Tax Administration

In response to a congressional request, GAO examined the Internal Revenue Service's (IRS) legislatively mandated efforts to curtail abusive tax shelters, focusing on the effectiveness of: (1) the tax shelter registration abusive shelter detection team programs in identifying abusive tax shelters; and (2) IRS efforts to administer penalties.

GAO found that: (1) the registration program did not provide district examination personnel with enough information to identify abusive tax shelters or to initiate investigations; (2) the detection team program did not provide district personnel with selection criteria to properly identify the types of shelter cases considered potentially subject to penalties; (3) although Congress raised the penalty to deter promotion and sale of abusive tax shelters from 10 percent to 20 percent of the gross income derived or to be derived from the shelter, promoters continued to have financial incentives for promoting abusive shelters; (4) although IRS assessed some penalties for persons who knowingly aided or abetted tax shelter abuses, it could have assessed more penalties if the law required a lesser burden of proof; (5) IRS either overlooked or incorrectly computed the penalties in 16 of 29 cases GAO reviewed in three districts; (6) IRS computational errors totalled $4.2 million in penalty underassessments; and (7) most of the errors occurred because IRS lacked penalty guidance, internal controls to ensure appropriate penalties, and procedures to detect errors and oversights and ascertain compliance with regulations.

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.

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