Corporate Tax Compliance:

IRS Should Determine Whether Its Streamlined Corporate Audit Process Is Meeting Its Goals

GAO-13-662: Published: Aug 22, 2013. Publicly Released: Sep 23, 2013.

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What GAO Found

Officials GAO interviewed inside and outside of the Internal Revenue Service (IRS) generally agreed on the potential major benefits of the Compliance Assurance Process (CAP) to taxpayers and IRS as reflected in its goals. These goals include saving IRS time and resources to use for other audits while ensuring compliance, and reducing taxpayer burden while increasing certainty on tax amounts now owed.

Contrary to its guidelines, IRS has not evaluated whether the goals are being achieved or the process should be expanded. IRS officials told GAO that IRS will start developing an evaluation plan in 2013, but did not provide dates for when an evaluation would be completed. IRS cannot show the extent to which the goals are being met for two reasons.

  • Some goals do not have measures and none have targets. Although developing measures and setting targets for goals (such as ensuring taxpayer compliance) can be difficult, not doing so limits IRS's ability to determine whether the process is working as intended.
  • IRS does not have consistent and complete data for CAP. Inconsistent data make some analyses difficult to do. For instance, the average annual staff hours spent auditing a return could not be analyzed because the code to track staff time charges sometimes included non-CAP time charges. Incomplete data did not allow IRS to track progress for some goals. While IRS audit teams document tax issues in case files, IRS does not compile the data to track issue resolution. As a result, IRS cannot readily determine whether audit teams are resolving issues uniformly or identifying emerging tax compliance issues. Similarly, IRS does not have a system to track resource savings. Without a system, IRS cannot know the amount of saved resources or plan for their reallocation.

IRS has been moving taxpayers into Compliance Maintenance without documenting a plan to ensure, among other things, that IRS has the capacity to assimilate these taxpayers in an expedited fashion, as intended. In addition, IRS audit staff had concerns about guidance on moving taxpayers in and out of this phase. IRS clarified the guidance in May 2013, but has not verified whether the audit staff understand it. Without verification, IRS does not have reasonable assurance that the audit staff understand which taxpayers are right for Compliance Maintenance and when it would be appropriate to remove them.

IRS is addressing difficulties in coordinating CAP with other compliance processes. Difficulties include resolving some complex tax issues within the expedited time frames, and ensuring that all IRS specialists who assist audit teams understand the process. It is too early to tell whether IRS's efforts will work.

Why GAO Did This Study

IRS audits of the tax returns filed by large corporations take four years, on average, to complete. Additional years can be spent in appeals. This is costly to IRS and creates years of uncertainty about a large corporation's actual tax liability. In response, IRS developed CAP in 2005. Under this process, IRS and taxpayers agree on how to report tax issues before the return is filed: compliant and cooperative taxpayers can get a streamlined IRS review of their tax return in a phase called Compliance Maintenance. GAO was asked to assess this process. In this report, GAO (1) describes the goals and potential benefits of the process, (2) assesses IRS's efforts to determine whether these goals are met, (3) assesses IRS's readiness to move more taxpayers into Compliance Maintenance, and (4) describes IRS's efforts to coordinate the process with its existing compliance processes. GAO reviewed IRS documentation and data, interviewed IRS officials and corporate tax experts, and held focus groups with tax executives of large corporations and with IRS audit staff.

What GAO Recommends

GAO recommends that IRS evaluate the process, develop measures and targets for the goals, consistently capture data to track goal progress, track resolution of tax issues and resource savings, develop a plan to expand Compliance Maintenance, and verify that audit staff understand attempts to clarify related guidance. In written comments, IRS agreed with our recommendations.

For more information, contact James R. White at (202) 512-9110 or whitej@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Internal Revenue Service (IRS) developed an evaluation plan for the Compliance Assurance Process (CAP) in June 2014, as GAO recommended in August 2013. IRS's evaluation plan includes performance measures and targets used to track progress against the program goals. IRS plans to evaluate CAP annually starting from fiscal year 2014. However, because IRS does not have plans to expand CAP, the evaluation plan is not intended to determine whether and how much to expand it. Nonetheless, conducting a CAP-wide evaluation can help answer decision makers' questions about the basic reasons the program exists and the continuing need for it. Such information could also help IRS evaluate whether CAP is meeting its goals.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should develop an evaluation plan for CAP, using IRS's guidelines for conducting program evaluations, that can (1) track progress against the goals, and (2) determine whether and how much to expand CAP.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Services and Enforcement

  2. Status: Closed - Implemented

    Comments: The Internal Revenue Service (IRS) developed an evaluation plan for the Compliance Assurance Process (CAP) in June 2014, as GAO recommended in August 2013. IRS's evaluation plan includes performance measures and targets used to track progress against the program goals. IRS plans to evaluate CAP annually starting from fiscal year 2014. However, because IRS does not have plans to expand CAP, the evaluation plan is not intended to determine whether and how much to expand it. Nonetheless, conducting a CAP-wide evaluation can help answer decision makers' questions about the basic reasons the program exists and the continuing need for it. Such information could also help IRS evaluate whether CAP is meeting its goals.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should develop an evaluation plan for CAP, using IRS's guidelines for conducting program evaluations, that can (1) track progress against the goals, and (2) determine whether and how much to expand CAP.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Office of the Commissioner: Principal Deputy Commissioner of Internal Revenue

  3. Status: Closed - Implemented

    Comments: The Internal Revenue Service (IRS) has developed performance measures and targets for each of its three Compliance Assurance Process (CAP) goals and tracks progress monthly using its CAP Balanced Measures Scorecard and CAP Measures Report. For example, for its CAP goal on ensuring compliance through enhanced efficiency in issue identification and resolution, IRS measures progress using the total number of CAP cases and returns closed, among others.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should develop measures for each CAP goal and set related targets.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Services and Enforcement

  4. Status: Closed - Implemented

    Comments: The Internal Revenue Service (IRS) has developed performance measures and targets for each of its three Compliance Assurance Process (CAP) goals and tracks progress monthly using its CAP Balanced Measures Scorecard and CAP Measures Report. For example, for its CAP goal on ensuring compliance through enhanced efficiency in issue identification and resolution, IRS measures progress using the total number of CAP cases and returns closed, among others.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should develop measures for each CAP goal and set related targets.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Office of the Commissioner: Principal Deputy Commissioner of Internal Revenue

  5. Status: Closed - Implemented

    Comments: The Internal Revenue Service (IRS) captures Compliance Assurance Process (CAP) data on a monthly basis to track progress against the three goals through its CAP Balanced Measures Scorecard and CAP Measures Report. Specifically, the scorecard includes performance measures and related targets while the report includes performance measures which link to the three goals. In addition, IRS stated that it would evaluate CAP annually starting from fiscal year 2014.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should consistently and completely capture data needed to track progress against the CAP goals.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Services and Enforcement

  6. Status: Closed - Implemented

    Comments: The Internal Revenue Service (IRS) captures Compliance Assurance Process (CAP) data on a monthly basis to track progress against the three goals through its CAP Balanced Measures Scorecard and CAP Measures Report. Specifically, the scorecard includes performance measures and related targets while the report includes performance measures which link to the three goals. In addition, IRS stated that it would evaluate CAP annually starting from fiscal year 2014.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should consistently and completely capture data needed to track progress against the CAP goals.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Office of the Commissioner: Principal Deputy Commissioner of Internal Revenue

  7. Status: Closed - Implemented

    Comments: During GAO's review of the Internal Revenue Service's (IRS) Compliance Assurance Process (CAP), GAO reported on how IRS tracked issues that were identified through CAP. While the Issue Management System (IMS) included a voluntary field for the type of issues audited, IRS did not have assurance that the issue data were consistent and complete. In response to GAO's August 2013 recommendation, IRS now requires CAP teams to use the Issue Resolution Agreement (IRA) in IMS if an IRA is prepared. Specifically, the Internal Revenue Manual 4.51.8.5(22) states that IRAs should be prepared after the IRS and a taxpayer have completely addressed and resolved an item or issue. Furthermore, GAO reported that IRS did not track whether CAP was identifying emerging tax issues which could create a risk that some IRS audits might miss such issues or treat taxpayers inconsistently. In response, IRS stated that new or emerging issues identified through CAP are shared agencywide on its intranet web site.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should track all CAP tax issues and at a minimum, identify (1) whether they are resolved or not resolved, and (2) whether any are new or emerging issues that should be shared IRS-wide.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Services and Enforcement

  8. Status: Closed - Implemented

    Comments: During GAO's review of the Internal Revenue Service's (IRS) Compliance Assurance Process (CAP), GAO reported on how IRS tracked issues that were identified through CAP. While the Issue Management System (IMS) included a voluntary field for the type of issues audited, IRS did not have assurance that the issue data were consistent and complete. In response to GAO's August 2013 recommendation, IRS now requires CAP teams to use the Issue Resolution Agreement (IRA) in IMS if an IRA is prepared. Specifically, the Internal Revenue Manual 4.51.8.5(22) states that IRAs should be prepared after the IRS and a taxpayer have completely addressed and resolved an item or issue. Furthermore, GAO reported that IRS did not track whether CAP was identifying emerging tax issues which could create a risk that some IRS audits might miss such issues or treat taxpayers inconsistently. In response, IRS stated that new or emerging issues identified through CAP are shared agencywide on its intranet web site.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should track all CAP tax issues and at a minimum, identify (1) whether they are resolved or not resolved, and (2) whether any are new or emerging issues that should be shared IRS-wide.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Office of the Commissioner: Principal Deputy Commissioner of Internal Revenue

  9. Status: Open

    Comments: As of September 2015, the Internal Revenue Service (IRS) has not taken any further action to close this recommendation. Similar to GAO's March 2015 update, IRS is tracking savings by analyzing and comparing the workload inventory of account coordinators who handle Compliance Assurance Process (CAP) cases against team coordinators who handle non-CAP cases, as GAO recommended in August 2013. GAO's review of IRS's CAP evaluation plan did not show how such a workload comparison proved dollar savings from CAP; our review of the average caseload did show that for tax years 2010 through 2012, account coordinators handling CAP cases exclusively or in conjunction with non-CAP cases have a larger caseload than team coordinators handling non-CAP cases. In addition, IRS has not developed a plan for reinvesting any savings, as GAO recommended in August 2013, which IRS could use to increase audit coverage. IRS stated that it is difficult to measure the impact of CAP on audit coverage because audit coverage is based on staffing and compliance priorities. Specifically, the primary driver of audit coverage is staffing. As the number of examiners has decreased, the coverage of large business returns has decreased. In addition, compliance priorities factor into audit coverage. CAP officials said that they have less than 200 CAP participants and nearly 300,000 large return business taxpayers. Because CAP is a small program in terms of the number of large return business taxpayers, they think that its ability to drive an increase in audit coverage is minimal. In addition, IRS officials said that while quantifying monetary savings would be impossible, it has reinvested its savings by expanding account coordinators' caseload to increase efficiency. IRS plans to continue to invest any efficiencies achieved by CAP towards additional compliance workload. However, without a plan for tracking savings and using them cost effectively, such as to increase audit coverage, IRS cannot be assured that the savings are effectively invested in either CAP or non-CAP taxpayers with a high compliance risk.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should track savings from Compliance Maintenance and CAP overall and develop a plan for reinvesting any savings.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Services and Enforcement

  10. Status: Open

    Comments: As of September 2015, the Internal Revenue Service (IRS) has not taken any further action to close this recommendation. Similar to GAO's March 2015 update, IRS is tracking savings by analyzing and comparing the workload inventory of account coordinators who handle Compliance Assurance Process (CAP) cases against team coordinators who handle non-CAP cases, as GAO recommended in August 2013. GAO's review of IRS's CAP evaluation plan did not show how such a workload comparison proved dollar savings from CAP; our review of the average caseload did show that for tax years 2010 through 2012, account coordinators handling CAP cases exclusively or in conjunction with non-CAP cases have a larger caseload than team coordinators handling non-CAP cases. In addition, IRS has not developed a plan for reinvesting any savings, as GAO recommended in August 2013, which IRS could use to increase audit coverage. IRS stated that it is difficult to measure the impact of CAP on audit coverage because audit coverage is based on staffing and compliance priorities. Specifically, the primary driver of audit coverage is staffing. As the number of examiners has decreased, the coverage of large business returns has decreased. In addition, compliance priorities factor into audit coverage. CAP officials said that they have less than 200 CAP participants and nearly 300,000 large return business taxpayers. Because CAP is a small program in terms of the number of large return business taxpayers, they think that its ability to drive an increase in audit coverage is minimal. In addition, IRS officials said that while quantifying monetary savings would be impossible, it has reinvested its savings by expanding account coordinators' caseload to increase efficiency. IRS plans to continue to invest any efficiencies achieved by CAP towards additional compliance workload. However, without a plan for tracking savings and using them cost effectively, such as to increase audit coverage, IRS cannot be assured that the savings are effectively invested in either CAP or non-CAP taxpayers with a high compliance risk.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should track savings from Compliance Maintenance and CAP overall and develop a plan for reinvesting any savings.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Office of the Commissioner: Principal Deputy Commissioner of Internal Revenue

  11. Status: Closed - Not Implemented

    Comments: As with the Compliance Assurance Process (CAP) program overall, the Internal Revenue Service has no plans to expand Compliance Maintenance. Each CAP taxpayer is evaluated annually for Compliance Maintenance based on a number of factors, including a history of transparency and cooperation, past tax return filings, and significant current year transactions.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should develop a plan for expanding Compliance Maintenance.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Services and Enforcement

  12. Status: Closed - Not Implemented

    Comments: As with the Compliance Assurance Process (CAP) program overall, the Internal Revenue Service has no plans to expand Compliance Maintenance. Each CAP taxpayer is evaluated annually for Compliance Maintenance based on a number of factors, including a history of transparency and cooperation, past tax return filings, and significant current year transactions.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should develop a plan for expanding Compliance Maintenance.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Office of the Commissioner: Principal Deputy Commissioner of Internal Revenue

  13. Status: Closed - Implemented

    Comments: In response to GAO's August 2013 recommendation, the Internal Revenue Service (IRS) posted its updated Compliance Assurance Process (CAP) Maintenance User Guide to its intranet in December 2013 on how IRS staff should monitor and remove taxpayers from Compliance Maintenance. In addition, IRS has included Compliance Maintenance as an agenda item for its CAP Account Coordinator/Team Manager meetings and verified that the updated guidance resolved staff concerns over monitoring or removing taxpayers from Compliance Maintenance.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should verify that the updated guidance for Compliance Maintenance on monitoring and removing CAP taxpayers has resolved CAP staff concerns about how these tasks are to be accomplished.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Services and Enforcement

  14. Status: Closed - Implemented

    Comments: In response to GAO's August 2013 recommendation, the Internal Revenue Service (IRS) posted its updated Compliance Assurance Process (CAP) Maintenance User Guide to its intranet in December 2013 on how IRS staff should monitor and remove taxpayers from Compliance Maintenance. In addition, IRS has included Compliance Maintenance as an agenda item for its CAP Account Coordinator/Team Manager meetings and verified that the updated guidance resolved staff concerns over monitoring or removing taxpayers from Compliance Maintenance.

    Recommendation: To ensure that IRS is meeting the stated goals of CAP, the Principal Deputy Commissioner of Internal Revenue and Deputy Commissioner for Services and Enforcement should verify that the updated guidance for Compliance Maintenance on monitoring and removing CAP taxpayers has resolved CAP staff concerns about how these tasks are to be accomplished.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Office of the Commissioner: Principal Deputy Commissioner of Internal Revenue

 

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