinary higher level of call volumes and related taxpayer inquiries. however, taxpayer service remains the most significant Irs priority, and we have implemented many new strategies in an effort to improve our overall level of service and processing of returns. to address the inventory, we have taken actions that include implementing surge teams, mandatory overtime, giving taxpayers increased access to online self-service tools, innovating to expedite case closures and suspending various notices. A key focus of our work in FY 2022 and one of my priorities as Commissioner has been enhancing the taxpayer experience for all taxpayers including people in diverse and underserved communities. Building upon our efforts last year, we further improved the assistance provided to taxpayers in multiple languages, such as releasing Form 1040 in spanish for the first time and giving taxpayers the opportunity to use a new schedule lep (limited english proficiency) to indicate their preferred contact language instead of english. We completed the conversion of 34 spanish notice inserts to Braille, text, audio and large print, and also converted Form 1040 and its main schedules into spanish Braille, text and large print. We have done the same for Forms 1040 nr, 1040 sr, W-4 and six Irs publications. We are committed to finding new ways to serve taxpayers and improve the tax system. It is critically important that everyone who interacts with us have a positive, supportive and seamless experience. IRS FY 2022 AGENCY FINANCIAL REPORT iii MessAGe FroM the CoMMIssIoner MESSAGE FROM THE COMMISSIONER during FY 2022, the Irs continued to develop and utilize innovative approaches to understand, detect and resolve potential noncompliance to maintain taxpayer confidence in the tax system. the comprehensive, coordinated enforcement strategy we have been developing to address abusive syndicated conservation easement transactions* has shown success, and we have worked closely with the u.s. department of Justice to shut down the promotion of them. Another great example involves our aggressive challenges of micro-captive transactions* in court. We have also seen success in our investigations of criminal activity related to CovId relief efforts, including fraudulently obtained loans, credits and payments meant for American workers, families and small businesses. In addition to these successes in FY 2022, I am pleased to report that the Irs maintained an unmodified (clean) financial statement audit opinion for the 23rd consecutive year. Based upon the results of our internal control evaluations, I can provide reasonable assurance that the performance and financial information in this report is complete and accurate. We continue to strengthen management controls and make progress toward remediating the significant deficiencies in internal control over financial reporting in meeting all u.s. financial systems compliance and conformance objectives as outlined in the Management’s discussion and Analysis – Analysis of systems, Control and legal Compliance. the truly transformational investment in the recently passed Inflation reduction Act of 2022 (IrA) provides nearly $80 billion to the Irs through FY 2031 for increased enforcement, investments in information technology modernization and improvements to taxpayer services. our taxpayer experience office, established last year, is setting the strategic direction for improving the taxpayer experience and identifying opportunities to make continuous improvements in real time for taxpayers and tax professionals. the improvements we have already made and will continue to make over the next few years will produce abundant benefits for our agency, taxpayers and the tax system well into the future. All of these efforts will strengthen our agency and lead to an Irs that is in a better position to help taxpayers and serve the needs of our great nation. the Irs’s dedicated workforce will continue striving to make a positive difference for taxpayers by enhancing the taxpayer experience and ensuring fair enforcement of the tax laws. sincerely, Charles p. rettig Commissioner of Internal revenue november 7, 2022 https://www.irs.gov/newsroom/irs-wraps-up-2022-dirty-dozen-scams-list-agency-urges-taxpayers-to-watch-out-for-tax-avoidance-strategies * iv IRS FY 2022 AGENCY FINANCIAL REPORT THE IRS IS MORE THAN A TAX ADMINISTRATION AGENCY THE SUCCESS OF OUR NATION IS CLOSELY TIED TO THE SUCCESS OF THE IRS " – Chuck Rettig, IRS Commissioner MANAGEMENT'S DISCUSSION AND ANALYSIS IRS FY 2022 AGENCY FINANCIAL REPORT 1 MAnAGeMent's dIsCussIon And AnAlYsIs ABOUT THE IRS the Irs is a bureau of the treasury. the Irs carries out the responsibilities of the secretary of the treasury under Internal revenue Code (IrC) section 7801. the secretary has full authority to administer and enforce the internal revenue laws and has the power to create an agency to enforce these laws. IrC section 7803 provides for the appointment of a Commissioner of Internal revenue to administer and supervise the execution and application of the internal revenue laws. the Irs is one of the world’s largest tax administrators. In FY 2022, the Irs collected more than $4.9 trillion in taxes, which represents nearly all the revenue that supports the federal government’s operations. Some key tax statistics in FY 2022 include: 260M $4.9T $1,838 $72.4B Federal Tax Returns and Forms Processed Collected in Gross Taxes Average Individual Refund Enforcement Revenue Collected HISTORY the Irs is one of the oldest bureaus in the u.s. Government. Article 1, section 8 of the Constitution gave the federal government the "power to lay and collect taxes, duties, Imposts and excises, to pay the debts and provide for the common defence and general Welfare of the united states…” In 1862, president lincoln and the Congress established the Bureau of Internal revenue and the nation’s first income tax. In 1953, the Bureau of Internal revenue’s name changed to the Internal revenue service. visit the Irs history timeline at www.irs.gov/irs-history-timeline. Internal Revenue Service Building, 1111 Constitution Ave. N.W., Washington D. C. 2 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs 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 and enforce the law with integrity and fairness to all. • this mission statement describes the Irs’s role and the public’s expectation about how the Irs should perform that role. • In the u.s., the Congress passes tax laws and requires taxpayers to comply. • the taxpayer’s role is to understand and meet their tax obligations. • the Irs’s role is to help willing taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share. FORCING EN AX TA TA S SISTING AS T TA X E S OCESSING PR RETUR N X PA Y E R S X LAWS STIGATIN VE TA G LLECTING CO IN 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, multiple refundable tax credits and other specialized programs. X C RIM ES the Irs's organizational structure closely resembles the private sector model of organizing around customers with similar needs. Four business units focus on unique groups of taxpayers: Wage and Investment (W&I), small Business/self-employed (sB/se), large Business and International (lB&I) and tax exempt and Government entities (te/Ge). Additionally, the Irs has other functional organizations that have direct interaction with taxpayers and tax preparers, as well as an operations support structure that supplies direction and guidance to the Irs’s administrative functions. the current Irs organization chart is available at: Today's IRS Organization | Internal Revenue Service (www.irs.gov/ pub/newsroom/marketing/internet/irs-organization-chart.pdf). IRS FY 2022 AGENCY FINANCIAL REPORT 3 MAnAGeMent's dIsCussIon And AnAlYsIs FY 2022–2026 STRATEGIC FRAMEWORK the IRS Strategic Plan FY 2022–2026 (www.irs.gov/about-irs/irs-strategic-plan) comprises four goals which align to specific objectives that serve as a roadmap to guide Irs operations and to meet the changing needs and expectations of the nation's taxpayers and tax professionals. each Irs organization aligns its programs and performance within this framework. It supports key governmentwide strategic priorities from the president’s Management Agenda including strengthening the federal workforce, delivering an excellent customer experience, enhancing clean energy efforts, increasing equity and supporting underserved communities. As treasury’s largest bureau, the Irs plays a critical role in advancing Treasury’s Strategic Plan 2022– 2026 (home.treasury.gov/system/files/266/treasurystrategicplan-FY2022-2026.pdf) by co-leading the “tax policy and Administration” strategic objective and supporting eight other objectives across all five treasury goals. the Irs regularly reports on progress toward these shared priorities and contributes to several of the Cross-Agency priority Goals and treasury's two-year Agency priority Goals. 1 Service Provide quality and accessible services to enhance the taxpayer experience. 2 Enforcement Enforce the tax law fairly and efficiently to increase voluntary compliance and narrow the tax gap. 4 Transformation Transform IRS operations to become more resilient, agile and responsive to improve the taxpayer experience and narrow the tax gap. 4 3 People Foster an inclusive, diverse and well-equipped workforce and strengthen relationships with our external partners. IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs PERFORMANCE OVERVIEW Major Programs the Irs demonstrates responsible stewardship over taxpayer dollars by aligning major programs and performance measures with budgetary resources as appropriated by Congress. the Irs strategic plan FY 2022–2026 consists of four strategic goals. three of the goals are major programs: service, enforcement and transformation, and align to the Irs statement of net Cost (snC). the Irs distributes the costs associated with its strategic Goal 3, people, across the three major programs that receive the benefits derived from the activities and accomplishments achieved by the people goal. TABLE 1: IRS STRATEGIC PLAN FY 2022–2026 GOALS AND OBJECTIVES Goals with Resources Invested Goal 1: Service Total Program Cost: $7,085 Million Goals with Resources Invested Goal 2: Enforcement Total Program Cost: $ 8,441 Million Goals with resources Invested Objectives 1.1 Deliver secure and customized services to meet taxpayer needs. 1.2 Identify and address the needs of underserved and multilingual communities to improve their ability to participate in the tax system. 1.3 Provide proactive outreach and education to improve taxpayer understanding of their rights, responsibilities, and obligations. 1.4 Safeguard taxpayer data and privacy and protect the IRS against internal and external threats. Objectives 2.1 Improve operations to effectively and efficiently identify and address noncompliance. 2.2 Enhance enforcement efforts to collect unpaid taxes in a fair and impartial manner. 2.3 Proactively identify current and emerging fraud schemes and other threats using real-time intelligence and analytics. objectives 3.1 Recruit, hire and retain a workforce that reflects the communities we serve to meet current and future needs. Goal 3: People* 3.2 Empower our workforce with the proper training, tools and processes to improve the employee experience and better serve taxpayers. 3.3 Strengthen, expand and effectively utilize our network of trusted partners to better serve taxpayers and improve compliance. Goals with Resources Invested Goal 4: Transformation Total Program Cost: $ 675 Million Objectives 4.1 Reorganize our operational structure to provide an exceptional taxpayer experience by increasing collaboration and maximizing efficiencies. 4.2 Modernize technology infrastructure and develop secure and sustainable solutions to improve tax administration. 4.3 Increase digitalization to streamline processes, improve access to digital data and lessen our environmental impact. 4.4 Improve data management and application of analytical capabilities to drive evidence-based decisions. * The IRS distributes costs associated with the People goal objectives among the IRS's Major Programs/Strategic Goals 1, 2 and 4. IRS FY 2022 AGENCY FINANCIAL REPORT 5 MAnAGeMent's dIsCussIon And AnAlYsIs IRS Performance Measurement Reporting Process the IRS Congressional Budget Justification & Annual Performance Report and Plan (APR&P) (www.irs.gov/about-irs/budget-documents-and-other-resources), approved by the Irs Commissioner and deputy Commissioners, includes key performance measures (KpMs), with annual and outyear targets, and key performance indicators (KpIs), which are tracked a few years before establishing targets. the Irs uses these key metrics to assess progress in achieving the strategic plan goals and reports its performance data in the Irs Congressional Budget Justification and Apr&p. the Irs estimates release of the FY 2024 report in the second quarter of FY 2023. Summary of FY 2022 Results: the Irs has a total of 28 KpMs and KpIs included in the budget and/ or published in the strategic plan, of which 15 are KpMs with targets and 13 are KpIs. the Irs exceeded the FY 2022 target for 10 out of 15 KpMs, and 6 out of 8 KpIs met or exceeded last year's results. results were not available for 5 KpIs; those results will appear in the FY 2024 Irs Congressional Justification (scheduled for publication in the second quarter of FY 2023). refer to Verification and Validation of Performance Data for details on the Irs’s performance measurement reporting and verification and validation processes. TEGIC PLA A R N ST FINANCIAL R E 6 ING RT PO ET G D U B PERFORMANCE MANAGEMENT IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs Major Program | Strategic Goal 1: SERVICE the Irs is dedicated to providing an excellent taxpayer experience and is committed to helping taxpayers of all communities participate in the tax system with ease and confidence. to create proactive, convenient, seamless and effective interactions for taxpayers and stakeholders, the Irs developed the taxpayer experience strategy roadmap. In FY 2022, the Irs enhanced its web communications and increased its online digital services, continued its efforts to improve tax products and services offered to limited-english proficient taxpayers and underserved communities, continued to provide partners and volunteers with the resources needed to assist taxpayers in meeting their tax obligations, conducted filing season outreach activities and products and improved data management and analytics. Moreover, the Irs continued implementing the executive order on improving the nation’s Cybersecurity to protect Irs systems and retain public trust. during the last two years, the Irs has experienced unprecedented challenges. the CovId-19 pandemic and resulting emergency closures of facilities as well as three rounds of pandemic-related relief legislation have affected every aspect of its operations since spring 2020, particularly the areas of correspondence and tax return inventory. the Irs is still facing unprecedented inventory levels, which continue to contribute to higher call volumes and related inquiries. the Irs established an inventory surge team consisting of former customer service representatives (Csrs), tax examiners, clerks and other employees who had Campus support experience to help address the inventory, recover from this tremendous challenge and improve the taxpayer experience. the Irs strives to deepen its understanding of the taxpayer experience, be responsive to changing needs and continuously enhance taxpayer service by improving access to phone and face-to-face assistance, reducing paper inventory and expanding online options for taxpayers to meet their needs. With the funding from the IrA, the Irs plans to increase service on the phones and in our taxpayer Assistance Centers in the coming months and automate the scanning of millions of individual paper returns into digital copies. the Irs is hard at work to make it possible for taxpayers to receive and respond to many notices online. While some changes may take time, taxpayers will see an immediate improvement during the 2023 tax season. San Francisco cookie company makes fortune cookies with IRS Free File tips inside to give to local seniors and low-income taxpayers Owner Kevin Chan of the San Francisco Golden Gate Fortune Cookies Company recently partnered with the IRS to make 2,000 fortune cookies with IRS Free File messages inside to give to local seniors and low-income taxpayers Branch Chief Christine Footit and Carol Xie, public affairs specialist (bilingual Chinese), worked together to come up with the idea and partner with the cookie company and community partners on this effort (continued on page 9) IRS FY 2022 AGENCY FINANCIAL REPORT 7 MAnAGeMent's dIsCussIon And AnAlYsIs Service Strategic Goal Results the Irs exceeded 5 out of 6 of its service KpMs and 3 out of 3 of the KpIs met or exceeded their prior-year results. TABLE 2: SUMMARY OF KEY STRATEGIC GOAL RESULTS FOR FY 2018–2022 Strategic Goal Key Performance Measures/Indicators* FY 2018 Actual FY 2019 Actual FY 2020 Actual FY 2021 Actual FY 2022 Target FY 2022 Actual Customer service representative level of service (los) – B 75.9% 65.4% 53.1% 18.5% 30.0% 17.4% Not Met CSR LOS was 17 4% which was 41 9% below plan of 30% IRS reduced the campus phone staffing to a minimal amount to focus on reducing the paper inventory Phone Demand through September of 81 3 million was 32% lower than the prior year of 119 9 million The Primary Abandoned Call Rate of 18 2% is 21% lower compared to last year during the same time frame The IRS will monitor demand in real time and allocate resources down to the half hour enabling the IRS to regularly shift staff between telephones and paper processing to address demand With the receipt of funding from the IRA, the IRS plans to deliver a higher LOS in FY 2023 total ending Inventory (Millions)1 (Added in FY 2022) – B 600 1,100 1,100 4,100 no target 2,156 set 99.6% 71.9% no target 116.4% set 92.8% 89.0% 92.0% Met 93.0% 89.0% 91.8% Met 92.0% 89.0% 96.4% Met The total number of accounts management and correspondence inventory percent of Closures to receipts1 (Added in FY 2022) – B 99.0% 92.7% The percentage of the number of adjustment cases closed compared to the number received Customer Accuracy — tax law (phones) – B 95.5% 91.6% 91.0% The percentage of correct answers given by a live assistor on toll-free tax law inquiries Customer Accuracy — Accounts (phones) – B 96.1% 94.3% 93.5% The percentage of correct answers given by a live assistor on toll-free account inquiries timeliness of Critical Individual Filing season tax products to the public – B, sp 59.6% 92.6% 78.4% The percentage of critical individual filing season tax products available to the public seven calendar days before the official IRS start of the individual filing season timeliness of Critical te/Ge & Business tax products to the public – B, sp 100.0% 96.1% 96.0% 92.9% 89.0% 96.0% Met The percentage of critical TE/GE and business tax products available to the public seven calendar days before the official IRS start of the individual filing season enterprise self-Assistance participation rate – B, sp 82.0% 85.4% 90.6% 92.3% 91.0% 93.9% Met The percentage of taxpayer assistance requests resolved using self-assisted automated services B = Budget, SP = Strategic Plan, KPI's have no target set. Historical data provided for comparative purpose. 2 Results not available and are not included in the total KPI count above. Results will appear in the IRS FY 2024 Congressional Budget Justification and APR&P. * 1 8 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs Strategic Goal Key Performance Measures/Indicators* FY 2018 Actual FY 2019 Actual FY 2020 Actual FY 2021 Actual FY 2022 Target FY 2022 Actual 74 73 74 70 no target set n/A2 taxpayers satisfied with the Irs – B, sp Taxpayers Satisfied with the IRS is based on the American Customer Satisfaction Index (ACSI) survey The All-Individual Tax Filer score is calculated from separate ACSI Individual Paper Filer and Electronic Filer Customer Satisfaction Index Scores based on a 100-point scale enterprise los (Added in FY 2022) – sp 69.0% 56.2% 51.2% 21.3% no target set 21.3% The success rate of taxpayers calling to speak with an assistor on any toll-free phone line B = Budget, SP = Strategic Plan, KPI's have no target set. Historical data provided for comparative purpose. 2 Results not available and are not included in the total KPI count above. Results will appear in the IRS FY 2024 Congressional Budget Justification and APR&P. * 1 (continued from page 7) worked together to come up with the idea and partner with the cookie company and community partners on this effort “We came up with the idea to approach them [the cookie company],” said Christine “They happily agreed to produce 2,000 individual wrapped fortune cookies ” Carol Xie (center) with Communication and Liaison's (C&L's) Tax Outreach, Partnership & Education branch displays the fortune cookies with community partners Lily Lo, CEO of Northeast Community Federal Credit Union and Amanda Fung, manager, Chinese Newcomers. The community partners will help distribute the cookies to taxpayers. Two community partners will distribute the cookies: Northeast Community Federal Credit Union and Chinese Newcomers These partners help the local community including seniors and low-income taxpayers with tax preparation C&L’s Tax Outreach, Partnership & Education Branch Chief Christine Footit and Carol Xie, public affairs specialist (bilingual Chinese), IRS FY 2022 AGENCY FINANCIAL REPORT The message inside says Get Help Filing Taxes for Free: IRS.gov/freefile Carol also brought some of the cookies to a Chinese restaurant and bumped into the chef – chef Martin Yan Carol introduced herself, and they made a short video about filing taxes through Free File1 See the recent IRS gov article, Here’s why IRS Free File is a great value for families2, to learn more about IRS free file and how it benefits taxpayers2 1 2 www.irsvideos.gov/?pid=4213 www.irs.gov/newsroom/heres-why-irs-free-file-is-a-great-value-for-families 9 MAnAGeMent's dIsCussIon And AnAlYsIs Major Program | Strategic Goal 2: ENFORCEMENT the Irs commits itself to the highest standards in administering and enforcing the tax code with integrity, transparency and objectivity. the gross tax gap is the difference between taxes owed and taxes paid on time. taxpayers deserve to know that all taxpayers are accountable to the same tax laws and pay their fair share. to make progress toward improving voluntary compliance, the Irs will continue to strengthen enforcement capabilities, improve outreach, proactively work to analyze new tax requirements and understand taxpayer behaviors and trends. the Irs will also leverage new technology and data analytics to detect and combat sophisticated evasion techniques and facilitate timely audits and collection investigations. In FY 2022, the Irs continued to ensure international tax compliance by assisting taxpayers with understanding how to comply with the law, enhancing Irs’s enforcement efforts to collect unpaid taxes and collaborating with partners in automatically exchanging data used for tax compliance purposes. In addition, the Irs began implementing section 80603, Information reporting for Brokers and digital Assets, of the Infrastructure Investment and Jobs Act, continued prioritizing high-income non-filers and systemically pursuing the most egregious noncompliant taxpayers to maintain the trust of all taxpayers. the Irs also proactively identified current and emerging fraud schemes and other threats through cross-collaboration and sharing of information across different offices. the Irs provided employees extensive on-demand training and certification using new technologies and tools to expand the depth and breadth of fraud detection expertise needed to ensure tax compliance in this rapidly evolving area. the Irs enforcement efforts should successfully narrow the tax gap, build trust with all taxpayers and keep pace with emerging threats without burdening compliant taxpayers with unnecessary audits. Enforcement Strategic Goal Results the Irs exceeded 2 out of 4 of its enforcement KpMs and 3 out of 5 of the KpIs met or exceeded their prior-year results. TABLE 3: SUMMARY OF KEY STRATEGIC GOAL RESULTS FOR FY 2018–2022 Strategic Goal Key Performance Measures/Indicators* examination efficiency — Individual – B FY 2018 Actual FY 2019 Actual FY 2020 Actual FY 2021 Actual FY 2022 Target FY 2022 Actual 131 109 76 108 100 101 Met The sum of all individual 1040 returns closed by SB/SE, W&I and LB&I (Field Exam and Correspondence Exam programs) divided by the total Full-Time Equivalent expended in relation to those individual returns time to start Compliance resolution1 (Added in FY 2020) – B, sp 60.1% 60.9% 66.3% 66.0% no target set 68.0% The percentage of all individual income tax enforcement cases started within six months of the return posting date time to resolve Compliance Issue After Filing1 (Added in FY 2020) – B, sp 494 469 491 484 no target set 404 The median time it takes to close all individual income tax enforcement cases in days (excluding disaster, bankruptcy and Tax Equity and Fiscal Responsibility Act cases for exam and collection cases that are not closed as full paid) starting from filing date B = Budget, SP = Strategic Plan, KPI's have no target set. Historical data provided for comparative purposes. 2 Results not available and are not included in the total KPI count above. Results will appear in the IRS FY 2024 Congressional Budget Justification and APR&P. * 1 10 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs Strategic Goal Key Performance Measures/Indicators* repeat noncompliance rate1 (Added in FY 2020) – B, sp FY 2018 Actual FY 2019 Actual FY 2020 Actual FY 2021 Actual FY 2022 Target FY 2022 Actual 30.0% 31.4% 35.6% 30.7% no target set n/A2 The percentage of individual taxpayers in a fiscal year with noncompliance two years after the initial tax year that contains a filing, payment or reporting compliance issue, compared to total taxpayers Collection Coverage – B 41.6% 41.3% 34.9% 41.2% 36.5% 38.3% Met 2,227 no target set 3,625 The volume of collection work disposed compared to the volume of collection work available exam starts — high Income Individuals1 (Added in FY 2021) – B, sp 2,307 2,108 2,693 The number of examinations of individual returns with a total positive income of $10 million and above started during the fiscal year exam starts — partnerships1 (Added in FY 2021) – B, sp 9,033 5,823 4,106 4,327 no target set 3,155 1,700 1,490 no target set 1,366 The number of examinations of partnership returns started during the fiscal year exam starts — large Corporations1 (Added in FY 2021) – B, sp 2,396 2,009 The number of examinations of large corporate returns reporting assets of $250 million and above started during the fiscal year Cost to Collect $100 – B $0.34 $0.33 $0.35 $0.33 no target set n/A2 The cost of collecting $100 is computed as total operating costs divided by gross collection divided by 100 Criminal Investigations Completed – B 3,051 2,797 2,624 2,766 2,600 2,552 Not Met The total number of subject criminal investigations completed during the fiscal year, including those that resulted in prosecution recommendations to the Department of Justice (DOJ) as well as those discontinued due to a lack of prosecution potential Criminal Investigations Completed was 2,552 for FY 2022, falling short of the year-end target of 2,600 COVID-19 continues to impact day-to-day investigative activities, thereby contributing to a higher cycle time for investigations completed Additional factors such as years of steady decrease in the number of special agents available to work cases (due to attrition and limited hiring) as well as Criminal Investigation's (CI) continued focus on traditional tax case programs, which tend to have a higher cycle time, continue to impact overall performance Conviction rate – B 91.7% 91.2% 90.4% 89.4% 92.0% 90.6% Not Met Throughout FY 2022, more U S courts resumed activity in many parts of the country (previously closed or limited by COVID-19 restrictions) thereby accepting more cases from CI than originally anticipated This led to an increase in not only the number of convictions but also cases acquitted and dismissed, thereby contributing to a slight drop in the Conviction Rate Nevertheless, COVID-19 continues to limit court availability and impact day-to-day investigative activities in support of the judicial system, which contributed to fewer cases than normal being adjudicated Additionally, years of steady decrease in the number of special agents available to work cases, due to attrition and limited hiring, has led to a decline in the total amount of cases initiated and consequently recommended for prosecution Despite this, appropriate case selection and effective field performance continue to positively affect the quality of cases resulting in a high rate of convictions Since CI does not prosecute its own cases, it must depend on the ability of the DOJ to accept its cases for prosecution and to move such cases through the courts CI management will continue its current efforts of appropriate and consistent contact with DOJ Tax Division and U S Attorney Offices regarding prosecutorial priorities and the appropriate movement of pipeline investigations to ensure a high rate of conviction B = Budget, SP = Strategic Plan, KPI's have no target set. Historical data provided for comparative purposes. 2 Results not available and are not included in the total KPI count above. Results will appear in the IRS FY 2024 Congressional Budget Justification and APR&P. * 1 IRS FY 2022 AGENCY FINANCIAL REPORT 11 MAnAGeMent's dIsCussIon And AnAlYsIs Winners all around at Puerto Rico recruiting event While attending a recruiting event at Fort Buchanan near San Juan, Puerto Rico, last month, SB/SE Deputy Commissioner Darren Guillot was amazed at the turnout “The room was packed with military spouses and veterans waiting to be interviewed,” said Guillot “I’ve never seen this kind of interest and this kind of crowd at an IRS recruiting event ” That interest resulted in a big win for the IRS in staffing the San Juan Automated Collection System call site 179 applicants left the event with a tentative job offer and pre-employment processing in the works IRS and military personnel attending agreed the extensive advertising, highly organized interview and hiring process, along with on-site assistance to help applicants navigate online resources, all worked together to make this recruitment event a monumental success Through collaboration with cross functional partners (e g , HCO, IT, U S Army), a process that would normally take 180 days or longer, was reduced to a matter of hours Truly a win for all That success was also a big win for U S military personnel stationed at FT Buchanan This is a labor pool unique in a number of ways, in particular that they’ve selflessly given [already] so much to America In a meeting with Guillot, base leadership noted the positive effect the joint effort will have on military families transitioning to civilian life and the significant infusion of employment opportunities, as well as economic development for the Caribbean Island SB/SE looks forward to continuing the partnership with FT Buchanan to better serve taxpayers and IRS employees in Puerto Rico "The room was packed with military spouses and veterans waiting to be interviewed," said Guillot. "I’ve never seen this kind of interest and this kind of crowd at an IRS recruiting event." Potential IRS employess wait for a job interview at FT Buchanan Puerto Rico recruiting event. 12 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs Strategic Goal 3: PEOPLE the Irs relies on its dedicated workforce and community of partners to provide taxpayers with quality service and fair enforcement. the Irs is committed to developing its employees by providing resources, tools and training that will help meet the needs of today and tomorrow. the Irs will continue to build its workforce using data-driven planning methods to strategically understand future workforce needs. In FY 2022, the Irs deployed deliberate rebranding, marketing and recruitment strategies through social media, student and graduate programs and collaboration with unemployment offices, educational institutions and federal employment programs to prepare for and better support anticipated hiring. the Irs also integrated human capital and other organizational business strategies to define emerging processes and capabilities with the goal of designing and delivering workforce planning capabilities that advance strategic Irs business plans to accomplish the short and long-term goals of the Irs. the Irs Comprehensive training strategy (Cts) calls for development of a flexible, responsive and efficient learning organization. to ensure comprehensive, equitable access to learning and development for all employees, the Irs continues to move forward in implementing Cts as outlined in the January 2021 Taxpayer First Act Report to Congress (www.irs.gov/pub/irs-pdf/p5426. pdf). the Irs continues to invest in its people and maintain its partnerships with internal and external entities in order to better serve taxpayers, improve compliance and accomplish its major programs and overall mission. People Strategic Goal Results the Irs exceeded 1 out of 1 of its people KpMs. TABLE 4: SUMMARY OF KEY STRATEGIC GOAL RESULTS FOR FY 2018–2022 Strategic Goal Key Performance Measures/Indicators* employee engagement Index – sp FY 2018 Actual FY 2019 Actual FY 2020 Actual FY 2021 Actual FY 2022 Target FY 2022 Actual 67.1% 68.6% 74.2% 73.5% no target set n/A1 The Office of Personnel and Management (OPM) Employee Engagement Index is a measure of the conditions conducive to engagement The index consists of 15 items grouped into 3 subindices: Leaders Lead, Supervisors, and Intrinsic Work Experience OPM measures this governmentwide number of vItA and tCe returns prepared – sp 3.6M 3.6M 2.5M 2.0M 2.0M 2.2M Met The number of individual federal income tax returns prepared by Volunteer Income Tax Assistance (VITA)/Tax Counseling for the Elderly (TCE) volunteers B = Budget, SP = Strategic Plan, KPI's have no target set. Results not available. * 1 IRS FY 2022 AGENCY FINANCIAL REPORT 13 MAnAGeMent's dIsCussIon And AnAlYsIs Memphis Campus celebrates 50-year anniversary with Commissioner Rettig Awash in a sea of gold, black and white commemorative t-shirts, Commissioner Chuck Rettig visited the Memphis Campus to help them celebrate their 50th anniversary on September 14, 2022 you today to help you celebrate the Memphis Campus 50th anniversary,” Rettig noted, “Your strength, hard work and dedication through the years is what makes me proud to be your Commissioner ” Campus Site Coordinator Mary Ray kicked off the event and introduced Commissioner Rettig as the special guest speaker “Since opening its doors on Democrat Road in January 1972 and moving to the Getwell site in 1996, the service center has played an integral part of tax return and payment processing, compliance and customer service,” Ray said “This is a very special milestone This campus has existed since 1972, and it gives me great pleasure to join the Commissioner in recognizing and acknowledging our many accomplishments ” He connected with employees, sharing heartfelt personal stories that demonstrated his pride in the military, the IRS, in being an American and his belief that together we are stronger “Every person is important and together we are stronger We live in the greatest country in the world,” he said The Commissioner joined Ray on stage and looked out at all the enthusiastically applauding employees and managers gathered for the occasion He said, “I am very honored to join The Commissioner also talked about how the employees consistently exceeded annual donation goals to help those less fortunate by contributing record-breaking amounts to the Combined Federal Campaign Memphis also broke records by donating over 52,000 pounds of food to the Mid-South Food Bank to help feed hungry families and individuals in the community Memphis Campus celebrates 50-year anniversary with Commissioner Rettig 14 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs “When I read the W&I Offline article about your outstanding success, I reached out to Mary to extend my congratulations to the campus and to thank her and her staff for a job well done,” he shared “Memphis has a great community inside the IRS Let’s continue to look through Commissioner Rettig tosses the first shovel of dirt on the large sealed white capsule filled with notable items. the eyes of other people as we’re all vital to this country I want you to know that your health, safety and well-being are at the forefront of my thoughts,” he added In closing, Commissioner Rettig thanked employees, saying, “From my heart, my wife and children, thank you for supporting me on this journey ” He joined employees for a catered lunch Many stopped by for a handshake, hug or a kind word, like IT project manager William Cox Jr During the event, employees proudly displayed in their commemorative anniversary t-shirts to welcome the Commissioner and honor the big day Angala Hobbs, C&L, won the anniversary t-shirt contest with her creative design He later joined current and retired directors, managers and employees for the time capsule burial ceremony Memphis Campus Exam/AUR/ Director Tiffany Vertison-Cole IRS FY 2022 AGENCY FINANCIAL REPORT acknowledged visiting community partners like the United Way of the Mid-South, Mid-South Food Bank, MIRSC Adopted Schools and the American Red Cross IRS Human Capital Officer Kevin McIver and retired IRS executive Hugh Davis Jr each talked about how proud they were to be a part of such a momentous occasion Three employees with 50 years of service, Verlinda Campbell, Hattie Jackson Hancock and Cordie McFarland were recognized and celebrated The Memphis Campus IRS band, made up of current and retired employees, was on hand to play music for the event The celebration continued throughout the day with a recognition ceremony, an employee sponsored boxed luncheon and a reception "Your strength, hard work and dedication through the years is what makes me proud to be your Commissioner." Commissioner Rettig tossed the first shovel of dirt on the large sealed white capsule filled with notable items like an Accounts Management Aspect telephone and headset, a wooden gavel from Appeals, an alma mater college banner from the campus Examination acting director, a tax form from Collections, a copy of the Memphis Service Center History Book (1972–1992), photos of some of the current heads of office and more Various IRS leaders, a few honorees and other employees took turns covering the capsule 15 MAnAGeMent's dIsCussIon And AnAlYsIs Major Program | Strategic Goal 4: TRANSFORMATION to continue delivering on its mission, the Irs must transform its operations to keep pace with a rapidly changing world. Implementation of recommendations from the Taxpayer First Act Report to Congress (www.irs.gov/pub/irs-pdf/p5426.pdf) and updates to the Irs’s modernization portfolio will enable the Irs to achieve this transformation and not only support taxpayers, but also handle persistent and sophisticated challenges to tax administration. In FY 2022, the Irs organizational redesign team worked to create a centralized compliance function geared toward breaking down silos, providing consistent outcomes for taxpayers and enhancing employee development. the Irs continues to modernize its technology infrastructure and to develop secure and sustainable solutions to improve the taxpayer experience and narrow the tax gap through the IRS Integrated Modernization Business Plan (www.irs.gov/pub/irs-pdf/p5336.pdf), which builds on significant achievements and reflects on an expanded view of requirements to modernize the Irs technology environment. In FY 2022, the Irs converted 100% of its core legacy code into a modern programming language — a major milestone in Irs history. this accomplishment reduces risks to its operating environment and marks a turning point in the Irs’s journey to modernize its Individual Masterfile, which is the core tax processing system. the Irs is currently conducting robust testing and parallel processing prior to using the new code for tax processing. the Irs also continues to implement its enterprise digitalization strategy to streamline processes and improve access to digital data. Innovative solutions enhance the taxpayer experience and help the Irs reduce paper volume, increase access to digital data and prepare the Irs workforce to manage digital data. Also, in FY 2022, the Irs made several improvements in data management and the application of analytical capabilities, which make operations more efficient, increase knowledge and increase the selection of appropriate compliance enforcement work among other operational enhancements. 16 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs Secretary Yellen: “The work of the IRS is essential to our government and our country.” Treasury Secretary Janet Yellen, right, tours the IRS New Carrolton Federal Building, Thursday, Sept. 15, 2022, in Lanham, Md. (AP Photo/Alex Brandon) IRS employees at the New Carrollton Federal Building (NCFB) hosted Treasury Secretary Janet Yellen for a special visit Thursday, September 15 Secretary Yellen toured the technology facilities at NCFB, calling them a model for the Information Technology (IT) modernization needed at the IRS, and delivered remarks to an in-person and virtual audience of several thousand employees After introductory remarks from Deputy Commissioners Jeff Tribiano and Douglas O'Donnell, Yellen highlighted the many ways IRS employees went above and beyond in recent years, despite being "severely IRS FY 2022 AGENCY FINANCIAL REPORT underfunded" with a shrinking workforce She discussed how the new, transformational IRS funding contained in the recently signed IRA will help our agency modernize, increase staff and ensure all taxpayers pay their fair share "In all, a strong IRS is critical to the economic success of this country – and I am heartened that we are finally reflecting that in our funding decisions," Yellen said, before thanking all employees for continuing to make a difference for American families She ended her visit with a pledge of support, expressing excitement for what's to come for the IRS 17 MAnAGeMent's dIsCussIon And AnAlYsIs Transformation Strategic Goal Results the Irs exceeded 2 out of 4 of its transformation KpMs. TABLE 5: SUMMARY OF KEY STRATEGIC GOAL RESULTS FOR FY 2018–2022 Strategic Goal Key Performance Measures/Indicators* rentable square Feet per person – B FY 2018 Actual FY 2019 Actual FY 2020 Actual FY 2021 Actual FY 2022 Target FY 2022 Actual 301 298 278 278 270 264 Met 16.0% 9.30% 20.0% 7.1% Met n/A n/A no target set n/A1 The amount of rentable square feet the IRS maintains per person requiring space percent of Aged hardware – B, sp 45.5% 31.0% The percentage of all IT hardware in operation that is past its useful life percent of high-volume Irs notices Available to be viewed by taxpayers digitally (Added in FY 2022) – sp n/A n/A The percentage of IRS-issued, high-volume notices made available to be viewed by taxpayers digitally through an IRS Online Account High-volume (a percentage of notices sent) is defined by weighted criteria based on complexity of the notice, shared content across notices, business value, taxpayer value and the volume of notices issued to the number of taxpayers percent of Major It Investments Within +/10% Cost variance at the Investment level –B 72.2% 88.9% 84.2% 94.1% 90.0% 81.3% Not Met Thirteen of 16 major investments were within the cost variance threshold, with 3 programs being out of variance due to underspend The IRS will continue to closely monitor cost reporting for investments in FY 2023 to improve current performance levels for this measure percent of Major It Investments Within +/10% schedule variance at the Investment level – B 83.3% 88.9% 94.7% 100.0% 90.0% 87.5% Not Met Fourteen of 16 major investments were within the schedule variance threshold One investment outside of variance was delayed and the other was completed early IRS IT will continue to closely monitor schedule reporting for investments in FY 2023 to improve current performance levels for this measure * B = Budget, SP = Strategic Plan, KPI's have no target set. Results not available. 1 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. 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 goals and priorities, identifying performance measures to fill any gaps and developing new performance measures to fill those gaps if none exist. 18 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs 2. the Irs’s 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 including, but not limited to: • definition • Business unit • responsible official • Formula/methodology for computation • source of the data • data limitations • Management controls 3. the responsible official for the measure is responsible for assessing the completeness, consis­ tency, timeliness and quality of the data, following the documented procedures for gathering the data and ensuring management controls are in place. the heads of office are accountable for their performance results. 4. the CFo strategic planning office (spo) reviews quarterly and year-end performance measure results before sharing the results with senior executives and/or publishing them in treasury and Irs documents. the spo also independently reviews the performance measure targets and accompa­ nying documentation to ensure the targets reasonably reflect allocated funding. If the spo identifies anomalies, it 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 spo conducts ad-hoc meetings with business units to discuss topics such as: oversight, responsibilities of ownership, guidance on measurement and reporting and organizational change. In addition, the spo conducts an annual Community of practice session focused on measures where business units, treasury contacts and additional outside speakers can share experiences related to performance measurement. 6. At the end of each fiscal year, the Irs’s deputy performance Improvement officer sends an email to the performance measures community reminding them of their responsibility for: • ensuring the quality and accuracy of the performance data. • reviewing and following Internal revenue Manual (IrM) guidelines when proposing new and modifying existing measures. • ensuring there are sufficient controls in place for proper and accurate reporting of their perfor­ mance results. IRS FY 2022 AGENCY FINANCIAL REPORT 19 MAnAGeMent's dIsCussIon And AnAlYsIs each fiscal year, Irs business unit heads of office submit a signed assurance statement that describes the effectiveness of internal controls for their areas of responsibility. the assurance statement identifies any significant deficiencies or weaknesses in internal controls that the Irs Commissioner should consider when forming their statement, including any issues with the quality of program data. 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 IRM 1.5.1: The IRS Balanced Performance Measurement System (www.irs.gov/irm/part1/irm_01­ 005-001). 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 to achieving its strategic goals. the annual enterprise risk assessment process includes internal and external environmental scanning activities and a comprehensive aggregation and analysis of business unit risks. For three years in a row, Adverse Impact of reduced enforcement on Compliance and Impact and Implementation of legislation and other requirements have remained in the top six risks on the risk profile. on August 16, 2022, the president signed the IrA, which includes significant multiyear funding directed toward service delivery, enforcement and modernization. this funding will substantially affect general Irs operations and enable the Irs to develop strategies previously not feasible due to years of budget constraints. this risk profile reflects risks and opportunities associated with initial planning and implementation of the IrA. As noted in the Commissioner’s Message and elsewhere, the Irs has already begun developing strategies and establishing project teams to promote responsible stewardship of IrA funding and effective implementation of all Irs-related provisions. however, such a large increase in funding combined with external environmental factors, may also create new organizational risks and/ or substantially affect known risks. For example, current unemployment rates may create challenges in hiring due to the competitive labor market. the people the Irs needs to effectively achieve its objectives have in-demand skillsets. the Irs will need to effectively recruit, hire, train and retain these employees to make implementation a success. the ability to address existing inventory, prepare for the filing season and effectively implement IrA is highly dependent on staffing levels and the timely implementation of technology applications that reduce manual processing and improve taxpayer service capabilities. 20 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs the goals in the new Irs strategic plan FY 2022–2026, which directly align with the funding streams outlined in the IrA, provides the Irs with a significant opportunity to positively impact tax administration for American taxpayers. By demonstrating that the agency can effectively manage the associated risk and leverage available resources to improve the taxpayer experience, fairly enforce tax laws and modernize the business of tax administration, the Irs can strengthen the trust and confidence of American taxpayers. the top Irs enterprise risks are: 1. Critical Staffing Shortages: the risk that challenges with hiring and backfilling employees, including those with specialized skills and expertise, coupled with increased attrition, may result in critical business failures, diminished service to taxpayers, loss of institutional knowledge, depen­ dence on contractors and a lack of resilience to events impacting employees' ability to work. 2. Adverse Impact of Reduced Enforcement on Compliance: the risk that reduced enforcement activities may adversely impact compliance, erode confidence in the tax administration system and contribute to the tax gap. 3. Taxpayer Experience: the risk that an inability to execute and improve the customer experience, combined with increased demand for services, may negatively impact taxpayers’ ability to meet their tax obligations and erode trust and confidence in the Irs. 4. Employee Engagement and Morale: the risk that a wide range of environmental and cultural factors, such as: inadequate staffing, employee turnover, insufficient tools, limited relationship building, insufficient inclusive workplace and a challenging external environment results in poor employee experience and adversely impacts employee engagement and morale. 5. Impact and Implementation of Legislation and Other Requirements: the risk that failure to timely and effectively implement an increasing number of complex multi-year legislative and non-statutory requirements may adversely impact the ability to fulfill core responsibilities and commitments to modernize technology, enhance service delivery and more effectively enforce the tax law, ultimately eroding trust and confidence in the Irs. 6. Cyber and Data Security: the risk that the increased complexity, sophistication and volume of cyber threats, including insider threats, social engineering, supply chain vulnerabilities and unauthorized access to or use of sensitive information results in data loss, refund fraud, identity theft, ransomware or denial of service. IRS FY 2022 AGENCY FINANCIAL REPORT 21 MAnAGeMent's dIsCussIon And AnAlYsIs ANALYSIS OF FINANCIAL STATEMENTS Financial Management Highlights IRS Management’s Report on Internal Control Over Financial Reporting Fiscal Year 2022 the Irs internal control over financial reporting is a process effected by those charged with governance, management and other personnel with related responsibilities. 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 (GAAp), 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, 2022, based on the criteria established under 31 united states Code (u.s.C.) 3512(c) and (d) (commonly known as the Federal Managers' Financial Integrity Act). Based on that evaluation, we conclude that as of september 30, 2022, the Irs’s internal control over financial reporting was effective. the Irs has two significant deficiencies in its internal control over financial reporting, for unpaid assessments and financial reporting systems, which we are actively addressing. Charles p. rettig Commissioner of Internal revenue 22 Jeffrey J. tribiano deputy Commissioner, operations support teresa r. hunter Chief Financial officer IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs Financial Statement Overview the financial statements are prepared to report the financial position, financial condition and results of operations, consistent with the requirements of 31 u.s.C. section 3515(b). the statements are prepared from records of federal entities in accordance with u.s. GAAp and the formats prescribed by oMB. reports used to monitor and control budgetary resources are prepared from the same records. users of the statements are advised that the statements are a component of the federal government. the Irs is responsible for the administration of tax laws and the custodial collections of taxes for the federal government. the financial management activities that support the responsibilities of the Irs are divided into two distinct account categories. Administrative accounts are included as appropriations and offsetting collections in the statement of Budgetary resources (sBr). these resources are reflected as assets, liabilities, costs, revenues and ultimately the net position of the Irs. Custodial accounts include activity in support of tax collection. the Irs collects the majority of receipts for the u.s. Government. these receipts are reported in designated custodial accounts as presented on the statement of Custodial Activity (sCA). Custodial accounts are also included as custodial Fund Balance with treasury (FBWt) for state Innovation Waiver program (sIWp) grants, taxes receivable not yet collected and Federal tax refunds payable not yet disbursed on the Balance sheet. In FY 2022, the Irs received supplemental funding from the IrA for $79,411 million. the budgetary resources were appropriated for two-year and ten-year availability. In FY 2022, the Irs obligated $106 million in IrA supplemental funding. In FY 2021, the Irs received supplemental funding from the American rescue plan Act 2021 (Arp) for $1,862 million and the Coronavirus response and relief supplemental Appropriations Act of 2021 (CrrsAA) for $509 million in budgetary resources totaling $2,371 million. the budgetary resources were appropriated for annual, two-year and three-year availability. In FY 2022, the Irs brought forward $1,415 million in unobligated balances with $1,155 million being obligated in FY 2022 and $332 million being brought forward into FY 2023. Financial statement fluctuations resulting from this activity are discussed in more depth in the applicable financial statement analysis. Note 21. COVID-19 Activity in the Financial Information section of this report also provides information for budgetary resources, obligations incurred, the remaining available budgetary resources and specific note disclosure data for FY 2022 and FY 2021. IRS FY 2022 AGENCY FINANCIAL REPORT 23 MAnAGeMent's dIsCussIon And AnAlYsIs Financial Statement Analysis Analysis of the Balance Sheet the Balance sheet displays amounts of future economic benefits owned or managed (assets), amounts owed (liabilities) and the residual amounts (net position) at the end of the fiscal year. Assets of the Irs primarily comprise Federal taxes receivable, net, FBWt, due from the General Fund of the u.s. Government, and General property and equipment, net. Comparative asset balances as of september 30, 2022 and 2021 are presented below. Assets (in Millions) Assets FY 2022 FY 2021 Federal Taxes Receivable, Net $236,000 $302,000 Fund Balance with Treasury $87,389 $7,062 Due from General Fund of the U.S. Government $6,947 $6,248 General Property and Equipment, Net $1,795 $1,822 1.5% ▼ $59 $1,522 96.1% ▼ Other 21.9% ▼ 1,137.5% ▲ 11.2% ▲ $0K ⬛ FY 2022 ⬛ FY 2021 $100K ▲ Increase in FY 2022 $200K $300K $400K ▼ Decrease in FY 2022 Asset fluctuations in FY 2022 primarily include increased FBWt, decreased Federal taxes receivable, net and increased due from the General Fund of the u.s. Government. FBWt increases of $80,327 million are primarily associated with the supplemental appropriations received from the IrA. due from General Fund of the u.s. Government increased $699 million as this line item correlates to Federal tax refunds payable, net. Amounts due from General Fund of the u.s. Government represents funds that will be used as resources to disburse federal tax refunds. Federal taxes receivable, net, decreased $66,000 million in FY 2022 as compared to FY 2021. this decrease is primarily related to payments on the deferred employer portion of Federal Insurance Contributions Act (FICA) social security taxes due to the federal government provided under the Coronavirus Aid, relief, and economic security Act (CAres Act). these deferrals are discussed in greater detail in Note 5. Federal Taxes Receivable, Net of the Financial Information section of this report. 24 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs Liabilities include Intragovernmental (Accounts payable, due to the General Fund of the u.s. Government, and other liabilities), Federal tax refunds payable, Federal employee benefits payable and other liabilities as detailed in Note 8. Other Liabilities of the Financial Information section of this report. liability fluctuations in FY 2022 primarily include decreased Intragovernmental liabilities and increased Federal tax refunds payable. Liabilities (in Millions) Liabilities FY 2022 FY 2021 Intragovernmental $238,624 $304,258 Federal Tax Refunds Payable $6,947 $6,248 Federal Employee Benefits Payable $1,003 $1,058 5.2% ▼ Other $2,235 $2,125 5.2% ▲ 21.6% ▼ 11.2% ▲ $0K ⬛ FY 2022 ⬛ FY 2021 $100K ▲ Increase in FY 2022 $200K $300K $400K ▼ Decrease in FY 2022 the decrease in Intragovernmental liabilities is primarily attributable to a decrease of $66,000 million for the due to the General Fund line on the Balance sheet. this line item is representative of funds that will be distributed to the General Fund upon collection and is directly attributable to the decrease in Federal taxes receivable, net. Federal tax refunds payable increased $699 million primarily due to large corporate tax refunds that have completed processing and are awaiting additional information to reissue the refunds as of september 30, 2022. IRS FY 2022 AGENCY FINANCIAL REPORT 25 MAnAGeMent's dIsCussIon And AnAlYsIs Net Position consists of unexpended Appropriations and the Cumulative results of operations. Funds made available by Congress are recorded in unexpended Appropriations. Cumulative results of operations is the net difference between 1) expenses, losses and transfers out from the inception of an agency or activity, and 2) financing sources such as appropriations and revenues, and gains from the inception of an agency or activity (whether financed from appropriations, transfer in, revenues, reimbursements or any combination of the four) to the reporting date of the financial statements. unexpended Appropriations increased 2,272% in FY 2022 due to appropriations received from the IrA. Net Position (in Millions) Net Position FY 2022 FY 2021 Unexpended Appropriations $82,049 $3,459 Cumulative Results of Operations $1,332 $1,506 2,272.0% ▲ 11.6% ▼ $0K $20K ⬛ FY 2022 ⬛ FY 2021 ▲ Increase in FY 2022 $40K $60K $80K $100K ▼ Decrease in FY 2022 Analysis of the Statement of Net Cost the snC 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. net cost includes gross costs incurred less exchange revenue earned from user fees and reimbursable agreements. the total net cost of Irs operations increased $830 million or 6% over the prior fiscal year. the snC reflects a total of $15,667 million for the period ending september 30, 2022 as compared to $14,837 million for the period ending september 30, 2021. the total gross cost for FY 2022 increased by $731 million due primarily to increases in expenses for consulting services, imputed costs, and payroll and benefits. total earned revenue decreased $99 million due to decreases in the Income verification express service user fees and the return of excess current year revenues to the General Fund of the u.s. Government. 26 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs net cost of operations by major program are presented in the table below for the period ending september 30, 2022. the FY 2022 snC presentation aligns with the FY 2022–2026 Irs strategic plan and is not comparable to the FY 2021 presentation by major program as detailed in Note 1. Summary of Significant Accounting Policies. Net Cost (in Millions) Major Program FY 2022 Enforcement of Tax Legislation $8,007 Service to the Taxpayer $6,990 Transformation of Business Systems $670 $0K $2K $4K $6K $8K ⬛ FY 2022 Analysis of the Statement of Budgetary Resources Irs operations are financed through appropriations, spending authority from offsetting collections and unobligated balances carried forward. Appropriations (in Millions) Appropriation FY 2022 FY 2021 919.8% ▲ Enforcement $51,032 $5,004 Operations Support $29,631 $5,583 Taxpayer Services $6,038 $3,208 88.2% ▲ Business Systems Modernization $5,025 $752 568.2% ▲ $802 Other 430.7% ▲ $353 127.2% ▲ $0K ⬛ FY 2022 ⬛ FY 2021 IRS FY 2022 AGENCY FINANCIAL REPORT ▲ Increase in FY 2022 $20K $40K $60K ▼ Decrease in FY 2022 27 MAnAGeMent's dIsCussIon And AnAlYsIs Major Budget Account Descriptions Enforcement funds the necessary expenses for tax enforcement activities of the Irs to determine and collect owed taxes, provide legal and litigation support, conduct criminal investigations, enforce criminal statutes related to violations of internal revenue laws and other financial crimes. Operations Support funds the necessary expenses of the Irs to support taxpayer services and enforcement programs, which includes rent payments, facilities services, printing and postage, physical security, headquarters and other Irs-wide administration activities, research and statistics of income, telecommunications, information technology development, enhancement, operations, maintenance and security. Taxpayer Services funds the necessary expenses of the Irs to provide taxpayer services, including pre-filing assistance and education, filing and account services, taxpayer advocacy services, low-income taxpayer clinic grants and Community volunteer Income tax Assistance Matching Grants for tax return preparation assistance. Business Systems Modernization funds the necessary expenses of the Irs's business systems modernization program for the capital asset acquisition of information technology systems. Sources of Funds (in Millions) Source of Funds FY 2022 FY 2021 Appropriations $92,528 $14,900 Unobligated Balance from Prior Year Budget Authority, Net $2,694 $1,580 Spending Authority from Offsetting Collections $154 521.0% ▲ 70.5% ▲ $151 2.0% ▲ $0K ⬛ FY 2022 ⬛ FY 2021 ▲ Increase in FY 2022 $50K $100K ▼ Decrease in FY 2022 Irs's total budgetary resources increased $78,745 million in FY 2022. this increase was primarily attributable to appropriations received for IrA totaling $79,411 million. the unobligated balance from prior year authority, net, increased $1,114 million as it includes the Arp and CrrsAA carryover funding. the Apportioned, unexpired accounts and unapportioned, unexpired accounts increased by $78,235 million due to the IrA funding received. 28 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs Analysis of the Statement of Custodial Activity the sCA is the presentation of custodial revenues, appropriations and distributions that occur for the current and prior fiscal years. this activity is performed on behalf of the federal government. the custodial appropriations presented on the sCA are not available to the Irs for operational expenditures and are therefore not included in the presentation of the sBr. Additional information relative to the fluctuations discussed below is provided in the other Information section of this report. FY 2022 revenue receipts collected by the Irs totaled $4.9 trillion, an $800 billion increase from $4.1 trillion in FY 2021. Federal tax revenues are reported in six major classifications: Individual income taxes (FICA, self-employment Contributions Act (seCA) and other), corporate income taxes, excise taxes, estate and gift taxes, federal unemployment taxes and railroad retirement taxes. the $800 billion increase is primarily due to a $383 million increase in individual withholding due to expiration of the temporary deferral of the employer's portion of social security; an additional $331 billion due to less tax credits, deductions, and exemptions allowed in filing taxes in 2022; and a $57 billion increase in corporate receipts due to an increase in taxable income of C corporations. Custodial Revenue (in Billions) Tax Class FY 2022 FY 2021 Individual Income $4,308 $3,595 Corporate Income $476 $419 Excise $71 $58 22.4% ▲ Estate and Gift $33 $28 17.9% ▲ Federal Unemployment $7 $6 16.7% ▲ Railroad Retirement $6 $6 0.0% 19.8% ▲ 13.6% ▲ $0K ⬛ FY 2022 ⬛ FY 2021 ▲ Increase in FY 2022 $2K $4K $6K ▼ Decrease in FY 2022 the sCA also presents refunds and outlays made by the Irs on behalf of the federal government. refund and outlay activities were $642 billion for the period ending september 30, 2022, as compared to $1.1 trillion for the period ending september 30, 2021. the 42% decrease was primarily driven by the economic Impact payment (eIp) amounts refunded in FY 2021. only the recovery rebate amounts from the eIps were refunded in FY 2022 under the CAres Act, CrrsAA, and the Arp, which included provisions to help stimulate the economy through eIp and/or recovery rebate Credit payments. Federal tax refunds and outlay activities include refunds of tax overpayments, payments for interest, and disbursements for refundable tax credits such as the earned Income tax Credit (eItC). IRS FY 2022 AGENCY FINANCIAL REPORT 29 MAnAGeMent's dIsCussIon And AnAlYsIs Unpaid Assessments under federal accounting standards, federal taxes receivable are unpaid assessments the taxpayer or court has agreed to. unpaid assessments not agreed to by taxpayers or the courts are categorized as compliance assessments and assessments 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. (In Billions) 2022 2021 UNPAID ASSESSMENTS Federal Taxes Receivable Compliance (Amounts not agreed to by taxpayer or courts) Write-offs (No future collection potential) $ 437 88 77 $ 493 80 85 Total Unpaid Assessments $ 602 $ 658 the decrease in total unpaid assessments is $56 billion when compared to september 30, 2021. the decrease in total unpaid assessments is primarily due to the decrease in social security tax deferral amounts (refer to the other Information section of this report for additional information). the total unpaid assessment balance consists of delinquent and non-delinquent 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 financial statements Note 1.E. Federal Taxes Receivable, Net and Note 5. Federal Taxes Receivable, Net for further details). delinquent balances are past due while non-delinquent balances are due at a future point in time and include IrC section 965(h) amounts, for repatriated foreign earnings, and CAres Act related social security tax deferral balances. (In Billions) 2022 2021 FEDERAL TAXES RECEIVABLE, GROSS Nondelinquent 965h Unpaid Assessments Nondelinquent Social Security Tax Deferral Unpaid Assessments Delinquent Unpaid Assessments Delinquent Restitution Based Unpaid Assessments $ 140 51 243 3 $ 158 106 227 2 Federal Taxes Receivable, Gross $ 437 $ 493 Collectability Modeling and Economic Conditions social security tax deferrals decreased $55 billion during FY 2022. the Irs treated these deferrals as collectable unless there was specific evidence otherwise, as year two amounts are not due until FY 2023. Indicators of financial health were manually reviewed for publicly traded businesses with large dollar IrC section 965 amounts due. the analysis determined that large dollar IrC section 965(h) taxpayers are primarily in a favorable long-term economic position to make their future payments. For delinquent unpaid assessments, collectability reflects existing economic conditions of the taxpayers’ ability to pay. 30 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs the total Federal taxes receivable, net, excludes the estimated uncollectible amount of $201 billion as of september 30, 2022 and $191 billion as of september 30, 2021. examples of uncollectible taxes include taxpayers who agree they owe the tax but are unlikely to pay and businesses with extreme financial hardships. overall collectability combines separate collectability calculations for delinquent taxes receivable IrC section 965(h) amounts, social security tax deferrals and restitution-based assessments (rBAs). Estimated Collectability: Federal Taxes Receivable Gross and Net (In Billions) As of September 30, 2022 Collectability Nondelinquent 965h Unpaid Assessments Nondelinquent Social Security Tax Deferral Unpaid Assessments Delinquent Unpaid Assessments 96.5% Gross $ 140 Net $ 135 90.7% 51 47 21.9% 246 54 Federal Taxes Receivable, Gross and Net $ (In Billions) As of September 30, 2021 Collectability Nondelinquent 965h Unpaid Assessments Nondelinquent Social Security Tax Deferral Unpaid Assessments Delinquent Unpaid Assessments Federal Taxes Receivable, Gross and Net IRS FY 2022 AGENCY FINANCIAL REPORT 90.6% 437 $ Gross $ 158 236 Net $ 143 99.9% 106 106 23% 229 53 $ 493 $ 302 31 MAnAGeMent's dIsCussIon And AnAlYsIs ANALYSIS OF SYSTEMS, CONTROL AND LEGAL COMPLIANCE Federal Managers’ Financial Integrity Act (FMFIA) Background the FMFIA 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 provides implementing guidance for FMFIA and defines management’s responsibility for establishing and assessing internal controls. the Circular 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 to achieve: (1) the objectives of effective and efficient operations, (2) reliable reporting for internal and external use and (3) compliance with applicable laws and regulations (FMFIA section 2). Additionally, agencies are required to assess whether financial management systems comply with federal financial management systems requirements (FMFIA section 4). Analysis of Controls the Commissioner’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 the controls are designed, implemented and operating effectively. As part of the evaluation process, the Irs considered results of this extensive testing and assessment across the Irs. Internal Control over Reporting In accordance with oMB Circular A-123, Appendix A, Management of reporting and data Integrity risk, the Irs also assessed internal controls over reporting. the Irs applied treasury’s Appendix A guidance to assess the effectiveness of its internal control by testing 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 concluded that as of september 30, 2022, the Irs’s internal control over financial reporting was effective. In addition to the financial statements, GAo issues an opinion on Internal Control over Financial reporting. the Irs Management's report on Internal Control over Financial reporting provides those assurances. 32 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs Federal Financial Management Improvement Act of 1996 (FFMIA) and Financial Management Systems the FFMIA requires federal agencies to implement and maintain financial management systems that substantially comply with federal financial management systems requirements, applicable federal accounting standards, and the u.s. standard General ledger (ussGl) at the transaction level. As described in oMB Circular A-123, Appendix d, “a financial management system includes an agency’s overall financial operation, reflecting the people, processes, and technology to capture, classify, summarize, and report data in a meaningful manner to support business decisions.” the FFMIA section 803(c)(1) requires an annual determination of substantial compliance with section 803(a) of the Act based on review of relevant factors. to support this determination, the Irs assesses its financial management systems annually for conformance with the requirements of oMB Circular A-123, Appendix d, Compliance with the FFMIA and other federal financial management system requirements. our assessment process includes the use of the FFMIA Compliance determination Framework, (Compliance 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 agency management already perform. the Compliance Framework is an outcome-based approach to assessing FFMIA compliance through a series of financial management goals that are common to all agencies. In applying the Compliance Framework, the Irs assesses available information from audit reports and other relevant and appropriate sources, such as the Federal Information security Modernization Act compliance activities, to determine whether our financial management systems substantially comply with FFMIA. 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 results of our overall assessment, the Irs concluded that its financial management systems were not substantially compliant with federal financial management system requirements as of september 30, 2022, due to significant deficiencies. the Irs has two significant deficiencies in internal control over financial reporting related to its unpaid assessments and financial reporting systems. specifically, these deficiencies relate to (1) limitations in the ability of Irs’s financial management systems to classify unpaid assessments and report taxes receivable in accordance with federal accounting standards and (2) Irs’s information system security controls related to financial reporting systems. the Irs worked diligently during FY 2022 to continue to enhance its It security posture and continues to implement a strategy and assessment process to verify the effectiveness of internal controls for the financial systems that affect the financial statements. this assessment supports the Irs’s overall internal control framework and helps mitigate deficiencies in the It environment. IRS FY 2022 AGENCY FINANCIAL REPORT 33 MAnAGeMent's dIsCussIon And AnAlYsIs Financial Management Systems the Irs developed its financial management systems to generate timely and accurate data and comply with applicable laws and regulations, while protecting data and systems through the design, implementation and monitoring of strong internal controls. the Irs objectives are to continuously improve 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 provide timely, accurate and complete financial information to generate the Irs’s financial statements and provide Irs business units data to execute their missions. Irs's financial management systems comprise two major components. the redesigned revenue Accounting Control system (rrACs) is a custom-built software database used to account for and summarize all Irs custodial tax transactions and activities. the Irs uses rrACs to record, control, account for, reconcile and balance all custodial accounting activity including tax payment collections and refunds, receivables, appropriation warrants, refundable tax credits and other transactional custodial activities on behalf of the federal government. rrACs specifically supports the Irs custodial responsibilities to ensure the accuracy and completeness of tax collections, disbursements and related activities in its financial reports and records. the Integrated Financial system (IFs) is comprised of three Commercial off the shelf sAp software components: the erp Central Component, procurement for public sector and Business Warehouse (BW). IFs interfaces with multiple systems, including, but not limited to, Internet payment platform, ConcurGov, MovelInQ and national Finance Center (nFC) systems. IFs provides the Irs with comprehensive automated functionality that supports financial and administrative program management. Its software provides automated functionality for significant administrative business processes including core financials, procurement, intragovernmental transactions, purchase card activities, and budget formulation and execution. IFs also provides robust cumulative reporting capabilities by merging data from all sub-systems in BW. during FY 2022, Irs implemented several system improvements including: • system for Award Management (sAM) unique entity Identifier as a replacement for the data universal numbering system number to verify federal contractors. • sAp and BW software upgrades. • systemwide technical and cybersecurity upgrades. • Automation for maintaining digital documentation of goods receipt and acceptance transactions and processes for recording and summarizing transactions related to Arp (dependent Care Assistance, rrC). 34 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs the Irs will build upon successes of FY 2022 with the vision that fully articulates the goals and objectives of the Irs’s strategic plan. the Irs is committed to developing its employees by providing resources, tools and training that will help meet the needs of today and tomorrow and continuing to build our workforce using data-driven planning to strategically understand future workforce needs. It is important for us to foster continued partnerships and build new ones with those who are essential contributors in improving the taxpayer experience. the Irs will continue to expand its network for better information sharing and improved service delivery. Within the next five years, the Irs plans to continue to enhance financial management systems including: • strengthening G-Invoicing, which is the long-term solution for federal agencies to manage intragovernmental buy/sell transactions within a web-based application. • Advancing transparency across systems with expanded data analytics capabilities. • Building core systemic functionality to support financial accounting program changes related to the IrA and the Creating helpful Incentives to produce semiconductors Act. • enhancing the IFs functional capability platform with technical upgrades. Other Laws the Irs is required to comply with several legal and regulatory requirements, including the Antideficiency Act. the Management Controls executive steering Committee, which includes top Irs administrative and programmatic leadership, provides oversight and governance for the design, implementation and monitoring of controls to comply with these legal and regulatory requirements. the Irs is not aware of any violations of the Antideficency Act. IRS FY 2022 AGENCY FINANCIAL REPORT 35 MAnAGeMent's dIsCussIon And AnAlYsIs MANAGEMENT ASSURANCES the Irs’s management is responsible for managing risks and maintaining effective internal control and financial management systems to meet the objectives of FMFIA. We conducted our assessment of risk and internal controls in accordance with oMB Circular A-123. Based on our assessment, we can provide reasonable assurance that, in accordance with section 2 of the FMFIA, the Irs’s internal control over operations, reporting and compliance with laws and regulations were operating effectively as of september 30, 2022. this includes the effective operation of internal control over financial reporting which was considered as part of our assessment. In addition, we can provide reasonable assurance that, as of september 30, 2022, we are in substantial conformance with the federal financial management systems requirements of section 4 of the FMFIA, except for two significant deficiencies related to unpaid assessments and financial reporting systems. As a result of these significant deficiencies, our financial management systems are not in substantial compliance with the FFMIA as of september 30, 2022. We continue to make progress in remediating these deficiencies 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 requirements. Additional information on the deficiencies can be found in other Information, section A. Charles p. rettig Commissioner of Internal revenue 36 IRS FY 2022 AGENCY FINANCIAL REPORT MAnAGeMent's dIsCussIon And AnAlYsIs FORWARD-LOOKING INFORMATION the information in this report reflects not only the work the Irs has done to serve taxpayers over the past year, but also the challenges the Irs faces and the vision we have for continuing to improve in the future. the new dedicated funding from the Inflation reduction Act will go toward tangible improvements that taxpayers will experience when they interact with the Irs. the Irs will improve customer service, answer more calls, process returns and refunds faster, update computer systems and simplify tax filing. the Irs will also continue building online capabilities to enable taxpayers to interact more fully with the Irs digitally. these resources will also enable the Irs to increase audits of high-income taxpayers and collect taxes from those who have not paid their balances due. ultimately, this will help ensure a fair tax system, as well as simpler tax filing for taxpayers. Building on our successes in implementing other major legislative bills, the Irs’s new IrA transformation & Implementation office will work across the Irs and oversee our implementation efforts. Given the wide scope of the new legislation, four subsidiary offices will support the new office and will focus on specific areas: implementation of new tax law provisions, taxpayer services transformation, tax compliance transformation and human capital transformation. this funding will also build upon and expand our existing Irs next initiative to revitalize and build a stronger, more modern organization for the next generation. the Irs has a great deal of hard work ahead to deliver on the high expectations prompted by its receipt of this historic funding. this is a multi-year effort, and it will take time to put these improvements into place. however, Irs employees are up to the task and will deliver for the nation as they have countless times before in the history of the Irs. IRS FY 2022 AGENCY FINANCIAL REPORT 37 page Intentionally left Blank WE’RE COMMITTED TO CONTINUOUSLY IMPROVING OUR SERVICE TO ENSURE THE TAX PROCESS IS EASY AND ACCESSIBLE AND WORKING WITH THE TAX COMMUNITY TO IMPROVE THE EXPERIENCE " – Doug O'Donnell, Deputy Commissioner for Services and Enforcement FINANCIAL SECTION IRS FY 2022 AGENCY FINANCIAL REPORT 39 page Intentionally left Blank FInAnCIAl InForMAtIon MESSAGE FROM THE CHIEF FINANCIAL OFFICER I am pleased to join Commissioner rettig in presenting the Irs’s Agency Financial report, which carries with it the Irs tradition of fiscal integrity and commitment to ensuring strong financial management. We received the 23rd consecutive unmodified opinion on our financial statements. external auditors also issued an unmodified opinion on the effectiveness of our internal control over financial reporting. We continue to be diligent in our efforts to resolve the two significant deficiencies identified in prior years affecting internal controls over unpaid assessments and financial reporting systems and the related noncompliance. the Irs financial management operations oversaw more than $4.9 trillion in tax collections, $642 billion in federal tax refunds and other outlays and $602 billion in unpaid assessments, as well as the resources that support the mission of the Irs. I am proud that the stewardship of our operations is a clear demonstration of the commitment we share toward our mission of leading the Irs’s financial management with integrity and accountability through expert planning and sound financial advice, ensuring an excellent customer experience. With sound operations, we are well-prepared to support the Irs operations with the new funding from the IrA, which allocates $79.4 billion through 2031. these funds will be used to add important and critical resources to our tax enforcement, taxpayer service and technology areas to help close the tax gap and improve taxpayer service. looking ahead in FY 2023, our objectives are to continue to innovate our processes, increase capacity and enhance efficiency, accuracy, data analytics and on demand reporting to support critical decision making. We continue to support a culture of curiosity and promote resilient, agile and sound financial management operations to continue our tradition of excellence in financial reporting and being prepared for the future while embracing innovative practices. I want to thank the entire CFo staff for their continued innovation, hard work, resilience and dedication to the Irs and public service. I’m proud of all that we’ve accomplished and look forward to another great year. sincerely, teresa r. hunter Chief Financial officer november 7, 2022 IRS FY 2022 AGENCY FINANCIAL REPORT 41 FInAnCIAl InForMAtIon INDEPENDENT AUDITOR'S REPORT 441 G St. N.W. Washington, DC 20548 Independent Auditor’s Report To the Commissioner of Internal Revenue In our audits of the fiscal years 2022 and 2021 financial statements of the Internal Revenue Service (IRS), we found • IRS’s financial statements as of and for the fiscal years ended September 30, 2022, and 2021, 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, 2022; and • no reportable noncompliance for fiscal year 2022 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, required supplementary information (RSI),1 and 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 sheets as of September 30, 2022, and 2021; the related statements of net cost, changes in net position, budgetary resources, and custodial activity for the fiscal years then ended; and the related notes to the financial statements. In our opinion, IRS’s financial statements present fairly, in all material 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 OMB Bulletin 22-01, Audit Requirements for Federal Financial Statements, app. B (Aug. 26, 2022). 42 IRS FY 2022 AGENCY FINANCIAL REPORT FInAnCIAl InForMAtIon respects, IRS’s financial position as of September 30, 2022, and 2021, and its net cost of operations, changes in net position, budgetary resources, and custodial activity for the fiscal years 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, 2022, based on criteria established under 31 U.S.C. § 3512(c), (d), commonly known as the Federal Managers’ Financial Integrity Act (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, 2022, based on criteria established under FMFIA. Our fiscal year 2022 audit continued to identify significant deficiencies in internal control over financial reporting concerning IRS’s unpaid assessments and financial reporting systems.4 We considered these significant deficiencies in determining the nature, timing, and extent of our audit procedures on IRS’s fiscal year 2022 financial statements. Although the significant deficiencies in internal control did not affect our opinion on IRS’s fiscal year 2022 financial statements, misstatements may occur in unaudited financial information reported internally and externally by IRS because of these significant deficiencies. In addition, because of the significant deficiencies in internal controls over unpaid assessments and financial reporting systems that existed during fiscal year 2022, 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 1996.5 We will be reporting additional details concerning the significant deficiency in internal control over financial reporting systems separately to IRS management, along with recommendations for corrective actions. In addition to the significant deficiencies in internal control over unpaid assessments and financial reporting systems, 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. 4An 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 (Aug. 25, 2015). A 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. 5Section 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 agency-wide 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 OMB Circular No. A-123, app. D, Compliance with the Federal Financial Management Improvement Act of 1996, § 4.A (Sept. 20, 2013). IRS FY 2022 AGENCY FINANCIAL REPORT 43 FInAnCIAl InForMAtIon We have communicated these matters to IRS management and, where appropriate, will report on them separately. Significant Deficiency in Internal Control over Unpaid Assessments During fiscal year 2022, the systems IRS uses to account for federal taxes receivable and other unpaid assessment balances continued to have limitations, as well as other control deficiencies that led to errors in taxpayer accounts. Because of these deficiencies, 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.6 As in prior years,7 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 determine a balance that was free of material misstatement.8 During fiscal year 2022, IRS recorded adjustments totaling about $18.5 billion to correct the effects of continued 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 on a daily basis throughout the year for effectively managing unpaid assessment balances. Further, errors in taxpayer accounts create a burden for those taxpayers whose accounts were affected. 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, 2022. 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. 6Federal 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 (Mar. 3, 2021). 7See GAO, Financial Audit: IRS’s FY 2021 and FY 2020 Financial Statements, GAO-22-104649 (Washington, D.C.: Nov. 10, 2021). 8In fiscal year 2022, IRS’s reported federal taxes receivable consisted of a combination of three 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; (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; and (3) taxpayer deferral of the employer’s share of Social Security taxes and certain selfemployment taxes permitted by the CARES Act, Pub. L. No. 116-136, div. A, tit. II, § 2302, 134 Stat. 281, 351-52 (Mar. 27, 2020), which is reprinted in 26 U.S.C. § 3111 note. 44 IRS FY 2022 AGENCY FINANCIAL REPORT FInAnCIAl InForMAtIon Significant Deficiency in Internal Control over Financial Reporting Systems During our fiscal year 2022 audit, we determined that information system security control deficiencies—primarily unresolved deficiencies identified in prior audits—collectively represent a significant deficiency in IRS’s internal control over financial reporting. These control deficiencies relate to general controls.9 IRS mitigated the potential effect of the identified control deficiencies primarily through compensating controls that management has designed to detect potential misstatements on the financial statements. Nevertheless, these deficiencies increase the risk of unauthorized access to, modification of, or disclosure of sensitive financial and taxpayer data and disruption of critical operations and are therefore important enough to merit the attention of those charged with governance of IRS. IRS made progress in addressing certain information system security control deficiencies. For example, IRS addressed deficiencies in (1) the identification and authentication of user and service accounts, (2) certain configuration settings, and (3) security management.10 However, deficiencies continue to exist as of September 30, 2022. For example, deficiencies exist concerning encryption and improper configuration of security settings. While IRS has expressed its intent to address unresolved deficiencies in fiscal year 2023, continued and consistent management commitment and attention are essential to addressing existing deficiencies and continually improving IRS’s information system security controls. 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 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 This matter deserves emphasis in order to put the information in IRS’s financial statements into context. As discussed in Note 1.E., 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 9General controls help to provide reasonable assurance that access to data is appropriately restricted, physical access to sensitive computing resources and facilities is restricted, systems are securely configured to avoid exposure to known vulnerabilities, and incompatible duties are segregated among individuals. In addition, controls should ensure that backup and recovery plans are adequate and tested to ensure the continuity of essential operations and that security is managed entity-wide under a framework that provides a continuing cycle of activity for assessing risk, developing and implementing effective security procedures, and monitoring the effectiveness of these procedures. 10Identification is the process of verifying the identity of a user, process, or device, usually as a prerequisite for granting access to resources in an information system. Authentication establishes the validity of a user’s claimed identity, typically during access to a system or application. Security management establishes a framework and continuous cycle of activity for assessing risk, developing and implementing effective security procedures, and monitoring the effectiveness of these procedures. IRS FY 2022 AGENCY FINANCIAL REPORT 45 FInAnCIAl InForMAtIon 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,11 nor do they include information on tax expenditures.12 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 IRS management is responsible for (1) the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; (2) preparing, measuring, and presenting the RSI in accordance with U.S. generally accepted accounting principles; (3) 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; (4) 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; (5) assessing the effectiveness of internal control over financial reporting based on the criteria established under FMFIA; and (6) its assessment about the effectiveness of internal control over financial reporting as of September 30, 2022, included in the accompanying Management’s Report on Internal Control over Financial Reporting on page 22. Auditor’s Responsibilities for the Audits of the Financial Statements and Internal Control over Financial Reporting Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and about whether effective internal control over financial reporting was maintained in all material respects, and to 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 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. 11The tax gap arises when taxpayers, whether intentionally or inadvertently, fail to (1) accurately report tax liabilities on tax returns (underreporting), (2) pay taxes due from filed returns (underpayment), or (3) file required tax returns altogether or on time (nonfiling). Based on its most recent study, which relied on 2014–2016 data, IRS estimated the average annual gross tax gap to be $496 billion. IRS estimated it would eventually collect $68 billion of that amount through late payments and enforcement actions, leaving an estimated net tax gap of $428 billion per year. 12Tax 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. 46 IRS FY 2022 AGENCY FINANCIAL REPORT FInAnCIAl InForMAtIon 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: • 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 in order to obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. • 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. 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 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%3Aeee7824db0dd18b5. Public record. Not legal advice.