United States General Accounting Office

GAO Report to the Commissioner, Internal

Revenue Service

October 1995 TAX

ADMINISTRATION

Audit Trends and Taxes

Assessed on Large

Corporations

GAO/GGD-96-6

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-260136 

October 13, 1995

The Honorable Margaret Milner Richardson

Commissioner of Internal Revenue

Dear Ms. Richardson:

This report focuses on the results of the Internal Revenue Service’s (IRS)

program to audit the tax returns of about 45,000 large corporations. IRS

audits of returns filed by these 45,000 corporations plus the 1,700 largest

corporations in IRS’ Coordinated Examination Program (CEP) have

generated about two-thirds of the additional taxes recommended from all

income tax audits. Although we have reported on CEP,

1

 under which IRS

audits the largest corporations, we have not previously studied audits of

other large corporations, particularly trends on what IRS invests in and

produces from these audits. Until recently, IRS had not analyzed these

trends either.

We used IRS data to (1) analyze audit trends for fiscal years 1988 through

1994, (2) compute the assessment rate—the portion of taxes

recommended by revenue agents that were eventually assessed, and

(3) develop and compare profiles of audited large corporations with those

not audited. The second phase of our work, now under way, will analyze

factors that affect the assessment rate and review IRS’ methodology for

estimating it.

Background For audit purposes, IRS’ Examination Division defines a corporation as

large or small depending on the amount of assets reported on its income

tax return. Small corporations (about 2.4 million) are defined as those that

report total assets of less than $10 million.

Corporations reporting higher assets are considered to be large, and IRS

audits large corporations in two groups. IRS annually selects about 1,700 of

the largest and most complex corporations for CEP. The remaining large

corporations (about 45,000) may be audited under a separate IRS

program—the subject of this report.

IRS has different ways to select corporations for audits. For small

corporations, IRS uses a formula that measures the likelihood of changes to

tax liability. This formula helps IRS objectively select returns for audits that

1

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

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

Page 1 GAO/GGD-96-6 Large Corporate Audit Data
B-260136 

are considered to be most likely to produce tax changes. IRS developed the

formula by analyzing results of line-by-line audits of a random sample of

tax returns. Once selected, a small corporation return is usually audited by

an IRS revenue agent. In fiscal year 1994, IRS audited about 44,000 (1.8

percent) of 2.4 million income tax returns filed by small corporations.

For CEP, IRS selects corporations on the basis of criteria for size,

complexity, and the like. After considering its audit resources and

manually reviewing the audit potential of every CEP return, IRS selects

returns for audit. IRS audits CEP returns with teams of revenue agents and

specialists, such as economists and engineers. Our 1992 report on CEP

noted that IRS audited about 77 percent of the CEP returns for fiscal year

1991.2

The remaining large corporations (hereafter referred to as large

corporations) are usually selected for audit on the basis of IRS agents’

judgment, rather than through a scoring formula or specific criteria. In

some cases, revenue agents at a service center select returns and send

them to a district office to be audited; in other cases, all relevant returns

are sent to the district office, where revenue agents choose those they will

audit. Unlike with CEP returns, IRS usually uses a revenue agent (hereafter

referred to as auditor) rather than a team to audit the returns from this

segment of the large corporation universe. According to IRS Examination

officials, these individual auditors recently have been using IRS specialists

more than they have in the past.

To give perspective on the sizes of these large corporations compared to

other types of businesses, we analyzed average assets reported for 1992

(the most recent year of available data at IRS’ Statistics of Income

Division). Reported assets ranged from an average of about $0.4 million by

small corporations to about $6.8 billion by CEP corporations. Within this

wide range, the remaining large corporations reported an average of

$130.7 million in assets as compared with partnerships, which reported an

average of $1.3 million in assets.

In recording the audit results for large corporations not part of CEP, IRS has

created four classes according to asset size, ranging from $10 million to

over $250 million. To facilitate our reporting of trends, we collapsed the

four classes into two, (1) lower asset ($10 million to less than $100 million)

and (2) higher asset ($100 million and over). Narrative in this letter and

2

Tax Administration: IRS Efforts to Improve Corporate Compliance (GAO/GGD-92-81BR, April 17,

1992).

Page 2 GAO/GGD-96-6 Large Corporate Audit Data
B-260136 

appendix II focuses on the differences in the trends for the two combined

classes but also discusses the four classes, particularly their assessment

rates.

Results in Brief IRS’ return on the large corporation audit program appears to be high. For

each dollar invested directly in audits, IRS recommended $56 and

ultimately assessed $15 in additional taxes for the years 1988 through 1994.

These calculations exclude indirect audit costs (e.g., overhead); other IRS

costs (e.g., appeals, litigation); and corporations’ costs. They also exclude

direct audit costs associated with recommended taxes for which the

assessed amount has not been finalized.

IRS invested more in directly auditing large corporations but recommended

less additional tax per hour invested in 1994 compared to 1988. IRS spent

25 percent more hours and audited only 3 percent more returns. Further,

additional taxes recommended per audit hour decreased by 7 percent in

current dollars. In 1994 constant dollars, additional taxes recommended

decreased 4 percent overall, decreased 7 percent per return audited, and

decreased 23 percent per audit hour. IRS Examination officials explained

that the increased hours stemmed from auditing more complex returns

and issues. As a result, IRS specialists also spent more time on the audits.

These officials noted that the tax yield from making these investments

lagged because of the complexity, among other reasons.

If IRS auditors conclude that additional taxes are owed, taxpayers may

appeal within IRS or agree to pay. IRS assesses any amounts the taxpayer

agrees to pay and any appealed amounts ultimately resolved as taxes

owed. Between 1988 and 1994, large corporations agreed with ever-higher

portions of recommended amounts but still agreed with only 34 percent of

the amounts by 1994. They continued to appeal most recommended

amounts—they appealed 66 percent for 1994. IRS appeared to lose most

appealed amounts. Of the additional taxes auditors recommended over the

7 years, IRS assessed 27 percent after either agreement or resolution in

appeals. IRS Examination officials noted that various factors outside the

audit (e.g., economic conditions, claims for refunds, or net operating

losses) could lower the assessment rate. Thus, they cautioned against

using the rate as a measure of audit effectiveness.

This assessment rate varied widely when disaggregated. By the four asset

classes, the rates ranged from 20 percent to 38 percent. By IRS District, the

rate reached as high as 103 percent and fell to less than 1 percent at 20 IRS

Page 3 GAO/GGD-96-6 Large Corporate Audit Data
B-260136 

districts that recommended over $100 million in additional taxes during

the 7 years we analyzed. The reasons for such disparate rates were not

apparent, but IRS Examination officials said they were attempting to find

out.3

IRS auditors can close audits without recommending additional tax

changes. Audits that end with no change to taxes owed could have

adjustments (e.g., reduced a reported net operating loss but not enough to

produce a tax liability) or no adjustments. IRS views the former as

productive and the latter as unproductive. These trends are moving in the

wrong direction, from what IRS expects. Audits that adjusted taxable

income but not enough to change taxes owed dropped over 40 percent.

Such adjustments can reduce the net operating loss for the audited year,

which also reduces carryover of that loss to other years. The rates for

audits closing without any adjustments at all almost doubled.

These no-change trends raise questions about how well IRS selects returns

for audit and/or audits them—questions we plan to explore in the second

phase of our work. IRS has also been concerned about these and other

trends. IRS Examination officials said they convened task forces in 1994 to

find ways to select better returns for audit and to then better focus the

audits.

Our profile of these large corporations showed that most were engaged in

manufacturing or the finance/insurance industries in 1992. Audited

corporations tended to report higher average income, tax liability, and

other tax amounts than nonaudited corporations.

Objectives, Scope,

and Methodology

Our objectives were to (1) analyze audit trends in fiscal years 1988 through

1994 for large corporations, (2) compute their assessment rate, and

(3) develop and compare profiles of audited large corporations with those

not audited. To identify large corporations, we used IRS data on those

reporting assets of $10 million and more. We used IRS data to eliminate CEP

corporations.

We used three IRS databases to meet our objectives. To analyze audit

trends, we used Audit Information Management System (AIMS) data on

large corporate audits closed in fiscal years 1988 through 1994. To

compute the assessment rate, we computer-matched the AIMS data on

3

Rates can exceed 100 percent for such reasons as Appeals assessing more taxes than IRS auditors

recommended. Rates can drop significantly whenever the recommended taxes are, among other

reasons, reduced or offset by claims filed by the large corporations.

Page 4 GAO/GGD-96-6 Large Corporate Audit Data
B-260136 

recommended tax assessments to actual tax assessments on the Business

Master File (BMF), which contains information about business tax returns.

We tracked the BMF data through December 1994. To develop a profile of

the large corporations, we obtained the 1992 Statistics of Income (SOI) file

for corporations—the most recent at the time we did our work. We

matched the SOI and AIMS data to divide our population into audited and

not audited groups.

We asked IRS Examination officials at the National Office to review our

analyses of the audit trends and assessment rates and to provide any

explanations. We performed our work in Washington, D.C., and Mission,

KS, between May 1994 and May 1995 in accordance with generally

accepted government auditing standards. Appendix I has more

information on our objectives, scope, and methodology.

Audit Trends Figure 1 summarizes trends in large corporate audits for fiscal years 1988

through 1994.

Page 5 GAO/GGD-96-6 Large Corporate Audit Data
B-260136 

Figure 1: Changes in Measures of

Large Corporation Audits Between

Fiscal Years 1988 and 1994

Audit coverage

Direct audit hours

Expected direction

Direct audit hours per return

Number of returns audited

Variable

Additional taxes recommended 


per audit hour

Percent

Current dollars (in percent)

Constant dollars (in percent)

Percent

Current dollars (in percent)

Constant dollars (in percent)

Percent

Current dollars (in percent)

Constant dollars (in percent)

Additional taxes recommended

Additional taxes recommended 


per return

= Not applicable


= Increase


= Decrease

18

63

14

43

28

3

17

41

16

4

20

38

16

1

5

23

7

4

7

12

16

32

4

16

14

2

25

3

21

Actual direction

Lower asset


corporations

Higher asset


corporations

Actual direction Total

b

b

b

a

13

aThis represents IRS’ expected direction of these indicators for the period 1988 to 1994. This is

not intended to reflect IRS’ longer term goals.

bPresented in 1994 constant dollars.

Source: GAO analysis of IRS data.

More details on these trends follow.

1. Number of audits: The total number of audited returns increased about

3 percent (from 10,062 in 1988 to 10,392 in 1994), after peaking in 1991 at

11,962. This increase largely involved corporations with less than

$50 million in assets. The number of audited returns for higher asset

corporations fluctuated but decreased 16 percent between 1988 and 1994,

particularly in 1989 and 1990. (Refer to table II.1.)

Page 6 GAO/GGD-96-6 Large Corporate Audit Data
B-260136 

2. Audit coverage: Audit coverage rose from 23 percent in 1988 to

24 percent in 1994, after peaking at 28 percent in 1991. Coverage varied by

asset class. It decreased (especially from 1991 to 1992) from 43 percent to

31 percent for higher asset corporations, and it increased from 18 percent

to 22 percent for those with lower assets after peaking in 1991 at

25 percent. (Refer to table II.2.)

3. Direct audit hours: A comparison of 1988 and 1994 shows that IRS

invested 25 percent more hours in auditing large corporations, particularly

those with lower assets. Audit hours decreased for higher asset

corporations, particularly 1988 through 1990. (Refer to table II.3.)

4. Direct audit hours per return: This ratio increased 21 percent from 1988

to 1994, driven by audits of lower asset corporations. Their ratio increased

43 percent compared to 14 percent for higher asset corporations. On

average, IRS spent twice as long auditing a return with higher assets

compared to those with lower assets—184 hours versus 89 hours,

respectively. (Refer to table II.4.)

5. Additional recommended taxes: This amount increased 16 percent from

about $1.6 billion in 1988 to $1.9 billion in 1994. It also increased for both

types of corporations. The amount peaked in 1992 for lower asset

corporations and fluctuated year to year for higher asset corporations

while peaking in 1993. IRS Examination officials explained that a few large

audits produced the peaks in 1991 and 1993. In 1994 constant dollars,

however, recommended taxes decreased 4 percent between 1988 and

1994. (Refer to table II.5 for current dollar data on additional taxes

recommended and table V.1 for 1994 constant dollars.)

6. Additional recommended taxes per return: As with recommended taxes,

this ratio increased overall and for both categories of corporations. It rose

12 percent from about $160,000 in 1988 to $180,000 in 1994 (after reaching

$242,000 in 1993). Higher asset corporations drove this increase as its ratio

increased 38 percent after declining in 1992 and 1994. Although IRS audited

fewer of their returns, IRS recommended a relatively higher amount of

taxes. In 1994 constant dollars, recommended taxes per return decreased

7 percent between 1988 and 1994. (Refer to table II.6 and table V.3 for

details.)

7. Additional recommended taxes per audit hour: The overall ratio

decreased 7 percent from $1,409 in 1988 to $1,313 per hour in 1994.

Although the ratio rose for corporations with higher assets, this rise was

Page 7 GAO/GGD-96-6 Large Corporate Audit Data
B-260136 

more than offset by a declining ratio for those with lower assets. In 1994

constant dollars, the overall ratio decreased 23 percent from 1988 to 1994.

(Refer to tables II.7 and V.4.)

IRS Examination officials offered reasons for the increase in direct audit

hours outpacing increases in audit coverage and recommended taxes after

1988. IRS has been auditing more complex returns and using more IRS

specialists. Both steps took more time and reduced coverage. Also, many

auditors have needed more time as they gradually shifted from auditing

corporate tax shelters to auditing the whole large corporation return. On

the other hand, recommended amounts can be reduced by economic

downturns. They also cited 1986 tax law changes that took away audit

issues (e.g., investment tax credit) with relatively high yield for a small

time investment and that lowered corporate tax rates, affecting additional

recommended taxes in later years.

We also analyzed trends in audit closures. The large corporations agreed

with higher portions of recommended tax amounts from 1988 to 1994

(34 percent by 1994), but they continued to appeal most amounts

(66 percent by 1994). Although they had similar trends over the 7 years,

higher asset corporations agreed, on average, with 21 percent of all

recommended amounts while lower asset corporations agreed with

33 percent (see table II.9). Even so, large corporations increasingly agreed

with most audits (52 percent for 1994) that recommended taxes (see table

II.8). In sum, they tended to agree with small tax amounts recommended

in many audits but appeal larger amounts recommended in fewer audits.

Audits that end with no change to taxes owed could have adjustments

(e.g., reduced a reported net operating loss but not enough to produce a

tax liability) or no adjustments. IRS views the former as productive and the

latter as unproductive. The no-change trends differed. Those with

adjustments dropped from 28 percent to 16 percent; those without

adjustments increased from 8 to 16 percent. The without adjustments rate

had reached 18 percent for lower asset corporations and 10 percent for

those with higher assets by 1994.

IRS Examination officials said they would like to see the no-change rate

without adjustments fall below 10 percent. They believed that this rate will

start falling as IRS closes ongoing audits that they viewed as more

productive. For example, they believed that their investment in audits of

more complex returns will start shifting more no-change audits to audits

that recommend taxes. Also, more auditors have now learned how to audit

Page 8 GAO/GGD-96-6 Large Corporate Audit Data
B-260136 

large corporations, not just tax shelters. Even so, these officials still want

better systems for selecting and classifying (i.e., finding issues that need to

be audited) returns. In recognizing this need, they convened task forces

during 1994 to overcome such problems with large corporation audits.

These task forces are slated to last through 1996.

See appendix II for detailed information about these trends and IRS’

explanations and appendix V for trends for recommended tax amounts in

constant dollars.

Assessment Rate In tracking taxes recommended for large corporations from 1988 through

1994, we found that the final assessment had been recorded for $8.6 billion

of $12 billion in net recommended taxes. Our computer match, involving

about 56,000 audited returns, showed that IRS assessed $2.3 billion of the

$8.6 billion (27 percent) through December 1994. In computing this rate,

we subtracted the tax refunds recommended from the additional taxes

recommended for these audited returns.

The assessment rate was similar for higher and lower asset

corporations—26 percent and 28 percent, respectively. The rate, however,

differed widely by the four asset classes, ranging from 20 percent to

38 percent. By IRS district, the assessment rate ranged from over

100 percent to less than 1 percent.

The reasons for these wide variations were not apparent in the IRS

databases we used to compute the assessment rates. Our work has shown

that various factors can cause the rate to exceed 100 percent, such as IRS

Appeals assessing more taxes than recommended by the auditors. Also,

the rates can drop whenever corporate claims for refunds or net operating

losses from other tax years reduce or offset taxes that were recommended

in the audit.

Nor did IRS Examination officials know the reasons for the wide variation

in the rates. They noted that the lowest rates occurred in two regions and

they are starting to pinpoint the reasons. We also plan to explore these

reasons during a follow-on review.

Our discussions with IRS Examination officials disclosed possible reasons

for low rates. These officials pointed to nonaudit factors that can lower

the assessment rate, even if auditors supported the taxes recommended.

They cited retroactive tax law changes, court decisions that affect the

Page 9 GAO/GGD-96-6 Large Corporate Audit Data
B-260136 

recommended taxes, and other tax abatements. In addition, they said IRS

Appeals can concede recommended taxes to avoid the hazards of litigation

or because the corporation provides new information that swayed

Appeals’ decision; this information could have dissuaded the auditors from

recommending the taxes. These officials did not know the extent to which

these factors lowered the assessment rate, given limitations in IRS’

databases. For this reason, our 1994 report on CEP recommended

corrections to IRS’ databases.

In sum, IRS Examination officials cautioned against misinterpreting the

assessment rates. Because of these nonaudit factors, they believed that the

rates reflect more about the tax system and economic fluctuations than

the effectiveness of the audits. Appendix III provides details on

assessment rates and IRS’ explanations.

We also computed the assessment rate for just the additional taxes

recommended (i.e., excluding audits recommending refunds). That rate

equalled 38 percent. IRS had estimated a similar assessment rate on just the

additional taxes recommended for audits closed in fiscal years 1992

through 1994—36 percent.

Regardless of which type of assessment rate is considered, we did not

attempt to track how much of the assessed taxes were ultimately

collected. IRS Finance officials provided data indicating that IRS collected

23 percent of the taxes recommended and 68 percent of the taxes assessed

as of July 1995 for the audits closed in fiscal years 1992 through 1994. IRS

based these results on data being tracked in a new system. We plan to

analyze the data and methodology being used in this system during the

second phase of our work.

Whenever audits recommend additional taxes that go unassessed, IRS can

miss opportunities to invest audit resources more productively, and large

corporations can incur more costs to challenge those recommendations.

Data on many of these costs were not available. Using only the direct audit

costs, we calculated that IRS recommended $56 and assessed $15 in taxes

for each dollar directly spent on auditing large corporations from 1988

through 1994.4

 These calculations exclude indirect audit costs (e.g.,

overhead), IRS costs outside of audits (e.g., appeals and litigation processes

4

We calculated these ratios using the $153 million in direct audit costs alone compared to

recommended amounts of $8.6 billion and assessed amounts of $2.3 billion.

Page 10 GAO/GGD-96-6 Large Corporate Audit Data
B-260136 

to settle on assessed tax amounts), and corporations’ costs.5 It is

important to recognize that these ratios provide just one indicator of IRS’

audit activities. The ratios do not account for the costs and taxes

associated with what IRS calls revenue protection. For example, IRS may

audit various corporate claims for tax refunds to determine whether the

claims are proper. In doing so, IRS protects the government’s revenue.

Auditors disallowed $202 million in claims by large corporations during

1994 in addition to the $1.9 billion they recommended in taxes. In

1991—the first year for which IRS tracked protected tax revenue—IRS

auditors denied $212 million of these claims.

To provide perspective, we computed a similar ratio for all IRS audits.

Although not readily available for assessed taxes, data were available in

IRS’ 1996 budget to compute the ratio of recommended taxes to the costs

of all IRS audits. Our computations showed that the ratio has been about

$16 in recommended taxes to $1 in audit costs (including indirect costs)

for recent years.

Profiles of Large

Corporations

According to 1992 income tax returns, over 60 percent of the large

corporations were engaged in manufacturing or in the finance/insurance

industry. This profile was similar for both the audited and nonaudited

large corporations. Audited large corporations, however, tended to report

higher amounts, on average, of total income, taxable income, and income

tax liability.

Whether audited or not, large corporations tended to claim the

possessions tax credit more frequently than other tax credits;6

 57 percent

of $6.4 billion in tax credits claimed was for the possessions tax credit.

Appendix IV provides more details on the profile of large corporations for

1992.

IRS Comments and

Our Evaluation

We requested comments on a draft of this report from the IRS

Commissioner, and we received comments from her representatives at a

meeting on August 9, 1995. These IRS officials included the Assistant

5

In addition to nonaudit costs, the calculations excluded interest that IRS assessed; assessed interest

amounts roughly equaled assessed tax amounts. Further, the assessed tax ratio excluded the direct

audit costs associated with 28 percent of all recommended taxes over the 7 years—about $3.4

billion—for which the assessed amounts have not been finalized.

6

Section 936 of the tax code provides a tax credit that equals the full amount of the U.S. income tax

liability on income earned by U.S. firms from operations in U.S. possessions. This credit is referred to

as the possessions tax credit.

Page 11 GAO/GGD-96-6 Large Corporate Audit Data
B-260136 

Commissioner for Examination and his staff that oversee audits of large

corporations as well as staff from IRS’ Office of Legislative Affairs. While

generally agreeing with the trends we analyzed, these officials had

comments on our draft. In addition to technical comments that we have

incorporated where appropriate, they offered comments on three major

issues.

First, they pointed to various efforts undertaken to correct problems with

large corporation audits. The major effort entails studying ways to

improve the selection of returns for audit. Our letter now refers to these

efforts.

Second, they suggested explanations for some trends. For example, they

offered various reasons for the increases in audit coverage and additional

recommended taxes lagging behind the increase in direct audit time. They

noted that IRS has been investing time in auditing more complex issues and

in using IRS specialists. They viewed this investment as necessary and as

likely to pay off soon. They also cited tax law changes in 1986 and the

transition in the early 1990s from auditing corporate tax shelters to all

large corporate tax issues. Both factors had dampening effects on

recommended tax amounts after 1988, according to these officials. They

suggested that these factors, in combination with auditing more complex

returns, also contributed to IRS closing more audits with neither changes to

taxes owed nor adjustments to taxable income. While we did not validate

IRS’ suggested explanations, we have added them to the letter and related

appendixes.

Third, they asked for clarification on the 27 percent assessment rate.

Although our draft report had not labelled this rate as a measure of audit

effectiveness, they wanted cautions noted. They said the rate should not

be used as such a measure because of nonaudit factors (e.g., net operating

losses from other tax years that offset audit yield). They did not know the

extent to which these factors affected the rate but they believed that the

rate was just as likely to be the product of the tax and economic systems,

which they have little control over, rather than of the audits. We have

added their comments about the potential effects of these nonaudit factors

on the rates.

We are sending copies of this report to the Senate Committee on Finance,

the House Committee on Ways and Means, and other interested parties.

Major contributors to this report are listed in appendix VI. If you or your

Page 12 GAO/GGD-96-6 Large Corporate Audit Data
B-260136 

staff have any questions concerning this report, please contact me at

(202) 512-5407.

Sincerely yours,

Jennie S. Stathis

Director, Tax Policy

 and Administration Issues

Page 13 GAO/GGD-96-6 Large Corporate Audit Data
Contents

Letter 1

Appendix I 

Objectives, Scope,

and Methodology

18

Analyzing Audit Trends 18

Computing the Assessment Rate 19

Profiling Large Corporations 20

Appendix II 

Audit Trends for Large

Corporations

22

Appendix III 

Assessment Rates for

Large Corporations

42

Appendix IV 

Profile of Large

Corporations

47

Appendix V 

Additional Taxes

Recommended

Presented in Constant

Dollars

54

Appendix VI 

Major Contributors to

This Report

58

Tables Table I.1: SOI Universe of Large Corporations for 1992 21

Table II.1: Number of Large Corporation Returns Audited, Fiscal

Years 1988 Through 1994

23

Table II.2: Audit Coverage for Large Corporations, Fiscal Years

1988 Through 1994

25

Page 14 GAO/GGD-96-6 Large Corporate Audit Data
Contents

Table II.3: Direct Audit Hours for Large Corporations, Fiscal

Years 1988 Through 1994

27

Table II.4: Direct Audit Hours per Return for Large Corporations,

Fiscal Years 1988 Through 1994

29

Table II.5: Additional Taxes Recommended for Large

Corporations, Fiscal Years 1988 Through 1994

31

Table II.5.1: Net Additional Taxes Recommended for Large

Corporations, Fiscal Years 1988 Through 1994

32

Table II.6: Additional Taxes Recommended per Return for Large

Corporations, Fiscal Years 1988 Through 1994

34

Table II.7: Additional Taxes Recommended per Direct Audit Hour

for Large Corporations, Fiscal Years 1988 Through 1994

36

Table II.8: Percent of Returns Audited by Type of Closure for

Higher Asset Large Corporations, Fiscal Years 1988 Through 1994

38

Table II.9: Percent of Additional Taxes Recommended for Large

Corporations by Asset Size and Type of Closure, Fiscal Years

1988 Through 1994

41

Table III.1: Assessment Rate on Net Additional Recommended

Taxes for Large Corporations, Fiscal Years 1988 Through 1994

42

Table III.2: Assessment Rate on Gross Additional Taxes

Recommended for Large Corporations, Fiscal Years 1988

Through 1994

43

Table III.3: Districts With Over $100 Million in Net Additional

Taxes Recommended for Large Corporations in Descending

Order of Assessment Rate, Fiscal Years 1988 Through 1994

44

Table III.4: Descending Order of Large Corporation Assessment

Rates for Gross Additional Taxes Recommended for Those

Districts With Over $100 Million in Net Additional Taxes

Recommended, Fiscal Years 1988 Through 1994

46

Table IV.1: Income and Tax Reported by Audited and Nonaudited

Large Corporations by Asset Size, 1992

50

Table IV.2: Tax Credits Claimed by Audited and Nonaudited

Large Corporations, 1992

52

Table V.1: Additional Taxes Recommended Presented in Constant

Dollars for Large Corporations, Fiscal Years 1988 Through 1994

54

Table V.2: Net Additional Taxes Recommended Presented in

Constant Dollars for Large Corporations, Fiscal Years 1988

Through 1994

55

Table V.3: Additional Taxes Recommended per Return, Presented

in Constant Dollars for Large Corporations, Fiscal Years 1988

Through 1994

56

Page 15 GAO/GGD-96-6 Large Corporate Audit Data
Contents

Table V.4: Additional Taxes Recommended per Direct Audit

Hour, Presented in Constant Dollars for Large Corporations,

Fiscal years 1988 Through 1994

57

Figures Figure 1: Changes in Measures of Large Corporation Audits

Between Fiscal Years 1988 and 1994

6

Figure II.1: Number of Large Corporation Returns Audited, Fiscal

Years 1988 Through 1994

22

Figure II.2: Audit Coverage for Large Corporations, Fiscal Years

1988 Through 1994

24

Figure II.3: Direct Audit Hours for Large Corporations, Fiscal

Years 1988 Through 1994

26

Figure II.4: Direct Audit Hours per Return for Large

Corporations, Fiscal Years 1988 Through 1994

28

Figure II.5: Additional Taxes Recommended for Large

Corporations, Fiscal Years 1988 Through 1994

30

Figure II.6: Additional Taxes Recommended per Return for Large

Corporations, Fiscal Years 1988 Through 1994

33

Figure II.7: Additional Taxes Recommended per Direct Audit

Hour for Large Corporations, Fiscal Years 1988 Through 1994

35

Figure II.8: Percent of Returns Audited by Type of Closure for

Large Corporations, Fiscal Years 1988 Through 1994

37

Figure II.9: Percent of Additional Taxes Recommended by Type

of Closure for Large Corporations, Fiscal Years 1988 Through

1994

40

Figure IV.1: Audited Large Corporations by Type of Industry,

1992

47

Figure IV.2: Nonaudited Large Corporations by Type of Industry,

1992

48

Figure IV.3: Percent of Large Corporations by Asset Size, 1992 49

Abbreviations

AIMS Audit Information Management System

BMF Business Master File

CEP Coordinated Examination Program

IRS Internal Revenue Service

SOI Statistics of Income

TIN taxpayer identification number

Page 16 GAO/GGD-96-6 Large Corporate Audit Data
Page 17 GAO/GGD-96-6 Large Corporate Audit Data
Appendix I 

Objectives, Scope, and Methodology

Our objectives were to (1) analyze audit trends for large corporations not

in the Coordinated Examination Program (CEP) for fiscal years 1988

through 1994, (2) compute the portion of taxes recommended in audits

that were actually assessed, and (3) develop and compare profiles of

audited large corporations with those not audited.

The Internal Revenue Service (IRS) defines large corporations as those

reporting assets of $10 million or more on their income tax returns. IRS

divides large corporations into four asset classes as follows:

(1)assets of $10 million to less than $50 million,

(2)assets of $50 million to less than $100 million,

(3)assets of $100 million to less than $250 million, and

(4)assets of $250 million and over.

For these corporations, our analyses focused on data from Forms 1120

(U.S. Corporation Income Tax Return) and other related corporate

returns, except for nontaxable returns such as the Form 1120-S. These

related income tax returns included the following:

(1)1120-L (U.S. Life Insurance Company Income Tax Return),

(2)1120-PC (U.S. Property and Casualty Insurance Company Income Tax

Return),

(3)1120 Consolidated income tax return,

(4)1120L Section 594/1504c income tax return for U.S. life insurance

companies,

(5)1120-PC Section 1504c income tax return for U.S. property and casualty

insurance companies,

(6)1120 Section 594/1504c income tax return for U.S. corporations.

Our analyses of audit trends, assessment rates, and the profiles excluded

large corporations in CEP. We excluded CEP corporations from the profile

information using IRS data on CEP.

We asked IRS Examination officials at the National Office to review our

analysis of the audit trends and assessment rates and to provide any

explanations. We have summarized their comments throughout this report.

Analyzing Audit

Trends

To analyze audit trends, we used IRS’ Audit Information Management

System (AIMS) data. This database includes records from all audits closed

Page 18 GAO/GGD-96-6 Large Corporate Audit Data
Appendix I 

Objectives, Scope, and Methodology

during a given fiscal year. We reconciled totals from this database to totals

in IRS’ annual report.1

For audits closed from fiscal years 1988 through 1994, we obtained AIMS

data on additional tax recommended, tax decreases recommended,

returns audited, and direct audit hours spent on returns. We then

calculated such measures as tax recommended per return, tax

recommended per hour, and audit hours per return.2

 Appendix II reports

these trends, using current dollars for the recommended tax amounts.

Appendix V reports those trends in constant dollars.

To calculate audit coverage, we used IRS’ method of dividing the number of

audits completed in a given fiscal year by the number of returns filed the

previous year. We also computed IRS’ direct costs for auditing these

returns. For audited corporations by asset class, we applied the average

cost IRS calculated for fiscal years 1991 and 1992 for each staff year that IRS

directly spent on these audits. We adjusted the costs to current dollars for

the specific fiscal year of the audit to obtain the average cost for each of

the 7 years we analyzed.

We also analyzed the ways in which IRS closed audits of the tax returns. If

IRS recommended additional taxes, large corporations could agree to pay

or appeal these taxes.3

 If IRS did not recommend such taxes, we analyzed

how often IRS closed these no-change audits without any audit adjustments

or with adjustments.4

Computing the

Assessment Rate

To compute the assessment rate—the percentage of recommended taxes

ultimately assessed after audits—we did a computer data match of

corporate income tax returns between two IRS databases. For all closed

audits in our populations, we matched the recommended tax assessments

1

AIMS data are the most reliable data available on audit results. Other than our reconciliation effort,

we did not assess the reliability of the AIMS data.

2

The term “recommended tax” refers to the amount of additional tax that an auditor concludes should

have been paid together with any associated penalties. Our analysis focused on recommended taxes.

Penalties involved small amounts (less than 10 percent) of the recommended taxes. Interest amounts

were not reflected in IRS’ data on audit results.

3

In analyzing closures, we treated “defaults” as part of “agreed” closures. Defaults arise when the

corporation neither formally agrees or appeals, meaning the recommended tax becomes assessed.

Over the 7 years, defaults tended to be a small percentage of total additional taxes recommended,

ranging from 0 to 9 percent.

4

These adjustments can affect the amount of income, deductions, and credits on tax returns but be

offset by operating losses or excess credits. These adjustments can result in additional taxes in the

future because of carryover provisions in tax laws.

Page 19 GAO/GGD-96-6 Large Corporate Audit Data
Appendix I 

Objectives, Scope, and Methodology

recorded on AIMS to the actual tax assessments recorded on the Business

Master File (BMF). In addition to the assessed tax liabilities, the BMF

contains information on taxable income, taxes not yet paid, penalties,

interest, payments, refunds, and audit actions for business tax returns. In

both systems, each record contains the taxpayer identification number

(TIN), tax year, and return type.5

To use BMF data, we eliminated all BMF records of tax returns that had no

audit adjustment code. We also eliminated all records with audit

transactions that were posted before fiscal year 1988. Because our AIMS

data covered fiscal years 1988 through 1994, none of these audit

adjustments could have been posted on BMF before fiscal year 1988.

Also, we applied our criterion of a “completed audit.” We defined this term

as the period in which IRS made at least one tax adjustment resulting from

an audit, followed by an audit release indicator. As the starting point, we

used the last day of the previous audit period or, if not present, the date

that IRS posted the return. The BMF audit release indicator identified the

end of an audit. We added 30 calendar days to the audit release date to

identify late posting audit adjustments. IRS also does this adjustment on its

new Enforcement Revenue Information System to match tax adjustments

to taxes recommended.

Using the 25,395 taxpayers identified in AIMS data for fiscal years 1988

through 1994, we were able to match 22,679 TINs to BMF. For these TINs, we

obtained records for 56,146 returns for various tax years ranging from 1964

to 1993. AIMS has the recommended tax adjustments for each closed audit.

We dropped records that showed recommended taxes of $1 because some

IRS districts use this amount if, for some reason, they must close the case

on AIMS for a second time.

Across the AIMS and BMF data, we sought the same corporate TINs and same

audited tax years for audits closed during fiscal years 1988 through 1994.

We matched the AIMS data on recommended assessments from these audits

to BMF data on actual assessments for these audits up through

December 1994. We then analyzed the assessment rate by variables such

as the asset size of the corporation and IRS district office that did the audit.

Profiling Large

Corporations

To develop a profile of the large corporations, we obtained the 1992

Statistics of Income (SOI) file for corporations—the most recent file when

5

We did not validate data recorded in BMF with source documents.

Page 20 GAO/GGD-96-6 Large Corporate Audit Data
Appendix I 

Objectives, Scope, and Methodology

we did our work. We eliminated CEP corporations as we did for our other

analyses. We selected the large corporations by using our criteria for

return type and the asset size. We matched these data with AIMS data to

divide the large corporation population into audited and nonaudited

groups. Table I.1 shows the SOI universe and populations for each of these

steps.

Table I.1: SOI Universe of Large

Corporations for 1992 Groups of SOI corporate returns Number of returns

Total corporate returns 80,822

Returns left after excluding CEP corporations 79,108

Returns left after applying return type and asset size criteria 24,604a

Returns that were not audited 15,666b

Returns that were audited 8,938c

aThis number is our universe of large corporate returns. The weighted value equals 39,155

returns.

bThis number is our universe of nonaudited large corporate returns. The weighted value equals

25,600 returns.

cThis number is our universe of audited large corporate returns. The weighted value equals

13,555 returns.

Sampling errors associated with our SOI estimates are less than 5 percent

at the 95 percent confidence level, except for the following items:

• For audited lower asset size corporations claiming the net operating loss

deduction, the sampling errors were $1.3 billion + 6.8 percent for the net

operating loss deduction claimed and $1 million + 5.9 percent for the

average deduction claimed.

• For the nonaudited corporations, the average Foreign Tax Credit claimed

as shown in table IV.2 had a sampling error of $1.593 million + 5.8 percent.

• For the other tax credits reported in table IV.2, the sampling errors

exceeded 5 percent for both audited and nonaudited corporations. The

sampling errors for the total amount claimed were $13.9 million + 5.7

percent and $11 million + 8.9 percent for audited and nonaudited

corporations, respectively. The sampling error for the average amount

claimed is as follows: $179 thousand + 16.6 percent and $225 thousand +

21.4 percent for audited and nonaudited corporations, respectively.

Page 21 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

This appendix presents our analysis of IRS’ audit results for large

corporations, using IRS’ AIMS data. We asked IRS Examination officials to

explain any major shifts in the trends. The narrative within this appendix

reflects any explanations that these officials provided.

Figure II.1: Number of Large

Corporation Returns Audited, Fiscal

Years 1988 Through 1994

Returns audited

12,000

10,000 

8,000

6,000

0

1988 1989 1990 1991 1992 1993 1994

4,000

2,000

Fiscal year

Asset size $10 million < $100 million

Asset size $100 million and over

Total

Source: GAO analysis of IRS data.

Page 22 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Table II.1: Number of Large Corporation Returns Audited, Fiscal Years 1988 Through 1994

Lower asset size Higher asset size

Large corporation asset size

Fiscal year

$10 mil.

< $50 mil.

$50 mil.

< $100 mil. Subtotal

$100 mil.

< $250 mil.

$250 mil.

& over Subtotal Total

1988 4,659 1,893 6,552 1,823 1,687 3,510 10,062

1989 5,132 1,679 6,811 1,548 1,361 2,909 9,720

1990 6,210 1,712 7,922 1,528 1,184 2,712 10,634

1991 7,104 1,877 8,981 1,627 1,354 2,981 11,962

1992 6,399 1,849 8,248 1,536 1,287 2,823 11,071

1993 6,292 1,677 7,969 1,586 1,321 2,907 10,876

1994 5,829 1,615 7,444 1,612 1,336 2,948 10,392

Average 5,946 1,757 7,704 1,609 1,361 2,970 10,674

Source: GAO analysis of IRS data.

From 1988 to 1994, the number of returns audited has increased slightly,

particularly from 1988 to 1991, when it peaked at 11,962 returns and then

decreased to 10,392 by 1994. IRS Examination officials attributed the

decline since 1991 to auditing more complex returns and issues. Doing so

takes more time that could have been spent on more returns. Corporations

with less than $50 million in assets accounted for the overall increase in

audits during the 7 years. All other asset classes had decreases.

Over the 7 years, the number of returns audited averaged 10,674. Of these

audited returns, lower asset corporations filed 72 percent (7,704 returns)

on average.

Page 23 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Figure II.2: Audit Coverage for Large

Corporations, Fiscal Years 1988

Through 1994

Percent coverage

50

40

30

20

0

Fiscal year

Asset size $10 million < $100 million

1988 1989 1990 1991 1992 1993 1994

Asset size $100 million and over

Total

10

Source: GAO analysis of IRS data.

Page 24 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Table II.2: Audit Coverage for Large Corporations, Fiscal Years 1988 Through 1994

Lower asset size Higher asset size

Large corporation asset size

Percent coverage

Fiscal year

$10 mil.

< $50 mil.

$50 mil.

< $100 mil.

Audit coverage

lower asset

size

$100 mil.

< $250 mil.

$250 mil.

& over

Audit coverage

higher asset

size

Total audit

coverage

1988 16% 31% 18% 41% 51% 45% 23%

1989 17 29 19 38 44 40 22

1990 19 32 21 41 52 45 24

1991 24 33 25 39 50 43 28

1992 23 27 24 28 36 31 25

1993 23 24 23 28 33 30 25

1994 21 23 22 28 34 31 24

Averagea 20% 29% 22% 36% 44% 39% 25%

aAverages are computed using actual data points and may not equal the averages of the whole

numbers in the columns.

Source: GAO analysis of IRS data.

For 1988 through 1994, audit coverage changed as follows:

• It increased from 18 percent to 22 percent, peaking in 1991, for lower asset

corporations. This increase stemmed from IRS doing more audits while the

number of returns filed remained fairly constant over the 7 years. In fact,

the audit rate increased only for corporations with assets of $10 million to

less than $50 million.

• It decreased from 45 percent to 31 percent for the higher asset classes.

Their rate held fairly steady through 1991 but then dropped through 1994.

Over all 7 years, their coverage decreased because more returns were filed

but fewer were audited. IRS Examination officials said IRS has spent more

time on complex audits since 1991.

• It averaged 25 percent overall. As asset size increased, so did the average

coverage rate. Over the four asset classes, the average rate ranged from

20 percent to 44 percent.

Page 25 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Figure II.3: Direct Audit Hours for

Large Corporations, Fiscal Years 1988

Through 1994

Hours in thousands

1,600

1,400

1,200

1,000

600

200

Fiscal year

Asset size $10 million < $100 million

1988 1989 1990 1991 1992 1993 1994

Asset size $100 million and over

Total

800

400

Source: GAO analysis of IRS data.

Page 26 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Table II.3: Direct Audit Hours for Large Corporations, Fiscal Years 1988 Through 1994

Lower asset size Higher asset size

Large corporation asset size

Hours in thousands

Fiscal year

$10 mil.

< $50 mil.

$50 mil.

< $100 mil. Subtotala

$100 mil.

< $250 mil.

$250 mil.

& over Subtotala Totala

1988 328 159 487 241 414 655 1,142

1989 359 161 520 224 272 496 1,016

1990 462 165 627 213 226 440 1,067

1991 600 216 816 266 234 501 1,317

1992 569 218 787 236 308 545 1,331

1993 560 220 780 268 297 564 1,344

1994 569 224 793 284 345 629 1,422

Average 493 195 687 248 300 547 1,234

aDifference due to rounding.

Source: GAO analysis of IRS data.

Time spent directly on the audit is measured in hours.1 After dropping

from 1988 to 1989, the audit hours steadily increased about 40 percent

from fiscal years 1989 through 1994. This change represents an increase

from about 1 million to 1.4 million staff hours. IRS Examination officials

attributed the increase to investing in audits of more complex tax returns

and issues.

The increased hours primarily arose from doing more audits of lower asset

corporations over the 7 years (see fig. II.1). The audit time for these

corporations increased from 487,162 hours in 1988 to 793,115 hours in

1994 (63 percent) after peaking in 1991 and then decreasing slightly

through 1994. Audit hours for higher asset corporations decreased from

654,974 hours in 1988 to 628,851 hours in 1994 (4 percent); their hours

decreased from 1988 to 1990 and then increased steadily through 1994.

1

A direct audit hour refers to time spent directly on the audit by IRS technical staff. It excludes

training, leave, and time spent by managers. A direct audit staff year equals 2,000 hours.

Page 27 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Figure II.4: Direct Audit Hours per

Return for Large Corporations, Fiscal

Years 1988 Through 1994

250

225

200

175

150

125

75

50

25

0

100

Hours per return

Fiscal year

$10 million < $100 million

1988 1989 1990 1991 1992 1993 1994

$100 million and over

Total

Source: GAO analysis of IRS data.

Page 28 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Table II.4: Direct Audit Hours per Return for Large Corporations, Fiscal Years 1988 Through 1994

Lower asset size Higher asset size

Large corporation asset size

Fiscal year

$10 mil.

< $50 mil.

$50 mil.

< $100 mil.

Audit hours

per return

$100 mil.

< $250 mil.

$250 mil.

& over

Audit hours

per return

Audit

hours per

return

1988 70 84 74 132 246 187 114

1989 70 96 76 145 200 171 105

1990 74 96 79 140 191 162 100

1991 84 115 91 164 173 168 110

1992 89 118 95 154 239 193 120

1993 89 131 98 169 224 194 124

1994 98 139 107 176 258 213 137

Averagea 83 111 89 154 220 184 116

aAverages are computed using actual data points and may not equal the averages of the whole

numbers in the columns.

Source: GAO analysis of IRS data.

On average, IRS auditors spent twice as long auditing returns from higher

asset corporations compared to those with lower assets—184 hours versus

89 hours per return, respectively.

From 1988 to 1994, the direct audit hours per return increased 43 percent

(74 to 107 hours) for lower asset corporations, 14 percent (187 to 213

hours) for higher asset corporations, and 21 percent (114 to 137 hours)

overall. These increases match the increases in direct audit hours (see

table II.3) and in audited returns for lower asset corporations and all large

corporations (see table II.1).

However, the number of direct audit hours and audited returns decreased

for higher asset large corporations. The increase in direct audit hours per

return results from a larger decrease in the number of audited returns (see

table II.1) compared to the number of audit hours (see table II.3).

IRS Examination officials said they expected the upward trend in audit

hours per return to continue as IRS does more complex audits. They also

cited other reasons. The lack of training and experience in auditing an

entire large corporation return instead of just corporate tax shelters has

added time.

Page 29 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Figure II.5: Additional Taxes

Recommended for Large Corporations,

Fiscal Years 1988 Through 1994

Dollars in millions

3,000

2,500

2,000

1,500

500

0

Fiscal year

Asset size $10 million < $100 million

1988 1989 1990 1991 1992 1993 1994

Asset size $100 million and over

Total

1,000

Source: GAO analysis of IRS data.

Page 30 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Table II.5: Additional Taxes Recommended for Large Corporations, Fiscal Years 1988 Through 1994

Lower asset size Higher asset size

Large corporation asset size

Dollars in millions

Fiscal year

$10 mil.

< $50 mil.

$50 mil.

< $100 mil. Subtotala

$100 mil.

< $250 mil.

$250 mil.

& over Subtotala Totala

1988 $402 $182 $584 $303 $723 $1,026 $1,610

1989 317 194 511 $246 686 932 1,444

1990 356 241 598 $567 792 1,359 1,957

1991 610 223 832 $449 1,074 1,523 2,356

1992 594 298 892 $498 866 1,364 2,256

1993 543 248 791 $506 1,331 1,837 2,629

1994 481 200 680 $429 758 1,186 1,867

Average $472 $227 $698 $428 $890 $1,318 $2,017

aDifference due to rounding.

Source: GAO analysis of IRS data.

For all large corporations, additional recommended taxes grew 16 percent

from about $1.6 billion in 1988 to about $1.9 billion in 1994; except for

1989, these amounts had increased through 1993 and then dropped in 1994.

IRS Examination officials did not know the reasons for the 1994 decrease.

Both higher and lower asset corporations had similar increases over the 7

years but those with higher assets always accounted for the bulk of the

additional tax amounts.

For higher asset corporations, recommended taxes peaked in 1993—about

double the amount from 1989—but then decreased 35 percent by 1994. IRS

Examination officials attributed the big increases in 1991 and in 1993 to a

few large dollar audits. For lower asset corporations, recommended taxes

increased 53 percent from 1988 to 1992 but then decreased 24 percent

through 1994.

All four asset classes had percentage increases from 1988 to 1994 in taxes

recommended; the $100 million to less than $250 million class had the

greatest increase (42 percent), while the $250 million and over class had

the smallest (5 percent). Each class also had fluctuations over the 7 years

and different peak years, ranging from 1990 to 1993.

Page 31 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Table II.5.1: Net Additional Taxes Recommended for Large Corporations, Fiscal Years 1988 Through 1994

Lower asset size Higher asset size

Large corporation asset size

Dollars in millions

Fiscal year

$10 mil.

< $50 mil.

$50 mil.

< $100 mil. Subtotala

$100 mil.

< $250 mil.

$250 mil.

& over Subtotala Totala

1988 $354 $137 $491 $266 $571 $ 837 $1,328

1989 245 155 399 191 583 774 1,173

1990 236 184 420 521 731 1,252 1,672

1991 520 169 689 367 977 1,343 2,033

1992 520 259 778 412 770 1,182 1,960

1993 421 211 632 440 1,159 1,598 2,231

1994 423 150 572 372 618 990 1,562

Average $388 $181 $569 $367 $773 $1,149 $1,708

aDifference due to rounding.

Source: GAO analysis of IRS data.

IRS’ audit mission is to determine the correct tax liability. This includes

determining additional taxes that taxpayers owe or that should be

refunded to the taxpayers.

Although IRS collects the data, IRS reports on audit results did not offset

recommended taxes by recommended tax refunds. Our analysis of IRS data

showed that subtracting refunds from reported additional taxes

recommended would reduce additional taxes between 8 to 34 percent over

the 7 years.

Page 32 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Figure II.6: Additional Taxes

Recommended per Return for Large

Corporations, Fiscal Years 1988

Through 1994

Dollars per return in thousands

700

600

500

400

200

0

Fiscal year

$10 million < $100 million

1988 1989 1990 1991 1992 1993 1994

$100 million and over

Total

300

100

Source: GAO analysis of IRS data.

Page 33 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Table II.6: Additional Taxes Recommended per Return for Large Corporations, Fiscal Years 1988 Through 1994

Lower asset size Higher asset size

Large corporation asset size

Dollars in thousands

Fiscal year

$10 mil.

< $50 mil.

$50 mil.

< $100 mil.

Taxes

recommended

per return

$100 mil.

< $250 mil.

$250 mil.

& over

Taxes

recommended

per return

Taxes

recommended

per return

1988 $86 $96 $ 89 $166 $428 $292 $160

1989 62 116 75 159 504 320 149

1990 57 141 75 371 669 501 184

1991 86 119 93 276 793 511 197

1992 93 161 108 324 673 483 204

1993 86 148 99 319 1,008 632 242

1994 82 124 91 266 567 402 180

Averagea $79 $141 $91 $266 $654 $444 $189

aAverages are completed using actual data points and may not equal the averages of the whole

numbers in the columns.

Source: GAO analysis of IRS data.

Over the 7 years, the additional taxes recommended per audited return

averaged about $189,000 for all large corporations. Audits of higher asset

corporations drove this average; these audits averaged about $444,000.

A comparison of 1988 to 1994 showed that the ratio of recommended taxes

per return increased for lower and higher asset corporations but at

different rates and with different fluctuations, as follows:

• For lower asset corporations, the ratio increased just 3 percent. This ratio

increased about 43 percent between 1990 and 1992 and then decreased

through 1994.

• For higher asset corporations, the ratio increased 38 percent from 1988 to

1994 after fluctuations. This ratio increased from 1988 to 1990, flattened

out for 1990 through 1992, increased in 1993, and then dropped 36 percent

in 1994.

As noted after table II.5, a few large cases drove the 1991 and 1993 results

according to the IRS officials.

Page 34 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Figure II.7: Additional Taxes

Recommended per Direct Audit Hour

for Large Corporations, Fiscal Years

1988 Through 1994

Dollars per hour

3,500

3,000

2,500

2,000

1,000

500

Fiscal year

Asset size $10 million < $100 million

1988 1989 1990 1991 1992 1993 1994

Asset size $100 million and over

Total

1,500

Source: GAO analysis of IRS data.

Page 35 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Table II.7: Additional Taxes Recommended per Direct Audit Hour for Large Corporations, Fiscal Years 1988 Through 1994

Lower asset size Higher asset size

Large corporation asset size

Fiscal year

$10 mil.

< $50 mil.

$50 mil.

< $100 mil.

Taxes

recommended

per hour

$100 mil.

< $250 mil.

$250 mil.

& over

Taxes

recommended

per hour

Taxes

recommended

per hour

1988 $1,224 $1,147 $1,199 $1,259 $1,744 $1,566 $1,409

1989 882 1,208 983 1,096 2,525 1,879 1,420

1990 771 1,464 953 2,657 3,504 3,093 1,835

1991 1,016 1,032 1,020 1,685 4,581 3,041 1,789

1992 1,044 1,372 1,134 2,104 2,812 2,504 1,695

1993 969 1,131 1,014 1,892 4,488 3,256 1,956

1994 845 891 858 1,510 2,196 1,887 1,313

Averagea $958 $1,165 $1,016 $1,730 $2,972 $2,410 $1,634

aAverages are computed using actual data points and may not equal the averages of the whole

numbers in the columns.

Source: GAO analysis of IRS data.

A comparison of 1988 to 1994 showed that taxes recommended per audit

hour decreased 7 percent. This ratio increased from 1988 to 1990 but then

fluctuated through 1994. It increased for higher asset corporations and

decreased for lower asset corporations. More specifically, this ratio:

• increased for higher asset corporations because audits of those with assets

of (1) $100 million to less than $250 million recommended more taxes for a

proportionately smaller increase in audit hours, and (2) $250 million or

more spent fewer audit hours to recommend a slight increase in the

amount of taxes; and

• decreased for lower asset corporations because audits of those with assets

of (1) $10 million to less than $50 million required more time to

recommend less tax, and (2) $50 million to less than $100 million invested

comparatively higher amounts of audit time to recommend higher tax

amounts.

IRS Examination officials pointed to a few large audits as major

contributors to the 1991 and 1993 results.

Page 36 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Figure II.8: Percent of Returns Audited

by Type of Closure for Large

Corporations, Fiscal Years 1988

Through 1994

Percent 

60

40

30

20

0

10

50

1989 1993

No change with adjustment

Fiscal year

Agreed

1988 1990 1991 1992 1994

Appealed

No change without adjustment

Source: GAO analysis of IRS data.

Page 37 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Table II.8: Percent of Returns Audited

by Type of Closure for Higher Asset

Large Corporations, Fiscal Years 1988

Through 1994

Type of audit closure

Fiscal

year Appealed Agreed

No change

with

adjustments

No change

without

adjustments Totala

Total - lower asset size

1988 24% 39% 27% 10% 100%

1989 20 44 24 11 100

1990 20 46 21 13 100

1991 19 46 19 16 100

1992 18 49 16 17 100

1993 17 50 15 18 100

1994 16 51 16 18 100

Average 19% 47% 20% 15% 100%

Total - higher asset size

1988 33% 32% 29% 5% 100%

1989 35 36 24 5 100

1990 34 36 22 7 100

1991 32 39 20 8 100

1992 33 43 16 8 100

1993 28 47 17 8 100

1994 19 54 16 10 100

Average 31% 41% 21% 7% 100%

Total - all asset sizes

1988 27% 37% 28% 8% 100%

1989 25 42 24 9 100

1990 24 44 21 11 100

1991 22 44 19 14 100

1992 22 48 16 15 100

1993 20 50 15 15 100

1994 17 52 16 16 100

Average 22% 45% 20% 13% 100%

aDifference due to rounding.

Source: GAO analysis based on IRS data.

Our analysis of how IRS closed audits of large corporations revealed two

distinct trends from 1988 through 1994. These trends were similar for

lower and higher asset corporations.

Page 38 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

First, large corporations appealed a smaller percentage of the returns that

recommended additional taxes and agreed with a higher percentage of

these returns. A comparison of 1988 to 1994 showed that higher asset

corporations reduced their appeal rate from 33 percent to 19 percent of

the audited returns; this rate was 28 percent in 1993. Lower asset

corporations reduced this rate from 24 percent to 16 percent of the

returns.

Second, the two types of no-change rates moved in different directions

over the 7 years. The rate with audit adjustments steadily declined and the

rate without audit adjustments slowly increased. The rate without

adjustments increased for both types of corporations over the 7 years—a

100-percent increase for higher asset corporations and an 80-percent

increase for lower asset corporations. Conversely, the rate with

adjustments decreased by over 40 percent for both higher and lower asset

corporations.

Further, a comparison of 1988 rates to 1994 rates showed that the

no-change rate without adjustments for lower asset corporations was

about twice the rate for higher asset corporations. Over the 7 years, the

overall no-change rate averaged 34 percent for lower asset corporations

and 28 percent for higher asset corporations.

IRS Examination officials noted these increases in the no-change rate

without adjustments. For all large corporations, this rate was 16 percent in

1994; this rate had been at or above 10 percent for lower asset

corporations and had reached 10 percent for higher asset corporations by

1994. These officials said a more satisfactory rate would be less than

10 percent within all IRS regions. They recognized the need to be more

selective in placing returns into the audit stream. They noted that this will

only be accomplished by universally using a process that better selects

returns for audit and that then identifies issues on those returns that need

to be audited. They pointed to a task force that IRS convened in 1994 to

develop the universal process across IRS.

Page 39 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Figure II.9: Percent of Additional Taxes

Recommended by Type of Closure for

Large Corporations, Fiscal Years 1988

Through 1994

Percent 

60

40

30

20

10

50

1989 1993

Fiscal year

Agreed

1988 1990 1991 1992 1994

Appealed

90

80

70

Source: GAO analysis of IRS data.

Page 40 GAO/GGD-96-6 Large Corporate Audit Data
Appendix II 

Audit Trends for Large Corporations

Table II.9: Percent of Additional Taxes

Recommended for Large Corporations

by Asset Size and Type of Closure,

Fiscal Years 1988 Through 1994 Type of audit closure

Lower asset total Higher asset total

Total all asset

categories

Fiscal year Appealeda Agreed Appealeda Agreed Appealeda Agreed

1988 70% 30% 76% 24% 74% 26%

1989 62 38 75 25 70 30

1990 76 24 88 12 85 15

1991 61 39 87 13 78 22

1992 70 30 82 18 77 23

1993 64 36 76 24 72 28

1994 64 36 67 33 66 34

Average 67% 33% 79% 21% 75% 25%

aIn 1991, IRS started to track partial agreements for appealed returns. The percent of appealed

dollars includes these partial assessments which is less than 6 percent of the total additional

taxes recommended.

Source: GAO analysis of IRS data.

As with the trends in closing audited returns, a comparison of 1988 to 1994

showed that the large corporations appealed less and agreed with more of

the recommended tax amounts. Unlike with the return trends, the large

corporations appealed the majority of these amounts (about two-thirds by

1994).

Further, the larger the asset size, the more likely that the large corporation

would appeal the recommended taxes rather than agree to pay them. On

average, higher asset corporations appealed 79 percent of the

recommended tax amounts compared to 67 percent for those with lower

assets over the 7 years.

Page 41 GAO/GGD-96-6 Large Corporate Audit Data
Appendix III 

Assessment Rates for Large Corporations

Table III.1 shows our computation of the assessment rate on net tax

recommendations—recommended additional taxes less recommended tax

decreases. IRS assessed $2.33 billion (27 percent) of the $8.64 billion in

taxes recommended.1 IRS made the assessments through December 1994

for audits closed in fiscal years 1988 through 1994.

Table III.1: Assessment Rate on Net

Additional Recommended Taxes for

Large Corporations, Fiscal Years 1988

Through 1994

Dollars in millions

Large corporation

asset size

Taxes

recommended

Taxes

assessed

Assessment

rate

$10 mil.

< $50 mil. $2,089 $ 621 29.75%

$50 mil.

< $100 mil. 888 220 24.78

$10 mil.

< $100 mil. 2,977 841 28.27

$100 mil.

< $250 mil 2,043 776 37.98

$250 mil. & over 3,620 714 19.72

$100 mil. & over 5,663 1,490 26.31

Total $8,640 $2,331 26.98%

Source: GAO analysis of IRS data.

The higher and lower asset corporations had similar assessment rates—26

percent and 28 percent, respectively. By asset class, the rates ranged from

20 percent to 38 percent. The 38 percent rate was driven by audits in the

Manhattan District Office. Manhattan accounted for $467.9 million (23

percent) of taxes recommended and $372.7 million (48 percent) of taxes

assessed in that asset class.

IRS Examination officials itemized factors outside of the audits that

depressed the assessment rate. For this reason, they cautioned against

using the rate to measure audit effectiveness. They pointed to net

operating losses that large corporations carried over to offset taxes

recommended as well as offsets or reductions by claims for refunds,

abatements, and retroactive tax law changes and court decisions. They

also said recommended taxes can be lost in Appeals due to hazards of

litigation and to large corporations withholding tax data until then. If IRS

auditors had had these data, they would have been less likely to

1

This rate approximates our computed CEP rate—22 percent ($7.1 billion of $32.4 billion). Both rates

exclude interest. For CEP, interest amounted to $3.3 billion; for other large corporations, interest

amounted to about $2.2 billion—$1.6 billion for those with higher assets and $0.6 billion for those with

lower assets.

Page 42 GAO/GGD-96-6 Large Corporate Audit Data
Appendix III 

Assessment Rates for Large Corporations

recommend taxes. These officials did not know the extent to which these

nonaudit factors affected the assessment rate.

IRS reports audit results by the gross recommended additional taxes. Table

III.2 shows the assessment rate when recommended tax increases and tax

decreases are not netted.

Table III.2: Assessment Rate on Gross

Additional Taxes Recommended for

Large Corporations, Fiscal Years 1988

Through 1994

Dollars in millions

Large corporation

asset size

Taxes

recommended

Taxes

assessed

Assessment

rate

$10 mil.

< $50 mil. $2,548 $ 985 38.65%

$50 mil.

< $100 mil. 1,164 464 39.87

$10 mil.

< $100 mil.a 3,713 1,449 39.03

$100 mil.

< $250 mil 2,413 1,084 44.91

$250 mil. & over 4,304 1,378 32.03

$100 mil. & overa 6,717 2,462 36.66

Totala $10,430 $3,912 37.51%

aDifference due to rounding.

Source: GAO analysis of IRS data.

Our analysis of just the gross additional taxes recommended showed a

higher assessment rate overall (38 percent) and by asset class (32 percent

to 45 percent) compared to the net rate. IRS has estimated similar gross

assessment rates using data from fiscal years 1992 through 1994 versus our

7-year period. IRS’ rate was 36 percent and ranged from 24 percent to

54 percent by asset class.

Table III.3 provides the net assessment rate for the districts that

recommended at least $100 million in additional taxes.

Page 43 GAO/GGD-96-6 Large Corporate Audit Data
Appendix III 

Assessment Rates for Large Corporations

Table III.3: Districts With Over $100

Million in Net Additional Taxes

Recommended for Large Corporations

in Descending Order of Assessment

Rate, Fiscal Years 1988 Through 1994

Dollars in millions

District Name

Number

of returns

Net taxes

recommended

Taxes

assessed

Assessment

rate

1. Cleveland 1,154 $117 $120 102.70%

2. Manhattan 2,436 507 343 67.63

3. Greensboro, NC 929 187 117 62.41

4. St. Paul 1,162 175 78 44.92

5. Des Moines 535 117 50 43.24

6. Atlanta 1,123 228 96 42.20

7. Newark 2,113 159 54 33.93

8. Detroit 1,654 324 104 32.07

9. Milwaukee 972 118 36 30.20

10. St. Louis 801 163 47 28.55

11. Philadelphia 1,363 106 25 24.03

12. Chicago 1,631 139 31 22.01

13. Salt Lake City 263 111 24 21.66

14. Dallas 2,310 189 36 19.17

15. Houston 796 204 32 15.54

16. Laguna Nigel, CA 948 336 39 11.73

17. Oklahoma City 831 230 19 8.29

18. Los Angeles 966 484 17 3.60

19. San Francisco 549 611 6 0.90

20. Baltimore 1,036 144 0 0.08

All other districts 21,843 1,815 584 32.18

Not allocable to a district

officea 10,731 2,175 473 21.73

Totalb 56,146 $8,640 $2,331 26.98%

aIRS records did not identify a district office for all taxes recommended. The recommended taxes

allocable to a district were about $6.5 billion (75 percent).

bDifference due to rounding.

Source: GAO analysis of IRS data.

Across IRS’ 64 districts, 20 recommended net additional taxes of

$100 million or more between fiscal years 1988 and 1994. Three of the 20

districts—San Francisco, Manhattan, and Los Angeles—each

recommended about $500 million or more and together accounted for

$1.6 billion of the $8.6 billion recommended by all districts.

Page 44 GAO/GGD-96-6 Large Corporate Audit Data
Appendix III 

Assessment Rates for Large Corporations

As table III.3 shows, the assessment rates varied widely across the

districts. The rates reached as high as about 103 percent to less than

1 percent. By including all but two IRS districts doing large corporate

audits, the lowest rate was negative 20 percent.2

Assessment rates that exceed 100 percent indicate that appeals officers

assessed more taxes than recommended by revenue agents. This can

occur when further adjustments increase tax liability while the case is

under Appeals’ jurisdiction. For example, liability increases can occur

when an adjustment on another tax year decreases a net operating loss

carryback deduction on the tax years being appealed, a math error is

found, or a taxpayer files an amended return increasing tax liability.

Negative assessment rates occur when the appeals officer not only

concedes all taxes recommended but also approves a tax refund because

the taxpayer filed a claim for refund or the appeals process reduced the

reported tax liability. For example, the appeals officer can decrease tax

liability because of an error in the taxes recommended or an increase in a

loss carryback deduction from another tax year to the tax year in Appeals.

IRS Examination officials did not know the specific reasons for the lowest

rates. They noted that two regions tended to account for these lowest

rates. They planned to follow up with the regions to uncover the reasons

and see whether actions need to be taken.

Using gross additional taxes recommended, the assessment rate and

ranking of the 20 districts changed slightly. The rate ranges from

90 percent to 3 percent. (See table III.4.)

2

We excluded two districts whose assessment rates exceeded negative 100 percent because all of the

net recommended dollars were refunds and IRS eventually refunded even more; the IRS databases did

not indicate the reasons. Regardless, the recommended refunds totaled less than 0.1 percent of all net

taxes recommended.

Page 45 GAO/GGD-96-6 Large Corporate Audit Data
Appendix III 

Assessment Rates for Large Corporations

Table III.4: Descending Order of Large

Corporation Assessment Rates for

Gross Additional Taxes Recommended

for Those Districts With Over $100

Million in Net Additional Taxes

Recommended, Fiscal Years 1988

Through 1994

Dollars in millions

District Name

Number

of returns

Gross taxes

recommended

Taxes

assessed

Assessment

rate

1. Cleveland 985 $145 $130 89.88%

2. Manhattan 2,059 723 537 74.32%

3. Greensboro, NC 810 209 139 66.37%

4. Newark 1,727 254 144 56.75%

5. St. Paul 1,003 185 88 47.62%

6. Atlanta 980 248 116 46.86%

7. Des Moines 449 129 60 46.19%

8. Milwaukee 799 138 61 44.41%

9. Philadelphia 1,113 142 60 42.02%

10. Chicago 1,316 214 87 40.84%

11. Dallas 1,890 259 103 39.54%

12. Detroit 1,475 358 135 37.59%

13. St. Louis 661 182 65 35.53%

14. Salt Lake City 215 119 33 27.68%

15. Houston 668 228 53 23.33%

16. Baltimore 871 179 27 15.36%

17. Oklahoma City 690 246 33 13.52%

18. Laguna Nigel, CA 839 365 48 13.16%

19. Los Angeles 806 524 53 10.11%

20. San Francisco 460 628 20 3.26%

All other districts 18,234 2,347 1,026 43.73%

Not allocable to a district

officea 8,543 2,609 893 34.22%

Totalb 46,593 $10,430 $3,912 37.51%

aIRS records did not identify a district office for all taxes recommended. The gross recommended

taxes allocable to a district were about $7.8 billion (75 percent).

bDifference due to rounding.

Source: GAO analysis of IRS data.

Page 46 GAO/GGD-96-6 Large Corporate Audit Data
Appendix IV 

Profile of Large Corporations

To develop a profile of large corporations, we used SOI data on large

corporations that filed income tax returns for 1992. We split our profile

into large corporations that were audited and not audited, using AIMS data.

Within that framework, the elements we profiled included the type of

industry, asset size, reported income and tax, and types of tax credits

claimed.

Figure IV.1: Audited Large

Corporations by Type of Industry, 1992 Finance/insurance 34%

Agriculture 1%

Mining 2%

Construction 4%

Transportation 5%

Services 6%

Retail trade 8%

Manufacturing 28%

Wholesale trade 13%

Source: GAO analysis of IRS’ SOI data.

Page 47 GAO/GGD-96-6 Large Corporate Audit Data
Appendix IV 

Profile of Large Corporations

Figure IV.2: Nonaudited Large

Corporations by Type of Industry, 1992 Finance/insurance 52%

Agriculture 1%

Mining 2%

Construction 2%

Transportation 4%

Services 9%

Retail trade 5%

Manufacturing 17%

Wholesale trade 8%

Source: GAO analysis of IRS’ SOI data.

The majority of audited large corporations were engaged in finance,

insurance and real estate (34 percent); manufacturing (28 percent); and

wholesale trade (13 percent).

The industry profile differs for the large corporations that were not

audited. A higher percentage of them were involved in finance/insurance

and real estate (52 percent), and a lower percentage were in

manufacturing (17 percent) and wholesale trade (8 percent). The

third-ranking industry involved services (9 percent).

For both audited and nonaudited returns of the corporations involved in

finance, insurance and real estate, the majority involved banks and credit

agencies.

In the manufacturing industry for audited returns, the corporations

primarily manufactured electronic equipment, fabricated metals (such as

metal cans and shipping containers), food, and chemicals. For returns not

audited, the manufacturing corporations had a similar industry profile to

those that were audited. They were largely involved in the same industries.

Page 48 GAO/GGD-96-6 Large Corporate Audit Data
Appendix IV 

Profile of Large Corporations

Figure IV.3: Percent of Large

Corporations by Asset Size, 1992 Percent 

60

40

30

20

10

50

$10 to 50 million

70

0

$50 to $100 million

$100 to 250 million

$250 million to 1 billion

$1 billion and over

Source: GAO analysis of IRS’ SOI data.

In 1992, 79 percent of the large corporations reported assets of $10 million

to $100 million (lower asset size), and 21 percent reported $100 million or

more (higher asset size). Over 60 percent reported less than $50 million in

assets.

For all corporations, the average asset size was $131 million. The average

asset size was $32 million for lower asset corporations and $510 million for

higher asset corporations.

Comparing those audited versus not audited, the results were similar. For

example, 75 percent of the audited corporations and 81 percent of the

nonaudited corporations were in the lower asset group; the rest were

Page 49 GAO/GGD-96-6 Large Corporate Audit Data
Appendix IV 

Profile of Large Corporations

higher asset corporations. On average, the audited corporations reported

$136 million in assets while those not audited reported $128 million in

assets.

Table IV.1: Income and Tax Reported

by Audited and Nonaudited Large

Corporations by Asset Size, 1992

Dollars in thousands

Amounts

Average

amounts Amounts

Average

amounts

Higher asset size - $100 million & over

Auditeda Auditeda Not auditedb Not auditedb

Total income $308,701,228 $92,787 $412,707,183 $86,904

Taxable income 36,969,665 11,112 39,261,772 8,267

Income tax 12,576,614 3,780 13,291,383 2,799

Net tax 11,173,474 3,358 10,617,493 2,236

Lower asset size - $10 million to $100 million

Auditedc Auditedc Not auditedd Not auditedd

Total income $143,372,354 $14,018 $184,122,017 $8,830

Taxable income 15,038,065 1,470 15,504,506 744

Income tax 5,105,788 499 5,233,269 251

Net tax 4,868,725 476 4,773,347 229

aRepresents 3,327 corporations.

bRepresents 4,749 corporations.

cRepresents 10,228 corporations.

dRepresents 20,851 corporations.

Source: GAO analysis of IRS’ SOI data.

In dollar amounts, the nonaudited large corporations reported more total

income, taxable income, and income tax than the audited corporations.

However, the audited large corporations reported higher average amounts

in these categories. These higher average amounts varied by asset group.

For example:

• Higher asset corporations that were audited reported higher average

amounts in these categories than those not audited.

• Lower asset corporations that were audited reported much higher average

amounts in these categories than those not audited. The reported average

amounts by the audited group usually doubled or almost doubled these

amounts for the nonaudited group, except for total income. For total

income, the audited group reported about 59 percent more on average.

Page 50 GAO/GGD-96-6 Large Corporate Audit Data
Appendix IV 

Profile of Large Corporations

Further analysis uncovered other results for 1992, as follows.

• Among all large corporations, the approximate $31.5 billion in reported net

tax was about 30 percent of the approximate $106.8 billion in reported

taxable income.

• The percentage of returns reporting zero taxable income and zero tax was

lower for audited returns compared to nonaudited returns. For example,

22 percent of audited returns reported zero net tax compared to

36 percent for nonaudited returns.1

We also analyzed the net operating loss deduction that large corporations

claimed to reduce their 1992 taxable income. Audited higher asset

corporations claimed about $2.5 billion (average of about $4.9 million),

and those not audited claimed about $6.6 billion (average of about

$7.8 million). Among lower asset corporations, those audited claimed

about $1.3 billion (average of about $1 million), and those not audited

claimed about $3.9 billion (average of about $0.9 million).

1

Of the 13,555 audited corporations, 2,956 reported zero net tax (22 percent); of the 25,600 nonaudited

corporations, 9,200 reported zero net tax (36 percent).

Page 51 GAO/GGD-96-6 Large Corporate Audit Data
Appendix IV 

Profile of Large Corporations

Table IV.2: Tax Credits Claimed by

Audited and Nonaudited Large

Corporations, 1992

Dollars in thousands

Type of credit

Number

claiming

credit

Total

amount

claimed

Percent

of total

amount

Average

amount

claimed

Audited corporationsa

Possessions tax

credit 61 $1,037,698 47% $17,011

Foreign tax credit 995 653,050 30% 656

General business

credit 1,577 247,092 11% 157

Alternative

minimum tax

credit 1,412 236,029 11% 167

Otherb 78 13,968 1% 179

Total credit 3,359 $2,187,837 100% $ 651

Nonaudited corporationsc

Possessions tax

credit 174 $2,628,703 62% $15,107

Foreign tax credit 697 1,110,210 26 1,593

General business

credit 1,660 232,950 5 $140

Alternative

minimum tax

credit 1,980 257,573 6 $130

Otherb 49 11,009 d $225

Total credit 3,875 $4,240,444 100% $1,094

aRepresents 13,555 corporations.

bNonconventional fuel source credit and orphan drug credit.

cRepresents 25,600 corporations.

dLess than 1 percent.

Source: GAO analysis of IRS’ SOI data.

For corporations audited, the possessions tax credit accounted for

47 percent of the total credits; the foreign tax credit represented another

30 percent. Both credits were claimed primarily by higher asset

corporations. Among corporations not audited, the possessions tax credit

accounted for 62 percent, and the foreign tax credit accounted for

26 percent of the total credits claimed.

Page 52 GAO/GGD-96-6 Large Corporate Audit Data
Appendix IV 

Profile of Large Corporations

Because the possessions tax credit was claimed so much, we looked more

closely at which types of audited and nonaudited large corporations

claimed this credit. The differences were minor, as illustrated below.

• Among audited corporations, manufacturers claimed 98 percent;

manufacturers of chemicals/drugs and food claimed 79 percent of the

total. The majority of the corporations claiming this credit were in the

higher asset group (90 percent).

• Among nonaudited corporations, manufacturers claimed 96 percent;

manufacturers of chemicals/drugs and instruments and related products

claimed 80 percent of the total. Further, 84 percent of the nonaudited

corporations claiming the credit fell into the higher asset group.

Page 53 GAO/GGD-96-6 Large Corporate Audit Data
Appendix V 

Additional Taxes Recommended Presented

in Constant Dollars

Table V.1: Additional Taxes Recommended Presented in Constant Dollars for Large Corporations, Fiscal Years 1988

Through 1994

Lower asset size Higher asset size

Large corporation asset size

Dollars in millions

Fiscal year

$10 mil.

< $50 mil.

$50 mil.

< $100 mil. Subtotala

$100 mil.

< $250 mil.

$250 mil.

& over Subtotala Totala

1988 $488 $221 $709 $368 $877 $1,245 $1,954

1989 368 226 594 $286 798 1,083 1,678

1990 397 269 665 $631 882 1,513 2,178

1991 654 239 892 $481 1,152 1,633 2,526

1992 620 311 931 $519 904 1,423 2,354

1993 554 254 808 $517 1,359 1,876 2,684

1994 481 200 680 $429 758 1,186 1,867

Average $509 $246 $754 $462 $961 $1,423 $2,177

Note: Taxes recommended are presented in 1994 dollars.

aDifference due to rounding.

Source: GAO analysis of IRS data.

In a comparison of 1988 to 1994, additional taxes recommended decreased

4 percent overall and for lower asset corporations in 1994 constant dollars.

For higher asset corporations, the recommended taxes decreased 5

percent from $1,245 million in 1988 to $1,186 million in 1994. The greatest

decrease of 14 percent occurred for corporations with assets of

$250 million and over ($877 million in 1988 to $758 million in 1994).

Page 54 GAO/GGD-96-6 Large Corporate Audit Data
Appendix V 

Additional Taxes Recommended Presented

in Constant Dollars

Table V.2: Net Additional Taxes Recommended Presented in Constant Dollars for Large Corporations, Fiscal Years 1988

Through 1994

Lower asset size Higher asset size

Large corporation asset size

Dollars in millions

Fiscal year

$10 mil.

< $50 mil.

$50 mil.

< $100 mil. Subtotala

$100 mil.

< $250 mil.

$250 mil.

& over Subtotala Totala

1988 $430 $166 $596 $323 $692 $1,016 $1,611

1989 284 180 464 222 678 899 1,363

1990 262 205 467 580 814 1,394 1,861

1991 558 182 739 393 1,047 1,440 2,180

1992 542 270 812 430 803 1,233 2,045

1993 430 216 646 450 1,183 1,632 2,278

1994 423 150 572 372 618 990 1,562

Average $418 $195 $614 $396 $834 $1,229 $1,843

Note: Taxes recommended are presented in 1994 dollars.

aDifference due to rounding.

Source: GAO analysis of IRS data.

In 1994 constant dollars, net additional taxes recommended slightly

decreased 3 to 4 percent overall and for higher and lower asset

corporations in a comparison of 1988 to 1994 results. Of the four asset

classes, only the audits of corporations with assets of $100 million to less

than $250 million generated more net recommended taxes—about 15

percent (from $323 million in 1988 to $372 million in 1994).

Page 55 GAO/GGD-96-6 Large Corporate Audit Data
Appendix V 

Additional Taxes Recommended Presented

in Constant Dollars

Table V.3: Additional Taxes Recommended per Return, Presented in Constant Dollars for Large Corporations, Fiscal Years

1988 Through 1994

Lower asset size Higher asset size

Large corporation asset size

Dollars in thousands

Fiscal

year

$10 mil. <

$50 mil.

$50 mil. <

$100 mil.

Taxes

recommended

per return

$100 mil. <

$250 mil.

$250 mil. and

over

Taxes

recommended

per return

Taxes

recommended

per return

1988 $105 $117 $108 $202 $520 $355 $194

1989 72 135 87 185 585 372 173

1990 64 157 84 413 745 558 205

1991 92 127 99 296 851 548 211

1992 97 168 113 338 702 504 213

1993 88 151 101 326 1,029 645 247

1994 82 124 91 266 567 402 180

Average $86 $140 $98 $287 $706 $479 $204

Note: Taxes recommended are presented in 1994 dollars.

Source: GAO analysis of IRS data.

In 1994 constant dollars, a comparison of 1988 to 1994 showed that the

amount of additional taxes recommended per return has decreased overall

and for lower asset size corporations. For higher asset size corporations,

this ratio increased 13 percent (about $355,000 in 1988 to $402,000 in

1994). However, corporations with assets of $10 million to less than

$50 million drove the overall change with a decrease of 21 percent of

recommended taxes per return (from about $105,000 in 1988 to about

$82,000 in 1994).

Page 56 GAO/GGD-96-6 Large Corporate Audit Data
Appendix V 

Additional Taxes Recommended Presented

in Constant Dollars

Table V.4: Additional Taxes Recommended per Direct Audit Hour, Presented in Constant Dollars for Large Corporations,

Fiscal years 1988 Through 1994

Lower asset size Higher asset size

Large corporation asset size

Dollars in thousands

Fiscal

year

$10 mil. <

$50 mil.

$50 mil. <

$100 mil.

Taxes

recommended

per audit hour

$100 mil. <

$250 mil.

$250 mil. and

over

Taxes

recommended

per audit hour

Taxes

recommended

per audit hour

1988 $1,485 $1,392 $1,455 $1,528 $2,117 $1,901 $1,710

1989 1,025 1,404 1,142 1,274 2,935 2,184 1,651

1990 858 1,629 1,061 2,957 3,900 3,442 2,042

1991 1,089 1,106 1,094 1,807 4,912 3,261 1,918

1992 1,089 1,431 1,183 2,195 2,933 2,612 1,768

1993 989 1,155 1,036 1,932 4,583 3,325 1,997

1994 845 891 858 1,510 2,196 1,887 1,313

Average $1,033 $1,262 $1,098 $1,865 $3,210 $2,601 $1,764

Note: Taxes recommended are presented in 1994 dollars.

Source: GAO analysis of IRS data.

A decrease occurred overall and for each asset class except for

corporations with assets of $250 million and over. The overall decrease

from $1,710 in 1988 to $1,313 in 1994 was 23 percent. However,

corporations with assets of $10 million to less than $50 million

experienced the greatest decrease of 43 percent ($1,455 in 1988 to $858 in

1994).

Page 57 GAO/GGD-96-6 Large Corporate Audit Data
Appendix VI 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Thomas D. Short, Assistant Director, Tax Policy and

 Administration Issues

Patricia H. McGuire, Computer Specialist

Susan Baker, Computer Assistant

Kansas City Regional

Office

Cecelia M. Ball, Project Manager

Royce L. Baker, Issue Area Coordinator

Thomas N. Bloom, Computer Specialist

(268634) Page 58 GAO/GGD-96-6 Large Corporate Audit Data
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