Department of the Treasury FY 2018 Agency Financial Report

FY 2018 AGENCY FINANCIAL REPORT

ABOUT THIS REPORT

Our Agency Financial Report (AFR) for Fiscal Year (FY) 2018 presents the Department of the Treasury's (Treasury, Department, or our) financial information relative to our vital mission and stewardship of the resources entrusted to us. The AFR also highlights our priorities, accomplishments, and challenges implementing programs that promote conditions for sustaining economic growth and stability at home and abroad, protecting the integrity of our nation's financial system, and effectively

HOW THIS REPORT IS ORGANIZED

Our AFR provides financial and performance information for the FY beginning October 1, 2017, and ending on September 30, 2018, with comparative prior year data, where appropriate. The AFR demonstrates our commitment to our mission and accountability to

managing the United States (U.S.) government's finances and resources. In accordance with Office of Management and Budget's (OMB) Circular A-136, Financial Reporting Requirements, we produce the following reports: (i) an AFR issued on November 15, 2018 and (ii) an Annual Performance Report (APR) submitted with Treasury's congressional budget justification, to be issued by February 1, 2019. The AFR will be available online at . The APR will be available online at .

Congress and the American people. This report presents Treasury's operations, accomplishments and challenges. The AFR begins with a message from the Secretary of the Treasury, Steven T. Mnuchin. This introduction is followed by three main sections.

Part 1: Management's Discussion and Analysis

Provides a high-level overview of our organizational structure, strategic framework, programmatic and financial performance, and management assurances related to Treasury's internal controls.

Part 2: Financial Section

Begins with a message from the Assistant Secretary for Management and Deputy Chief Financial Officer, followed by the Independent Auditors' Report, audited financial statements and notes, and supplementary information.

Part 3: Other Information

Contains various information including Management and Performance Challenges identified by the Inspectors General and Management's response, along with information related to tax gap and tax burden, improper payments, and other relevant information.

TABLE OF CONTENTS

FY 2018 AGENCY FINANCIAL REPORT

FY 2018 AGENCY FINANCIAL REPORT FY 2018 AGENCY FINANCIAL REPORT

MESSAGE FROM THE SECRETARY OF THE TREASURY........................................................................................................................4

PART 1: MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED)

TREASURY AT A GLANCE..................................................................................................................................................................9 ORGANIZATION ............................................................................................................................................................................... 11 TREASURY STRATEGIC MANAGEMENT.......................................................................................................................................14 PERFORMANCE OVERVIEW...........................................................................................................................................................16 ENTERPRISE RISK MANAGEMENT...............................................................................................................................................32 FY 2019 OUTLOOK.......................................................................................................................................................................33 FINANCIAL HIGHLIGHTS ? FINANCIAL OVERVIEW ...................................................................................................................34 MANAGEMENT ASSURANCES........................................................................................................................................................39 SYSTEMS, CONTROLS AND LEGAL COMPLIANCE .......................................................................................................................40

PART 2: FINANCIAL SECTION

MESSAGE FROM THE ASSISTANT SECRETARY FOR MANAGEMENT AND DEPUTY CHIEF FINANCIAL OFFICER...............47 INSPECTOR GENERAL'S TRANSMITTAL LETTER .......................................................................................................................48 INDEPENDENT AUDITORS' REPORT ............................................................................................................................................50 MANAGEMENT'S RESPONSE TO INDEPENDENT AUDITORS' REPORT.....................................................................................56 FINANCIAL STATEMENTS..............................................................................................................................................................57 NOTES TO THE FINANCIAL STATEMENTS...................................................................................................................................64 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) ............................................................................................... 135

PART 3: OTHER INFORMATION (UNAUDITED)

SECTION A: TAX GAP AND TAX BURDEN................................................................................................................................ 145 SECTION B: REDUCE THE FOOTPRINT .................................................................................................................................... 154 SECTION C: MANAGEMENT CHALLENGES AND TREASURY RESPONSE.............................................................................. 155 SECTION D: SUMMARY OF FINANCIAL STATEMENT AUDIT AND MANAGEMENT ASSURANCES .................................... 190 SECTION E: PAYMENT INTEGRITY ........................................................................................................................................... 192 SECTION F: FRAUD REDUCTION REPORT............................................................................................................................... 207 SECTION G: CIVIL MONETARY PENALTIES INFLATION ADJUSTMENT ............................................................................... 210 SECTION H: GRANTS OVERSIGHT AND NEW EFFICIENCY ACT REQUIREMENTS ............................................................. 216 APPENDIX: GLOSSARY OF ACRONYMS..................................................................................................................................... 217

FY 2018 AGENCY FINANCIAL REPORT | MESSAGE FROM THE SECRETARY OF THE TREASURY

MESSAGE FROM THE SECRETARY OF THE TREASURY

MISSION STATEMENT

Maintain a strong economy and create economic and job opportunities by promoting conditions that enable economic growth and stability at home and abroad; strengthen national security by

combating threats and protecting the integrity of the financial system; and manage the U.S. government's finances and resources effectively.

Treasury's annual Agency Financial Report provides an opportunity to reflect on our accomplishments of the past year. Our Department has taken a leading role in fulfilling the Trump Administration's promise of prosperity and security for all Americans, and I am proud of what we have achieved together. As we prepare to enter 2019, the Treasury remains focused on the successful implementation of the Tax Cuts and Jobs Act (TCJA), the reduction of regulatory burdens, and countering illicit financial activity at home and abroad.

TAX REFORM

Treasury has worked tirelessly to implement the TCJA to realize its benefits for the American people. Since the law's passage, hundreds of companies have credited tax reform while announcing special bonuses, higher wages, enhanced benefits, and new jobs for their workers. American companies have also dramatically increased their capital expenditures, pouring hundreds of billions of dollars back into our economy.

While the TCJA has already delivered results for hardworking Americans, there is still more work to be done. Treasury's Office of Tax Policy and the Internal Revenue Service (IRS) are issuing important tax guidance and updating over 140 systems to reflect changes in the law. The IRS has already issued more than 50 guidance documents, and providing further clarity will continue to be a top priority for Treasury.

REGULATORY REFORM

Treasury is also focused on fostering stronger economic growth by reducing regulatory burdens on businesses. In response to Executive Orders by the President, the Department continued releasing reports with recommendations for improving the financial regulatory environment.

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DEPARTMENT OF THE TREASURY

MESSAGE FROM THE SECRETARY OF THE TREASURY | FY 2018 AGENCY FINANCIAL REPORT

This year Treasury published recommendations on the Orderly Liquidation Authority and Bankruptcy Reform, and Community Reinvestment Act Modernization. It also released a comprehensive report regarding Nonbank Financials, Fintech, and Innovation.

The Department also worked closely with Congress on the successful passage of The Economic Growth, Regulatory Relief and Consumer Protection Act. This law provides relief for America's small, mid-size, community, and regional banks. It enhances the flow of credit to small businesses and supports job creation and wage growth.

ILLICIT FINANCE

Treasury's Office of Terrorism and Financial Intelligence plays a critical role in using our unique economic and financial tools to advance the priorities of the Administration's National Security Strategy and protect the U.S. and international financial system from abuse by illicit actors.

Highlighting just a few initiatives in the past year, Treasury has spearheaded the Administration's reimposition of sanctions against Iran, the world's largest state sponsor of terrorism. Treasury took action to hold Russia accountable for a host of malign activities targeting the U.S. and our allies. We also engaged in a successful pressure campaign to cut off illicit money flowing to North Korea. We have utilized authorities related to the Global Magnitsky program and others to target human rights abuse and corruption around the world, including sanctioning warlords in Africa, kleptocrats in Venezuela, and those responsible for chemical weapons attacks in Syria. On terrorism, we have designated more Hizballah-related financiers than in any single previous year, disrupted Islamic State in Iraq and Syria's global fundraising networks, and opened a new Terrorist Financing Targeting Center to promote better coordination on countering terrorist financing across the Middle East.

CFIUS

Treasury worked closely with members of Congress on the passage of the Foreign Investment Risk Review Modernization Act (FIRRMA). As Chair of the Committee on Foreign Investment in the United States (CFIUS), Treasury's Office of International Affairs played a lead role in modernizing the CFIUS review process to protect America's critical technology and infrastructure, while also keeping America open to investment. Congress passed FIRRMA with strong bipartisan support, and the Department continues to work with interagency Committee members to implement the law's various provisions by or before the statutory deadline of February 2020.

TRADE

Treasury is also working with our interagency partners across the Administration to improve trade agreements for the benefit of American workers and businesses. President Trump has delivered on a key promise by replacing the North American Free Trade Agreement with an agreement promoting free, fair and reciprocal trade. The announcement of the United States-MexicoCanada Agreement represents an important step in the modernization and rebalancing of our trading relationships.

DEPARTMENT OF THE TREASURY

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FY 2018 AGENCY FINANCIAL REPORT | MESSAGE FROM THE SECRETARY OF THE TREASURY

Of course, one of Treasury's core functions is to be effective stewards of taxpayer resources and to be transparent with the American people. I am pleased to report that Treasury received an unmodified audit opinion on its consolidated financial statements and validated its financial and performance data as complete and reliable. Treasury continued to strengthen its management controls and successfully downgraded a long-standing material weakness at the IRS, thereby making significant progress toward achieving all U.S. financial systems and control objectives. We provide this report as a comprehensive review of the Department's important work and finances.

Over the last year, Americans have seen the highest GDP growth in over a decade, and business and consumer optimism have soared. Wages are rising, and unemployment is historically low.

We could not have accomplished so much without the hard work of the professionals here at the Treasury Department. I know that all who serve here care greatly about the national security and economic prosperity of the American people. I look forward to another successful year for our Department and our nation.

Steven T. Mnuchin Secretary of the Treasury November 15, 2018

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DEPARTMENT OF THE TREASURY

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