Tax Administration: Factors Affecting Results from Audits of Large Corporations
GGD-97-62
Published: Apr 17, 1997. Publicly Released: Apr 17, 1997.
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Highlights
GAO reviewed the Internal Revenue Service's (IRS) program to audit the tax returns of about 45,000 large corporations that are not in the Coordinated Examination Program (CEP), focusing on factors that contributed to the assessment rate and audit results.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | To improve the audits of tax returns filed by large corporations, the Commissioner of Internal Revenue should provide more specific objective criteria and procedures to guide the selection of large corporate tax returns and classification of tax issues with high audit potential across the districts. |
IRS is developing the Discriminant Analysis System (DAS) to select and classify large corporation returns. IRS is testing DAS in four phases over 5 years, starting with the smallest of the large corporations. Testing is being done to validate the DAS formulas. The first three phases have started, but have been delayed by IRS' reorganization and creation of large and mid sized business (LMSB). The last phase--involving large corporations--is underway with a projected completion date of October 2002. IRS is to update the status of many GAO recommendations after October 1, 2002. This one will be included in the review. LMSB has implemented a process of scoring returns and full implementation of a plan to place these returns in the field has been completed. With the completion of the process of return filings at Ogden, and IRS' ability to score returns and identify them post-pipeline, the identification of high-risk returns is underway. Return orders using DAS scoring as a predictor is also underway. External review of our DAS formulae is virtually completed and IRS is in the process of considering suggestions for improving the system and expanding it to other return types. Implementation was accomplished in March 2002.
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| Internal Revenue Service | To improve the audits of tax returns filed by large corporations, the Commissioner of Internal Revenue should develop criteria and procedures to guide the evaluation across the districts of the impacts of groups specializing in audits of large corporations. |
IRS has not done and has no plans to do the recommended evaluation. Since GAO issued this report, IRS reorganized, switching from functionally based (examination) to taxpayer based (small business). A 1998 Act prompted this switch, among other things. As part of this, IRS has created the LMSB (large and mid size business) division. In doing so, IRS adopted the general rule of auditing all large corporations through groups of auditors--unless using just one auditor makes more sense. Prior to this, IRS only audited the largest corporations through groups. Even so, IRS plans to evaluate all LMSB operations against strategic, operational, and program measures/standards.
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| Internal Revenue Service | To improve the audits of tax returns filed by large corporations, the Commissioner of Internal Revenue should encourage District Examination management to work with District Counsel officials on finding cost-effective ways to provide revenue agents with the necessary legal assistance. |
IRS issued an IRS-wide memo to Examination management to work with District Counsel on finding cost-effective ways to provide legal advice to revenue agents. The memo confirms that IRS will include these instructions in its manual 4260 when it is reissued.
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| Internal Revenue Service | To improve the audits of tax returns filed by large corporations, the Commissioner of Internal Revenue should require Appeals to notify Examination of new information received from a large corporation that could cause the appealed issues to not be fully sustained. |
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 the issue 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 | To improve the audits of tax returns filed by large corporations, the Commissioner of Internal Revenue should require Examination to: (1) indicate whether it wishes to review the new information; and, if so: (2) review the information and notify Appeals of the results of the review as soon as possible. |
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 require comments from Examination on cases going from Appeals to Examination within a specified timeframe, to be established by the Appeals officer.
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| Internal Revenue Service | To improve the audits of tax returns filed by large corporations, the Commissioner of Internal Revenue should require Examination management to provide feedback to its revenue agents on the final settlements that Appeals reaches with large corporations. |
IRS issued a memorandum to the field, and plans to change the manual to require feedback to be given to revenue agents on Appeals' final settlements. The memo confirms that IRS' manual 4260 will include the change when it is reissued.
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Appeals processAppellate procedureAuditing proceduresCorporationsGovernment collectionsIncome taxesInteragency relationsTax administrationTax lawTax nonpaymentTax return audits