IRS Can Improve Its Process for Deciding Which Corporate Returns To Audit
GGD-79-43: Published: Aug 3, 1979. Publicly Released: Aug 3, 1979.
- Full Report:
A vital part of the Internal Revenue Service's (IRS) program for auditing corporate tax returns is the process for deciding which ones to audit. Because IRS does not have unlimited audit staff, it must have a way of identifying returns most in need of audit while maximizing revenue, treating taxpayers equally, and promoting voluntary compliance.
The first step in selecting corporate returns for audit is the development of long- and short-range plans for determining how many to audit and where those audits should be done. Although the planning process is conceptually sound, the annual plan could be enhanced if more definitive data were available to assess (1) the relationship between audit coverage and voluntary compliance; (2) the validity of examination rates, which specify the average number of returns that can be audited in a direct examination staff-year and which form the cornerstone of the annual plan; and (3) the adequacy of audit attention to miscellaneous corporate returns, such as those filed by life insurance companies and homeowners associations. IRS has developed a system directed at identifying those returns most worthy of audit. A primary concern with any such system is whether it adequately protects against returns being audited or not audited for reasons other than audit potential. A major aspect of the corporate selection system, whereby classifiers evaluate returns for audit potential, has not been very effective. IRS has little assurance that the corporate returns most in need of audit are being addressed or that the most productive issues are being addressed during the audit process. The IRS process for determining which corporate income tax returns to audit could be more effective and equitable.
Recommendation for Executive Action
Comments: Please call 202/512-6100 for additional information.
Recommendation: The Commissioner of IRS should: define a quality audit and then determine the time required to do such an audit in each corporate asset class; modify the planning process by limiting changes from year to year; require examiners to adequately explain in writing why they need the returns so that the requests can be properly evaluated; reconsider criteria for deciding which noncomputer-scored returns have to be manually screened for audit potential; revise the management information system to generate data that would help management assess the effectiveness of its classification process; issue detailed guidelines to help classifiers select corporate returns for audit; revise procedures to require that classifiers scrutinize the entire return and note all significant audit issues; and require classifiers to explain the issues they have identified.