Audit workpapers also provide the principal support for the auditor’s report, which is to be provided to the audited taxpayer, on findings and conclusions about the taxpayer’s correct tax liability. According to IRS officials, these files may contain documentation on case reviews by group managers even though such documentation may not be in the workpapers. On the basis of our review of IRS’ audit workpapers, we found that IRS auditors did not always meet the requirements laid out under this workpaper standard. The following are examples of some of the problems we found during our review of IRS audit workpapers:
Tax adjustments shown in the workpapers, summaries, and reports did not agree. They are a tool to use in formulating and documenting the auditor’s findings, conclusions, and recommended adjustments, if any. Documentation of Supervisory Review of Audit Workpapers Was Limited

IRS’ primary quality control mechanism is supervisory review of the audit workpapers to ensure adherence to the audit standards. As a result, the files lacked documentation that IRS group managers reviewed workpapers during the audits to help ensure that the recommended tax adjustments were supported and verified, and that the audits did not unnecessarily burden the audited taxpayers. We found little documentation in the workpapers that group managers reviewed workpapers before sharing the audit results with the taxpayer. On the basis of our analysis of the sampled audits closed during fiscal years 1995 and 1996, we estimated that about 6 percent of the workpapers in the sample population contained documentation of group manager review during the audits. In discussions about our estimate with IRS Examination Division officials, they noted that all unagreed audits (i.e., those audits in which the taxpayers do not agree with the tax adjustments) are to be reviewed by the group managers, and they pointed to the manager’s initials on the notice of deficiency as documentation of this review. We did not count reviews of these notices in our analysis because they occurred after IRS sent the original audit report to the taxpayer. Further, we analyzed all unagreed audits in our sample to see how many had documentation of group manager review during the audit, rather than after the audit results were sent to the taxpayer; this would be the point at which the taxpayer either would agree or disagree with the results. We found documentation of such a review in 12 percent of the unagreed audits. The Examination Division officials also said that a group manager may review the workpapers without documentation of that review being recorded in the workpapers. In these monthly workload reviews, supervisors are to monitor time charges to an audit. These questions cannot be answered conclusively, however, because the amount of supervisory review cannot be determined.
Why GAO Did This Study

GAO reviewed the condition of the Internal Revenue Service's (IRS) audit workpapers, including the documentation of supervisory review.

What GAO Found

GAO noted that: (1) during its review of IRS' financial status audits, the workpapers did not always meet the requirements under IRS' workpaper standards; (2) standards not met in some audit workpapers included the expectation that: (a) the amount of tax adjustments recorded in the workpapers would be the same as the adjustment amounts shown in the auditor's workpaper summary and on the report sent to the taxpayer; and (b) the workpaper files would contain all required documents to support conclusions about tax liability that an auditor reached and reported to the taxpayer; (3) these shortcomings with the workpapers are not new; (4) GAO found documentation on supervisory review of workpapers prepared during the audits in an estimated 6 percent of the audits in GAO's sample; (5) in the remaining audits, GAO found no documentation that the group managers reviewed either the support for the tax adjustments or the report communicating such adjustments to the taxpayer; (6) IRS officials indicated that all audits in which the taxpayer does not agree with the recommended adjustments are to be reviewed by the group managers; (7) if done, this review would occur after the report on audit results was sent to the taxpayer; (8) even when GAO counts all such unagreed audits, those with documentation of supervisory review would be an estimated 26 percent of the audits in GAO's sample population; (9) GAO believes that supervisory reviews and documentation of such reviews are important because they are IRS' primary quality control process; (10) proper reviews done during the audit can help ensure that audits minimize burden on taxpayers and that any adjustments to taxpayers' liabilities are supported; (11) although Examination Division officials recognized the need for proper reviews, they said IRS group managers cannot review workpapers for all audits because of competing priorities; (12) these officials also said that group managers get involved in the audit process in ways that may not be documented in the workpapers; (13) they stated that these group managers monitor auditors' activities through other processes, such as by reviewing the time that auditors spent on an audit, conducting on-the-job visits, and talking to auditors about their cases and audit inventory; and (14) in these processes, however, the officials said that group managers usually were not reviewing workpapers or validating the calculations used to recommend adjustments before sending the audit results to the taxpayer.