United States General Accounting Office

GAO Report to the Honorable

Rob Portman, Committee on Ways and

Means, House of Representatives

June 1998 TAX

ADMINISTRATION

IRS Measures Could

Provide a More

Balanced Picture of

Audit Results and

Costs

GAO/GGD-98-128

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-277433 

June 23, 1998

The Honorable Rob Portman

Committee on Ways and Means

House of Representatives

Dear Mr. Portman:

The Internal Revenue Service’s (IRS) mission is to collect the proper

amount of taxes at the least cost to the federal government and taxpayer.

As part of its effort to achieve its mission, IRS audits all types of tax returns

to determine whether taxpayers have reported their correct tax liabilities.

IRS spends over a billion dollars annually on its audit programs, including

staff costs. These audits also impose costs and burdens on taxpayers. On

the basis of its audits, IRS annually recommends that taxpayers pay

additional taxes totaling tens of billions of dollars.

IRS has traditionally measured the overall results of audits by the amount

of recommended additional taxes and by the amount of direct staff time

used in an audit. In 1994, we reported that these measures for large

corporations provided an incomplete picture of audit results, because

much of the recommended taxes had not been assessed and collected

after being disputed by taxpayers.1

 As a result, we recommended that IRS

expand its measures for audits of large corporations to include the percent

of recommended taxes that is ultimately collected. In its budget request to

Congress for fiscal year 1999, IRS continues to report audit revenues only

as dollars recommended.

This report responds to your request for information about IRS’ measures

of the results of its audits of tax returns. Our objective was to determine

how much of the additional taxes recommended in all types of audits that

were closed in fiscal years 1992 through 1997 had been settled or were still

in dispute and, if settled, how much had been assessed and collected as of

September 27, 1997. In addition, for audits closed in fiscal year 1992, our

objectives were to determine how much of the recommended additional

taxes had been assessed and collected across all types of audits and

whether broad IRS measures of audit results fully represented audit

revenues and costs.

1

Tax Administration: Compliance Measures and Audits of Large Corporations Need Improvement

(GAO/GGD-94-70, Sept. 1, 1994).

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Background IRS has a multistage process that governs audits and settlements of

disputes over the additional taxes recommended. In an audit, an auditor,

usually from IRS’ Examination Division, is to review a taxpayer’s books and

records to determine compliance with tax laws in reporting the proper

amount of tax. Auditors usually recommend additional tax assessments

but may recommend a decrease or no change in the tax reported on the

return, depending on the documentation provided by the taxpayer. If the

taxpayer agrees to pay or does not respond to IRS’ notices on

recommended additional taxes, IRS assesses the tax—that is, formally

notifies the taxpayer that the specified amount of tax is owed and that

interest and penalties may accrue if the tax is not paid by a certain date.

Taxpayers who do not agree with the recommended additional taxes can

(1) file a protest with the IRS Office of Appeals, (2) take the dispute to tax

court without paying the recommended tax, or (3) pay the tax and claim a

refund in the U.S. Court of Federal Claims or a federal district court. Of

these options, taxpayers usually protest to IRS Appeals.2

 Appeals settles

most of these disputes, and the remainder are docketed for trial. If Appeals

is unsuccessful in settling the dispute, the Office of Chief Counsel gets

involved in settlement as well as in any trial. The agreements made in

settlements and the rulings made in trials dictate how much of the

disputed amount gets assessed. The assessed amount—not the

recommended amount—establishes the taxpayer’s liability. If taxpayers do

not pay the taxes that are assessed, IRS can take action to collect the taxes.

IRS tracks the additional taxes recommended by audit classes, which are

based on the amount of reported income or assets and type of return.

Across the audit classes, tax returns vary in complexity, ranging from

simple individual returns to complex corporation returns. The classes

include specialized audit programs, such as the Coordinated Examination

Program (CEP) for the nation’s largest corporations.

The range of size and complexity across tax returns affects the amount of

time and resources IRS uses to audit a return and resolve disputes over the

assessment of recommended taxes. Audits of large corporations usually

take 2 to 3 years. If the large corporation disputes the recommended

additional taxes, another 2 to 3 years can elapse in trying to settle the

dispute through Appeals; several additional years may be needed if the

dispute goes to trial. For smaller, less complex returns, the time IRS uses to

2

Taxpayers also may appeal audits that recommend decreases or no changes to the reported tax when

they believe that their tax liabilities should be even less.

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audit and settle any disputes over recommended tax assessments is

shorter; but these processes usually take at least 1 year.

To deal with this varying complexity, IRS has three types of auditors. First,

lower graded tax examiners at IRS service centers audit simpler individual

returns through correspondence. Second, higher graded revenue agents

from IRS district offices visit individuals, corporations, and other types of

taxpayers to address the most complex tax returns; they also work in

teams to audit CEP and some other large corporations. Third, tax auditors,

who usually do audits by meeting with taxpayers at a district office, fall in

the middle ranges regarding their grades and the complexity of their

audits. IRS’ appeals officers also differ by their grades and by the

complexity and size of their workloads.

Results in Brief For audits closed in fiscal years 1992 through 1997, IRS recommended tens

of billions of dollars in additional taxes for each year. IRS reported these

recommended taxes to Congress as its audit results. However, not all

recommended taxes are assessed; and not all assessed taxes are collected.

For example, as a result of the fiscal year 1992 audits, IRS had assessed 34

percent ($8.5 billion) of the $24.8 billion in recommended additional taxes

as of September 27, 1997. IRS had settled another 40 percent ($9.9 billion)

without assessing the recommended taxes, usually because of Appeals’

decisions, and had yet to settle the assessment status of the other 26

percent ($6.4 billion). Of the $8.5 billion assessed, IRS had collected 72

percent ($6.1 billion), which means that 25 percent of all recommended

taxes for fiscal year 1992 audits had been collected as of September 27,

1997. For audits closed in fiscal years 1993 through 1997, assessment and

collection results were less complete because less time had elapsed for

these actions to occur compared with 1992.

The assessment and collection rates varied by the type of audit closed in

fiscal year 1992. In general, IRS assessed a higher percentage of the

recommended taxes but collected a lower percentage of the assessed

taxes for simpler audits compared with complex audits. However, IRS

collected a higher percentage of the recommended taxes from the simpler

audits than complex audits. For simpler service center audits, IRS had

assessed 76 percent of the recommended taxes but had collected

56 percent of the assessed taxes as of September 27, 1997. As of that date,

all of the service center audits had been settled. At the other extreme, after

audits of complex returns from CEP corporations, IRS had assessed

20 percent of the recommended taxes but had collected 97 percent of the

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assessed taxes. As of September 27, 1997, 39 percent of the amounts

recommended in CEP audits were still in dispute. Overall, IRS had collected

less than half of the recommended taxes across all types of

audits—ranging from 20 percent (CEP) to 43 percent (service center).

IRS’ existing performance measures do not cover all audit-based revenues

or costs. Measuring the taxes recommended does not account for the

related assessments and collections; nor does it account for indirect

revenue gains, such as when audits enhance voluntary compliance.

Measuring other types of revenues is important because not all

recommended taxes are assessed or collected. IRS measures the staff time

directly charged to audits but not the dollar costs of this direct time.

Likewise, IRS does not measure indirect costs incurred by the Examination

Division for training, office space, and the like or the direct and indirect

costs that audits create outside of the Examination Division for IRS as well

as for taxpayers. Compiling complete and reliable data on the indirect

revenues and taxpayer costs can be very difficult to do because of

limitations in the data sources and research.

Beyond these limitations, IRS did not use other existing data to develop and

report measures that more fully represented audit results. For example, in

reporting audit results, data on taxes recommended could be balanced

with data on taxes assessed and collected. If these existing assessment

and collection data were reported, fuller insights would be available on IRS’

audit revenues. For additional measures, audit revenues could be

compared with related costs. To develop such measures, IRS would need

more data on both direct and indirect costs. Given the problems inherent

in collecting and analyzing data on indirect costs, the role of management

judgment in making decisions about audits and audit resources will

continue to be essential.

Scope and

Methodology

To address our objectives on the assessments, collections, and costs

related to taxes recommended in audits, we used IRS’ Enforcement

Revenue Information System (ERIS) data as of September 27, 1997.3

 Our

analyses started with audits closed in fiscal year 1992. According to IRS

officials, ERIS data were unreliable prior to 1992. We focused most of our

analyses on 1992, instead of later years, to allow the most time for

assessment and collection actions to have been taken on additional

amounts recommended in audits. Because ERIS attempts to continually

3

Since 1990, IRS has used ERIS to track actions taken outside of the Examination Division on

recommended additional taxes (app. I provides further information on ERIS).

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B-277433 

update the status of these recommended amounts, ERIS’ data could differ

from data in other IRS systems that are not doing such updating.

We did not test the reliability of the data provided to ERIS by other IRS

systems or data processed by ERIS.

4

 However, we followed up with IRS on

any anomalies that we found in the data and adjusted the data or our

methodology as needed. For example, as a result of questioning by us and

other IRS officials, ERIS officials discovered a mistake during April 1998 in

the documentation provided to us for interpreting ERIS data on the

settlement status of recommended taxes. Subsequent discussions with ERIS

officials clarified the approach to use for interpreting the ERIS data. IRS

officials concurred with the analytical results generated from using this

approach.

To determine how much of the recommended additional tax amounts had

been settled, assessed, and collected as of September 27, 1997, for audits

closed in fiscal years 1992 through 1997, we matched the recommended

amounts to actions taken in Appeals or the Office of Chief Counsel.5

 In

calculating the final assessments, we subtracted amounts that IRS initially

assessed from the additional taxes recommended but later abated.6

 Then,

for each fiscal year, we added the assessments and collections that took

place in each IRS function—Examination, Appeals, and Chief Counsel—to

obtain the overall results for the audits. We arrayed these results by the

fiscal year of the audit closure to develop a broad picture of what

happened to recommended tax amounts. (App. II shows the results for

each fiscal year for seven types of audits.)

To determine how much of the recommended additional tax amounts had

been assessed and collected as of September 27, 1997, by type of audit

closed in fiscal year 1992, we did analyses similar to those done for our

first objective. We expanded the analyses to array the results by seven

types of audits. We developed these 7 types from 30 subcategories that IRS

used to classify audits by type of tax return, tax, or taxpayer (app. III

4

These systems include the individual and business masterfiles, the Audit Information Management

System, and other systems on IRS enforcement actions.

5

In addition to recommending additional taxes, IRS officials said audits produce revenue in other

ways. For example, IRS audits “protect” revenue (e.g., disallow claims filed by taxpayers for refunds of

previously assessed taxes) and generate interest on additional assessments. Our analyses excluded

protected revenue because our objective was to track the recommended additional taxes. We excluded

interest because it is a function of time and is not recommended by Examination.

6

Auditors can recommend (1) additional taxes, (2) reductions in taxes, or (3) no changes in taxes. The

audit results in this report do not include recommended reductions in taxes because our objectives

dealt with actions taken on the recommended additional taxes.

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shows the subcategories).7 The seven types include income tax audits at

IRS service centers or at IRS district offices of nonbusiness individuals,

business individuals, small corporations, non-CEP large corporations, and

CEP corporations as well as those audited for other types of tax liabilities.8

At the request of IRS officials, we separately analyzed service center and

CEP audits because of their specialized natures.

To determine whether IRS’ broad measures of audit results fully

represented audit revenues and costs, we reviewed IRS’ budget

submissions for fiscal years 1998 and 1999 to see the data reported as

audit results and performance measures. We analyzed available ERIS data

on the revenues and costs associated with audits to identify audit

measures that could be developed. We then created three ratios of tax

revenues to costs for audits closed in fiscal year 1992. These ratios

compared additional taxes recommended, assessed, and collected with the

related direct costs through each of these stages. We arrayed these three

ratios across the seven types of audits.

For the revenues, we used available IRS data on the additional taxes

recommended, assessed, and collected. For the costs, we used available

data on direct time charged by staff who do the audits and settle disputes

over the additional taxes recommended;9

 data on the direct staff time to

collect the additional taxes assessed were not available. We identified the

direct hours charged by staff grade level in Examination, Appeals, and

Chief Counsel.10 We then applied an hourly rate to the grade levels by

using the General Schedule pay tables for 1992 through 1997. For each

grade, we adjusted the midpoint of the pay scale to account for locality

pay. We accounted for work hours available and costs of staff benefits,

such as paid vacation and sick leave, by using Office of Management and

Budget Circular No. A-76.11 Using these factors, we computed the direct

staff costs.

7

The categories used by IRS to classify audits may change if IRS is restructured as proposed by the

Commissioner of IRS.

8

The difference between nonbusiness and business individuals depends on whether most of the

reported income derives from self-employment in a business. The difference between a small and large

non-CEP corporation depends on whether a corporation reports less than $10 million in assets. The

large corporation category also includes audits of foreign corporations. The “other” category includes

all other tax liabilities, such as employment, gift, and estate taxes.

9

Direct time charged by staff excludes time charges for such things as training or administration.

10In computing the direct costs, we included audits that resulted in no change or in a reduction to the

tax reported on the return. We reasoned that IRS incurred these costs in an attempt to identify

taxpayers owing additional tax amounts.

11When we began our review, ERIS data did not include the costs of staff benefits. We shared our

computation of these costs with IRS officials. ERIS now includes the costs of staff benefits.

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We discussed our methodology and our results with IRS officials who

manage ERIS or who manage the audit, settlement, and collection activities.

We incorporated their suggestions into our work as appropriate. We

requested comments on a draft of this report from the Commissioner of

Internal Revenue. His comments are discussed near the end of this letter

and reprinted in appendix V. We performed our audit work at IRS’ National

Office in Washington, D.C., between July 1997 and May 1998 in accordance

with generally accepted government auditing standards.

IRS Assessed and

Collected Only Part of

the Taxes

Recommended

IRS annually reports to Congress on the amount of additional tax and

penalties recommended in audits closed in each fiscal year. For the years

we reviewed, the recommended amounts ranged up to about $32 billion.

However, the recommended amount does not represent the actual revenue

resulting from IRS’ audits. As of September 27, 1997, less than half of the

recommended amount had been assessed as additional taxes, and not all

of the assessed amount had subsequently been collected.

For fiscal year 1992 audits, as of September 27, 1997, IRS had assessed

$8.5 billion (34 percent) of the $24.8 billion in recommended additional

taxes. IRS settled another 40 percent of the recommended additional taxes

without ultimately assessing the recommended additional taxes for

various reasons. These reasons included taxpayer claims; decisions in

Appeals or the courts; and reductions (i.e., abatements) of amounts that

had initially been assessed.12 Disputes on the final 26 percent of the

additional recommended taxes had yet to be settled. As of September 27,

1997, IRS had collected $6.1 billion—or 72 percent of the additional taxes

assessed and 25 percent of the additional taxes recommended. Table 1

shows these results for audits closed in fiscal year 1992 as well as for fiscal

years 1993 through 1997.

12Certain factors can reduce or eliminate assessments from audit-based recommendations. For

example, (1) prior to assessment, recommended taxes that were upheld by Appeals can be offset by

taxpayers’ claims, such as those for net operating losses carried over from other tax years and (2) after

the audit and appeals processes, taxpayers may provide additional information that can offset the

taxes assessed. IRS’ databases cannot easily track all these factors. In our report GAO/GGD-94-70, we

recommended that IRS improve its databases to begin accounting for such factors.

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Table 1: Status of Additional Amounts Recommended for Audits Closed in Fiscal Years 1992 Through 1997, as of

September 27, 1997

Settlement status of recommended amounts Collection status

Dollars in millionsa

Fiscal year

Recommended

amountsb

Percent of

disputes

unsettled

Percent not

assessedb

Percent

assessed

Collected

amounts

As percent of

amount

assessed

As percent of

amount

recommended

1992 $24,833 26% 40% 34% $6,138 72% 25%

1993 22,022 25 35 40 6,022 68 27

1994 22,637 31 28 41 6,059 65 27

1995 27,184 41 19 40 6,878 63 25

1996 30,771 46 18 36 6,737 61 22

1997 31,691 55 7 38 6,447 54 20

Note: Appendix II shows these results for each fiscal year for the seven types of audits.

aDollars are in current dollars.

bRecommended amounts are considered “not assessed” when (1) they are not sustained during

IRS’ appeals process; (2) they are sustained during appeals but offset by taxpayers’ claims, such

as net operating losses from other tax years, before being assessed; and/or (3) they were initially

assessed but later abated because of information or claims filed by the taxpayers.

Source: GAO analysis of IRS ERIS data.

Since 1992, the results of the audits were less complete because larger

percentages are unsettled for each succeeding year, reaching 55 percent in

1997. As more settlements occur over time, the rates at which the

recommended taxes are assessed and collected should increase. IRS

officials said they believe that this assessment rate is higher in more recent

years compared with 1992 because IRS has been trying to obtain taxpayer

agreement with any taxes recommended before the audit is closed.

However, it is not yet clear whether the rate at which assessed amounts

are collected for 1993 through 1997 audits will exceed the rate for 1992.

Because of the incomplete results for audits closed in these more recent

years, our analyses focused on 1992 audits.

Collection and

Assessment Rates

Vary by Type of Audit

Table 2 shows how much of the recommended additional taxes had been

settled, assessed, and collected as of September 27, 1997, for seven types

of audits closed in fiscal year 1992. In general, the assessment and

collection rates varied by the complexity of the audit. With more complex

audits, such as corporation audits, taxpayers were more likely to reduce

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additional assessments by appealing amounts recommended but also more

likely to pay almost all of the amounts assessed. For example:

• Assessment rates for the simpler audits done at service centers and for the

audits of individuals were higher than for corporate audit categories. The

rates were 76 percent for service center audits and about 59 percent for

audits of individuals, but the rates were 20 percent for CEP audits and

33 percent for other large corporation audits.

• The rates for collection of assessed amounts were higher for corporation

audits. IRS collected about half of the assessed amounts for service center

and individual audits compared with 97 percent for CEP and 73 percent for

other large corporation audits.

The percentage of recommended amounts that IRS collects is also affected

by these assessment and collection rates. For fiscal year 1992 audits, the

percentage of recommended taxes that IRS had collected as of

September 27, 1997, ranged from 20 percent for CEP audits to 43 percent

for service center audits.

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Table 2: Status of Additional Amounts Recommended for Fiscal Year 1992 Across Seven Types of Audits, as of

September 27, 1997

Settlement status of recommended

amountsa Collection status

Dollars in millions

Type of Audit

Recommended

amounts

Percent of

disputes

unsettled

Percent not

assessedb

Percent

assessed

Collected

amount

As percent of

amount

assessed

As percent of

amount

recommended

Service center $1,464 0% 24% 76% $ 625 56 43%

Individual

nonbusiness 2,763 4 37 59 894 55 32

Individual business 1,290 6 33 60 371 48 29

Small corporations 1,001 6 42 52 301 58 30

Large corporations 2,221 7 60 33 543 73 24

CEP 13, 893 39 41 20 2,757 97 20

Otherc 2,202 27 34 40 646 74 29

Totald 24,833 26 40 34 6,138 72 25

Note: Table III.1 shows this information by the 30 selected categories

aPercentages do not total to 100 percent due to rounding.

bRecommended amounts are considered “not assessed” when (1) they are not sustained during

IRS’ appeals process; (2) they are sustained during appeals but offset by taxpayers’ claims, such

as net operating losses from other tax years, before being assessed; and/or (3) they were initially

assessed but later abated because of information or claims filed by the taxpayers.

c“Other” includes audits of returns for employment tax, estate tax, excise tax, and gift tax; audits

conducted in IRS training; and audits categorized by IRS as other.

dAmounts do not add to totals due to rounding.

Source: GAO analysis of IRS ERIS data.

We asked IRS officials to explain differences in the assessment and

collection rates across the types of audits. IRS officials said several factors

contributed to these variances. For example, comparing the service center

and corporation audits, they said:

• The rate for assessing the recommended amount is higher for service

center audits, because the taxpayers are (1) more likely to not respond to

IRS correspondence and notices, which leads IRS to assess the

recommended amounts and (2) less likely to dispute the recommended

amounts, usually much smaller and involving simpler tax issues, compared

with audits of corporations for which disputes are much more likely.

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• The rate for collecting the assessed amount is lower for service center

audits because the taxpayers tend to have fewer assets to pay the tax

assessment. Further, CEP and large corporations are more likely to pay the

assessments to avoid large interest charges. Small corporations and

individuals with businesses also may have difficulties finding the funds to

pay the additional tax assessments.

IRS’ Performance

Measures Do Not

Fully Reflect All Audit

Revenues and Costs

IRS’ performance measures do not fully reflect all audit-based revenues and

costs. For example, IRS’ existing measures on taxes recommended do not

include indirect revenues resulting from the effect of audits on voluntary

compliance. Although IRS measures the staff time directly spent on audits,

it does not measure the dollar costs of this direct time or the indirect costs

incurred by the Examination Division for such things as training time or

office space. IRS also does not measure direct and indirect costs that audits

create outside of the Examination Division for IRS as well as taxpayers.

Compiling complete and reliable data on the indirect revenues and costs

from outside IRS can be very difficult because of limitations with the data

sources and research.

Further, IRS does not use its available data to develop and report measures

that would provide a fuller, more balanced picture of audit results. For

example, data on taxes recommended could be balanced with data on

taxes assessed and collected in reporting audit results and, as we

previously recommended for audits of large corporations, in developing

additional performance measures. In developing these measures, such

revenue data could be related to information on the costs of audits. In

addition, IRS has the capacity to track more data beyond the direct staff

costs.

IRS Data on Revenues

From Audits Are

Incomplete

IRS data on taxes recommended, assessed, and collected do not represent

all revenues from audits. Data are not available on the indirect revenue

effects from audits. For example, when audits induce both audited and

unaudited taxpayers to be more voluntarily compliant, tax collections

increase indirectly. Other indirect revenue effects occur if audits adjust

how much of a tax deduction can be claimed in one tax year versus other

years or reduce that claim for future years.13

13If an audit reduces a depreciation claim by $100 but allows that $100 to be claimed in future years,

tax revenue would be higher for the audited year but lower whenever the claims are allowed. If an

audit reduces but does not eliminate a net operating loss claim, the audit would produce no tax

revenue for the audited year but higher tax revenue in the future when, because of the audit, a smaller

loss is claimed.

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IRS has difficulty measuring the indirect revenue effects because of

limitations with the data and research methods. Such measurements

require (1) data that reflect the impact of audits and other IRS activities on

the compliance of individual taxpayers and (2) a research methodology

that reliably distinguishes the effect of audits on voluntary compliance

from other influencing factors. IRS has researched the indirect effects of

audits but has yet to develop reliable estimates because of these

limitations.

IRS data also do not include the marginal revenue effects from doing

audits. Such marginal effects are the changes in total revenues that result

when IRS incrementally changes the number of audits in an audit class. As

with indirect effects, developing data on marginal effects can be

challenging. Without data on the indirect and marginal effects, IRS and

Congress cannot know the full impacts of audits.

IRS Data on Costs of

Audits Are Incomplete

IRS data on both its direct and indirect costs from doing audits are

incomplete. IRS associates its direct costs with the time charged by the

staff who do the audits, settle the audit disputes, and collect the audit

assessments for specific types of audits. IRS has data available for

computing the direct staff costs for the audit and settlement activities.

However, IRS did not have such data for the collection activity because IRS’

Collection Division did not track the time that staff spent trying to collect

the additional assessments arising from specific types of audits. Our

analyses of the significance of the direct costs of collection were

inconclusive because of missing data.14

Also, IRS did not have data on its indirect costs for an audit. IRS considers

its indirect costs to include management time, training time, space, and

other support given to those who do audits, settle audit disputes, and

collect audit assessments. Likewise, IRS does not account for indirect costs

outside IRS, such as those imposed on the audited taxpayer or on society

when a taxpayer evades tax liabilities.15 However, as with indirect

revenue, collecting the data for quantifying these external indirect costs is

14Our analysis focused on the amount of time IRS took to collect additional tax assessments arising

from audits. Appendix IV describes our analysis and results.

15If audits reduce tax evasion, the social costs involving the efficiency and equity of the tax system also

could be reduced. Some taxpayers choose investments or occupations that provide opportunities to

evade taxes. With fewer evasion opportunities, taxpayers may use their resources more efficiently

elsewhere in the economy. Reducing evasion also could make the tax system more equitable. Tax

evasion creates inequities when taxpayers with the same tax liability pay different tax amounts.

Greater equity may balance, at least in part, any increased costs imposed on audited taxpayers.

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a difficult task. IRS has been working on ways to measure taxpayers’ costs

and is starting to survey taxpayers on their satisfaction with the audit

process. This survey does not gather data on taxpayers’ costs but may

prove useful to IRS in deciding how to quantify these costs.

IRS Does Not Report All

Existing Data on Audit

Results

Although IRS lacks data on all of the revenues and costs associated with

audits, it does have data that could be used to measure selected revenues

and costs. However, IRS does not measure and report all its existing data

on audit revenues, such as additional taxes assessed and collected on the

basis of taxes recommended in audits. Further, IRS has not developed data

and measures on the costs related to each type of revenue.

This report discusses broad, IRS-wide dollar measures of audit results to

track actions on any additional taxes recommended in audits. Such

measures do not account for all aspects of audit performance, such as the

proper treatment of taxpayers and the decision to recommend no change

or a reduction to the tax liability reported on a return. These measures are

not intended to be used to evaluate the performance of individual IRS

employees.

Over the years, IRS has measured the overall results of audits done in the

Examination Division by the amount of additional taxes recommended

and time charged directly to an audit by Examination staff. These

measures do not employ existing data that could more fully represent the

revenues and costs associated with audits. First, the measures do not

report how much of the recommended taxes are actually assessed and

collected. Second, the measures do not report the dollar costs of the direct

time charged to an audit or the indirect costs for the audit, settlement, and

collection activities.

Although useful in some ways, measuring audit performance by just taxes

recommended and direct audit staff time presents an unbalanced picture

of the audit results. Tables 1 and 2 show large differences between the

amounts recommended, assessed, and collected. Taxpayers dispute most

of the additional recommended amounts, and settlement of these disputes

results in smaller amounts being assessed and collected.

Relying too heavily on additional taxes recommended as a measure of

audit results may create undesirable incentives. Our previous work on

audits of large corporations has raised concerns that relying on

recommended taxes as a performance indicator may encourage auditors

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to recommend taxes that would be unlikely to withstand taxpayer

challenge and thus not be assessed and collected. To the extent that this

happens, audited taxpayers could be unnecessarily burdened. We

recommended that IRS balance its measures of audit performance by

adding such measures as taxes ultimately collected.

Further, the direct time charged to audits does not measure the dollar

costs. In computing the costs of the direct time charges, one must

recognize that the pay grade levels of staff assigned to audits vary by type

of audit. Further, the direct time charged in the Examination Division

excludes direct staff time charged in Appeals, Chief Counsel, and

Collection as well as indirect costs for the audit, settlement, and collection

activities.

To illustrate the importance of developing a more complete set of

measures, we compared three ratios that each measured a type of audit

revenue with the related direct cost for seven types of audits. We

calculated direct costs using hours charged by staff in Examination,

Appeals, and Chief Counsel. The audit revenues included the amounts

recommended, assessed, and collected.

Table 3 shows that these ratios differ widely. Many factors affect

audit-based revenues and costs. For example, recommended amounts are

affected by the number of audits and amount recommended per audit. The

number of auditors as well as their time charges and pay grades affect

direct audit costs. Service center auditors have the lowest grades and

charge the least amount of time per audit, while CEP auditors have the

highest grades and charge the most amount of time. Also, the costs of

settlement in corporate audits are likely to be higher than in other audits

because corporations are more likely to dispute recommended

assessments. As a result, reliance on a single measure gives a less

complete picture of audit results than relying on all three measures.

Page 14 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
B-277433 

Table 3: Taxes Recommended,

Assessed, and Collected Compared

With Related Direct Staff Costs for

Audits Closed in Fiscal 1992, as of

September 27, 1997

Type of audit

Recommended to

cost ratioa

Assessed to cost

ratiob

Collected to cost

ratioc

Service center 197:1 104:1 59:1

Individual

nonbusiness 29:1 14:1 8:1

Individual business 21:1 11:1 5:1

Small corporations 15:1 7:1 4:1

Large corporations 44:1 13:1 10:1

CEP corporations 124:1 24:1 23:1

Otherd 23:1 8:1 6:1

Total 50:1 16:1 11:1

Note: Table III.2 shows this information by the 30 selected categories.

aIncludes Examination’s direct staff costs but not related indirect costs.

bIncludes Examination’s, Appeals’, and Counsel’s direct staff costs but not related indirect costs.

cIncludes Examination’s, Appeals’, and Counsel’s direct staff costs but not Collection’s direct staff

costs and related indirect costs.

d“Other” includes audits of returns for employment, estate, excise, and gift taxes; audits done in

IRS training; and audits categorized by IRS as other.

Source: GAO analysis of IRS ERIS data.

The ratios in table 3 should not be used as official measures of results

because they do not account for all costs. If costs such as Collection’s

direct staff costs and IRS’ indirect costs could be included, the ratios would

be smaller, and the differences by type of audit could change significantly.

Direct staff time accounts for about half of all time charged by auditors;

much of the remaining time produces indirect costs. The allocation of time

could vary by type of audit. For example, service center audits may have a

higher proportion of indirect costs given IRS’ reliance on automation and

nonaudit staff to help the auditors. Further, because individuals tend to

pay their additional tax assessments more slowly than corporations (see

app. IV), IRS would be likely to incur more costs to collect additional

assessments from individuals.

IRS has plans to develop a measure that approximates the least complete

ratio of the three ratios. In its 1999 budget submission, IRS reported plans

to develop a ratio of the taxes recommended to the audit costs.16 IRS

16IRS also has developed a measure that only tracks collections of recommended assessments to which

taxpayers agreed at the closure of CEP audits. Further, IRS has developed a measure of total

collections for all enforcement functions but these collections are not linked to the taxes

recommended.

Page 15 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
B-277433 

officials said the audit cost side of the ratio will come from an

activity-based costing model that IRS is developing.

We talked to IRS officials about improving these ratios by capturing more

data on the related costs. They said that tracking the direct staff time to

collect audit assessments cannot now be done but would be possible if

Collection Division staff began to report the time spent on audit-based

assessments. These officials said IRS plans to use formulas to allocate

indirect costs, such as for administration and rent, of the audit, settlement,

and collection activities to the types of audits. They said that the model

should, at a minimum, give them a better basis for knowing more about

the nature and magnitude of the indirect costs.

Further, we asked IRS about opportunities to more fully report existing

data on the revenues generated by audits. Our interviews with IRS officials

indicated that measuring and reporting information on taxes assessed and

collected from audits, in addition to taxes recommended, would not be

costly. Rather, the challenge would be to report these impacts in the most

understandable and meaningful way. For example, the officials said

amounts collected could be reported in a variety of ways, including by

fiscal year of the audit closure, fiscal year of the collection, type of audit,

and type of auditor.

Conclusions In considering the IRS-wide results of the audit function, analyzing and

reporting the assessment and collection of amounts recommended

provides a more complete picture of revenue impacts than that offered by

looking just at recommended amounts. For example, our analyses of

audits closed in fiscal year 1992 showed that IRS assessed and collected a

fraction of the recommended additional taxes. By disputing recommended

taxes, taxpayers substantially reduced the additional taxes that were

ultimately assessed. IRS, however, did collect most of the assessed taxes. A

closer analysis showed differences by the types of audit. IRS was more

likely to assess taxes recommended in simpler audits of individuals than in

complex audits of corporations. However, IRS was more likely to collect

assessments from the corporations.

We believe that analyses of existing IRS data can offer a fuller, more

balanced picture of what happens to additional taxes recommended in

audits. If IRS and Congress had access to data and analyses on the

assessment and collection of recommended amounts by type of audit, they

would have a more informed foundation for discussions and decisions on

Page 16 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
B-277433 

the audit function. For example, if certain types of audits recommend

taxes that tend not to be assessed or collected, IRS may decide to analyze

the reasons why and then make improvements to those audits or shift

audit resources elsewhere.

Another broad view of audit impacts would involve ratios that compare

the direct tax revenues generated with IRS’ related costs. Such ratios can

be developed with existing data on the direct costs incurred to

recommend, assess, and collect additional taxes as a result of the audits.

However, such ratios are not yet complete measures of audit results. For

example, IRS’ data did not include its direct staff costs to collect the

additional taxes and its indirect costs for the audit, assessment, and

collection activity. Although incomplete as measures, the ratios provide

more information on audit impacts compared with solely using data on

additional taxes recommended in audits. These analyses could be enriched

if IRS had data on its direct collection costs and its indirect costs for the

audit, settlement, and collection activities. IRS is developing an

activity-based costing model that could help IRS to account for these costs.

The analyses could also benefit from IRS having data on the other indirect

and marginal effects of audits on tax collections and costs but compiling

such data is difficult to do. We are making no recommendations on these

indirect and marginal effects because we did not attempt to collect and

analyze data on these effects.

Recommendations We recommend that the Commissioner of Internal Revenue develop

meaningful ways to report the results to Congress from tracking, over a

reasonable number of future years, existing IRS data on the assessment and

collection of additional amounts recommended in specific types of audits

closed for each fiscal year. One option for developing reporting formats

could be the tables used in this report. The reports would provide fuller

measures of the impacts of audits across IRS than those just on taxes

recommended.

We also recommend that the Commissioner develop a way to track the

direct staff costs of collecting tax assessments associated with specific

types of audits. Similarly, the Commissioner also should determine how to

account for IRS’ indirect costs in auditing returns, settling audit disputes,

and collecting audit assessments by type of audits. In analyzing how to

account for these indirect costs, IRS may find that the activity-based

costing model being developed can serve as a helpful tool.

Page 17 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
B-277433 

Agency Comments

and Our Evaluation

On April 27, 1998, we obtained comments on a draft of this report during a

meeting with officials representing IRS. They included the Assistant

Commissioner for Examination and his staff, the National Director for

Financial Analysis and his staff, the National Director for Compliance

Specialization, and representatives for the National Director of Appeals,

the Assistant Commissioner for Collection, and the National Director,

Legislative Affairs Division. The IRS Commissioner also documented the

comments in a letter dated May 27, 1998 (see app. V).

Both at the meeting and in its letter, IRS agreed to implement our

recommendations. For our recommendation on reporting the amounts of

recommended taxes that are assessed and collected, IRS said it will

annually report to Congress, by fiscal year, the amounts of recommended

taxes that are collected. For our recommendation on tracking direct and

indirect IRS costs associated with audits, IRS said it will continue to develop

the activity-based costing model to track these costs by types of audit.

IRS’ letter included an enclosure that provided various technical comments

on issues discussed in our report as well as other issues. These comments

dealt with issues such as (1) the need to carefully analyze and interpret

ERIS data; (2) the challenges of allocating IRS’ costs; (3) the value of the

activity-based costing model in allocating costs; (4) the ongoing use of ERIS

data; (5) IRS’ efforts since 1992 to improve the audit and dispute resolution

processes; (6) concerns about misinterpretations of the analyses on how

much of the recommended tax amounts were settled, assessed, and

collected; and (7) the need to analyze new measures. We have made

changes and incorporated those comments that had a direct bearing on the

information provided in this report.

We are sending copies of this report to the Chairmen and Ranking

Minority Members of the House Committee on Ways and Means, the

Senate Committee on Finance, and other congressional committees with

responsibility for IRS oversight; the IRS Commissioner; the Director of the

Office of Management and Budget; the Secretary of the Treasury; and

other interested parties. We will also make the report available to others

upon request.

Page 18 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
B-277433 

Major contributors to this report are listed in appendix VI. Please contact

me on (202) 512-9110 if you or your staff have any questions about this

report.

Sincerely yours,

James R. White

Associate Director, Tax Policy and

Administration Issues

Page 19 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Contents

Letter 1

Appendix I 

IRS’ Enforcement

Revenue Information

System

24

Appendix II 

Status of Additional

Amounts

Recommended for

Audits Closed in

Fiscal Years 1993-1997

Across Seven Types of

Audits

25

Appendix III 

Detailed Information

on Audit Results

30

Appendix IV 

The Amount of Time

IRS Takes to Collect

Additional Taxes

Assessed After Audits

33

Appendix V 

Comments From the

Internal Revenue

Service

37

Page 20 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Contents

Appendix VI 

Major Contributors to

This Report

38

Tables Table 1: Status of Additional Amounts Recommended for Audits

Closed in Fiscal Years 1992 Through 1997, as of September 27,

1997

8

Table 2: Status of Additional Amounts Recommended for Fiscal

Year 1992 Across Seven Types of Audits, as of September 27,

1997

10

Table 3: Taxes Recommended, Assessed, and Collected

Compared With Related Direct Staff Costs for Audits Closed in

Fiscal 1992, as of September 27, 1997

15

Table II.1: Status of Additional Amounts Recommended for

Audits Closed in Fiscal Year 1993 Across Seven Types of Audits,

as of September 27, 1997

25

Table II.2: Status of Additional Amounts Recommended for

Audits Closed in Fiscal Year 1994 Across Seven Types of Audits,

as of September 27, 1997

26

Table II.3: Status of Additional Amounts Recommended for

Audits Closed in Fiscal Year 1995 Across Seven Types of Audits,

as of September 27, 1997

27

Table II.4: Status of Additional Amounts Recommended for

Audits Closed in Fiscal Year 1996 Across Seven Types of Audits,

as of September 27, 1997

28

Table II.5: Status of Additional Amounts Recommended for

Audits Closed in Fiscal Year 1997 Across Seven Types of Audits,

as of September 27, 1997

29

Table III.1: Amounts Recommended for Audits Closed in Fiscal

Year 1992 Across 30 Audit Subcategories, as of September 27,

1997

30

Table III.2 Taxes Recommended, Assessed, and Collected per

Direct Staff Cost for Audits Closed in Fiscal Year 1992 Across the

30 Audit Subcategories, as of September 27, 1997

31

Table IV.1: Timing of Collection of Assessed Taxes From Audits

Closed in Fiscal Year 1992, as of September 27, 1997

34

Table IV.2: Timing of Collection of Assessed Taxes From Audits

Closed in Fiscal Year 1992 Across the 30 Audit Subcategories, as

of September 27, 1997

35

Page 21 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Contents

Abbreviations

AIMS Audit Information Management System

CEP Coordinated Examination Program

ERIS Enforcement Revenue Information System

IRS Internal Revenue Service

Page 22 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Page 23 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix I 

IRS’ Enforcement Revenue Information

System

The Enforcement Revenue Information System (ERIS) is an automated data

repository, outside the Internal Revenue Service (IRS) enforcement

process, that contains IRS data on its enforcement results; these data come

from several IRS sources. IRS developed ERIS to track information on the

resolution of enforcement cases. Prior to the development of ERIS in 1990,

IRS did not have a system that tracked the enforcement results from each

fiscal year.

The purpose of ERIS is to account for revenues collected and costs

incurred as a result of IRS enforcement activities. In addition, ERIS provides

a link to taxes assessed and collected for different types of cases tracked

by enforcement activities. ERIS enhances IRS’ ability to provide a more

complete reporting of enforcement results and forecast enforcement

revenues. ERIS also may help IRS manage its enforcement activities better to

the extent that it provides more complete reporting of costs and revenues.

ERIS works by integrating data from the various enforcement functions

with corresponding Master File data to build a comprehensive

enforcement database. It merges data extracted from the Audit

Information Management System, Information Reporting Program Case

Analysis System, Individual and Business Master Files, Individual

Retirement Account Master File, and Non-Master File. Once the data are

integrated from various sources, IRS develops a summary database from

which comprehensive reports are printed.

Page 24 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix II 

Status of Additional Amounts

Recommended for Audits Closed in Fiscal

Years 1993-1997 Across Seven Types of

Audits

Table II.1: Status of Additional Amounts Recommended for Audits Closed in Fiscal Year 1993 Across Seven Types of

Audits, as of September 27, 1997

Settlement status of recommended amountsa Collection status

Dollars in millions

Type of audit

Recommended

amounts

Percent of

disputes

unsettled

Percent not

assessed

Percent

assessed

Collected

amounts

As percent of

amount

assessed

As percent of

amount

recommended

Service center $1,146 0% 23% 77% $438 50% 38

Individual

nonbusiness 2,721 6 31 64 947 55 35

Individual

business 1,331 9 32 59 363 46 27

Small corporation 1,292 5 45 50 300 46 23

Large corporation 2,821 13 53 34 623 64 22

Coordinated

Exam Program 10,547 43 29 28 2,744 93 26

Otherb 2,164 7 51 42 606 67 28

1993 Totalc $22,022 25 35 40 $6,022 68 27

aPercentages do not total to 100 percent due to rounding.

b“Other” includes audits of returns for employment tax, estate tax, excise tax, and gift tax; audits

conducted in IRS training; and audits categorized by IRS as other.

cAmounts do not add to total due to rounding.

Source: GAO analysis of IRS ERIS data.

Page 25 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix II 

Status of Additional Amounts

Recommended for Audits Closed in Fiscal

Years 1993-1997 Across Seven Types of

Audits

Table II.2: Status of Additional Amounts Recommended for Audits Closed in Fiscal Year 1994 Across Seven Types of

Audits, as of September 27, 1997

Settlement status of recommended

amounts Collection status

Dollars in millions

Type of audit

Recommended

amounts

Percent of

disputes

unsettled

Percent not

assessed

Percent

assessed

Collected

amounts

As percent of

amount

assessed

As percent of

amount

recommended

Service center $830 0% 18% 82% $353 52% 43%

Individual

nonbusiness 3,330 7 23 70 965 41 29

Individual business 1,428 8 25 67 364 38 26

Small corporation 868 6 37 57 247 50 28

Large corporation 1,867 10 40 50 622 67 33

Coordinated Exam

Program 12,228 48 26 26 2,994 95 24

Othera 2,087 31 35 34 514 72 25

1994 Totalb $22,637 31 28 41 $6,059 65 27

a“Other” includes audits of returns for employment tax, estate tax, excise tax, and gift tax; audits

conducted in IRS training; and audits categorized by IRS as other.

bAmounts do not add to total due to rounding.

Source: GAO analysis of IRS ERIS data.

Page 26 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix II 

Status of Additional Amounts

Recommended for Audits Closed in Fiscal

Years 1993-1997 Across Seven Types of

Audits

Table II.3: Status of Additional Amounts Recommended for Audits Closed in Fiscal Year 1995 Across Seven Types of

Audits, as of September 27, 1997

Settlement status of recommended

amountsa Collection status

Dollars in millions

Type of audit

Recommended

amounts

Percent of

disputes

unsettled

Percent not

assessed

Percent

assessed

Collected

amounts

As percent of

amount

assessed

As percent of

amount

recommended

Service center $1,300 1% 16% 83% $409 38% 31%

Individual

nonbusiness 3,599 11 23 66 796 34 22

Individual business 1,730 5 24 70 355 29 21

Small corporation 905 24 33 43 220 56 24

Large corporation 2,460 40 28 32 661 84 27

Coordinated Exam

Program 15,406 59 14 27 3,792 91 25

Otherb 1,783 16 32 52 644 70 36

1995 Totalc $27,184 41 19 40 $6,878 63 25

aPercentages do not total to 100 percent due to rounding.

b“Other” includes audits of returns for employment tax, estate tax, excise tax, and gift tax; audits

conducted in IRS training; and audits categorized by IRS as other.

cAmounts do not add to total due to rounding.

Source: GAO analysis of IRS ERIS data.

Page 27 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix II 

Status of Additional Amounts

Recommended for Audits Closed in Fiscal

Years 1993-1997 Across Seven Types of

Audits

Table II.4: Status of Additional Amounts Recommended for Audits Closed in Fiscal Year 1996 Across Seven Types of

Audits, as of September 27, 1997

Settlement status of recommended

amountsa Collection status

Dollars in millions

Type of audit

Recommended

amounts

Percent of

disputes

unsettled

Percent not

assessed

Percent

assessed

Collected

amounts

As percent of

amount

assessed

As percent of

amount

recommended

Service center $1,468 1% 16% 83% $469 38% 32%

Individual

nonbusiness 3,379 17 18 65 826 38 24

Individual business 1,633 15 16 69 363 32 22

Small corporation 880 25 27 48 251 60 29

Large corporation 3,135 42 16 41 762 59 24

Coordinated Exam

Program 18,093 63 17 20 3,331 92 18

Otherb 2,183 16 34 50 734 67 34

1996 Totalc $30,771 46 18 36 $6,737 61 22

aPercentages do not total to 100 percent due to rounding.

b“Other” includes audits of returns for employment tax, estate tax, excise tax, and gift tax; audits

conducted in IRS training; and audits categorized by IRS as other.

cAmounts do not add to total due to rounding.

Source: GAO analysis of IRS ERIS data.

Page 28 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix II 

Status of Additional Amounts

Recommended for Audits Closed in Fiscal

Years 1993-1997 Across Seven Types of

Audits

Table II.5: Status of Additional Amounts Recommended for Audits Closed in Fiscal Year 1997 Across Seven Types of

Audits, as of September 27, 1997

Settlement status of recommended

amountsa Collection status

Dollars in millions

Type of audit

Recommended

amounts

Percent of

disputes

unsettled

Percent not

assessed

Percent

assessed

Collected

amounts

As percent of

amount

assessed

As percent of

amount

recommended

Service center $2,343 2% 6% 92% $328 15% 14%

Individual

nonbusiness 3,544 34 7 60 688 33 19

Individual business 2,107 33 9 58 309 25 15

Small corporation 1,109 43 10 46 290 56 26

Large corporation 3,158 54 10 36 712 63 23

Coordinated Exam

Program 16,445 70 7 23 3,512 93 21

Otherb 2,984 56 6 38 608 53 20

1997 Totalc $31,691 55 7 38 $6,447 54 20

aPercentages do not total to 100 percent due to rounding.

b“Other” includes audits of returns for employment tax, estate tax, excise tax, and gift tax; audits

conducted in IRS training; and audits categorized by IRS as other.

cAmounts do not add to total due to rounding.

Source: GAO analysis of IRS ERIS data.

Page 29 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix III 

Detailed Information on Audit Results

Table III.1: Amounts Recommended for Audits Closed in Fiscal Year 1992 Across 30 Audit Subcategories, as of

September 27, 1997

Settlement statusa Collection status

Dollars in millions

Subcategory

Total

recommended

Percent of

disputes

unsettled

Percent not

assessed

Percent

assessed

Collected

amounts

As percent

of amount

assessed

As percent of

amount

recommended

Service center

Individual nonbusiness $1,310.85 0% 24% 76% $542.06 54% 41%

Individual business 107.98 1 23 76 62.54 76 58

Other 44.80 0 33 67 20.69 69 46

Individual nonbusiness

1040A TPI < $25,000 373.27 0 21 79 126.41 43 34

Non-1040A TPI < $25,000 237.66 1 25 74 77.77 44 33

TPI $25,000 < $50,000 375.23 1 26 73 135.96 50 36

TPI $50,000 < $100,000 382.25 2 32 66 156.54 62 41

TPI $100,000 and over 1,394.72 7 48 46 397.13 62 28

Individual business

C-TGR < $25,000 123.00 0 19 81 30.84 31 25

C-TGR $25,000 < $100,000 317.51 1 30 70 84.51 38 27

C-TGR $100,000 and over 760.07 8 38 54 220.21 53 29

F-TGR < $100,000 14.41 0 29 71 7.95 78 55

F-TGR $100,000 and over 75.38 23 30 47 27.77 79 37

Small corporations

No balance sheet 72.16 5 42 53 16.53 44 23

Assets < $250,000 167.76 6 40 55 38.89 43 23

Assets $250,000 < $1 million 199.65 4 41 55 67.43 61 34

Assets $1 million < $5 million 363.77 7 41 52 123.71 65 34

Assets $5 million < $10 million 197.26 8 46 47 54.56 59 28

Large corporations

Assets $10 million < $50 million 535.22 10 52 39 146.08 71 27

Assets $50 million < $100

million 288.20 12 47 41 87.67 74 30

Assets $100 million < $250

million 420.94 7 46 47 107.62 55 26

Assets $250 million and over 862.43 5 72 24 188.59 93 22

Foreign corporations 113.80 0 85 15 13.06 79 11

Coordinated Exam Program 13,893.32 39 41 20 2,757.19 97 20

Other returns

Employment tax 287.03 1 52 48 71.95 53 25

(continued)

Page 30 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix III 

Detailed Information on Audit Results

Settlement statusa Collection status

Dollars in millions

Subcategory

Total

recommended

Percent of

disputes

unsettled

Percent not

assessed

Percent

assessed

Collected

amounts

As percent

of amount

assessed

As percent of

amount

recommended

Estate tax 1,161.84 43 28 30 308.84 90 27

Excise tax 213.03 2 39 59 48.98 39 23

Gift tax 172.93 27 51 22 36.44 96 21

Trainee 328.34 11 24 65 166.84 78 51

Other 38.57 3 52 45 12.77 73 33

Total $24,833.38 26 40 34 $6,137.54 72 25

Legend

Assessed = Tax and penalty assessed less related abatements

1040A = Nonbusiness returns filed by individuals

TPI = Total positive income (income reported as a positive on tax return tables)

C-TGR = Form 1040 Schedule C (profit or loss from business) total gross receipts

F-TGR = Form 1040 Schedule F (profit or loss from farming) total gross receipts

aPercentages do not total to 100 percent due to rounding.

Source: GAO analysis of IRS ERIS data.

Table III.2 Taxes Recommended,

Assessed, and Collected Per Direct

Staff Cost for Audits Closed in Fiscal

Year 1992 Across the 30 Audit

Subcategories, as of September 27,

1997

Subcategory

Recommended

to cost ratioa

Assessed to

cost ratiob

Collection to

cost ratioc

Service center

Individual nonbusiness 216:1 112:1 61:1

Individual business 120:1 66:1 51:1

Other 93:1 58:1 40:1

Individual nonbusiness

1040A TPI < $25,000 32:1 22:1 9:1

Non-1040A TPI < $25,000 19:1 12:1 5:1

TPI $25,000 < $50,000 19:1 11:1 6:1

TPI $50,000 < $100,000 20:1 11:1 7:1

TPI $100,000 and over 44:1 16:1 10:1

Individual business returns

C-TGR < $25,000 20:1 15:1 5:1

C-TGR $25,000 < $100,000 19:1 12:1 4:1

C-TGR $100,000 and over 22:1 11:1 6:1

F-TGR < $100,000 10:1 6:1 5:1

F-TGR $100,000 and over 23:1 10:1 8:1

Small corporation returns

(continued)

Page 31 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix III 

Detailed Information on Audit Results

Subcategory

Recommended

to cost ratioa

Assessed to

cost ratiob

Collection to

cost ratioc

No balance sheet 25:1 12:1 5:1

Assets < $250,000 11:1 5:1 2:1

Assets $250,000 < $1,000,000 11:1 6:1 4:1

Assets $1,000,000 <

$5,000,000 16:1 8:1 5:1

Assets $5,000,000 <

$10,000,000 22:1 9:1 6:1

Large corporations

Assets $10,000,000 <

$50,000,000 26:1 9:1 7:1

Assets $50,000,000 <

$100,000,000 36:1 14:1 10:1

Assets $100,000,000 <

$250,000,000 46:1 19:1 10:1

Assets $250,000,000 and over 74:1 15:1 14:1

Foreign corporations 108:1 12:1 9:1

Coordinated Exam Program 124:1 24:1 24:1

Other returns

Employment tax 31:1 13:1 7:1

Estate tax 67:1 18:1 16:1

Excise tax 30:1 17:1 6:1

Gift tax 120:1 22:1 21:1

Trainee 9:1 6:1 4:1

Other 1:1 1:1 0

Total 50:1 16:1 11:1

Legend

1040A = Nonbusiness returns filed by individuals

TPI = Total positive income (income reported as a positive on tax return tables)

C-TGR = Form 1040 Schedule C (profit or loss from business) total gross receipts

F-TGR = Form 1040 Schedule F (profit or loss from farming) total gross receipts

aIncludes Examination direct staff cost but excludes indirect cost.

bIncludes Examination, Appeals, and Counsel direct staff cost but excludes indirect cost.

cIncludes Examination, Appeals, and Counsel staff cost but excludes Collection’s direct cost and

indirect cost.

Source: GAO analysis of IRS ERIS data.

Page 32 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix IV 

The Amount of Time IRS Takes to Collect

Additional Taxes Assessed After Audits

In developing ratios of the amount of taxes collected to the direct costs for

the audit, assessment, and collection activities, we could not include IRS’

direct staff costs for the collection activity. We tried various analyses to

gain insights on these costs to collect audit-based assessments, but none

of our analyses were conclusive. In sum, IRS did not have data that would

indicate the significance of these costs.

For example, we found that about 10 percent of the additional taxes

collected were collected through the direct involvement of Collection

staff. However, IRS’ data did not help us to translate this information into

the related direct staff costs. Nor did IRS have enough data to allow us to

develop formulas for allocating the Collection Division’s overall staff costs

to the direct staff costs of collecting audit-based tax assessments.

Although our analyses did not help us compute the direct collection costs,

we are reporting our results on how long IRS took to collect the

audit-based tax assessments. To determine how much time IRS took to

collect the tax assessments associated with audits closed in fiscal year

1992, we analyzed ERIS data on the amount of taxes collected from the

various types of collection notices. Using IRS manuals, we determined the

number of weeks that was to have elapsed between the assessment and

each notice.1

 These collections also accounted for amounts that taxpayers

paid as a result of the audit before IRS made the official assessment. We

analyzed the timing of collections by types of audits.

For audits closed in fiscal year 1992, IRS had collected $6.1 billion of the

$8.5 billion in additional assessments, as of September 27, 1997.2

 Although

the time taken to do the audits and settle any disputes can be quite

lengthy, IRS usually collected any additional taxes from doing the audits

prior to or soon after assessment; about 81 percent was collected prior to

assessment and within the first 5 weeks after assessment. IRS collects

taxes prior to assessment to the extent that taxpayers overwithhold their

income taxes, overestimate their quarterly tax payments for the audited

tax return, carry over excess tax payments from previous tax returns, or

make a payment prior to the additional assessment to prevent the accrual

of further interest.

1

IRS sends up to four notices at 5-week intervals to individual taxpayers. To business taxpayers, IRS is

to send up to three notices, with the second notice being sent 5 weeks after the first and the third

notice being sent 6 weeks after the second.

2

We did not analyze how long the remaining $2.4 billion had gone uncollected; nor did we analyze the

length of the audit and settlement activities, given our focus on the collection of additional

recommended taxes.

Page 33 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix IV 

The Amount of Time IRS Takes to Collect

Additional Taxes Assessed After Audits

Specifically, these analyses showed that IRS collected taxes sooner from

corporations than from individuals. IRS collected 95 percent of the taxes

from CEP corporations and 92 percent from other large corporations before

the assessments or within the first 5 weeks of the assessments. For

individuals audited at service centers or district offices, IRS collected about

60 percent of the taxes within these time periods. However, the portion of

the taxes that IRS collected after 15 weeks was much higher for individuals

than for corporations; staff from the Collection Division become involved

after this time. For example, less than 5 percent of the taxes collected

from CEP and other large corporations were collected after 15 weeks.

About 25 percent of the taxes collected from individuals audited at the

service centers and district offices were collected after this period.

Table IV.1 and table IV.2 show the timing of collections of assessed taxes

for the various types of audits closed in fiscal year 1992.

Table IV.1: Timing of Collection of Assessed Taxes From Audits Closed in Fiscal Year 1992, as of September 27, 1997a

Dollars in millions

Type of audit Amount collected

Percent collected

prior to

assessment

Percent collected

within 5 weeks

after assessment

Percent collected

between 5 to 15

weeks after

assessment

Percent collected

over 15 weeks

after assessment

Service center $625 27% 32% 17% 25%

Individual nonbusiness 894 37 23 16 24

Individual business 371 36 23 13 28

Small corporations 301 54 30 8 9

Large corporations 543 59 33 5 4

Coordinated

Examination Program 2,757 62 33 3 1

Otherb 646 60 18 9 12

Totalc $6,138 52 29 8 10

aPercentages do not total to 100 percent due to rounding.

b“Other” includes audits of returns for employment tax, estate tax, excise tax, and gift tax; audits

conducted in IRS training; and audits categorized by IRS as other.

cAmounts do not add to total due to rounding.

Source: GAO analysis of IRS ERIS data.

Page 34 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix IV 

The Amount of Time IRS Takes to Collect

Additional Taxes Assessed After Audits

Table IV.2: Timing of Collection of Assessed Taxes From Audits Closed in Fiscal Year 1992 Across the 30 Audit

Subcategories, as of September 27, 1997a

Dollars in millions

Subcategory Tax collected

Percent collected

prior to

assessment

Percent collected

within 5 weeks

after assessment

Percent collected

between 5 to 15

weeks after

assessment

Percent collected

over 15 weeks

after assessment

Service center

Individual nonbusiness $542.06 27% 30% 17% 26%

Individual business 62.54 32 33 17 17

Other 20.69 14 72 6 8

Individual nonbusiness

1040A TPI < $25,000 126.41 11 19 29 41

Non-1040A TPI < $25,000 77.77 22 20 22 36

TPI $25,000 < $50,000 135.96 28 21 18 32

TPI $50,000 < $100,000 156.54 41 21 14 24

TPI $100,000 and over 397.13 50 26 10 14

Individual business returns

C-TGR < $25,000 30.84 20 17 19 45

C-TGR $25,000

< $100,000 84.51 26 19 15 40

C-TGR $100,000

and over 220.21 39 24 12 24

F-TGR < $100,000 7.95 61 14 8 17

F-TGR $100,000

and over 27.77 48 34 8 10

Small corporation returns

No balance sheet 16.53 58 31 3 7

Assets < $250,000 38.89 51 24 10 16

Assets $250,000

< $1 million 67.43 52 28 10 10

Assets $1 million

< $5 million 123.71 56 30 7 7

Assets $5 million 

< $10 million 54.56 52 33 6 9

Large corporation returns

Assets $10 million

< $50 million 146.08 55 34 4 7

Assets $50 million

< $100 million 87.67 53 35 9 4

Assets $100 million

< $250 million 107.62 65 26 8 2

(continued)

Page 35 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix IV 

The Amount of Time IRS Takes to Collect

Additional Taxes Assessed After Audits

Dollars in millions

Subcategory Tax collected

Percent collected

prior to

assessment

Percent collected

within 5 weeks

after assessment

Percent collected

between 5 to 15

weeks after

assessment

Percent collected

over 15 weeks

after assessment

Assets $250 million and over 188.59 59 37 3 2

Foreign corporations 13.06 93 6 0 1

Coordinated Exam Program 2,757.19 62 33 3 1

Other returns

Employment tax 71.95 40 25 12 23

Estate tax 308.84 80 13 4 3

Excise tax 48.98 52 21 10 18

Gift tax 36.44 69 20 7 3

Trainee 166.84 34 22 18 26

Other 12.77 62 27 5 6

Totalb $6,137.54 52 29 8 10

Legend

1040A = Nonbusiness returns filed by individuals

TPI = Total positive income (income reported as a positive on tax return tables)

C-TGR = Form 1040 Schedule C (profit or loss from business) total gross receipts

F-TGR = Form 1040 Schedule F (profit or loss from farming) total gross receipts

aPercentages do not total to 100 percent due to rounding

bAmounts do not add to total due to rounding.

Source: GAO analysis of IRS ERIS data.

Page 36 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix V 

Comments From the Internal Revenue

Service

Page 37 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
Appendix VI 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Thomas D. Short, Assistant Director, Tax Policy and Administration Issues

Kevin E. Daly, Senior Economist

Kansas City Field

Office

Royce L. Baker, Tax Issue Area Coordinator

James A. Slaterbeck, Evaluator-in-Charge

Bradley L. Terry, Evaluator

Thomas N. Bloom, Computer Specialist

(268807) Page 38 GAO/GGD-98-128 IRS’ Audit Results and Costs Measures
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