Tax Administration:

IRS' Partnership Compliance Activities Could Be Improved

GGD-95-151: Published: Jun 16, 1995. Publicly Released: Jun 16, 1995.

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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) partnership compliance activities, focusing on the: (1) extent of partnership compliance with tax laws; and (2) steps IRS could take to improve partnership compliance.

GAO found that: (1) the most current partnership compliance data showed that individual partners owed an additional $2.4 billion in taxes in 1982; (2) IRS will not have more current partnership compliance data until October 1998 when it completes its audits of tax year 1994 partnership returns; (3) IRS reliance on audits to detect partnership noncompliance has proven to be an inadequate strategy; (4) relatively few partnership returns have been audited in recent years because IRS has focused its resources on corporate audits; (5) partnership audits have resulted in audit adjustments more frequently than other business audits; (6) IRS could not measure the amount of net taxes assessed per partnership because it did not maintain data on the specific results of partnership audit adjustments; (7) IRS discontinued its delinquent partnership return program in 1989, but it plans to reinstate the program in 1996; (8) IRS does not have a computer document matching program for partnerships, but may develop one in its modernization efforts that will be completed in 2001; and (9) IRS is training revenue agents to identify partnership compliance issues, since it takes an average of 12 months to complete each partnership audit.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: According to IRS, it agreed only to test the feasibility of a document matching program for non-TEFRA partnerships. If testing proved successful, IRS agreed to develop plans for a non-TEFRA partnership matching program as Tax Systems Modernization (TSM) progressed. To perform this testing, Examination would need to develop and examine a substantial number of leads based on a statistically valid sample. The majority of these cases, especially the underreporter test cases, would require revenue agent field time to conduct the examinations. Because of the tight budget for Compliance organizations, financial resources to fund this testing are not available. In addition, the field examination staff time required to complete this number of test cases would result in a further reduction in already low audit coverage. The IRS Senior Council for Management Controls approved the Assistant Commissioner's (Examination) request to cancel this corrective action at its December 9, 1997 meeting.

    Recommendation: The Commissioner of Internal Revenue should develop plans for a document matching program using information returns to verify partnership income.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: The Form 1065 delinquency check was added to the BMF check schedule in April 1996. An accomplishment report will be prepared in September 1997 when results of the delinquency check are known.

    Recommendation: The Commissioner of Internal Revenue should reinstitute the delinquency check program for partnerships to identify partnerships that do not file required tax returns.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS will address this through NORA/DORA sites. These sites must determine how to use partnership files.

    Recommendation: The Commissioner of Internal Revenue should analyze computer partnership files to develop audit leads and select returns for audit.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: According to IRS, a special Partnership Control System report (Report 8-3A) will be produced by the Service Center Examination Support Unit (ESU) that services the key entity return. Although the system is not an ideal one, the district offices will be able to use the report to measure the Tax Equity and Fiscal Responsibility Act (TEFRA) partnership (which are partnerships with 10 or more partners or with 1 or more nonindividual partners and are covered by TEFRA) assessments on investor cases that have been closed. The procedures were changed effective January 1, 1997, through a RIS. With few exceptions, the report assigns the results of the partner/investor examination to the district where the partnership examination was conducted. District offices can use the report to measure TEFRA assessments on investor cases that have closed.

    Recommendation: The Commissioner of Internal Revenue should develop plans to modify audit management information systems to include information on the tax assessment on partners' income tax returns and changes in allocations of profits and losses among partners.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: IRS established a task force to reevaluate the feasibility of developing a scannable Schedule K-1. The Document Processing System (DPS) Project has been discontinued, leaving the IRS without a system to scan two-sided forms. The form was to be included in Modular IV of the DPS rollout. Also, it is IRS' position to accept nonstandard substitute forms based on input from tax practitioner groups and the forms and software development community. Nonstandard forms cannot be scanned accurately by IRS' existing systems. The task force concluded that it is not feasible to develop a scannable Schedule K-1. IRS failed to note that the Taxpayer Relief Act of 1997 requires all partnerships with more than 100 partners to file their tax returns and Schedules K-1 on magnetic media. IRS could begin using these data in a document matching program.

    Recommendation: The Commissioner of Internal Revenue should devise ways to enter all Schedules K-1 onto the computer so they can be used in the individual computer document matching program and for other compliance purposes.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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