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Streamlined Corporate Audit Process Is Meeting Its Goals' which was 
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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

August 2013: 

Corporate Tax Compliance: 

IRS Should Determine Whether Its Streamlined Corporate Audit Process 
Is Meeting Its Goals: 

GAO-13-662: 

GAO Highlights: 

Highlights of GAO-13-662, a report to congressional requesters. 

Why GAO Did This Study: 

IRS audits of the tax returns filed by large corporations take four 
years, on average, to complete. Additional years can be spent in 
appeals. This is costly to IRS and creates years of uncertainty about 
a large corporation’s actual tax liability. In response, IRS developed
CAP in 2005. Under this process, IRS and taxpayers agree on how to 
report tax issues before the return is filed: compliant and 
cooperative taxpayers can get a streamlined IRS review of their tax 
return in a phase called Compliance Maintenance. GAO was asked to 
assess this process. In this report, GAO (1) describes the goals and 
potential benefits of the process, (2) assesses IRS’s efforts to 
determine whether these goals are met, (3) assesses IRS’s readiness to 
move more taxpayers into Compliance Maintenance, and (4) describes IRS’s
efforts to coordinate the process with its existing compliance 
processes. GAO reviewed IRS documentation and data, interviewed IRS 
officials and corporate tax experts, and held focus groups with tax 
executives of large corporations and with IRS audit staff. 

What GAO Found: 

Officials GAO interviewed inside and outside of the Internal Revenue 
Service (IRS) generally agreed on the potential major benefits of the 
Compliance Assurance Process (CAP) to taxpayers and IRS as reflected 
in its goals. These goals include saving IRS time and resources to use 
for other audits while ensuring compliance, and reducing taxpayer 
burden while increasing certainty on tax amounts now owed. 

Contrary to its guidelines, IRS has not evaluated whether the goals 
are being achieved or the process should be expanded. IRS officials 
told GAO that IRS will start developing an evaluation plan in 2013, 
but did not provide dates for when an evaluation would be completed. 
IRS cannot show the extent to which the goals are being met for two 
reasons. 

* Some goals do not have measures and none have targets. Although
developing measures and setting targets for goals (such as ensuring
taxpayer compliance) can be difficult, not doing so limits IRS's ability
to determine whether the process is working as intended. 

* IRS does not have consistent and complete data for CAP.
Inconsistent data make some analyses difficult to do. For instance,
the average annual staff hours spent auditing a return could not be
analyzed because the code to track staff time charges sometimes
included non-CAP time charges. Incomplete data did not allow IRS to
track progress for some goals. While IRS audit teams document tax
issues in case files, IRS does not compile the data to track issue
resolution. As a result, IRS cannot readily determine whether audit
teams are resolving issues uniformly or identifying emerging tax
compliance issues. Similarly, IRS does not have a system to track
resource savings. Without a system, IRS cannot know the amount of
saved resources or plan for their reallocation. 

IRS has been moving taxpayers into Compliance Maintenance without
documenting a plan to ensure, among other things, that IRS has the 
capacity to assimilate these taxpayers in an expedited fashion, as 
intended. In addition, IRS audit staff had concerns about guidance on 
moving taxpayers in and out of this phase. IRS clarified the guidance 
in May 2013, but has not verified whether the audit staff understand 
it. Without verification, IRS does not have reasonable assurance that 
the audit staff understand which taxpayers are right for Compliance 
Maintenance and when it would be appropriate to remove them. 

IRS is addressing difficulties in coordinating CAP with other compliance
processes. Difficulties include resolving some complex tax issues 
within the expedited time frames, and ensuring that all IRS 
specialists who assist audit teams understand the process. It is too 
early to tell whether IRS’s efforts will work. 

What GAO Recommends: 

GAO recommends that IRS evaluate the process, develop measures and 
targets for the goals, consistently capture data to track goal progress,
track resolution of tax issues and resource savings, develop a plan to
expand Compliance Maintenance, and verify that audit staff understand
attempts to clarify related guidance. In written comments, IRS agreed 
with our recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-13-662]. For more 
information, contact James R. White at (202) 512-9110 or 
whitej@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Significant Benefits Are Envisioned from CAP As Reflected in Its Goals: 

IRS Has Not Evaluated Whether CAP Is Meeting Its Intended Goals, Has 
Not Established a Full Suite of Performance Measures and Targets, and 
Has Not Developed Consistent and Complete Data: 

IRS's Readiness to Further Expand Compliance Maintenance Is Unclear: 

CAP Taxpayers and Auditors Use IRS Compliance Processes in the Same 
Manner as Traditional Audits but Coordination Difficulties Exist: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Internal Revenue Service: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Eligibility Criteria for Each Compliance Assurance Process 
(CAP) Phase: 

Table 2: Not all Compliance Assurance Process (CAP) Goals Have 
Measures or Targets: 

Figures: 

Figure 1: Average Months Spent on Traditional Audits under Coordinated 
Industry Cases (CIC) and Industry Cases (IC) for Large Corporations 
before Appeals, Fiscal Year 2012: 

Figure 2: Number of Compliance Assurance Process (CAP) Taxpayers by 
Tax Year: 

Abbreviations: 

APA: Advance Pricing Agreement: 

APMA: Advance Pricing and Mutual Agreement: 

CAP: Compliance Assurance Process: 

CIC: Coordinated Industry Case: 

GPRA: Government Performance and Results Act: 

IC: Industry Case: 

IDR: Information Document Request: 

IMS: Issue Management System: 

IPG: Issue Practice Group: 

IRS: Internal Revenue Service: 

LB&I: Large Business and International: 

MOU: Memorandum of Understanding: 

RAS: Research, Analysis, and Statistics: 

SEC: Securities and Exchange Commission: 

TIGTA: Treasury Inspector General for Tax Administration: 

UTP: Uncertain Tax Position: 

[End of section] 

GAO:
United States Government Accountability Office: 
441 G St. N.W. 
Washington, DC 20548: 

August 22, 2013: 

The Honorable Max Baucus: 
Chairman, Committee on Finance: 
United States Senate: 
The Honorable Dave Camp: 
Chairman, Committee on Ways and Means: 
House of Representatives: 

In fiscal year 2012, the Internal Revenue Service (IRS) collected 
about $282 billion in gross federal income tax from corporations. To 
ensure compliance, IRS examines (audits) corporate tax returns of the 
largest corporations every year.[Footnote 1] IRS views the continuous 
audits as necessary because the largest corporations regularly engage 
in complex business transactions for which determining the correct tax 
requires careful interpretation of the tax code. Through these audits, 
IRS proposed assessments of $20.1 billion in additional tax in fiscal 
year 2012.[Footnote 2] 

While resulting in billions of dollars of additional tax assessed, 
traditional corporate audits usually start months or years after a tax 
return is filed and can take years to complete. Even after completion, 
more years usually elapse before appeals are resolved and final tax 
assessments are determined. For corporations, the traditional audit 
process leads to years of uncertainty about their actual tax 
liabilities, uncertainty that must be reflected on financial 
statements. For IRS, the process is costly and can result in delays in 
uncovering new types of transactions that evade or misinterpret the 
tax laws. 

In an attempt to improve the traditional corporate audit process, IRS 
developed the Compliance Assurance Process (CAP) as a pilot program in 
2005. Managed by IRS's Large Business and International Division 
(LB&I), IRS examiners and participating large corporations work to 
reach agreement on how to report tax issues before their tax returns 
are filed. To the extent CAP works as intended, taxpayers should 
achieve tax certainty sooner with less administrative burden compared 
to traditional post-filing audits, allowing taxpayers to better manage 
tax reserves and more precisely report earnings on financial 
statements.[Footnote 3] In addition, IRS intends for CAP to foster tax 
compliance while reducing its cost for corporate audits. IRS also 
intends that any resources saved, particularly in a streamlined review 
CAP phase known as Compliance Maintenance, be devoted to auditing 
other corporations, thereby increasing audit coverage. 

You asked us to assess CAP. This report (1) describes the goals and 
potential benefits of CAP, (2) assesses IRS's efforts to determine 
whether CAP is meeting its goals, (3) assesses IRS's readiness to 
expand Compliance Maintenance, and (4) describes IRS's efforts to 
coordinate CAP with existing processes for large corporate compliance. 
To address these objectives, we reviewed IRS documentation, our prior 
work, and other relevant literature. We also assessed IRS's efforts on 
CAP with criteria in the Government Performance and Results Act (GPRA) 
of 1993,[Footnote 4] GPRA Modernization Act of 2010,[Footnote 5] and 
the Standards for Internal Control in the Federal Government.[Footnote 
6] We attempted to replicate IRS's analysis of CAP and do separate 
analyses of CAP taxpayers. We interviewed IRS officials responsible 
for managing CAP and conducting exploratory CAP research. In addition, 
we interviewed 11 corporate tax experts, including former IRS 
officials who were familiar with or had experience with CAP. We held 
six focus groups with a total of 22 account coordinators who are the 
primary IRS representative for CAP audits,[Footnote 7] two focus 
groups with a total of 11 managers of IRS's Issue Practice Groups who 
are responsible for providing guidance and advice to CAP audit teams 
on resolving tax issues, and one focus group with 12 tax executives of 
large corporations to understand their experiences using CAP.[Footnote 
8] For details on our scope and methodology, see appendix I. 

We conducted this performance audit from July 2012 to August 2013 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

IRS has two categories of traditional audits for large corporations: 
Coordinated Industry Cases (CIC) and Industry Cases (IC). CAP includes 
both CICs and ICs, with the majority being CICs (about 88 percent). 
The distinction between CIC and IC is based on criteria such as the 
amount of gross assets, amount of gross receipts, number of operating 
entities, multiple industry status, total foreign asset amounts, and 
amount of foreign taxes paid. All corporations that are designated as 
CICs are audited every year by a team of IRS staff while corporations 
that are designated as ICs are not held to the same requirement. 

Before IRS created CAP, large corporations waited about 50 months on 
average from the time a tax return was filed to IRS closing of the 
traditional audit under CIC. This did not include additional time 
after the audits were closed to resolve any appeals of the audit 
results--a process that usually took another 2 or 3 years. Therefore, 
obtaining certainty about the status of tax issues reported on the tax 
return for a given tax year may have taken 6 or 7 years--if not 
longer. This created significant burdens and problems for taxpayers 
and IRS. As already noted, taxpayers had to reflect uncertainty about 
their tax liability on their financial statements. This meant that 
taxpayers had to put aside reserves in a provisional account meant for 
changes in taxes owed after an audit. Large corporation tax officials 
we spoke to said that when corporations have a large reserve, it 
lowers their expected profits. In addition, IRS might not become aware 
of emerging tax issues associated with new types of business 
transactions or products for years. Traditional audits of large 
corporations still take years, as shown in figure 1. 

Figure 1: Average Months Spent on Traditional Audits under Coordinated 
Industry Cases (CIC) and Industry Cases (IC) for Large Corporations 
before Appeals, Fiscal Year 2012: 

[Refer to PDF for image: illustration] 

Traditional audits for Coordinated Industry Cases: 

Audits that are processed through Large Business and International 
(1,375 returns): 
Taxpayer submits return to IRS: 
Audit begins: 19.74 months; 
Audit closed: 27.85 months; 
Average total months: 47.59. 

Traditional audits for Industry Cases: 
Audits that are processed through Large Business and International
(13,966 returns): 
Taxpayer submits return to IRS: 
Audit begins: 16.02 months; 
Audit closed: 13.05 months; 
Average total months: 29.07. 

Source: GAO analysis of IRS data. 

Note: Figure 1 does not include the number of months and associated 
returns that are appealed after traditional audits are closed. IRS 
provided such a number for all Large Business and International 
audits, including Compliance Assurance Process and traditional audits. 
In fiscal year 2012, the average number of months to finish appeals 
after taxpayers filed their return was 83.6 months for CICs and 50.9 
months for ICs. 

[End of figure] 

IRS launched CAP in March 2005 as a pilot program to assess its 
viability as an alternative approach to large corporate tax 
administration. For the pilot, IRS selected voluntary, corporate 
taxpayers based on factors including their working relationship with 
IRS, a history of not taking aggressive tax positions, and not having 
major tax litigation under way. 

IRS created pre-filing and post-filing stages for CAP. In pre-filing, 
a taxpayer works with the CAP team to resolve issues of tax 
controversy and to determine the appropriate tax treatment of 
completed transactions before filing the tax return. CAP requires 
contemporaneous exchange of information about a taxpayer's completed 
transactions and other events that may affect tax liability. In post-
filing, the CAP audit team reviews the tax return to confirm adherence 
to agreements on how tax issues should be reported. In exchange for 
increased cooperation and transparency, the taxpayer may attain tax 
certainty sooner and with less administrative burden, compared to 
traditional post-filing audits. 

After 6 years of experience with the CAP pilot, IRS management decided 
to make CAP permanent in March 2011.[Footnote 9] IRS had received 
positive feedback from taxpayers and employees on the CAP pilot, 
indicating they wanted CAP to continue. Officials who had worked at 
IRS told us that IRS did exploratory research on the pilot's impacts 
on timeliness as well as on other areas. 

In making CAP permanent, IRS created three phases by adding the Pre-
CAP and Compliance Maintenance phases to the existing CAP phase. To 
avoid confusion, we will refer to the entire CAP program (all three 
phases) as CAP to distinguish it from the CAP phase defined below. 

Pre-CAP phase: To enter CAP, all audits for prior tax years must be 
resolved. The large corporate taxpayer and IRS work together in the 
traditional post-file audit process to close audits of tax returns 
filed for previous tax years within agreed upon time frames. Closing 
these audits can take significant time if, as suggested by figure 1, 
audits are open for many tax years. 

CAP phase: The large corporate taxpayer and IRS work to identify tax 
issues and resolve how they are to be reported for the current tax 
year in the pre-filing stage. IRS then confirms these issues are 
reported as agreed upon during the post-filing review. 

Compliance Maintenance phase: Large corporate taxpayers who continue 
to meet the CAP phase eligibility requirements and expectations may 
progress to Compliance Maintenance after at least 1 year in the CAP 
phase. Taxpayers must continue to be compliant and transparent in 
filing tax returns and pose no new tax compliance risks. IRS intends 
to spend less time examining these returns when filed as well as 
significantly reducing the scope and depth of the pre-filing review. 
IRS's guidance explains that the criteria for considering a taxpayer 
for Compliance Maintenance include the complexity and number of 
issues, and the taxpayer's history of CAP compliance, cooperation, and 
transparency. Taxpayers are expected to continue disclosing completed 
business transactions, information on material items and issues that 
occur during the CAP year, and their proposed tax positions on these 
disclosed items. The Internal Revenue Manual states that taxpayers can 
be removed from Compliance Maintenance depending on the complexity, 
number of issues, or other factors. 

Not every large corporation is eligible for CAP. Table 1 shows the 
criteria for each phase. 

Table 1: Eligibility Criteria for Each Compliance Assurance Process 
(CAP) Phase[A]: 

Pre-CAP phase; 
* Assets of $10 million or more; 
* If publicly-held, has complied with legal requirements to submit 
Form 10K, 10Q, 8K, or 20F to the Securities and Exchange Commission or 
other regulatory body[A]; 
* If privately held, must agree to provide certified, audited 
financial statement or equivalent on a quarterly basis; 
* Not under investigation by or in litigation with IRS or other 
federal or state agencies that would limit access to tax records. 

CAP phase; 
* Same as Pre-CAP, and; 
* If under examination, taxpayer can have no more than one filed 
return that has not been closed and one unfiled return for the year 
most recently ended, the return for which is not yet due. 

Compliance Maintenance phase; 
* Taxpayer maintains honest communication 
with CAP team and consistency in tax department personnel; 
* Taxpayer fully discloses all material and significant transactions; 
* Taxpayer has good internal controls; 
* Historically, taxpayer has low risk transactions and limited 
controversy; 
* Taxpayer has minimal noncomplex issues anticipated for the CAP year 
(meaning no major new transactions for the coming year). 

Source: GAO analysis of IRS documents. 

[A] The federal securities laws require publicly traded companies to 
disclose information to the Securities and Exchange Commission (SEC) 
on an ongoing basis. Domestic issuers must submit annual reports on 
Form 10-K and quarterly reports on Form 10-Q. The annual report on 
Form 10-K provides a comprehensive overview of the company's business 
and financial condition and includes audited financial statements. 
Form 8-K is the current report companies must file with the SEC to 
announce major events that shareholders should know about. Form 20-F 
is for foreign companies. 

[End of table] 

Taxpayers must sign a memorandum of understanding (MOU) that outlines 
their agreement to meet the CAP requirements. For Pre-CAP, the MOU 
will be effective for the first Pre-CAP year and continue until audits 
of tax returns for all transition years are closed and the CAP phase 
selection criteria are fulfilled. For the CAP phase, the MOU applies 
to a single tax year known as the CAP year. For Compliance 
Maintenance, the CAP phase MOU is used. To continue in the CAP and 
Compliance Maintenance phases, taxpayers must reapply and execute a 
new MOU for each CAP year. 

Of about 60,000 large corporate taxpayers considered for audit in 
fiscal year 2012, 161 were in CAP. Figure 2 shows the growth of CAP 
since its inception in 2005. 

Figure 2: Number of Compliance Assurance Process (CAP) Taxpayers by 
Tax Year: 

[Refer to PDF for image: line graph] 

Tax year: 2005; 
Number of CAP taxpayers: 16. 

Tax year: 2006; 
Number of CAP taxpayers: 34. 

Tax year: 2007; 
Number of CAP taxpayers: 71. 

Tax year: 2008; 
Number of CAP taxpayers: 91. 

Tax year: 2009; 
Number of CAP taxpayers: 100. 

Tax year: 2010; 
Number of CAP taxpayers: 112. 

Tax year: 2011; 
Number of CAP taxpayers: 139. 

Tax year: 2012 (year CAP was made permanent); 
Number of CAP taxpayers: 161. 

Source: IRS. 

[End of figure] 

CAP taxpayers work with team and account coordinators who serve as the 
primary IRS representative for all federal tax matters. In the Pre-CAP 
phase, taxpayers work with an assigned team coordinator; in the CAP 
phase or Compliance Maintenance phase, taxpayers work with an assigned 
account coordinator. Other IRS team members include IRS examiners, the 
team manager, the territory manager, and the Director of Field 
Operations, as well as various IRS specialists (as needed) who offer 
technical knowledge about tax issues and large corporations. 

CAP work on a tax return may be concluded in one of three ways: 

1. Full Acceptance Letter--IRS provides the taxpayer with a full 
acceptance letter if the pre-filing stage concludes with a taxpayer 
fully complying with the MOU and with resolutions of all identified 
items and issues through factual clarification, closing agreement(s), 
issue resolution agreement(s), or a combination of these.[Footnote 10] 
The letter constitutes written confirmation that IRS will accept the 
taxpayer's return if it is filed consistent with those resolutions and 
no additional items or issues are discovered during the post-filing 
review that were not previously disclosed. 

2. Partial Acceptance Letter--IRS provides the taxpayer with a partial 
acceptance letter if the pre-filing stage concludes with a taxpayer 
fully complying with the MOU, but IRS and the taxpayer cannot resolve 
all identified items or issues before the tax return is filed. The 
letter constitutes written confirmation that IRS will accept the 
taxpayer's return for the resolved items and issues if the post-filing 
review shows the return is filed consistent with the agreement(s). 

3. Termination Letter--IRS can issue a termination letter at any time, 
which results in the case being withdrawn from CAP and transferred to 
a traditional post-filing examination. This can happen for several 
reasons, including the taxpayer: 

* not adhering to information document request (IDR)[Footnote 11] 
response times, not responding to IDRs, or not providing complete IDR 
responses; 

* not engaging in meaningful or good-faith issue resolution 
discussions; 

* failing to thoroughly disclose prior, concurrent, and ongoing 
transactions; 

* failing to disclose a tax shelter or listed transaction; 

* failing to disclose an investigation or litigation that limits 
access by the IRS to current corporate records; or: 

* not adhering to any other MOU commitment(s). 

Two other new reporting requirements, one financial and one tax, have 
been introduced since the 2005 pilot and may reinforce CAP. The first, 
Financial Accounting Standards Board Interpretation Number 48, 
Accounting for Uncertainty in Income Taxes, implemented in June 2006, 
requires public and private corporations subject to the U.S. Generally 
Accepted Accounting Principles to disclose uncertain tax positions. 
Several of the tax experts we spoke to said this gives IRS an 
additional source for verifying the completeness of the disclosures 
that corporations make in the CAP phase. The second, Schedule UTP, 
Uncertain Tax Position Statement, has a similar disclosure purpose. 
IRS implemented it in 2010 as required reporting by taxpayers that 
have assets equaling or exceeding $50 million.[Footnote 12] Along with 
their tax returns, these taxpayers are to disclose information on the 
Schedule UTP about tax positions that may affect federal income tax 
liabilities or are included in audited financial statements. According 
to the August 2011 UTP guidance and procedures for CAP, CAP teams 
should compare the list of taxpayer disclosures made to them during 
the CAP year to the issues identified on the Schedule UTP to verify 
that the disclosures match. 

Significant Benefits Are Envisioned from CAP As Reflected in Its Goals: 

IRS envisioned that CAP would yield significant benefits to 
participating taxpayers and IRS by resolving tax issues in a pre-
filing environment. IRS's vision is reflected in the following seven 
CAP goals: 

* ensure taxpayer compliance; 

* reduce overall examination time; 

* increase currency for taxpayers (e.g., working on the unfiled return 
for the most recent tax year during the CAP pre-filing stage); 

* enhance the accurate, efficient, and timely resolution of complex 
tax issues; 

* increase audit coverage by providing more efficient use of resources; 

* reduce taxpayer administrative burden; and: 

* increase certainty for taxpayers. 

IRS account coordinators for CAP cases, other IRS officials, and non-
IRS officials (such as corporate tax experts and large corporation tax 
officials) told us what they believe the benefits of CAP are if its 
goals are achieved.[Footnote 13] Because the goals are not all 
mutually exclusive, some benefits can be perceived as relating to more 
than one goal.[Footnote 14] 

* Ensure taxpayer compliance: IRS and non-IRS officials indicated that 
compliance may be higher under CAP. Specifically, transactions 
disclosed by taxpayers in CAP may not have been disclosed or otherwise 
detected during traditional audits. For example, some account 
coordinators and large corporation tax officials who participated in 
our focus groups said that the risk of getting removed from CAP 
sometimes prompts large corporations to over-disclose issues and 
transactions. 

* Increase currency for taxpayers: IRS and non-IRS officials generally 
agreed that CAP increases currency. Some of the officials informed us 
that currency reduces taxpayers' cost to retrieve information as well 
as their interest expenses on unpaid tax liabilities. Currency means 
that the appropriate documents and corporate staff knowledgeable about 
a particular transaction are more likely to be available for 
consultation. 

* Enhance the accurate, efficient, and timely resolution of complex 
tax issues: IRS and non-IRS officials generally agreed that currency 
could also enhance the resolution of disputes over tax issues for the 
reasons given above. Having documents and responsible corporate staff 
available should make it easier for IRS to understand the tax 
implications of a transaction. In addition, a full or partial 
acceptance letter can speed the post-filing review of resolved issues. 

* Increase audit coverage by providing more efficient use of IRS 
resources: IRS and non-IRS officials generally agreed that CAP has the 
potential to reduce IRS resources spent auditing large corporations 
relative to what would have been spent on traditional audits. Some of 
the officials stated that most of the resource savings would occur in 
the Compliance Maintenance phase. Any resources saved through 
Compliance Maintenance could be reinvested in increasing the audit 
coverage of CAP and non-CAP taxpayers. As an example of resource 
savings, an account coordinator informed us that she was able to 
devote more time and resources to other audits because one of her 
taxpayers was in Compliance Maintenance. 

* Reduce taxpayer administrative burden: CAP taxpayers who 
participated in IRS's 2012 survey responded that they were satisfied 
that CAP had reduced their administrative burden compared to 
traditional post-file audits. While CAP may reduce taxpayer 
administrative burden over time, corporate tax experts indicated that 
CAP requires significant upfront investment from taxpayers because all 
audits for prior tax years must be resolved. 

* Increase certainty for taxpayers: IRS and non-IRS officials we spoke 
with generally agreed that CAP can increase the certainty that 
taxpayers have about their tax obligations when tax returns and 
financial statements are filed. They specifically emphasized the value 
to corporations of not having to maintain reserves for potential 
future tax liabilities. A corporate tax expert told us that certainty 
is so valuable to corporations that they may be willing to concede 
certain tax issues to achieve it. Increased certainty has other 
effects, such as making it less likely that state tax returns will 
need to be amended, which also saves time and resources. 

Both IRS officials and corporate tax experts informed us that for CAP 
to achieve such benefits, taxpayers must be willing to disclose 
transactions to IRS. For this reason, transparency and communication 
are emphasized in the MOU. The corporate tax experts we interviewed 
readily acknowledged that not all large corporate taxpayers may be 
good candidates for CAP. As examples, they mentioned corporations that 
consistently take aggressive tax positions, have numerous complex 
transactions, or are unwilling to be cooperative and transparent with 
IRS. 

IRS Has Not Evaluated Whether CAP Is Meeting Its Intended Goals, Has 
Not Established a Full Suite of Performance Measures and Targets, and 
Has Not Developed Consistent and Complete Data: 

Although CAP started 8 years ago and IRS is looking to further expand 
CAP, IRS has not evaluated CAP's effectiveness, whether its goals are 
being accomplished, or whether it should be expanded and if so, to 
what extent. The evidence in the preceding section about the benefits 
of CAP is based on viewpoints of those in our focus groups which 
cannot be generalized to the entire population of IRS and non-IRS 
officials. The Senate Committee on Appropriations, in June 2012, urged 
IRS to develop additional performance measures to evaluate the 
effectiveness of CAP.[Footnote 15] The Treasury Inspector General for 
Tax Administration (TIGTA) in February 2013 recommended that IRS 
develop an evaluation plan for CAP and IRS agreed to do so in 
responding to TIGTA's report.[Footnote 16] IRS officials stated in May 
2013 that they will start to develop a plan for evaluating CAP during 
the fourth quarter of fiscal year 2013 but they did not state when the 
plan would be completed or the evaluation would be done. 

IRS faces challenges in evaluating CAP. For example, it is not easy to 
measure compliance by large corporations or concepts like certainty 
and administrative burden. IRS has attempted exploratory research on 
the impacts of CAP but these efforts were not conclusive. However, 
without evaluations of CAP or its expansion, IRS does not have a 
credible base of information for understanding the current 
effectiveness of CAP such as for saving resources or for making 
decisions about any future expansion of CAP. 

IRS has guidelines for conducting program evaluations that could be 
applied to CAP.[Footnote 17] According to the guidelines, a program 
evaluation attempts to provide accurate, objective, and trustworthy 
information about program performance and to help assess the quality 
or value of a program. Conducting a program evaluation can help answer 
questions decision makers have about the basic reasons the program 
exists and the continuing need for it. The guidelines also allow for 
evaluating the costs and benefits of continuing, revising, or ending a 
program. 

IRS Has Created Some Performance Measures, but Has No Targets to 
Measure Progress Towards CAP Goals: 

The Government Performance and Results Act of 1993 (GPRA), as enhanced 
by the GPRA Modernization Act of 2010, requires agencies to set 
results-oriented goals, establish performance measures and related 
performance indicators with targets in meeting such goals,[Footnote 
18] and report progress.[Footnote 19] Performance measures and targets 
are established so that actual results can be compared to planned 
performance or goals. 

As shown in table 2 and discussed below, IRS cannot show the extent to 
which CAP goals are being met because some goals do not have measures 
and none have specific targets. 

Table 2: Not All Compliance Assurance Process (CAP) Goals Have 
Measures or Targets: 

CAP goal: Ensure taxpayer compliance; 
IRS measure: None; 
Target: None. 

CAP goal: Reduce overall examination cycle time; 
IRS measure: Overall examination cycle time, although data are 
inconsistent; 
Target: None. 

CAP goal: Increase currency for taxpayers; 
IRS measure: None; 
Target: None. 

CAP goal: Enhance accurate, efficient and timely resolution of complex 
tax issues; 
IRS measure: None; 
Target: None. 

CAP goal: Increase audit coverage by providing more efficient use of 
resources; 
IRS measure: Partial--Average staff hours for pre-and post-filing; 
Target: None. 

CAP goal: Reduce taxpayer administrative burden; 
IRS measure: Partial--Taxpayer satisfaction on burden of CAP compared 
to traditional audits; 
Target: None. 

CAP goal: Increase certainty for taxpayers; 
IRS measure: Taxpayer assessment of extent to which certainty 
increased and percentage of full acceptance or no change letters; 
Target: None. 

Source: GAO analysis of IRS data. 

Note: Partial means that the measure does not fully address the goal. 

[End of table] 

* Ensure taxpayer compliance: IRS officials we interviewed said that, 
despite multiple attempts, they do not have measures or targets 
related to CAP taxpayer compliance because of the difficulty of 
measuring it. IRS has directly measured compliance for different 
groups of taxpayers in the past, such as through audits of randomly-
selected taxpayers. IRS has not used this approach with large 
corporations because it may be a burden both for IRS and taxpayers. 

An alternative to measuring the direct impact of CAP on compliance is 
the use of proxy measures.[Footnote 20] During the pilot as well as 
after making CAP permanent, IRS tried various approaches to measure a 
proxy for compliance in paying taxes owed, such as the taxes paid 
before and after audit by CAP taxpayers compared to non-CAP taxpayers. 
One approach attempted to create peer groups for CAP taxpayers to 
compare taxes paid by CAP taxpayers with those paid by non-CAP peers. 
Another approach explored ways to estimate the impact of CAP on 
effective tax rates. However, the results were not conclusive because 
of the challenges of controlling for other factors that could affect 
taxes paid.[Footnote 21] IRS has not researched the potential use of 
another proxy measure for compliance: using the results from measuring 
the quality of work by CAP teams to identify material tax issues and 
to develop support for how these issues should be reported on tax 
returns. Without compliance measures or related proxy measures and 
accompanying targets, it will be difficult for Congress and IRS to 
know whether CAP is meeting its goal for ensuring taxpayer compliance. 

* Reduce overall examination cycle time: IRS has defined a measure for 
this goal but its related data are inconsistent. This measure combines 
IRS's traditional cycle time metric--the number of months or years it 
takes to close an audit after a tax return is filed--with the number 
of months for pre-filing work. Measuring the pre-filing time could 
provide insights on whether a taxpayer is a good candidate for CAP. 
For example, a long pre-filing period could be an indicator of complex 
tax issues or delays in providing information to IRS. However, as 
discussed in the next section, we found inconsistencies in the CAP 
data for use in measuring this goal. In particular, we could not 
resolve inconsistencies in the reporting of cycle time data by 
different sources. 

* Increase currency for taxpayers: LB&I has data on currency for all 
CIC audits, but it has not broken out currency data for CAP pre-filing 
work or post-filing audits. IRS officials stated that they believe 
that all CAP cases are current (which could be a CAP target). However, 
they had no measures for either the pre-filing or post-filing stages 
or related targets. 

* Enhance the accurate, efficient, and timely resolution of complex 
tax issues: IRS does not have a measure or target for this goal. IRS 
knows that CAP taxpayers are satisfied with their issue resolutions. 
According to IRS's 2012 taxpayer satisfaction survey,[Footnote 22] 80 
percent of the CAP respondents were satisfied with issue resolution in 
CAP.[Footnote 23] It is useful to know how taxpayers feel about issue 
resolution; however, IRS does not have a system to track issues that 
are being audited and resolved to provide data to help assess the 
goal. For example, IRS does not track whether the same issues repeat 
year after year or whether IRS and the CAP taxpayer agreed on a method 
to be used to resolve the issue in future tax years. Having such 
tracking to measure success in meeting this issue resolution goal 
could reduce the costs of future audits. 

* Increase audit coverage by providing more efficient use of 
resources: IRS partially measures this goal by tracking certain CAP 
resources spent, such as the average staff hours for pre-filing and 
post-filing activities, but does not measure whether any savings are 
used to increase audit coverage. 

* Reduce taxpayer administrative burden: IRS partially measured this 
goal through its 2012 customer satisfaction survey to determine 
whether CAP taxpayers believed that the administrative burden had 
decreased. However, IRS does not have a measure of the actual burden 
on CAP taxpayers because it has not been able to identify how to 
capture taxpayer burden (other than relying on survey responses). IRS 
has been attempting to more directly measure how CAP affects taxpayer 
burden but has faced challenges. In 2013, IRS's Research, Analysis, 
and Statistics (RAS) division analyzed whether CAP taxpayers were less 
likely to use outside tax preparation services. While RAS concluded 
that payments for such services were significantly lower for 
corporations that had been in CAP for at least a year, this result 
might indicate that CAP corporations choose to use more in-house staff 
and fewer outside experts for work related to taxes rather than from 
being in CAP. RAS also analyzed responses to its tax year 2009 tax 
compliance cost survey to compare compliance costs for CAP and non-CAP 
corporations while controlling for other factors that might influence 
the costs. The results of this analysis were inconclusive. 

* Increase certainty for taxpayers: IRS relies on its customer 
satisfaction survey to measure whether taxpayer certainty has 
increased. In its 2012 survey, 90 percent of CAP respondents said that 
tax certainty has increased "somewhat" or "a lot" for their 
corporations. In addition, an IRS official informed us in June 2013 
that IRS has begun to use data it has been collecting on the 
percentage of taxpayers that are issued full acceptance or no change 
letters by tax and fiscal years to reflect certainty. 

IRS officials stated that the measures being used for CAP, such as 
cycle time, staff hours, and taxpayer satisfaction, are derived from 
the traditional LB&I balanced measures related to business results and 
customer satisfaction for all of its audits. These traditional 
balanced measures do not directly link to all CAP goals. 

According to an IRS official, IRS has not identified targets for any 
of its CAP measures because it does not traditionally set official 
targets for pilot programs. The official informed us in July 2013 that 
IRS is developing targets, which may be in place by the start of 
fiscal year 2014 pending approval by LB&I leadership. Even if IRS 
implements targets, IRS does not have an objective basis for 
determining whether CAP is effective because some goals do not have 
measures. 

IRS Does Not Have Consistent and Complete Data for CAP: 

To implement a performance measurement system, it is necessary to 
collect the right data and ensure its accuracy. Standards for Internal 
Control in the Federal Government calls for a variety of control 
activities for data being collected to help ensure that actions are 
taken to reduce risk.[Footnote 24] Even though some CAP measures 
exist, the IRS data being collected are not consistent or complete to 
use in determining whether the CAP goals are met. 

Such inconsistencies arise in part from data collection processes. An 
IRS official indicated that data used by IRS to manage CAP are 
manually transferred from multiple databases into an excel 
spreadsheet. Without controls or documentation to ensure and validate 
their consistency, we could not be assured of the validity and 
accuracy of the data that IRS uses to create the CAP report used by 
LB&I leadership. Furthermore, this limits the ability to do analyses, 
such as: 

* measuring the average hours spent to close a tax return and staff 
time charges for a tax year by pre-filing and post-filing activities. 
Specifically, tracking staff time charges on pre-filing activities for 
CAP could not be done because the code used by IRS to track some 
charges also included non-CAP activities; doing an analysis of CAP 
time charges would help determine whether CAP saves resources compared 
to traditional audits. 

* comparing taxpayer's returns filed before and after they entered CAP 
to analyze any similarities and differences, accounting for when 
taxpayers entered CAP and moved from the Pre-CAP phase to the CAP 
phase. Doing an analysis may help IRS determine whether the right 
taxpayers are in CAP. 

* replicating IRS management reports and TIGTA data tables on the 
total number of CAP taxpayers, using taxpayer identification numbers, 
tax years, and form types. 

* reconciling differences in the reported number of months for cycle 
time. An IRS official provided a report used by LB&I leadership 
involved with CAP showing that the average cycle time for closed CAP 
audits is about 20 months for both pre-filing and post-filing work, 
with more than half of this time spent on post-filing work rather than 
pre-filing work. However, TIGTA reported average cycle time for closed 
audits to be about 24 months with more than half of this time spent on 
pre-filing work rather than post-filing (over 15 months and about 8.5 
months, respectively).[Footnote 25] 

IRS's Issue Management System (IMS)[Footnote 26] has a field for the 
type of issues audited, but IRS officials said that they did not have 
assurance that the issue data were consistent and complete. When CAP 
audit teams entered issue data into IMS, IRS did not know whether the 
teams were consistently selecting the proper issue codes. IRS 
officials indicated that entering the issue into IMS can be a 
significant burden because IRS has tens of thousands of issue codes to 
consider and one issue can be associated with multiple codes from 
which to choose. Furthermore, IRS does not require this issue field to 
be completed and does not know whether CAP teams entered all issues 
audited. As a result, the risk increases that data are not consistent 
and complete. Thus, neither we nor IRS could determine the number, 
types, and dollar amounts of recommended tax changes for issues 
addressed in CAP. 

In addition, data in CAP case files are not tracked and thus are not 
readily available to assess whether the issue resolution goal is being 
met. IRS has not created a system to compile data from the issue 
resolution agreements between CAP teams and taxpayers to guide how 
issues are to be reported on tax returns when corporations file; 
instead, these agreements are kept in a case file for each CAP 
taxpayer. An IRS official agreed to attempt to start electronically 
tracking issues reported on issue resolution agreements and said in 
July 2013 that the mandatory entry of data from the issue resolution 
agreements into the IMS would be recommended to the LB&I Business 
Review Board in late July 2013.[Footnote 27] Thus, the date and 
methodology for starting to track the issues resolved during pre-
filing are not known. Even if implemented, the planned tracking would 
not cover all other audited issues and whether they were resolved 
during post-filing. Without such CAP-wide data, it will be difficult 
for IRS to know whether it is resolving issues uniformly across CAP 
taxpayers for a current tax year or addressing the same complex tax 
issues year after year for a CAP taxpayer. 

Even if IRS compiled and tracked data on all audited issues, whether 
or not resolved, IRS does not have a way to identify and track 
emerging tax issues. Compared to traditional audits, CAP could help 
identify new issues sooner for multiple CAP taxpayers because CAP 
occurs in real-time.[Footnote 28] Without this tracking, IRS cannot 
readily determine how quickly new issues are identified or resolved in 
CAP. Thus, IRS could miss opportunities to detect new types of 
noncompliance earlier and to share the information IRS-wide. Account 
coordinators in our focus groups informed us they used an informal 
process to relay information on emerging issues, such as to the local 
office counsel, but the extent to which this information circulates 
across IRS is not known. 

Similarly, as of May 2013, IRS was not tracking data on its CAP goal 
for resource savings to invest in increased audit coverage. Without 
the data on the savings and a related plan for using any savings to 
increase audit coverage, IRS cannot be assured that the saved 
resources are invested effectively on either CAP or non-CAP taxpayers 
with high compliance risks. IRS officials explained that a possible 
way to track the effect of the saved resources would be to count the 
number of cases that account coordinators work, expecting that some 
coordinators will be able to work non-CAP cases that would not have 
been worked.[Footnote 29] 

IRS's Readiness to Further Expand Compliance Maintenance Is Unclear: 

IRS has been moving taxpayers into the Compliance Maintenance phase. 
In this phase, IRS intends to save resources by streamlining its 
reviews of corporate tax returns. IRS expects that Compliance 
Maintenance will start generating resource savings in 2014. The number 
of taxpayers in Compliance Maintenance has increased from 10 in early 
fall 2012 to 44 as of June 2013. 

Although Compliance Maintenance is growing, IRS has not assessed 
whether it is working as intended and has not developed a plan to 
expand it. Standards for program management state that specific 
desired outcomes or results should be conceptualized, defined, and 
documented in the planning process as part of a road map, along with 
the appropriate steps and time frames needed to achieve those results. 
The standard practices also call for assigning responsibility and 
accountability for ensuring the results of program activities. 
[Footnote 30] 

Such a plan also could discuss how IRS will assimilate these taxpayers 
and ensure that IRS has the capacity to manage the increased workload 
within the expedited time frames envisioned for corporate taxpayers 
placed into Compliance Maintenance. Without such an assessment and 
plan to guide expansion, IRS will not know whether Compliance 
Maintenance will help meet CAP goals, such as reducing the resources 
devoted to pre-and post-filing, or increasing audit coverage while 
maintaining compliance. 

The lack of a documented plan for expanding Compliance Maintenance 
could create risks for CAP in ensuring that this phase includes the 
right types of taxpayers. Our reviews of IRS documents and our focus 
groups held with account coordinators indicated that confusion exists 
about how IRS would monitor taxpayers in Compliance Maintenance and 
how it would remove taxpayers that no longer qualify. Account 
coordinators that we included in our focus groups expressed 
uncertainty over how IRS would monitor CAP taxpayers, given that some 
taxpayers could potentially "game" Compliance Maintenance because this 
phase requires a lighter review using less resources than the CAP 
phase. Account coordinators were also uncertain about the process and 
criteria for removing taxpayers when we spoke to them in March and 
April 2013. In addition, they told us that a taxpayer that had been 
accepted into Compliance Maintenance for tax year 2013 was expected to 
remain in Compliance Maintenance until all of the work was completed 
for that tax year, regardless of whether their circumstances changed 
(such as tax personnel changes in the taxpayer's business or discovery 
of new complex tax issues). 

We brought the concerns from account coordinators that participated in 
our focus groups to the attention of IRS. In response, IRS management 
informed us that they revised their draft user guide for Compliance 
Maintenance at the end of May 2013 and clarified the process and 
criteria for moving taxpayers from Compliance Maintenance back to the 
CAP phase. An IRS official explained that moving a taxpayer out of 
Compliance Maintenance would require a serious compliance risk. 
According to the May 2013 draft user guide, taxpayers would remain in 
Compliance Maintenance for the entire pre-filing phase. If their 
compliance risk changes,[Footnote 31] such taxpayers will remain in 
Compliance Maintenance for that calendar year but may be moved back to 
the CAP phase in the next year. Additionally, a March 2013 
notification letter to CAP taxpayers approved for Compliance 
Maintenance highlighted that if changes occurred (such as to 
transparency, cooperation, or tax return filing activity) IRS might 
revisit whether they should remain in Compliance Maintenance. 

IRS has not yet verified whether these recent changes are uniformly 
understood by account coordinators and resolve their concerns, which 
they shared in our focus groups during March and April 2013. At the 
end of June 2013, IRS indicated agreement that verifying the changes 
to the guidance may help address the account coordinators' concerns. 
Verifying that the changes it took resolved account coordinators' 
concerns could provide IRS with reasonable assurance that its staff 
are including the right types of taxpayers in Compliance Maintenance 
and are monitoring and removing them appropriately. 

The potential savings from Compliance Maintenance relate to multiple 
CAP goals, such as increased audit coverage and taxpayer certainty, as 
well as reduced overall examination cycle time. CAP may not achieve 
its intended goals if IRS does not have a clear plan or criteria for 
how it would expand Compliance Maintenance and monitor and ensure that 
the right taxpayers are in this phase. 

CAP Taxpayers and Auditors Use IRS Compliance Processes in the Same 
Manner as Traditional Audits but Coordination Difficulties Exist: 

Regardless of whether taxpayers are in CAP, they have access to other 
existing IRS processes to help resolve tax issues with IRS. Examples 
include accelerated issue resolution,[Footnote 32] advance pricing 
agreements (APA) to help resolve transfer pricing issues,[Footnote 33] 
Appeals,[Footnote 34] early referral to Appeals,[Footnote 35] fast 
track settlement,[Footnote 36] industry issue resolution,[Footnote 37] 
and settlement authority for coordinated issues.[Footnote 38] For 
example, CAP taxpayers retain the same appeal rights as non-CAP 
taxpayers if they disagree with IRS's audit findings. As for IRS 
staff, both CAP and traditional audit teams can contact Issue Practice 
Groups (IPG) for technical advice on specific tax issues.[Footnote 39] 
IPGs are designed to foster effective collaboration and sharing of 
knowledge and expertise across LB&I and Chief Counsel. In our focus 
groups, account coordinators that requested assistance from IPGs 
generally reported that IPGs responded in a timely manner and 
prioritized their inquiry over non-CAP audits, even though IRS does 
not formally require that priority. 

CAP's Expedited Time Frames Pose Coordination Difficulties for Some 
Tax Issues Which IRS Is Addressing: 

According to IRS account coordinators for CAP cases, other IRS 
officials, corporate tax experts, and large corporation tax officials 
that we interviewed or that participated in our focus groups, the 
expedited nature of a CAP audit has led to difficulties in 
coordinating IRS reviews of APAs and research credits--both take 
longer to complete than the pre-filing time frame of CAP allows. 
[Footnote 40] IRS has initiated some efforts to address such 
difficulties: 

* For APAs, IRS highlighted in the 2013 CAP MOU that complex transfer 
pricing issues may require additional time beyond the typical CAP time 
frame to reach an agreement and consequently, could result in a 
partial acceptance letter. The MOU also states that the account 
coordinator is responsible for contacting the appropriate Advance 
Pricing and Mutual Agreement (APMA) Team to ensure ongoing 
coordination between the CAP and APMA programs. 

* For research credits, IRS implemented the General Business Credits 
IPG, which consists of IRS's technical experts on corporate tax credit 
issues, to provide assistance in reaching a resolution. 

As mentioned previously, IRS does not systematically track tax issues 
for CAP in a centralized manner. To the extent IRS begins tracking how 
long it takes to audit and resolve specific tax issues, IRS would have 
data to assess the effectiveness of these efforts to better coordinate 
CAP with APAs and research credit claims. 

IRS Is Working to Ensure CAP's Culture of Cooperation and Transparency 
Is Understood Throughout IRS: 

IRS and non-IRS officials highlighted the need for IRS specialists to 
better understand the cooperative and transparent culture necessary 
for CAP to succeed. For example, in IRS's 2012 survey of taxpayers, 
the most frequently cited barriers to the CAP review process were the 
lack of training and urgency by specialists that CAP teams rely on for 
advice. Specifically, CAP taxpayers in the survey perceived a lack of 
urgency and cooperation by the specialists working on CAP audits. 
Moreover, account coordinators we included in our focus groups 
expressed some concerns that the need for cooperation between IRS and 
the taxpayer in the CAP environment had not been fully adopted by 
specialists throughout IRS. 

Without a cooperative and transparent environment, CAP teams are 
hindered in coordinating with specialists, which may affect IRS's 
ability to achieve its goals. To address these concerns, IRS is acting 
on the following efforts to improve coordination with these IRS 
specialists: 

* Joint training is being conducted on CAP to include all CAP team 
members, specialists, and taxpayers. 

* Monthly meetings on CAP are being set up with the Tax Executives 
Institute, which represents the tax executives of large corporations, 
to discuss common concerns and practices, such as those with 
specialists. 

* Procedures are being updated to help with transparency. For example, 
CAP teams, including specialists, must discuss IDRs with the taxpayer 
before they are filed. 

* Work is being done to improve specialists' knowledge of the 
corporations whose audits they are involved in, as well as their 
methods of communication with such corporations. 

IRS officials indicated that they have taken these actions to ensure 
that coordination has improved between taxpayers and CAP teams 
(including specialists), and to monitor whether taxpayer concerns 
about specialists have been addressed. However, it is too early to 
tell whether IRS's efforts will work. 

Conclusions: 

CAP is an ambitious effort to improve tax audits of large 
corporations. It holds the promise of significant benefits for 
participating corporations in the form of increased certainty about 
tax liability and reduced administrative burden. It also has the 
potential to save IRS resources, which could be reallocated to 
increase audit coverage. Attracted by these benefits, IRS has been 
expanding the number of taxpayers in CAP and the related Compliance 
Maintenance phase. However, despite several efforts, IRS has not 
succeeded at assessing whether or not CAP is achieving its goals. 
While anecdotal evidence indicates that CAP may be effective at 
ensuring compliance, increasing certainty, saving resources, and 
achieving other goals, a CAP-wide assessment could validate these 
results and help ensure that support for CAP, both inside and outside 
IRS, does not wane. 

The lack of a CAP assessment is related to missing or incomplete 
performance measures, nonexistent targets for the CAP goals, and 
incomplete or inconsistent data. Without a full suite of measures and 
targets as well as appropriate data for program evaluation, fully 
assessing whether CAP is achieving its goals is not possible. The 
consequences of not establishing performance measures and not 
collecting the data needed to track performance can be significant. 
For example, one CAP goal is to resolve complex tax issues, but IRS 
does not track whether they are being resolved. As a result, IRS will 
not be able to tell whether CAP is dealing with disputes over the same 
issues year after year. Similarly, IRS does not track whether CAP is 
identifying emerging tax issues. Without such tracking, IRS cannot 
share information about emerging issues across IRS, creating a risk 
that some IRS audits might miss the issue or treat taxpayers 
inconsistently. For its goal on increasing audit coverage by saving 
resources through CAP, IRS did not have a way to collect data on the 
resources saved. Without that data, IRS cannot readily plan for how 
any savings will be used to increase audit coverage. 

Finally, without an assessment and plan for expansion, the rationale 
and pathway for expanding Compliance Maintenance are missing. In 
addition, the extent to which CAP staff understand how taxpayers are 
to be monitored and, if necessary, removed from Compliance Maintenance 
has not been verified. Absent a clear plan for expanding Compliance 
Maintenance and ensuring that account coordinators clearly understand 
guidance on monitoring and removing taxpayers, it will be difficult 
for IRS to provide reasonable assurance that Compliance Maintenance 
accepts the most compliant and cooperative corporate taxpayers, which 
is necessary for this phase to work as intended and to contribute to 
CAP goals, such as generating resource savings to increase audit 
coverage. 

Recommendations for Executive Action: 

To ensure that IRS is meeting the stated goals of CAP, we recommend 
that the Principal Deputy Commissioner of Internal Revenue and Deputy 
Commissioner for Services and Enforcement take the following seven 
actions: 

* Develop an evaluation plan for CAP, using IRS's guidelines for 
conducting program evaluations, that can: 

- track progress against the goals, and: 

- determine whether and how much to expand CAP. 

* Develop measures for each CAP goal and set related targets. 

* Consistently and completely capture data needed to track progress 
against the CAP goals. 

* Track all CAP tax issues and at a minimum, identify: 

- whether they are resolved or not resolved, and: 

- whether any are new or emerging issues that should be shared IRS-
wide. 

* Track savings from Compliance Maintenance and CAP overall and 
develop a plan for reinvesting any savings. 

* Develop a plan for expanding Compliance Maintenance. 

* Verify that the updated guidance for Compliance Maintenance on 
monitoring and removing CAP taxpayers has resolved CAP staff concerns 
about how these tasks are to be accomplished. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to IRS for review and comment. The 
Acting Deputy Commissioner for Services and Enforcement at IRS 
provided written comments, which are reprinted in appendix II. IRS 
plans to implement all seven of our recommendations but was not clear 
on the extent to which its plans will fully address our first six 
recommendations, as highlighted below. 

* For the first recommendation, IRS stated that it would develop and 
execute a program evaluation for CAP by June 30, 2014. However, IRS 
did not state whether the plan would track progress against goals and 
determine whether and how to expand CAP. 

* For the second recommendation, IRS stated that it will develop a 
balanced measures scorecard for CAP, but it is unclear whether IRS 
intends to develop measures for each CAP goal and set related targets 
as part of this action. 

* For the third recommendation, IRS stated that it will capture 
additional data points to track progress on the CAP goals, but did not 
indicate how it will ensure that the data are consistent and complete, 
accounting for problems we discussed in this report. 

* For the fourth recommendation, IRS stated that it will mandate use 
of the Issue Resolution Agreement tool to track CAP issues, but did 
not clarify how it will track CAP issues that were not resolved. 

* For the fifth recommendation, IRS stated that it will identify 
resource savings from CAP by June 30, 2014, but did not mention how it 
will develop a plan for reinvesting any savings. 

* For the sixth recommendation, IRS stated that it annually evaluates 
whether a CAP taxpayer should be included in the CAP Compliance 
Maintenance phase. However, IRS did not list actions it will take to 
develop a plan for expanding this phase. This report provides details 
on what a plan might cover (such as steps to be taken at certain times 
by specified parties to achieve desired results) as well as IRS's 
capacity to assimilate more CAP taxpayers and manage the workload 
within expedited time frames for this phase. 

IRS also provided technical comments on the draft report, which we 
incorporated as appropriate. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the 
Chairmen and Ranking Members of other Senate and House committees and 
subcommittees that have appropriation, authorization, and oversight 
responsibilities for IRS. We are also sending copies of the report to 
the Principal Deputy Commissioner of Internal Revenue and Deputy 
Commissioner for Services and Enforcement, the Secretary of the 
Treasury, and other interested parties. In addition, this report is 
available at no charge on the GAO website at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions or wish to discuss the 
material in this report further, please contact me at (202) 512-9110 
or whitej@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. Key contributors to this report are listed in appendix III. 

Signed by: 

James R. White: 
Director, Tax Issues: 
Strategic Issues Team: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

The objectives of this report were to (1) describe the goals and 
potential benefits of the Compliance Assurance Process (CAP), (2) 
assess the Internal Revenue Service's (IRS) efforts to determine 
whether CAP is meeting its goals, (3) assess IRS's readiness to expand 
Compliance Maintenance, and (4) describe IRS's efforts to coordinate 
CAP with existing processes for large corporate compliance. 

To address these objectives, we reviewed IRS's strategic plan from 
2009 to 2013, IRS's guidance for CAP and conducting program 
evaluations, a CAP management report, CAP research studies, results 
from IRS's 2012 CAP taxpayer survey, IRS documents pertaining to other 
compliance processes, our prior work on corporate audits and the tax 
gap, and other relevant literature. We also assessed IRS's efforts on 
CAP by comparing them with criteria in the Government Performance and 
Results Act (GPRA) of 1993, GPRA Modernization Act of 2010, and the 
Standards for Internal Control in the Federal Government. We also 
attempted to replicate analysis of IRS's data and tried to conduct our 
own analyses of CAP taxpayers but could not do so because of 
inconsistent data sources from multiple systems. 

Further, we interviewed officials from IRS's Large Business and 
International Division, who were responsible for managing CAP; 
Research, Analysis, and Statistics Division, who were responsible for 
conducting exploratory CAP research studies; and the Treasury 
Inspector General for Tax Administration. In addition, we interviewed 
11 corporate tax experts, including former IRS employees who were 
familiar with CAP or had some experience with CAP. We also conducted 
one focus group with tax executives of 12 large corporations to 
understand their experiences using CAP; six focus groups with 22 
account coordinators responsible for being the primary IRS 
representative for CAP audits; and two focus groups with 11 managers 
of IRS's Issue Practice Groups responsible for providing guidance and 
advice to CAP teams on resolving complex tax issues. To select the 22 
CAP account coordinators for our six focus groups, we received a list 
from IRS and drew a random sample to ensure a variety of independent 
viewpoints of those employees who work on different accounts in varied 
locations.[Footnote 41] 

We conducted this performance audit from July 2012 through August 2013 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the Internal Revenue Service: 

Department of The Treasury: 
Deputy Commissioner: 
Internal Revenue Service: 
Washington, D.C. 20224: 
        
August 9, 2013: 

Mr. James R. White: 
Director, Tax Issues: 
Strategic Issues Team: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Mr. White: 

Thank you for the opportunity to review and provide comments on your 
draft report entitled, "Corporate Tax Compliance: IRS Should Determine 
Whether Its Streamlined Corporate Audit Process Is Meeting Its Goals." 
We appreciate the considerable time the Audit Team spent assessing the 
benefits of the Compliance Assurance Process (CAP) Program and our 
efforts to meet the CAP goals, expand the Compliance Maintenance 
Phase, and coordinate our CAP efforts with other existing compliance 
processes to resolve complex tax issues. 

As your report indicates, the CAP Program is an ambitious effort to 
improve tax audits of large corporations. Based on positive feedback 
from employees and taxpayers participating in the CAP pilot, the IRS 
made the CAP a permanent program effective March 31, 2012. The program 
provides significant benefits in terms of increased certainty about 
tax liability and reduces administrative burden, and it has the 
potential to save IRS resources, which can be used for other audits. 

The Large Business and International Division has a full set of 
balanced measures for the CAP, which provides a framework for 
measuring the success of the program. These measures have been in 
place since the inception of the CAP pilot. In addition to using our 
in-place balanced measures, we will continue to develop strategic 
indicators to enhance our measures and ensure that the CAP does not 
erode compliance efforts. We will continue to collaborate with the 
Research, Analysis, and Statistics organization on developing 
innovative methods for gaining insights into the benefits of the CAP 
to taxpayers and IRS administration. 

Your findings indicate that improvements are needed with respect to 
the assessment of CAP goals, performance measures, data capturing, 
identification of emerging issues, and program expansion and 
coordination with other compliance processes in place. We appreciate 
the audit recommendations and plan to implement them as described in 
the attached action plan. 

We invite you to revisit this program in a year to evaluate our 
progress. 

If you have any questions, please contact me, or a member of your 
staff may contact Deborah Palacheck, Acting Director, Pre-Filing and 
Technical Guidance at (202) 515-4748. 

Sincerely, 

Signed by: 

Heather C. Maloy: 
Acting Deputy Commissioner for Services and Enforcement: 

Enclosure: 

To ensure that IRS is meeting the stated goals of the CAP Program, GAO 
recommends that the Commissioner of Internal Revenue take the 
following seven actions. 

Recommendation 1: 

Develop an evaluation plan for CAP, using IRS's guidelines for 
conducting program evaluations that can: track progress against the 
goals; and, determine whether and how much to expand CAP. 

Management Response: 

The Large Business & International Division (LBW) will develop and 
execute a program evaluation for CAP in accordance with our Guidelines 
for Conducting Program Evaluations. This will begin in Fiscal Year 
2013, and a report will be issued by June 30, 2014. 

Recommendation 2: 

Develop measures for each CAP goal and set related targets. 

Management Response: 

LB&I will develop a Balanced Measures Scorecard for CAP in accordance 
with Internal Revenue Manual 1.5.1, The IRS Balanced Performance 
Measurement System. 

Recommendation 3: Capture data needed to track progress against the 
CAP goals consistently and completely. 

Management Response: 

LB&I will capture additional data points for CAP on a monthly basis to 
track progress to ensure the goals of the program are fulfilled. 

Recommendation 4: 

Track all CAP tax issues and at a minimum, identify: whether they are 
resolved or not resolved; and, whether any are new or emerging issues 
that should be shared IRS wide. 

Management Response: 

We will make use of the Issue Resolution Agreement (IRA) tool in our 
Issue Management System (IMS) mandatory. We will also monitor issues 
on CAP cases and ensure that any new or emerging issues identified are 
shared appropriately. 

Recommendation 5: 

Track savings from Compliance Maintenance and CAP overall, and develop 
a plan for reinvesting any savings. 

Management Response: 

We will conduct an analysis of CAP cases to identify resource savings 
by June 30, 2014. 

Recommendation 6: 

Develop a plan for expanding Compliance Maintenance. 

Management Response: 

Annually, each CAP taxpayer is evaluated on a case-by-case basis for 
inclusion in the CAP Maintenance Phase. This is based on a number of 
factors including a history of transparency and cooperation in CAP, 
past tax return filings, and significant current year transactions. 

Recommendation 7: 

Verify that the updated guidance for Compliance Maintenance on 
monitoring and removing CAP taxpayers has resolved CAP staff concerns 
about how these tasks are to be accomplished. 

Management Response: 

We are updating our guidance on Compliance Maintenance. The updated 
guidance will address these concerns in a session with all Account 
Coordinators, which is planned by no later than January 30, 2014. The 
guidance will also be incorporated into future CAP training. 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James R. White, (202) 512-9110 or whitej@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Tom Short (Assistant 
Director); Ben Crawford; Sara Daleski; Amy Radovich; Susan Sato; Jehan 
Chase; Edward Nannenhorn; and Cynthia Saunders made key contributions 
to this report. 

[End of section] 

Related GAO Products: 

Tax Policy: The Research Tax Credit's Design and Administration Can Be 
Improved. [hyperlink, http://www.gao.gov/products/GAO-10-136]. 
Washington, D.C.: November 6, 2009. 

Tax Administration: IRS' Advance Pricing Agreement Program. 
[hyperlink, http://www.gao.gov/products/GAO/GGD-00-168]. Washington, 
D.C.: August 14, 2000. 

Tax Administration: IRS Measures Could Provide a More Balanced Picture 
of Audit Results and Costs. [hyperlink, 
http://www.gao.gov/products/GAO/GGD-98-128]. Washington, D.C.: June 
23, 1998. 

Internal Revenue Service: IRS Initiatives to Resolve Disputes Over Tax 
Liabilities. [hyperlink, http://www.gao.gov/products/GAO/GGD-97-71]. 
Washington, D.C.: May 9, 1997. 

Tax Administration: Factors Affecting Results from Audits of Large 
Corporations. [hyperlink, http://www.gao.gov/products/GAO/GGD-97-62]. 
Washington, D.C.: April 17, 1997. 

Tax Administration: Audit Trends and Taxes Assessed on Large 
Corporations. [hyperlink, http://www.gao.gov/products/GAO/GGD-96-6]. 
Washington, D.C.: October 13, 1995. 

Tax Policy: Additional Information on the Research Tax Credit. 
[hyperlink, http://www.gao.gov/products/GAO/T-GGD-95-161]. Washington, 
D.C.: May 10, 1995. 

International Taxation: Transfer Pricing and Information on Nonpayment 
of Tax. [hyperlink, http://www.gao.gov/products/GAO/GGD-95-101]. 
Washington, D.C.: April 13, 1995. 

Tax Policy: Information on the Research Tax Credit. T-GGD-95-140. 
Washington, D.C.: April 3, 1995. 

Tax Policy and Administration: Information on Transfer Pricing. 
[hyperlink, http://www.gao.gov/products/GAO/GGD-94-206R]. Washington, 
D.C.: September 15, 1994. 

Tax Administration: Compliance Measures and Audits of Large 
Corporations Need Improvement. [hyperlink, 
http://www.gao.gov/products/GAO/GGD-94-70]. Washington, D.C.: 
September 1, 1994. 

[End of section] 

Footnotes: 

[1] IRS defines large corporations as having assets greater than $10 
million. For purposes of this report, we will focus on the largest 
corporations which IRS defines as having assets of at least $250 
million. 

[2] Taxpayers may appeal proposed assessments of additional tax 
amounts before any such amounts are actually assessed as owed. 

[3] Corporations may set aside tax reserves for current, deferred, and 
potential or contingent tax liabilities. 

[4] Government Performance and Results Act of 1993, Pub. L. No. 103-
62, 107 Stat. 285 (Aug. 3, 1993). 

[5] GPRA Modernization Act of 2010, Pub. L. No. 111-352, 124 Stat. 
3866 (Jan. 4, 2011). 

[6] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[7] We selected account coordinators for our focus groups from an IRS 
list of account coordinators. 

[8] Because the focus groups included non-probability selections of 
managers and coordinators, the results cannot be used to make 
inferences about the populations. 

[9] IRS made CAP permanent in March 2011, applying to taxable years 
after December 31, 2011. 

[10] IRS drafts an issue resolution agreement for each item or issue 
that is resolved with the CAP taxpayers during the pre-filing stage, 
except for items or issues that are resolved through simple factual 
clarification. 

[11] According to the Internal Revenue Manual 4.46.4, IDRs are used by 
examination teams to gather information. The process is intended to 
encourage collaboration between the taxpayer and IRS to provide 
information needed to support an audit. 

[12] For 2010 and 2011, taxpayers that had assets equaling or 
exceeding $100 million were required to report uncertain tax positions 
on Schedule UTP. The asset threshold decreased from assets that equal 
or exceed $100 million to assets that equal or exceed $50 million for 
2012. 

[13] Examples we cited in this section were derived from interviews or 
focus groups with IRS and non-IRS officials. 

[14] Those we interviewed did not point to benefits from reducing 
overall examination time. 

[15] S. Rep. No. 112-177, at 28 (June 14, 2012). 

[16] TIGTA, The Compliance Assurance Process Has Received Favorable 
Feedback, but Additional Analysis of Its Costs and Benefits Is Needed, 
Reference Number 2013-30-021 (Washington, D.C.: Feb. 22, 2013). 

[17] IRS, Guidelines for Conducting Program Evaluations (Washington, 
D.C.: May 2012). 

[18] According to the GPRA Modernization Act of 2010, a performance 
indicator is a particular value or characteristic used to measure 
output or outcome, and common federal government performance 
indicators with quarterly targets are to be used in measuring or 
assessing, among other things, overall progress toward each federal 
government performance goal. GPRA Modernization Act of 2010, Pub. L. 
No. 111-352, 124 Stat. 3866, 3868-3871 (Jan. 4, 2011). 

[19] Government Performance and Results Act of 1993, Pub. L. No. 103-
62, 107 Stat. 285 (Aug. 3, 1993). GPRA Modernization Act of 2010, Pub. 
L. No. 111-352, 124 Stat. 3866 (Jan. 4, 2011). 

[20] A proxy measure is an attempt to indirectly measure a variable 
that is difficult to directly measure. GAO, Informing Our Nation: 
Improving How to Understand and Assess the USA's Position and 
Progress, [hyperlink, http://www.gao.gov/products/GAO-05-1] 
(Washington, D.C.: Nov. 10, 2004). 

[21] The IRS research completed to date has not used data that reflect 
the factors that IRS uses to select corporations for CAP; this 
omission could affect the results as well as whether the results can 
be generalized to potential CAP participants. 

[22] Pacific Consulting Group, Internal Revenue Service Taxpayer 
Satisfaction Survey: Large Business and International (LB&I), 
Compliance Assurance Process (CAP) Taxpayer Satisfaction Report 
Covering 2012 (November 2012). Taxpayers who were in CAP for the 2012 
tax year were surveyed. 

[23] In terms of how significant issues were resolved, 82 percent of 
CAP respondents were "somewhat" or "very satisfied" with resolutions 
before filing their return and 80 percent were "somewhat" or "very 
satisfied" with resolutions after filing their return. 

[24] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[25] Analysis covered fiscal years 2007 through 2011. TIGTA, The 
Compliance Assurance Process Has Received Favorable Feedback, but 
Additional Analysis of Its Costs and Benefits Is Needed, Reference 
Number 2013-30-021 (Washington, D.C.: Feb. 22, 2013). 

[26] According to IRS, IMS is an automated tool that collects issue-
based information on audits in a way that makes it available centrally 
for audit monitoring and strategy development. 

[27] The LB&I Business Review Board includes LB&I management and 
National Treasury Employees Union officials. 

[28] These new tax issues may emerge from how CAP taxpayers 
interpreted the tax impacts from new laws or changes to the laws as 
well as from changes in the business environment and new products or 
activities. An example includes new tax credits such as for hiring new 
employees. 

[29] IRS provided summary information in June 2013 on the workload for 
10 account coordinators working CAP cases in the Compliance 
Maintenance phase. However, the results only showed a very minor 
increase in the number of cases worked by account coordinators. 

[30] Project Management Institute, The Standard for Program Management 
(Newtown Square, PA: 2006). 

[31] Events that may change risk include the number of high-risk and 
material transactions reported, breakdown in personnel relations, 
change in tax department personnel that significantly impacts 
timeliness of review, and taxpayer relocation. 

[32] Accelerated issue resolution is an examination process to apply 
the resolution of the same or similar issues arising for an 
examination of an LB&I taxpayer from one or more tax periods to other 
tax periods. 

[33] In advance of a taxable transaction, taxpayers voluntarily use 
APAs to help resolve transfer pricing issues in a cooperative manner 
with IRS and with countries that have a tax treaty with IRS. A 
transfer price is the price charged by one company for a product or 
service supplied to a related company, such as the price a parent 
corporation charges its wholly-owned subsidiary. Any company that has 
a related company with which it transacts business establishes 
transfer prices for those intercompany transactions. 

[34] Appeals is independent of any other IRS office and serves as an 
informal administrative forum for a taxpayer who disagrees with an IRS 
determination. Appeals provide a venue where disagreements concerning 
the application of tax law can be resolved on a fair and impartial 
basis for both the taxpayer and the government. 

[35] Early referral is an optional process to resolve cases faster 
through LB&I and Appeals working simultaneously. This process may be 
requested by any taxpayer. A taxpayer may request early referral for 
one or more unresolved issues. 

[36] Taxpayers can request the use of fast track settlement if they 
cannot resolve issues identified. For CAP, fast track can be used on 
an issue-by-issue basis during the pre-filing and post-filing periods. 
However, if a taxpayer elects to use fast track in pre-filing, it 
cannot be used for the same issue during the post-filing period. 

[37] The Industry Issue Resolution Program resolves frequently 
disputed or burdensome tax issues that affect a significant number of 
business taxpayers through the issuance of guidance. 

[38] Settlement authority covers coordinated issues with Appeals 
Settlement Guidelines. Settlement authority is available for these 
types of issues, regardless of the amount of the adjustment. 

[39] IRS has 15 IPGs for issues related to accounting, corporate 
issues, credits, and penalties, among others. 

[40] Research credits allow taxpayers to claim tax credits in the 
amounts they paid for supplies used when conducting qualified 
research. Clarifying the type of supplies that qualify for the credit 
can be very difficult. 

[41] Results from nongeneralizable samples cannot be used to make 
inferences about a population. 

[End of section] 

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