Contrary to its own guidelines, the Internal Revenue Service has not evaluated whether the goals of its streamlined corporate tax audit process are being achieved or if the process should be expanded, according to a new report by the Government Accountability Office.
IRS audits of the tax returns filed by large corporations take four years on average to complete, the GAO noted, and more years can be spent on appeals. The process can be costly to the IRS and lead to years of uncertainty about a large corporation’s actual tax liability.
In response, the IRS developed the Compliance Assurance Process, or CAP, in 2005. Under this process, the IRS and corporate taxpayers agree on how to report tax issues before the corporate tax return is filed. Compliant and cooperative corporate taxpayers can in turn get a streamlined IRS review of their tax return in a phase called Compliance Maintenance.
Officials interviewed by the GAO inside and outside the IRS generally agreed that CAP could provide major potential benefits to both taxpayers and the IRS. The goals of the program include saving time and resources that the IRS can use for other audits while ensuring tax compliance, and reducing taxpayer burden while increasing certainty about the tax amounts now owed.
However, the IRS has not evaluated whether those goals are being achieved or if it should expand CAP. IRS officials told the GAO that the IRS will start developing an evaluation plan this year, but did not provide dates for when an evaluation would be completed.
The IRS cannot show the extent to which the goals are being met for two reasons, the GAO suggested. First, some goals do not have measures and none have targets. Although developing measures and setting targets for goals such as ensuring taxpayer compliance can be difficult, not doing so limits the IRS’s ability to determine whether the process is working as intended.
Second, the IRS does not have consistent and complete data for CAP. Inconsistent data can make some analyses difficult to do. For example, the average number of annual staff hours spent auditing a tax return could not be analyzed because the code to track staff time charges sometimes included non-CAP time charges. The incomplete data did not allow the IRS to track its progress for some goals.
While IRS audit teams document tax issues in case files, the IRS does not compile the data to track issue resolution, the GAO pointed out. As a result, the IRS cannot readily determine whether its audit teams are resolving issues uniformly or identifying emerging tax compliance issues. Similarly, the IRS does not have a system to track resource savings. Without such a system, the IRS cannot know the amount of saved resources or plan for their reallocation.
In addition, the GAO discovered that the IRS has been moving taxpayers into the Compliance Maintenance phase without documenting a plan to ensure, among other things, that the IRS has the capacity to assimilate these taxpayers in an expedited fashion, as intended. Large corporate taxpayers that continue to meet the CAP phase eligibility requirements and expectations may progress to Compliance Maintenance after at least one year in the CAP phase.
In addition, IRS audit staff members had concerns about the guidance on moving taxpayers in and out of this phase. The IRS clarified the guidance in May of this year but has not verified whether the audit staff members actually understand the information. Without verification, the IRS does not have reasonable assurance that the audit staff understands which taxpayers are right for Compliance Maintenance and when it would be appropriate to remove them.
The IRS is addressing several difficulties in coordinating CAP with other compliance processes. Those difficulties include resolving some complex tax issues within the expedited time frames, and ensuring that all IRS specialists who assist audit teams understand the process. It is too early to tell whether the IRS’s efforts will work, the GAO noted.
The GAO recommended that the IRS evaluate CAP, develop measures and targets for the goals, consistently capture data to track goal progress, track resolution of tax issues and resource savings, develop a plan to expand Compliance Maintenance, and verify that audit staff members understand the IRS’s attempts to clarify related guidance. In written comments, the IRS agreed with the GAO’s recommendations but pointed out that it already has some measures in place for evaluating the program.
“The Large Business and International Division has a full set of balanced measures for the CAP, which provides a framework for measuring the success of the program,” wrote IRS acting deputy commissioner for services and enforcement Heather C. Maloy in response to the report. “These measures have been in place since the inception of the CAP pilot. In addition to using our in-place balanced measures, we will continue to develop strategic indicators to enhance our measures and ensure that the CAP does not erode compliance efforts.”
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