Under its 1997 compliance initiative proposal (CIP), IRS is attempting to link IGPs to a larger research framework and better manage IGPs to make them more useful for doing compliance research. IGPs Nationwide and in Georgia

IRS Examination staff can run IGPs in IRS’ National Office, its 33 district offices, and its 10 service centers. Recent IGP Results in IRS’ Georgia District

For fiscal years 1994 through 1996, IRS provided information on 76 IGPs that were open at some time during these years in the Georgia District. Over half of these IGPs (44) focused on four types of taxpayers: (1) businesses that potentially underreported income or overreported expense deductions; (2) businesses that potentially did not properly report or pay taxes, such as excise taxes on fuel, chemicals, or heavy vehicle use; (3) individual taxpayers who potentially claimed an improper exemption for dependents, a filing status (e.g., head of household), or earned income credit; and (4) businesses and individual taxpayers who potentially did not file required tax returns. Of the 76 IGPs, 41 were closed as of June 1997. The audit results for the 41 IGPs also varied widely. Of the 32 projects involving audits, 23 were closed after auditing fewer than 50 returns each. The additional recommended tax plus penalty amounts per IGP ranged from $0 (in the 9 IGPs closed without any audits) to $269 million; of the 32 IGPs with audits, 11 recommended total additional tax amounts that exceeded $500,000, and 7 recommended total amounts exceeding $1 million. Table I.3 reports the audit results of projects that were closed as of June 1997. IGP Controls and Procedures

For years, IRS has had various controls and procedures in using IGPs as audit selection tools, including the approval and review of proposed projects, independence in the selection of returns, and limits on the duration of the audit phase. To identify the number of IGPs open both nationwide and in Georgia in fiscal years 1994 through 1996, we reviewed available records from IRS’ National Office and Georgia District. According to officials, IRS began a total restructuring in fiscal year 1994 that reduced the number of district offices from 63 to 33 and shifted the responsibility for maintaining IGP records. We focused our efforts on all IGPs that were open at any time during fiscal years 1994 through 1996. To determine whether the complexity of the Internal Revenue Code contributed to the level of noncompliance among business taxpayers who prepared their own tax returns.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Internal Revenue Services's (IRS) use of Information Gathering Projects (IGP), focusing on: (1) the number of IGPs nationwide and in IRS' Georgia District during fiscal years 1994 through 1996; (2) descriptions and results of IGPs in Georgia during fiscal years 1994 through 1996; and (3) controls and procedures IRS has in place for IGPs.

What GAO Found

GAO noted that: (1) IRS reported that it had about 1,000 IGPs open nationwide during both fiscal year (FY) 1995 and FY 1996; (2) data on the nationwide number of IGPs in FY 1994 were not readily available; (3) according to IRS officials, nationwide tracking records were discarded or lost during IRS' reorganization efforts, which involved consolidating 63 districts into 33 and shifting responsibility for IGP records; (4) of the 76 IGPs that were open in Georgia during fiscal years 1994 through 1996, over half focused on: (a) business taxpayers that potentially underreported their income or overreported expenses; (b) business taxpayers that potentially did not properly report or pay taxes, such as the excise tax on fuels; (c) individual taxpayers who potentially claimed an improper exemption, filing status, or earned income credit; and (d) business and individual taxpayers who potentially did not file required tax returns; (5) of these 76 Georgia IGPs, 41 had closed as of June 1997; (6) the duration of these closed audits varied from several months to several years; (7) the audit results, such as additional taxes recommended plus penalties, also varied, with the additional tax amounts ranging from $0 to $269 million; (8) for most of these IGPs, IRS audited relatively few tax returns; (9) IRS closed about three-quarters of these IGPs after auditing fewer than 50 returns, including 9 that closed without any audits being done; (10) for years, IRS has had several controls and procedures designed to limit the vulnerability of IGPs to misuse as an audit selection technique; (11) IRS has always required that proposed IGPs undergo review and approval processes at high levels within the Examination Division in each of the districts; (12) to oversee IGPs, IRS has a unit at each of its 33 district offices; (13) these units monitor how returns were selected for audit and whether the audit results justified continuance of the project; (14) further, IRS recently has started adding processes to enhance the contribution of IGPs to compliance research; (15) in 1997, IRS began implementing compliance initiative proposal processes; and (16) IRS is involving its Research Division in the processes for approving and overseeing IGPs in the hope of making IGPs more useful for research purposes.