After considering its audit resources and manually reviewing the audit potential of every CEP return, IRS selects returns for audit. 3. Direct audit hours: A comparison of 1988 and 1994 shows that IRS invested 25 percent more hours in auditing large corporations, particularly those with lower assets. 4. Additional recommended taxes: This amount increased 16 percent from about $1.6 billion in 1988 to $1.9 billion in 1994. IRS Finance officials provided data indicating that IRS collected 23 percent of the taxes recommended and 68 percent of the taxes assessed as of July 1995 for the audits closed in fiscal years 1992 through 1994. Using only the direct audit costs, we calculated that IRS recommended $56 and assessed $15 in taxes for each dollar directly spent on auditing large corporations from 1988 through 1994. Objectives, Scope, and Methodology

Our objectives were to (1) analyze audit trends for large corporations not in the Coordinated Examination Program (CEP) for fiscal years 1988 through 1994, (2) compute the portion of taxes recommended in audits that were actually assessed, and (3) develop and compare profiles of audited large corporations with those not audited. If IRS recommended additional taxes, large corporations could agree to pay or appeal these taxes. Computing the Assessment Rate

To compute the assessment rate—the percentage of recommended taxes ultimately assessed after audits—we did a computer data match of corporate income tax returns between two IRS databases. For the other tax credits reported in table IV.2, the sampling errors exceeded 5 percent for both audited and nonaudited corporations. Over the 7 years, the additional taxes recommended per audited return averaged about $189,000 for all large corporations. By asset class, the rates ranged from 20 percent to 38 percent. By including all but two IRS districts doing large corporate audits, the lowest rate was negative 20 percent. Less than 1 percent.
Why GAO Did This Study

GAO reviewed the results of the Internal Revenue Service's (IRS) efforts to audit the tax returns of about 45,000 large corporations, focusing on: (1) audit trends for fiscal years 1988 through 1994; (2) the portion of taxes recommended by agents that were eventually assessed; and (3) the profiles of audited large corporations compared with those of nonaudited corporations.

What GAO Found

GAO found that: (1) for every dollar invested in large corporation audits, IRS ultimately assessed $15 in additional taxes for the years 1988 through 1994; (2) IRS invested more hours in directly auditing large corporations but recommended less additional tax per hour invested in 1994 compared to 1988; (3) in 1994, large corporations appealed 66 percent of the additional taxes that IRS recommended in its audits; (4) between 1988 and 1994, IRS assessed 27 percent of the recommended additional taxes either after agreement or resolution in appeals; (5) IRS believed that the assessment rate was not an accurate measure of audit effectiveness, since various factors outside the audit could lower the rate; (6) the assessment rates ranged from 20 to 38 percent for four asset classes and from 0 to 103 percent by IRS district, but the reasons for the disparities were unclear; (7) the rates for audits closing without any adjustments has rapidly increased, raising questions about how IRS selects returns for audits; and (8) audited corporations tended to report higher average incomes, tax liabilities, and other tax amounts than nonaudited corporations.