With Better Management Information, IRS Could Further Improve Its Efforts Against Abusive Tax Shelters

In response to a congressional request, GAO reviewed Internal Revenue Service (IRS) activities in the tax shelter area.

Lately, the size and complexity of the IRS work load in the tax shelter area have strained its resources. The number of those types of tax shelters which IRS has identified as abusive have risen from 2 to 18 in 9 years, while the IRS approach to examining shelter returns requires that virtually every shelter return identified as potentially abusive be examined. Examiner staff-days devoted to the Tax Shelter Program have risen from 2.5 percent of direct examination time during fiscal year (FY) 1979 to 8.9 percent during the first 6 months of FY 1983. Examining abusive shelters imposes a large administrative burden on examiners because an abusive shelter is often set up as a partnership and examining such a shelter often requires the control of several returns, for different tax years, and in different districts. GAO found that about 60 percent of examiner time is spent on administrative tasks with only 40 percent applied to examining returns and developing examination issues. At the present pace, tax shelter returns take more than 4 years to process. To compound the problem, about 50 percent of completed tax shelter examinations are appealed, involving 90 percent of all potential revenue from these examinations. IRS has focused top management attention on this area and devised new approaches to reduce the number of cases in its inventory. In addition, Congress has provided legislative relief, most recently, in the Tax Equity and Fiscal Responsibility Act (TEFRA), which gives IRS several enforcement tools and simplifies the administrative aspects of partnership examinations.

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: Jennie S. Stathis Team: General Accounting Office: General Government Division Phone: (202) 275-6407