Tax Administration:

IRS Measures Could Provide a More Balanced Picture of Audit Results and Costs

GGD-98-128: Published: Jun 23, 1998. Publicly Released: Jun 23, 1998.

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Pursuant to a congressional request, GAO provided information on the Internal Revenue Service's (IRS) measures of the results of its audits of tax returns, focusing on: (1) how much of the additional taxes recommended in all types of audits that were closed in fiscal year (FY) 1992 through FY 1997 had been settled or were still in dispute and, if settled, how much had been assessed and collected as of September 27, 1997; (2) how much of the recommended additional taxes had been assessed and collected for audits closed in FY 1992; and (3) whether broad IRS measures of audit results fully represented audit revenues and costs.

GAO noted that: (1) for audits closed in FY 1992 through FY 1997, IRS recommended tens of billions of dollars in additional taxes for each year; (2) however, not all recommended taxes are assessed; and not all assessed taxes are collected; (3) IRS had settled 40 percent of FY 1992 audits without assessing the recommended taxes, usually because of IRS Office of Appeals' decisions, and had yet to settle the assessment status of the other 26 percent; (4) of the $8.5 billion assessed, IRS had collected 72 percent, which means that 25 percent of all recommended taxes for FY 1992 audits had been collected as of September 27, 1997; (5) for audits closed in FY 1993 through FY 1997, assessment and collection results were less complete because less time had elapsed for these actions to occur compared with 1992; (6) the assessment and collection rates varied by the type of audit closed in FY 1992; (7) in general, IRS assessed a higher percentage of the assessed taxes for simpler audits compared with complex audits; (8) however, IRS collected a higher percentage of the recommended taxes from the simpler audits than complex audits; (9) for simpler service center audits, IRS had assessed 76 percent of the recommended taxes but had collected 56 percent of the assessed taxes as of September 27, 1997; (10) at the other extreme, after audits of complex returns from Coordinated Examination Program (CEP) corporations, IRS had assessed 20 percent of the recommended taxes but had collected 97 percent of the assessed taxes; (11) as of September 27, 1997, 39 percent of the amounts recommended in CEP audits were still in dispute; (12) IRS' existing performance measures do not cover all audit-based revenues or costs; (13) measuring the taxes recommended does not account for the related assessments and collections; nor does it account for indirect revenue gains; (14) measuring other types of revenues are important because not all recommended taxes are assessed or collected; (15) IRS measures the staff time directly charged to audits but not the dollar costs of this direct time; (16) compiling complete and reliable data on the indirect revenues and taxpayer costs can be very difficult to do because of limitations in the data sources; (17) beyond these limitations, IRS did not use other existing data to develop and report measures that more fully represented audit results; (18) for additional measure, audit revenues could be compared with related costs; and (19) to develop such measures, IRS would need more data on both direct and indirect costs.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: In each annual budget submission, IRS officials state that they plan to report, by fiscal year, to Congress on the amount of taxes recommended through audits and the amounts collected of the taxes recommended. The first reporting was slated for the fiscal year 2002 budget submission. Since then, GAO has been tracking this. The IRS does not appear to have firm plans to implement this recommendation anytime soon. For that reason, GAO is closing it as not implemented.

    Recommendation: The Commissioner of Internal Revenue should develop meaningful ways to report the results to Congress from tracking, over a reasonable number of future years, existing IRS data on the assessment and collection of additional amounts recommended in specific types of audits closed for each fiscal year. One option for developing reporting formats could be the tables used in this report. The reports would provide fuller measures of the impacts of audits across IRS than those just on taxes recommended.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: The IRS is building an activity-based cost model to track different types of costs for various programs at the IRS. The IRS believes the model will have the ability--once completed--to track costs by audit type. The IRS completed the user needs study of field offices in June 2000. The study was evaluated by GAO as part of the IRS financial audit. The IRS has purchased the new system and has been trying to implement it since then. As of July 2005, GAO could not get clear information about when the system would be implemented, if at all. GAO has decided to close this recommendation as not implemented.

    Recommendation: The Commissioner of Internal Revenue should develop a way to track the direct staff costs of collecting tax assessments associated with specific types of audits. Similarly, the Commissioner also should determine how to account for IRS' indirect costs in auditing returns, settling audit disputes, and collecting audit assessments by type of audits. In analyzing how to account for these indirect costs, IRS may find that the activity-based costing model being developed can serve as a helpful tool.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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