Tax AdministrationIRS' Use of Information Gathering Projects Gao ID: GGD-98-39 February 5, 1998
The Internal Revenue Service (IRS) each year audits tax returns to determine whether taxpayers have voluntarily complied with the tax laws and paid the proper amounts owed. In selecting returns for audit, IRS' computers assign a score to each filed return to help find those having audit potential--that is, those for which an audit would be likely to change the reported tax because of noncompliance. Because such computer-aided selection techniques rely solely on information on filed returns, IRS collects information from other sources to identify potential taxpayer noncompliance. Information gathering projects are one method the agency uses to collect information on noncompliance and to spot returns with audit potential. This report provides information on the (1) number of information gathering projects nationwide and in IRS' Georgia District during fiscal years 1994 through 1996, (2) descriptions and results of information gathering projects in Georgia during fiscal years 1994 through 1996, and (3) controls and procedures IRS has in place for information gathering projects.
GAO noted that: (1) IRS reported that it had about 1,000 IGPs open nationwide during both fiscal year (FY) 1995 and FY 1996; (2) data on the nationwide number of IGPs in FY 1994 were not readily available; (3) according to IRS officials, nationwide tracking records were discarded or lost during IRS' reorganization efforts, which involved consolidating 63 districts into 33 and shifting responsibility for IGP records; (4) of the 76 IGPs that were open in Georgia during fiscal years 1994 through 1996, over half focused on: (a) business taxpayers that potentially underreported their income or overreported expenses; (b) business taxpayers that potentially did not properly report or pay taxes, such as the excise tax on fuels; (c) individual taxpayers who potentially claimed an improper exemption, filing status, or earned income credit; and (d) business and individual taxpayers who potentially did not file required tax returns; (5) of these 76 Georgia IGPs, 41 had closed as of June 1997; (6) the duration of these closed audits varied from several months to several years; (7) the audit results, such as additional taxes recommended plus penalties, also varied, with the additional tax amounts ranging from $0 to $269 million; (8) for most of these IGPs, IRS audited relatively few tax returns; (9) IRS closed about three-quarters of these IGPs after auditing fewer than 50 returns, including 9 that closed without any audits being done; (10) for years, IRS has had several controls and procedures designed to limit the vulnerability of IGPs to misuse as an audit selection technique; (11) IRS has always required that proposed IGPs undergo review and approval processes at high levels within the Examination Division in each of the districts; (12) to oversee IGPs, IRS has a unit at each of its 33 district offices; (13) these units monitor how returns were selected for audit and whether the audit results justified continuance of the project; (14) further, IRS recently has started adding processes to enhance the contribution of IGPs to compliance research; (15) in 1997, IRS began implementing compliance initiative proposal processes; and (16) IRS is involving its Research Division in the processes for approving and overseeing IGPs in the hope of making IGPs more useful for research purposes.