Tax Administration: More Criteria Needed on IRS' Use of Financial Status Audit Techniques

GGD-98-38 Published: Dec 30, 1997. Publicly Released: Dec 30, 1997.
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Highlights

Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) use of financial status audit techniques to: (1) estimate how frequently IRS used financial status audit techniques in audits closed in tax years prior to the 1994 initiative (1992 and 1993) and in tax years following the 1994 initiative (1995 and 1996); (2) consider how IRS' need to contact taxpayers for additional taxpayer information when using financial status techniques might intrude on taxpayers; (3) estimate the audit results from using financial status audit techniques in terms of the amount of adjustments to reported income; and (4) determine how IRS applied its audit standards, quality controls, and measurement of audit quality to the use of financial status techniques.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Internal Revenue Service To provide better assurance that financial status techniques are not overly burdensome and intrusive to taxpayers and that the most productive use is made of limited audit resources, the Commissioner of Internal Revenue should further pursue efforts to develop more specific criteria on when and to what extent to use financial status techniques. To help develop and refine these criteria, the Commissioner of Internal Revenue should ensure that these specific criteria on using the techniques are reflected in the instructions for interpreting the audit standards and the evaluations through the Examination Quality Measurement System and its reason codes of how well audits meet these standards.
Closed – Implemented
IRS has revised the guidelines on using and evaluating (through EQMS) the use of financial status techniques. Audit Standard 3 covers use of the techniques. The EQMS reviewer guide provides criteria on using and evaluating the use of the techniques. The EQMS reviewer's form and guide contains the reason codes.
Internal Revenue Service To provide better assurance that financial status techniques are not overly burdensome and intrusive to taxpayers and that the most productive use is made of limited audit resources, the Commissioner of Internal Revenue should further pursue efforts to develop more specific criteria on when and to what extent to use financial status techniques. To help develop and refine these criteria, the Commissioner of Internal Revenue should monitor the use of financial status techniques under the new criteria to identify factors associated with successful and unsuccessful usage in terms of when and to what extent to use the techniques as well as whether the usage identified unreported income and if so, in what amounts.
Closed – Implemented
IRS has created a form under EQMS to monitor the use of the techniques under the new criteria and guidelines. The form is to be used to track which technique was used and the amount of audit adjustments associated with the technique used.
Internal Revenue Service To provide better assurance that financial status techniques are not overly burdensome and intrusive to taxpayers and that the most productive use is made of limited audit resources, the Commissioner of Internal Revenue should further pursue efforts to develop more specific criteria on when and to what extent to use financial status techniques. To help develop and refine these criteria, the Commissioner of Internal Revenue should use these monitoring results to evaluate whether to make further revisions to the criteria on using the techniques or in the system by which IRS monitors their use.
Closed – Implemented
IRS has collected data on the use of financial status audit techniques during April to December 1999. On the basis of that data, IRS decided during April 2000 to provide more automated guidance and training to its auditors.

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