With Better Management Information, IRS Could Further Improve Its Efforts Against Abusive Tax Shelters

GGD-83-63: Published: Aug 25, 1983. Publicly Released: Aug 25, 1983.

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In response to a congressional request, GAO reviewed Internal Revenue Service (IRS) activities in the tax shelter area.

Lately, the size and complexity of the IRS work load in the tax shelter area have strained its resources. The number of those types of tax shelters which IRS has identified as abusive have risen from 2 to 18 in 9 years, while the IRS approach to examining shelter returns requires that virtually every shelter return identified as potentially abusive be examined. Examiner staff-days devoted to the Tax Shelter Program have risen from 2.5 percent of direct examination time during fiscal year (FY) 1979 to 8.9 percent during the first 6 months of FY 1983. Examining abusive shelters imposes a large administrative burden on examiners because an abusive shelter is often set up as a partnership and examining such a shelter often requires the control of several returns, for different tax years, and in different districts. GAO found that about 60 percent of examiner time is spent on administrative tasks with only 40 percent applied to examining returns and developing examination issues. At the present pace, tax shelter returns take more than 4 years to process. To compound the problem, about 50 percent of completed tax shelter examinations are appealed, involving 90 percent of all potential revenue from these examinations. IRS has focused top management attention on this area and devised new approaches to reduce the number of cases in its inventory. In addition, Congress has provided legislative relief, most recently, in the Tax Equity and Fiscal Responsibility Act (TEFRA), which gives IRS several enforcement tools and simplifies the administrative aspects of partnership examinations.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The MIS database was modified to produce appropriate reports to evaluate tax shelter programs. Partial implementation of a new Partnership Central System began in January 1986. Full implementation of the system was completed in January 1987.

    Recommendation: The Commissioner of Internal Revenue should develop such management information as is appropriate and necessary to more accurately gauge the current size of the problem of abusive tax shelters and the impact IRS is having on noncompliance in this regard.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: Project and activity codes were implemented to identify prefiling notification cases and time spent on tax shelter cases. The Partnership Control System is monitoring TEFRA inventory, and TEFRA cases are now being identified.

    Recommendation: The Commissioner of Internal Revenue should develop such management information as is appropriate and necessary for determining whether TEFRA and administrative changes have eliminated the causes of past problems and for identifying, as early as possible, any other obstacles to effective and efficient program operations. If IRS finds that the must-work approach is still resulting in administrative difficulties, the Commissioner of Internal Revenue should: (1) reassess the goal of expeditiously examining every abusive shelter which is identified, in light of this goal's impact on the IRS examination plan; (2) formulate, if this goal is found to be no longer attainable, criteria for deciding which abusive tax shelters are most in need of examination; and (3) make more extensive use of centralized support staffs and computer, rather than manual, systems to further free examiners from clerical and administrative tasks.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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