In July  2004, it convened a roundtable discussion on the effect of tax services  provided by auditors on auditor independence. IRS considers  listed transactions, which must be reported on tax returns sent to IRS, to be  abusive. The Joint Committee on Taxation has described listed  transactions as having a tax avoidance purpose, with the tax benefits  subject to disallowance under existing law. Nonlisted transactions generally are  transactions reportable to IRS that may have some characteristics of  abusive shelters but are not, and may never be, listed. Scope and Methodology

To address our first two objectives—relating to Fortune 500 companies,  officers, and directors obtaining tax shelter services from their company  auditors--we matched data from two sources—S&P and IRS. IRS’s database included information disclosed  to or discovered by IRS on companies, individuals, and other taxpayers  who used tax shelters. Although we do not know for  sure that a company obtained tax shelter and auditing services from an  accounting firm at exactly the same time, we considered it a match when at  least one of the tax years for which the company received a tax benefit  matched a fiscal year from 1998 through 2003 for which the accounting firm  was the company’s auditor. Although they were not representative of change overall, we  believe that the 8 companies illustrate some of the changes that have  occurred in recent years related to auditors providing tax services. The 61 companies had 82 transactions worth about  $3.4 billion in estimated potential tax losses over many years for  transactions that were generally reportable on tax returns sent to IRS. Despite these data limitations, the numbers we present in this report  provide a general indication of the extent to which Fortune 500 companies  did use their external auditor for tax shelter services. According to Available but Limited Data, Officers or Directors Associated with 17 Fortune 500 Companies Used Tax Shelters That Had Been Promoted by the Company’s Auditor

As shown in table 4, one or more officers or directors of 17 Fortune 500  companies used tax shelters that were promoted by an accounting firm that  was the Fortune 500 company’s external auditor during at least one of the  years that the officer or director benefited from the tax shelter. According to Their Representatives, All Case Study Companies Recently Changed How They Acquire Tax Services from Their Auditors

According to their representatives, all eight of our case study companies  adopted or refined policies or practices in 2002 or 2003 requiring their audit  committees to pre-approve tax services to be obtained or governing the tax  services provided. According to company representatives, all eight case study companies  obtained tax services from their auditors during the period from 2000  through 2003. Only two of the companies told us of obtaining tax shelter  services, and one of them obtained the services before 2000. Six of Eight Case Study Companies Said They Allowed Officers and Directors to Obtain Tax Services from the External Auditor, but Four Said They Then Stopped

Although six of our case study companies reported that officers or  directors at some time since 2000 used the auditor for some tax services,  such as tax return preparation, officials told us that four of the companies  in 2002 or 2003 adopted policies prohibiting officers from using the auditor  for the services in the future. In contrast to the situation with tax services in  general, none of the companies reported officers or directors obtaining tax  shelter services from the company auditor. The Commissioner also said that IRS changes and recent legislation will  enable IRS to address the database limitations we note, several of which  IRS had already identified and was working to overcome.
Why GAO Did This Study

Recent legislative and regulatory changes have addressed the relationship between auditor-provided tax services and auditor independence. At this time, the federal regulatory community is exploring further changes. To contribute to the discussion surrounding these changes, GAO's objectives were to determine (1) according to Internal Revenue Service (IRS) data, how many Fortune 500 companies obtained tax shelter services from their auditor; (2) according to IRS data, in how many Fortune 500 companies did the auditor provide the services to individual company officers or directors; and (3) whether selected Fortune 500 case study companies changed how they obtain tax services from their auditor in recent years. For the first two objectives, GAO used IRS and Standard and Poor's data after finding they were sufficiently reliable for our work. GAO counted a company, officer, or director as obtaining a tax shelter service from the company's external auditor when an auditor that IRS identified as promoting a tax shelter also audited the company in at least one year that the shelter was in effect. For the third objective, independent of any IRS information, GAO selected case studies on the basis of geographic location and previous GAO contact. The companies are illustrative in nature and not intended to be representative of other companies.

What GAO Found

IRS data available on tax shelter services sometimes predate legislative and regulatory changes reflecting a heightened focus on auditor independence. However, both during this earlier period covered by some of the data and also following the recent changes, auditors were allowed to provide tax services, including tax shelter services, to firms they audited. According to IRS data, 61 Fortune 500 companies obtained tax shelter services from their external auditor during 1998 through 2003 for transactions generally reportable on tax returns sent to IRS. IRS considered some reportable transactions abusive, with tax benefits subject to disallowance under existing law, and other transactions to possibly have some traits of abuse. Estimated multi-year potential tax revenue lost to the federal government from the 61 companies' auditor-related transactions was about $3.4 billion (about $1.8 billion in categories IRS considered abusive). In 17 companies, at least one officer or director used the company's auditor to obtain individual tax shelter services. These numbers are imprecise because they have important limitations. These limitations, such as some transactions in IRS's database without tax shelter providers listed, are fully discussed in this report. Commenting on a draft of this report, IRS said that ongoing changes and recent legislation will enable it to address the data limitations noted. According to their representatives, all eight case study companies adopted or refined policies or practices in 2002 or 2003 for pre-approving tax services or governing the tax services provided, such as who would provide them. All eight reported using their auditor for tax services during 2000 through 2003. Two told us of obtaining tax shelter services from their auditor, but one of them obtained the services before this period. Six of the eight reported officers or directors obtaining individual tax services from the auditor at some time since 2000, with four disallowing the practice later. None reported officers or directors using the auditor for individual tax shelter services.