IRS Could Better Protect U.S. Tax Interests in Determining the Income of Multinational Corporations

GAO reported on the Internal Revenue Service's (IRS) administration of the Internal Revenue Code section 482 when auditing multinational corporations. Specific changes were discussed which would improve IRS enforcement of existing regulations. The larger question was explored of whether more fundamental changes in the regulations together with additional approaches to taxation of multinational corporations could alleviate some of the uncertainty and administrative burden presently being experienced by IRS and corporate taxpayers.

Multinational corporations have both the incentive and the opportunity to shift income between jurisdictions to take advantage of disparate corporate tax rates. One incentive is the minimization of taxes. The opportunity lies in the pricing of interorganizational transactions. This presents an excellent opportunity for abuse. IRS has not yet developed baseline information on the incidence and magnitude of multinational corporation noncompliance in terms of improper shifting of income. Thus, IRS has no basis for determining the amount of audit resources to be assigned to the problem, nor for gauging the success of those resources that are applied to it. Enforcement difficulties are compounded by the complexities involved in measuring the amount of income misallocated. Thus, regulations and the resulting enforcement process create an unacceptable level of uncertainty and a significant administrative burden both for corporate taxpayers and IRS examiners. Neither GAO nor IRS knows how much noncompliance exists, nor how many more adjustments IRS should have made. However, it can reasonably be concluded that the potential for greater enforcement exists.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Johnny C. Finch Team: General Accounting Office: General Government Division Phone: (202) 512-7824