IRS Audits

Since 1996, the most common type of Internal Revenue Service (IRS) audit of individual taxpayers has been the correspondence audit. These audits are done through the mail, with IRS typically asking taxpayers for more support on one or two simple issues on a tax return. GAO found several weaknesses in IRS' correspondence audit processes. During fiscal years 1992-97, the annual number and results of correspondence audits done by IRS varied considerably. The number ranged from just over 200,000 to about 1.1 million audits annually. The rate at which IRS auditors closed audits without recommending additional taxes ranged from 13 percent to 46 percent. When additional taxes were recommended, the average amounts ranged from $1,300 to $2,800. The rate at which taxpayers failed to respond to IRS' request for the additional taxes ranged from 29 percent to 63 percent. For the traditional correspondence audits closed in fiscal year 1996, the time between the filing of a return and the start of the audit averaged 10 months. It then took another 11 months before IRS assessed any taxes recommended by the audits. An estimated 75 percent of the 1996 returns reported adjusted gross incomes of less than $15,000. In part, this percentage reflects the correspondence audit's focus on simple tax issues and the earned income credit. IRS' correspondence audit weaknesses fell into four areas. First, not all of the traditional correspondence audits closed in 1996 were manually reviewed to identify all issues for audit, as required by IRS. Second, support for recommended audit filings was not adequately documented in the audit workpaper files for about one-third of the audits. Third, the taxpayer documentation that was required to justify claims for the earned income credit varied from service center to service center. Fourth, GAO found weaknesses in the reviews that IRS did on a sample of closed audits to measure their quality.

GAO noted that: (1) several weaknesses were found in IRS' correspondence audit processes; (2) these weaknesses, individually or in combination, can erode the integrity of the correspondence audit processes, which are designed to help ensure that taxpayers pay the correct tax amounts and are treated properly; (3) during fiscal years 1992-1997, the annual number and results of correspondence audits conducted by IRS varied considerably; (4) the number ranged annually from just over 200,000 to about 1.1 million audits; (5) the rate at which IRS auditors closed audits without recommending additional taxes ranged from 13 percent to 46 percent; (6) when they did recommend additional taxes, the average amounts ranged from $1,300 to $2,800; (7) the rate at which taxpayers did not respond to these recommended additional taxes after being requested to do so by IRS ranged from 29 percent to 63 percent; (8) these variations resulted, in part, from an increase in the number of correspondence audits of returns claiming an earned income credit (EIC); (9) for the traditional correspondence audits closed in fiscal year 1996, the time between the filing of a return and the start of the correspondence audit averaged 10 months; (10) it then took 11 more months before IRS assessed any taxes that were recommended during the audits; (11) as for the characteristics of these 1996 returns, an estimated 75 percent had reported adjusted gross incomes of less than $15,000; (12) in part, this percentage reflects the correspondence audit's focus on simple tax issues and EIC; (13) IRS had weaknesses in implementing the correspondence audit requirements for four processes; (14) not all of the traditional correspondence audits closed in 1996 were manually reviewed (or classified) to identify all issues for audit, as required by IRS; (15) support for recommended audit findings was not adequately documented in the audit workpaper files, as required, for about one-third of the audits; (16) the taxpayer documentation that was required to justify EIC claims varied from service center to service center; (17) GAO found weaknesses in the reviews that IRS did on a sample of closed audits to measure their quality; and (18) in addition to the weaknesses in implementing the requirements, IRS allowed service centers to exclude certain types of audits that did not have all required documentation from being measured against the audit standard on workpaper documentation.

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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