IRS Audits: Weaknesses in Selecting and Conducting Correspondence Audits
GGD-99-48
Published: Mar 31, 1999. Publicly Released: Mar 31, 1999.
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Highlights
Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) program to audit income tax returns through correspondence, focusing on: (1) the number, results, and duration of correspondence audits as well as the characteristics of the audited returns; and (2) processes and requirements that IRS has had for years to govern correspondence audits.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | The Commissioner of Internal Revenue should improve controls to better ensure that IRS' correspondence audit processes adhere to existing audit requirements and standards on classifying filed returns, and in particular, referring returns with complex schedules that may have potential tax changes to staff with sufficient knowledge to classify them. |
Closed – Implemented
IRS sent a memo to relevant parties to remind them of their roles in assuring adherence to the audit classification procedures in the manual. This action meets the general intent of the recommendation but does not necessarily institute a full control. Because this is a positive step and IRS does not plan further steps, GAO is closing this recommendation.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should improve controls to better ensure that IRS' correspondence audit processes adhere to existing audit requirements and standards on documenting the support for audit findings and recommendations in the audit workpaper files. |
Closed – Implemented
IRS sent a memo to relevant parties on their role in assuring that the manual requirements for doing audit workpapers must be followed. In addition, IRS is enlarging the samples drawn and intensifying the reviews done through its audit quality program. A major quality standard involves adequate workpapers. This memo, in conjunction with the enhanced quality review effort, should meet the intent of the recommendation.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should improve controls to better ensure that IRS' correspondence audit processes adhere to existing audit requirements and standards on ensuring consistency in the treatment of audited EIC claims by collecting and using the information required, including verification from third parties, to justify the claims. |
Closed – Implemented
IRS officials provided documentation to show that they issued new guidelines, revised forms/notices, and revised procedures in its manuals to clarify the required evidence that taxpayers should provide, the need for third party verification, and the consistency by which examiners should review the evidence. IRS also provided documentation to show that quality reviewers should look for consistent application of these changes.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should improve controls to better ensure that IRS' correspondence audit processes adhere to existing audit requirements and standards on including all types of closed audits across the 10 service centers in the samples for measuring audit quality. |
Closed – Implemented
IRS has revised its IRM guidance (IRM 21.8.1.4.86.2). These revisions clarify that all types of audit cases are subject to the quality review sample.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should require supervisors in the service centers to document their reviews of audit workpapers. |
Closed – Implemented
IRS issued a May 1999 memo requiring supervisors to document their reviews of audit workpapers. IRS also revised manual section 114.1.7 to emphasize this requirement to document their reviews of audit workpapers.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should eliminate the discretion that service centers have to exclude audits that lack documentation on the audit steps and support for audit recommendations from the calculations IRS does to measure adherence to the audit quality standard on workpaper documentation. |
Closed – Implemented
IRS has implemented a new quality review system. First, it requires that all audits be subjected to quality review in IRM 21.8 and 21.10. Second, in analyzing the audits' quality, it requires (see exhibit 21.10.1-5) that quality reviewers always evaluate the support for the audit recommendations and the documentation for the audit steps (unless local procedures do not require documentation for audits of certain types of issues).
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| Internal Revenue Service | The Commissioner of Internal Revenue should determine the reasons, through statistically valid and cost-effective means, for taxpayers' not responding to IRS' audit letters, so that IRS can identify ways to encourage more taxpayers to respond. |
Closed – Implemented
IRS tasked its District Office Research and Analysis unit in North Florida to do this study on why taxpayers do not respond to the audit letters. In March 2001, IRS issued a report on this study. Although IRS designed the study to be valid, many taxpayers did not respond to IRS study letter on why they did not respond to IRS' audit letters. Even so, IRS believes the study generated some useful insights, which IRS hopes will lead to better ways to contact taxpayers and to induce their responses.
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Auditing standardsFederal taxesGovernment collectionsIncome taxesInternal controlsTax administrationTax nonpaymentTax return auditsTaxpayersTaxes