Tax Administration:

Difficulties in Accurately Estimating Tax Examination Yield

GGD-88-119: Published: Aug 8, 1988. Publicly Released: Aug 8, 1988.

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In response to a congressional request, GAO examined the Internal Revenue Service's (IRS): (1) computation of the revenue it actually realized as a result of its implementation of a revenue initiative, which added 2,500 to the examination staff; and (2) assumptions in estimating the yield derived from the increased staff.

GAO found that: (1) since 1978, IRS has consistently underestimated the amount of additional taxes that its examination staff would recommend each year; (2) the annual underestimate averaged 28 percent over the period and ranged from about $100 million in 1978 to about $3.8 billion in 1986; (3) it was difficult for IRS to estimate the exact amount of revenue that it would generate by adding a specific number of auditors in 1987, since it did not use all of the staff years Congress authorized; and (4) IRS used data from audits it closed in 1972 instead of current information in developing its estimates. GAO also found that: (1) to support its request for additional staff years, IRS expected to audit 120,000 more returns and assess $829 million in additional taxes, penalties, and interest; (2) IRS calculated that it would generate $847.5 million in assessed taxes, penalties, and interest in 1987 as a result of the additional audit staff; (3) IRS based its calculation on an increase in staff that was more than double what actually occurred; and (4) IRS did not take into account the amount of potential revenue lost because it used experienced staff to train the new staff.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress will probably not decide what to do until after IRS completes its attempt to develop a methodology for identifying actual audit revenues. IRS is implementing a system that will allow it to determine the amount of actual audit revenues. If IRS does not use that data in its budget submissions, thus precluding the need for Congress' intervention, GAO will issue a follow-up report.

    Matter: Congress should consider requiring IRS to include in its annual budget submission information on the actual amount of revenues derived from its audits.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS issued a report in November 1989 that: (1) discussed major criticisms of its estimating process, including those made in the GAO report; (2) introduced a revised interim methodology for estimating Exam revenues; and (3) set forth numerous short and long-term improvements that were underway or planned.

    Recommendation: The Commissioner of Internal Revenue should complete a systematic reexamination and validation of the IRS estimating process. This should include an analysis of the use of historical trends, updating of the audit tracking data used to compute assessment rates, validation of the average yield assumptions, and writing procedures to demonstrate the quality controls used in the process.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: In its budget request for fiscal year (FY) 1990, IRS labeled the yield figures for FY 1988 as Estimated Actuals. This is too minor to justify an accomplishment report.

    Recommendation: The Commissioner of Internal Revenue should also fully disclose in its budget requests that assessed amounts shown as actual are really only estimates.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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