Internal Revenue Service Efforts to Detect Slush Funds in Large Corporations

Under the Coordinated Examination Program, the Internal Revenue Service (IRS) audits corporations with assets over $250 million and financial institutions and utilities with at least $1 billion in assets and seeks to uncover secret slush funds used for such purposes as political contributions, bribery, lobbying, kickbacks, and diversions to personal use. Through the efforts of the Securities and Exchange Commission (SEC), approximately 400 corporations have made voluntary disclosures relating to such funds. In May 1976, IRS supplemented its audit instructions with a standard set of 11 questions. A sampling of 16 cases, including a series of compliance checks other than the 11 questions, was analyzed to identify areas where slush funds or illegal payments could be initiated. Only one of the compliance checks was successful in uncovering possible fraudulent activity. Slush funds were disclosed in 13 of the 16 cases examined; most of these were detected through SEC reports and use of the 11 questions. Payments were reflected on the books of the taxpayers as ordinary business expenses. Most of the questionnaire responses did not disclose whether payments were deducted on tax returns, and additional audit work was usually needed to determine tax or criminal implications. Revenue agents and case managers must decide appropriate action in cases of questionable payments; there appeared to be a lack of guidelines on what constitutes a prosecutable offense.