IRS Audits

Workpapers Lack Documentation of Supervisory Review Gao ID: GGD-98-98 April 15, 1998

The Internal Revenue Service (IRS) requires its auditors to examine a taxpayer's books and records in sufficient depth to fully develop the relevant facts and correctly apply the tax laws to these facts. IRS auditors are to document these activities and their conclusions in audit workpapers. In a December 1997 report (GAO/GGD-98-38), GAO reviewed workpapers for a random sample of 354 IRS audits to measure how often IRS auditors used the financial status audit techniques and what these techniques produced in tax adjustments. GAO discovered two procedural issues that extended beyond the objectives of that assignment: (1) the adequacy of audit workpapers and (2) documentation of supervisory review of those workpapers. This report evaluates the condition of IRS workpapers, including documentation of supervisory review, that GAO found in doing its work for the December 1997 report.

GAO noted that: (1) during its review of IRS' financial status audits, the workpapers did not always meet the requirements under IRS' workpaper standards; (2) standards not met in some audit workpapers included the expectation that: (a) the amount of tax adjustments recorded in the workpapers would be the same as the adjustment amounts shown in the auditor's workpaper summary and on the report sent to the taxpayer; and (b) the workpaper files would contain all required documents to support conclusions about tax liability that an auditor reached and reported to the taxpayer; (3) these shortcomings with the workpapers are not new; (4) GAO found documentation on supervisory review of workpapers prepared during the audits in an estimated 6 percent of the audits in GAO's sample; (5) in the remaining audits, GAO found no documentation that the group managers reviewed either the support for the tax adjustments or the report communicating such adjustments to the taxpayer; (6) IRS officials indicated that all audits in which the taxpayer does not agree with the recommended adjustments are to be reviewed by the group managers; (7) if done, this review would occur after the report on audit results was sent to the taxpayer; (8) even when GAO counts all such unagreed audits, those with documentation of supervisory review would be an estimated 26 percent of the audits in GAO's sample population; (9) GAO believes that supervisory reviews and documentation of such reviews are important because they are IRS' primary quality control process; (10) proper reviews done during the audit can help ensure that audits minimize burden on taxpayers and that any adjustments to taxpayers' liabilities are supported; (11) although Examination Division officials recognized the need for proper reviews, they said IRS group managers cannot review workpapers for all audits because of competing priorities; (12) these officials also said that group managers get involved in the audit process in ways that may not be documented in the workpapers; (13) they stated that these group managers monitor auditors' activities through other processes, such as by reviewing the time that auditors spent on an audit, conducting on-the-job visits, and talking to auditors about their cases and audit inventory; and (14) in these processes, however, the officials said that group managers usually were not reviewing workpapers or validating the calculations used to recommend adjustments before sending the audit results to the taxpayer.


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