IRS Audit Coverage

In response to a congressional request, GAO examined Internal Revenue Service (IRS) enforcement activities with respect to foreign-owned U.S. corporations to: (1) identify and analyze IRS procedures for classifying income tax returns that foreign-owned U.S. corporations file and for selecting specific returns to audit; and (2) develop and analyze audit statistics comparing foreign-owned and domestically owned U.S. corporations.

GAO found that IRS procedures for classifying and selecting income tax returns neither single out nor exclude foreign-owned U.S. corporations. The main criterion for selection is the potential for an audit to significantly change the reported tax liability through adjustments in the taxpayer's income or denial of certain deductions or credits. Although some returns having international issues may be selected for audit through special compliance projects, U.S. parent corporations with tax haven subsidiaries are also given special emphasis. GAO also found that the differences in audit coverage percentages between foreign-owned and domestically owned U.S. corporations are not statistically different and are more due to sampling error, rather than bias in IRS classification procedures. Based on size of total assets, category of industry, and country of foreign owner, IRS audited a comparatively higher percentage of domestically owned U.S. corporations in the higher total-assets levels. However, in some industries, IRS audited relatively more foreign-owned U.S. corporations, many involving leading-trade-partner countries.