Tax Administration

This report focuses on the Internal Revenue Service's (IRS) program to audit the tax returns of about 45,000 large corporations. IRS audits of returns field by these 45,000 corporations plus the 1,700 largest corporations in IRS' Coordinated Examination Program have generated about two-thirds of the additional taxes recommended from all income audits. GAO used IRS data to (1) analyze audit trends for fiscal years 1988 through 1994, (2) compute the assessment rate--the portion of taxes recommended by revenue agents that were eventually assessed, and (3) develop and compare profiles of audited large corporations with those not audited.

GAO found that: (1) for every dollar invested in large corporation audits, IRS ultimately assessed $15 in additional taxes for the years 1988 through 1994; (2) IRS invested more hours in directly auditing large corporations but recommended less additional tax per hour invested in 1994 compared to 1988; (3) in 1994, large corporations appealed 66 percent of the additional taxes that IRS recommended in its audits; (4) between 1988 and 1994, IRS assessed 27 percent of the recommended additional taxes either after agreement or resolution in appeals; (5) IRS believed that the assessment rate was not an accurate measure of audit effectiveness, since various factors outside the audit could lower the rate; (6) the assessment rates ranged from 20 to 38 percent for four asset classes and from 0 to 103 percent by IRS district, but the reasons for the disparities were unclear; (7) the rates for audits closing without any adjustments has rapidly increased, raising questions about how IRS selects returns for audits; and (8) audited corporations tended to report higher average incomes, tax liabilities, and other tax amounts than nonaudited corporations.