Tax Administration:

Compliance Measures and Audits of Large Corporations Need Improvement

GGD-94-70: Published: Sep 1, 1994. Publicly Released: Oct 17, 1994.

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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) Coordinated Examination Program (CEP) to audit the largest corporations' tax returns, focusing on: (1) whether large corporations pay all the taxes they owe; (2) the amount of additional taxes collected after appeals and litigation; (3) factors that reduce the amounts collected; and (4) the status of ongoing changes to CEP to address those factors.

GAO found that: (1) it is impossible to determine the proper amount of taxes owed by large corporations because of the complexity and ambiguity of tax laws; (2) historically, IRS has collected 22 percent of the additional taxes recommended through CEP audits and collections have varied widely among industries and IRS districts; (3) simplifying the tax code would improve the collection rate and benefit IRS and taxpayers by reducing interpretation conflicts, recurring tax disputes, audits, and appeals; (4) IRS has not fully implemented planned CEP improvements and has not allocated sufficient resources to CEP; (5) IRS revenue agents are encouraged to make audit recommendations while upholding the IRS legal position; (6) IRS appeals officers try to avoid litigation as much as possible while being fair and impartial, even if they undermine the IRS legal position; (7) adding a measure of dollars collected to audit recommendations would better balance conflicting incentives and improve IRS communication and collection rates; and (8) the IRS Appeals Division needs to coordinate with other IRS functions to reduce costs and improve collections, but it must maintain its independence and authority to settle cases objectively.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS agrees and developed the Enforcement Revenue Information System (ERIS) to track collections in CEP. ERIS has accounted for many but not all factors that overstate or understate the collection rate (e.g., net operating loss deductions). Given IRS' refocusing of its computer modernization and its focus on Y2K issues, IRS' actions have sufficiently met GAO's intent, and this recommendation should be closed.

    Recommendation: The Commissioner of Internal Revenue should correct the factors in IRS databases that caused the CEP collection rate to be understated or overstated (i.e., net operating losses and refund claims after settlement) and use the corrected results to update the collection rate.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: IRS believes that unaudited returns already receive in-depth classification reviews and that expanding these audits would burden taxpayers and IRS. With IRS' budget limitations, IRS has no plans to do this test.

    Recommendation: The Commissioner of Internal Revenue should test the cost-effectiveness and accuracy of measuring CEP corporate compliance and the related tax gap by auditing samples of unaudited CEP returns and audited CEP returns in greater depth.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Not Implemented

    Comments: The Commissioner's proposed restructuring of IRS combined the responsibility and authorization for budget and resources needed to improve the audits of CEP corporations and other large corporations as well as mid-sized corporations. After some discussion, GAO decided that this consolidation does not meet the intent of the recommendation. With the new restructuring, IRS will not be acting on GAO's recommendation either. IRS no longer has an executive director nor district offices.

    Recommendation: The Commissioner of Internal Revenue should give the CEP Executive Director authority over CEP budget resources and staff allocations at the district office level.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: IRS agrees, and has implemented training initiatives in various areas since 1995.

    Recommendation: The Commissioner of Internal Revenue should ensure that CEP revenue agents receive adequate training on the industry they specialize in as well as on tax laws and basic auditing skills such as standards of evidence.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: IRS agrees, and began tracking collection of CEP-recommended taxes through ERIS in 1995. In 1997, IRS developed a measure on collections and plans to develop others.

    Recommendation: The Commissioner of Internal Revenue should expand the measures of CEP productivity to include the percent of recommended taxes that is ultimately collected.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: IRS agrees. IRS studied the problems with getting the data and implemented procedures in 1997. It plans to continue to take steps to improve its ability to obtain needed data.

    Recommendation: The Commissioner of Internal Revenue should issue regulations or propose legislation to strengthen IRS ability to obtain needed data from CEP corporations during the audit after evaluating options for obtaining needed data from corporations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Implemented

    Comments: IRS agrees and implemented a revised rotation policy in 1996.

    Recommendation: The Commissioner of Internal Revenue should modify CEP policy to allow revenue agents to rotate among corporations in the same industries to the extent possible.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Closed - Not Implemented

    Comments: IRS acknowledged, in 1994, that it could make stronger legislative proposals. Sufficient action, however, has not been taken since 1994. In the current climate, action to strengthen legislative proposals on CEP policy issues is unlikely.

    Recommendation: The Commissioner of Internal Revenue should more strongly propose legislative changes to resolve more recurring CEP tax disputes.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  9. Status: Closed - Implemented

    Comments: IRS agrees and developed one cross-functional measure and is considering others.

    Recommendation: The Commissioner of Internal Revenue should better balance incentives to encourage communication among Appeals, CEP teams, and Chief Counsel. In addition to current IRS program measures, consideration should be given to a cross-functional standard measure, such as the collection rate, that encourages all units to work toward the overall IRS mission to collect the proper amount of tax at the least cost.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  10. Status: Closed - Implemented

    Comments: IRS has made some changes to its manual that will provide new direction for returning taxpayer data to Examination revenue agents. The action taken will resolve GAO's concern on both parts of this recommendation that revenue agents be made aware of all taxpayer data so that they can revise audit recommendations, if appropriate, and be made aware of the taxpayer data considered by Appeals in final settlement.

    Recommendation: The Commissioner of Internal Revenue should improve controls to ensure that Appeals provides CEP teams with new information that taxpayers submit and an opportunity to comment just prior to settling a case.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  11. Status: Closed - Not Implemented

    Comments: Appeals had disagreed with this recommendation. GAO kept it open, believing in its need/validity. However, a provision in the 1998 Restructuring and Reform Act prohibited Appeals' interactions with other IRS parties that would appear to compromise Appeals' independence in settling tax disputes. Recent IRS guidance indicated that some interactions with Counsel fall into the prohibited category. As a result, GAO is closing this recommendation, which deals with pre-settlement interactions.

    Recommendation: The Commissioner of Internal Revenue should improve controls to ensure that Appeals coordinates with Counsel before deviating from standard positions on CEP tax issues by: (1) requiring coordination when Appeals concedes a substantial portion; (2) eliminating the exception on facts differing materially when Appeals settles an issue contrary to an applicable technical advice or private letter ruling; and (3) tracking settlements and coordination on disputed issues involving technical advice or private letter rulings.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  12. Status: Closed - Not Implemented

    Comments: IRS disagrees with using a 22-percent collection rate, but has taken action to develop reliable information on collections. Because of the passage of time and until IRS develops this information, GAO no longer knows that 22 percent is a valid rate.

    Recommendation: The Commissioner of Internal Revenue should use a 22.1-percent collection rate when estimating the taxes that will ultimately be collected from CEP audits until more reliable information becomes available.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  13. Status: Closed - Not Implemented

    Comments: IRS Appeals has disagreed because it believes the manual guidance is sufficient. According to IRS, IRM 8(14)22 sets out the notification procedures to be followed when Appeals proposes to fully concede an issue contrary to Service Position, and a need to change these procedures is not foreseen to cover cases with less than a full concession. GAO believes that communicating Appeals' settlement decisions and rationales for any deviations from standard positions in Appeals' written summaries is worthwhile. IRS has no plans, however, to do it--at least according to its contact.

    Recommendation: The Commissioner of Internal Revenue should improve communication of settlement decisions and aid quality control efforts by requiring Appeals to identify the existence and effects of, and any deviations from, standard positions in its written summaries on CEP settlements.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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