Even so, the amount of taxes recommended (in constant dollars) dropped 23 percent per audit hour and 7 percent per audited return. In addition, IRS’ no-change rate doubled from 8 percent to 16 percent. Further, for the 7-year period, we computed that IRS assessed, on average, 27 percent of the additional taxes that IRS revenue agents recommended in these audits. Factors Affecting Assessment Rate and Audit Results

We identified four factors that affected the assessment rate and/or audit results, such as the lower recommended taxes per audit hour in 1994 compared to 1988. However, when a revenue agent tried to recommend taxes without sufficient support, such recommended taxes would not likely be sustained in Appeals, and the assessment rate would be lower. Tax Law Complicates IRS’ Audits of Large Corporations

IRS and large corporate taxpayers can have legitimate differences over how tax laws should be interpreted. Although they worked alone, these revenue agents received little assistance from district counsel or their group managers. Also, IRS’ approach for classifying and selecting these large corporate returns did not help ensure that revenue agents spent their audit time on the most noncompliant returns. In combination, these circumstances made it difficult for revenue agents to recommend taxes that had enough support to be assessed without investing a lot of time. Two reasons help explain this limited sharing with Examination staff. Conclusions

Our analysis of questionnaire responses and interviews with IRS officials identified at least four factors that contributed to the low assessment rate or decline in audit results for 1988 to 1994. IRS is taking action on both of these recommendations. Fourth, the Appeals and Examination functions did not always share information. Recommendations

To improve the audits of tax returns filed by large corporations, we recommend that the IRS Commissioner 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; develop criteria and procedures to guide the evaluation across the districts of the impacts of groups specializing in audits of large corporations; encourage District Examination management to work with District Counsel officials on finding cost-effective ways to provide revenue agents with the necessary legal assistance; require Appeals to notify Examination of new information received from a large corporation that could cause the appealed issues to not be fully sustained, and 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; and require Examination management to provide feedback to its revenue agents on the final settlements that Appeals reaches with large corporations. (1) (2) (3) (4) (5) (6)
The revenue agent's workload The revenue agent's group/case manager's workload The revenue agent's skills and knowledge The complexity of the tax laws e. Appeals resolution of disputed issues from a prior audit of this taxpayer Appeals resolution of disputed issues from a different taxpayer g. Other (Specify)
In your opinion, to what extent, if at all, do audits of large corporations unreasonably burden those taxpayers selected for audit? Similar issues for different 24. Did this return have any related entities? 11. 12. 25.
Why GAO Did This Study

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.

What GAO Found

GAO noted that: (1) IRS invested 25 percent more hours in audits of large corporations during 1994 than it did in 1988, yet it recommended 23 percent less additional tax per hour and doubled the rate at which it closed audits with no tax changes; (2) during this 7-year period, IRS assessed 27 percent of the additional taxes revenue agents recommended; (3) GAO's analysis of questionnaire responses and interviews of officials from across IRS identified at least four factors that had a negative effect on both the audit results and the assessment rate; (4) the complexity and vagueness of the tax code caused legitimate differences in interpretation between IRS and corporations over the correct tax liability; (5) this complexity and vagueness made it difficult for IRS revenue agents to find the necessary evidence to clearly support any additional recommended taxes without investing a lot of audit hours; (6) such recommended taxes were less likely to survive the IRS Office of Appeals process and be assessed; (7) also, complex and vague tax laws increased the tax burden on large corporations by increasing their uncertainty about what actions they had to take to comply with the tax code; (8) the IRS Examination Division and Office of Appeals used different performance measures; (9) this difference in measures resulted in a lower assessment rate; (10) these revenue agents worked alone on complex audits without much assistance from district counsel or their group managers, who tended to be responsible for managing all types of audits; (11) further, audit staff had a limited basis on which to classify and select returns that had the most audit potential; (12) IRS' approach for these large corporate returns gave a great deal of discretion to audit staff, however the staff had little information on previously audited corporations or industry issues to serve as guideposts; (13) all these aspects can contribute to a reduction in the amount of taxes recommended per audit hour and, with the possible exception of the problems in selecting returns, can affect the assessment rate; (14) Appeals usually did not share with Examination information that could be used to educate revenue agents; (15) even if Appeals did share information, revenue agents did not always have time to review the new information due to time pressures to do other audits; (16) although Appeals usually shared the final settlement on disputed issues, Examination management often did not distribute those results to the revenue agents; and (17) such feedback can help agents decide whether and how to audit similar issues in the future with better support of any recommended taxes.