Tax Administration: Compliance Measures and Audits of Large Corporations Need Improvement
GGD-94-70
Published: Sep 01, 1994. Publicly Released: Oct 17, 1994.
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Highlights
Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) Coordinated Examination Program (CEP) to audit the largest corporations' tax returns, focusing on: (1) whether large corporations pay all the taxes they owe; (2) the amount of additional taxes collected after appeals and litigation; (3) factors that reduce the amounts collected; and (4) the status of ongoing changes to CEP to address those factors.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | The Commissioner of Internal Revenue should use a 22.1-percent collection rate when estimating the taxes that will ultimately be collected from CEP audits until more reliable information becomes available. |
Closed – Not Implemented
IRS disagrees with using a 22-percent collection rate, but has taken action to develop reliable information on collections. Because of the passage of time and until IRS develops this information, GAO no longer knows that 22 percent is a valid rate.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should correct the factors in IRS databases that caused the CEP collection rate to be understated or overstated (i.e., net operating losses and refund claims after settlement) and use the corrected results to update the collection rate. |
Closed – Implemented
IRS agrees and developed the Enforcement Revenue Information System (ERIS) to track collections in CEP. ERIS has accounted for many but not all factors that overstate or understate the collection rate (e.g., net operating loss deductions). Given IRS' refocusing of its computer modernization and its focus on Y2K issues, IRS' actions have sufficiently met GAO's intent, and this recommendation should be closed.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should test the cost-effectiveness and accuracy of measuring CEP corporate compliance and the related tax gap by auditing samples of unaudited CEP returns and audited CEP returns in greater depth. |
Closed – Not Implemented
IRS believes that unaudited returns already receive in-depth classification reviews and that expanding these audits would burden taxpayers and IRS. With IRS' budget limitations, IRS has no plans to do this test.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should give the CEP Executive Director authority over CEP budget resources and staff allocations at the district office level. |
Closed – Not Implemented
The Commissioner's proposed restructuring of IRS combined the responsibility and authorization for budget and resources needed to improve the audits of CEP corporations and other large corporations as well as mid-sized corporations. After some discussion, GAO decided that this consolidation does not meet the intent of the recommendation. With the new restructuring, IRS will not be acting on GAO's recommendation either. IRS no longer has an executive director nor district offices.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should ensure that CEP revenue agents receive adequate training on the industry they specialize in as well as on tax laws and basic auditing skills such as standards of evidence. |
Closed – Implemented
IRS agrees, and has implemented training initiatives in various areas since 1995.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should expand the measures of CEP productivity to include the percent of recommended taxes that is ultimately collected. |
Closed – Implemented
IRS agrees, and began tracking collection of CEP-recommended taxes through ERIS in 1995. In 1997, IRS developed a measure on collections and plans to develop others.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should issue regulations or propose legislation to strengthen IRS ability to obtain needed data from CEP corporations during the audit after evaluating options for obtaining needed data from corporations. |
Closed – Implemented
IRS agrees. IRS studied the problems with getting the data and implemented procedures in 1997. It plans to continue to take steps to improve its ability to obtain needed data.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should modify CEP policy to allow revenue agents to rotate among corporations in the same industries to the extent possible. |
Closed – Implemented
IRS agrees and implemented a revised rotation policy in 1996.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should more strongly propose legislative changes to resolve more recurring CEP tax disputes. |
Closed – Not Implemented
IRS acknowledged, in 1994, that it could make stronger legislative proposals. Sufficient action, however, has not been taken since 1994. In the current climate, action to strengthen legislative proposals on CEP policy issues is unlikely.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should better balance incentives to encourage communication among Appeals, CEP teams, and Chief Counsel. In addition to current IRS program measures, consideration should be given to a cross-functional standard measure, such as the collection rate, that encourages all units to work toward the overall IRS mission to collect the proper amount of tax at the least cost. |
Closed – Implemented
IRS agrees and developed one cross-functional measure and is considering others.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should improve controls to ensure that Appeals provides CEP teams with new information that taxpayers submit and an opportunity to comment just prior to settling a case. |
Closed – Implemented
IRS has made some changes to its manual that will provide new direction for returning taxpayer data to Examination revenue agents. The action taken will resolve GAO's concern on both parts of this recommendation that revenue agents be made aware of all taxpayer data so that they can revise audit recommendations, if appropriate, and be made aware of the taxpayer data considered by Appeals in final settlement.
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| Internal Revenue Service | The Commissioner of Internal Revenue should improve controls to ensure that Appeals coordinates with Counsel before deviating from standard positions on CEP tax issues by: (1) requiring coordination when Appeals concedes a substantial portion; (2) eliminating the exception on facts differing materially when Appeals settles an issue contrary to an applicable technical advice or private letter ruling; and (3) tracking settlements and coordination on disputed issues involving technical advice or private letter rulings. |
Closed – Not Implemented
Appeals had disagreed with this recommendation. GAO kept it open, believing in its need/validity. However, a provision in the 1998 Restructuring and Reform Act prohibited Appeals' interactions with other IRS parties that would appear to compromise Appeals' independence in settling tax disputes. Recent IRS guidance indicated that some interactions with Counsel fall into the prohibited category. As a result, GAO is closing this recommendation, which deals with pre-settlement interactions.
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| Internal Revenue Service | The Commissioner of Internal Revenue should improve communication of settlement decisions and aid quality control efforts by requiring Appeals to identify the existence and effects of, and any deviations from, standard positions in its written summaries on CEP settlements. |
Closed – Not Implemented
IRS Appeals has disagreed because it believes the manual guidance is sufficient. According to IRS, IRM 8(14)22 sets out the notification procedures to be followed when Appeals proposes to fully concede an issue contrary to Service Position, and a need to change these procedures is not foreseen to cover cases with less than a full concession. GAO believes that communicating Appeals' settlement decisions and rationales for any deviations from standard positions in Appeals' written summaries is worthwhile. IRS has no plans, however, to do it--at least according to its contact.
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