February 14,2003

Baucus Statement Regarding IRS Lockbox Banks

During the 2000 tax filing season, more than 76,000 income tax payments to theIRS valued at $1.2 billion were lost or destroyed at a lockbox facility operated by theMellon Financial Corporation in Pittsburgh. As a result, thousands and thousands of liveswere disrupted by disputes over non-payment of income tax to the IRS. Today, theGovernment Accounting Office (GAO) issued a report showing that oversight of lockboxbanks during fiscal year 2002 was not fully effective to ensure that taxpayer data andreceipts were adequately safeguarded and properly processed.

The GAO reviewed existing and planned security and internal control measures atall lockbox banks that are under contract with the Department of Treasury’s FinancialManagement Service (FMS) to provide services for the IRS. The lockbox program isdesigned to accelerate the deposit of tax payments by having taxpayers send theirpayments to commercial banks rather than to the IRS. There are currently elevencommercial banks across the country that serve as IRS lockbox facilities. In fiscal year2002, the IRS collected over $2 trillion. Of that amount, financial institutions serving aslockbox banks processed more than $268 billion.

Throughout the GAO investigation, a number of security breaches were observed,including unlocked perimeter doors, unresponsive guards to door alarms, pooremployment status verification process, inadequate visitor control, lack of monitoring ofitems brought into or out of the processing areas and lack of adequate camerasurveillance. With regard to processing controls, additional security deficiencies werefound, such as inadequate candling procedures, inadequate safeguards for cash receipts,and inadequate protection of returned refund checks from theft.

The GAO also reports that the IRS and the FMS have not performed acomprehensive study of the costs and benefits of using lockbox banks. Therefore, it isunclear whether forgoing the speedier deposit of tax receipts and using IRS fundselsewhere, such as within other high- yield compliance activities, might result in financialbenefits to the government that would be greater then those generated by accelerating thedeposit of receipts.

“Today’s findings by the GAO are concerning, especially given the number oflives impacted and funding lost as a result of the poor management and oversight of theIRS lockbox program,” Baucus said. “The use of outside contractors to performinherently governmental functions, like collecting taxes, cannot be successful unless thereis true accountability and effective oversight. While I recognize that all vulnerabilitiescannot be eliminated, the IRS must do more to secure taxpayer data and receipts. It isalso very important that before we move forward with additional privatization of certaingovernment services and programs, we ensure that there is real cost-savings benefits involved.”