IRS Is Taking Action To Improve the Quality of Its Small Corporation Audits

In response to a congressional request, GAO reviewed Internal Revenue Service (IRS) audits of tax returns filed by small corporations to determine how well IRS agents complied with auditing standards and whether the quality review system was providing an accurate assessment of the quality of those audits.

In the audits of 317 small corporation tax returns, GAO found that about one-half of the audits failed to comply with one or more audit standards, and IRS has established that a single deviation from audit standards renders an audit unacceptable. Because these defects had not been detected by IRS quality reviewers, they were not included in the IRS audit quality review information system. Therefore, the quality of the audits in the five districts which GAO reviewed was less than the management information system indicated. After GAO completed its review, IRS initiated a national quality assurance review of audited cases which reinforced GAO findings. The IRS regions believed that error rates could be substantially reduced and examination quality enhanced through the efforts of examination personnel. In 1984, IRS developed an action plan to improve the quality of its examinations by clarifying its manual, developing standardized workpapers, training auditors and reviewers, and better managing personnel. IRS has completed some of these actions and others are scheduled to be completed by early 1987.