IRS Return Selection: Certain Internal Controls for Audits in the Small Business and Self-Employed Division Should Be Strengthened
Published: 2015-12-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: IRS audits small businesses and self-employed individuals to ensure compliance with tax laws. Audits can help improve reporting compliance and reduce the tax gap—the difference between taxes owed and those voluntarily paid on time, which is estimated at $385 billion annually after late payments and enforcement actions. Therefore, it is important that IRS makes informed decisions about how it selects taxpayers for audit.
GAO was asked to review IRS's processes and controls for selecting SB/SE taxpayers for audit. This report (1) describes these processes and (2) determines how well SB/SE's selection processes and controls support its mission to apply the tax law with integrity and fairness to all.
GAO reviewed IRS criteria, processes, and control procedures for selecting taxpayers for audit; assessed whether IRS control procedures followed Standards for Internal Control in the Federal Government ; and reviewed nonprobability samples of over 200 audit files. GAO also conducted eight focus groups with SB/SE staff who review or make audit selection decisions and interviewed IRS officials.
section_title: What GAO Found
paragraphs: The Small Business/Self-Employed (SB/SE) division of the Internal Revenue Service (IRS) uses over 30 methods, called workstreams, to identify and review tax returns that may merit an audit. These returns were initially identified through seven sources which include referrals; computer programs that run filters, rules, or algorithms to identify potentially noncompliant taxpayers; and related returns that are identified in the course of another audit.
SB/SE's workstreams follow a general, multiphase process for identifying, reviewing (classifying), and selecting returns for audit. Within this general approach, the selection process varies across workstreams. Differences include the number of review steps and manual processes, which are greater for field audits compared to correspondence audits which generally focus on a single compliance issue and are identified using automated processes. For fiscal year 2013, IRS reported that SB/SE's primary workstream for field audits identified about 1.6 million returns as potentially most noncompliant. About 77,500 returns (5 percent) were selected for audit, a much smaller pool of returns than was initially identified.
SB/SE has control procedures for safeguarding data and segregating duties across the overall selection process, among others, but it has not implemented other key internal controls. The lack of strong control procedures increases the risk that the audit program's mission of fair and equitable application of the tax laws will not be achieved. Examples of internal control deficiencies include the following:
Program objectives and key term of fairness are not clearly defined. Fairness is specified in SB/SE's mission statement and referenced in IRS's procedures for auditors. However, IRS has not defined fairness or program objectives for audit selection that would support its mission of treating taxpayers fairly. GAO heard different interpretations of fairness from focus group participants. Not having a clear definition of fairness can unintentionally lead to inconsistent treatment of taxpayers and create doubts as to how fairly IRS administers the tax law. Further, the lack of clearly articulated objectives undercuts the effectiveness of SB/SE's efforts to assess risks and measure performance toward achieving these objectives.
Procedures for documenting and monitoring selection decisions are not consistent. SB/SE does not always require selection decisions and rationales to be documented. For example, SB/SE requires that some workstreams document survey decisions (when returns are not assigned for audit), rationale, and approval using a form. Other workstreams, such as its primary workstream for field audits, require a group manager stamp but do not require the rationale to be documented. Also, SB/SE does not always require classification decisions (when returns are assessed for audit potential and compliance issues) to be reviewed. Having procedures to ensure that selection decisions and rationale are consistently documented and reviewed can reduce the potential for error and unfairness.
section_title: What GAO Recommends
paragraphs: GAO recommends that IRS take seven actions to help ensure that the audit selection program meets its mission, such as establishing and communicating program objectives related to audit selection and improving procedures for documenting and monitoring the selection process. In commenting on a draft of this report, IRS agreed with the recommendations.

section_title: Letter
paragraphs: The Internal Revenue Service’s (IRS) Small Business/Self-Employed  Division (SB/SE)—one of four IRS operating divisions—oversees about  57 million taxpayers who file income, employment, excise, estate, or gift  returns. SB/SE’s enforcement responsibilities include auditing individual  and business tax returns to detect misreporting. Audits can help improve  reporting compliance and reduce the tax gap—the difference between  taxes owed and those paid voluntarily and on time. As we have  previously reported, small businesses are a key contributor to the tax  gap. Nearly 40 percent, or $179 billion, of the tax gap can be attributed  to the underreporting of both business income on individual income tax  returns and the self-employment tax that is largely assessed on business  income for self-employed taxpayers. An additional 4 percent of the tax  gap, or $19 billion, can be attributed to underreporting by small  corporations, which IRS defines as having less than $10 million in assets.
Audits provide IRS with an important enforcement tool to identify  noncompliance in reporting tax obligations as well as to enhance  voluntary reporting compliance. If taxpayers perceive the selection of  returns for audit as unfair, their confidence in IRS could be undermined  and voluntary compliance could be undercut. The mission of IRS, as well  as SB/SE, incorporates these concepts of ensuring compliance and fairly  applying the tax law.
Given the concerns expressed about the fairness of selecting taxpayers  for review, you asked us to review SB/SE’s processes and controls for  selecting returns for audit. This report (1) describes SB/SE’s processes  for selecting returns for audit; and (2) assesses how well SB/SE’s  processes and controls for selecting returns for audit support its mission,  including applying the tax law with integrity and fairness to all.
For the first objective, we reviewed IRS documents to understand the  processes and procedures that SB/SE uses to prioritize, identify, review,  and select returns for audit, as well as how SB/SE documents selection  decisions. For the second objective, we reviewed the procedures  identified above that SB/SE uses to help achieve its stated mission of  applying “the tax law with integrity and fairness to all.” We then assessed  whether these procedures adhered to relevant federal standards for  internal controls. To determine the extent to which SB/SE implemented  its selection procedures, we conducted a file review consisting of (1) a  nongeneralizable sample of 173 SB/SE audit cases opened between  March 2014 and February 2015, (2) a nongeneralizable sample of 30  evaluations on how well SB/SE staff reviewed returns, and (3) a  nongeneralizable sample of 30 returns that were selected for audit but  later removed, or screened out, from the audit inventory (i.e., surveyed).  While our samples are not representative of their populations, we  selected the samples to ensure coverage across a broad range of key  criteria and dimensions, including the extent to which manual processes  are involved. We used the results of the file review in combination with  other sources of information to assess the internal controls that help  safeguard the fairness of the return selection process, and not to  specifically look for cases of inappropriate selection. We also conducted  eight focus groups with selected SB/SE staff who are responsible for  reviewing or making return selection decisions. For both objectives, we  analyzed data from IRS’s Audit Information Management System. Based  on our testing of the data and review of documentation and interviews, we  determined that these data were reliable for the purposes of this report.  Finally, we interviewed SB/SE officials about return selection processes  and procedures, and to discuss any potential deficiencies we identified.
We conducted this performance audit from September 2014 to December  2015 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. More detailed information  on our scope and methodology appears in appendix I.
subsections: section_title: Background
paragraphs: IRS’s operating divisions develop annual plans to guide audit decisions in  terms of the number of returns to be audited. SB/SE audit plans strive to  balance the number of audits in any fiscal year across all types of tax  returns (e.g., individual income tax returns) and taxpayers (e.g., individual  wage earners, small businesses, corporations) given the available  number and location of IRS auditors, and knowledge about types of  noncompliance to pursue through audits.
SB/SE conducts audits through field offices located in seven regional  areas. These audits generally are conducted by meeting with the  taxpayer and/or his or her representatives. The field auditors include  revenue agents who tend to audit the most complex returns and tax  compliance officers who tend to audit simpler returns. SB/SE also does  audits through its four campus locations; these audits tend to be the  simplest and are generally done by tax examiners through  correspondence with the taxpayers. Figure 1 shows an organizational  chart of IRS’s operating divisions and SB/SE’s audit offices.
In fiscal year 2014, SB/SE closed 823,904 audits, representing more than  half of nearly 1.4 million closed audits across IRS in fiscal year 2014.  SB/SE audits resulted in over $12 billion of the $33 billion in total  recommended additional taxes across all IRS audits. For details on  results of SB/SE audits, see appendix II.
In addition to audits, IRS conducts nonaudit compliance checks, which  may lead to an audit. These checks include the Math Error, Automated  Underreporter (AUR), and Automated Substitute for Return (ASFR)  programs. The Math Error program electronically reviews tax returns as  they are filed for basic computational errors or missing forms/schedules.  Several months after returns have been filed, AUR electronically matches  information reported by third parties, such as banks or employers, against  the information that taxpayers report on their tax returns. This matching  helps identify potentially underreported income or unwarranted  deductions or tax credits. ASFR also uses information return data to  identify persons who did not file returns; constructs substitute tax returns  for certain nonfilers; and assesses tax, interest, and penalties based on  those substitute returns. Although these and other compliance checks  may identify potentially noncompliant tax returns that are subsequently  audited, these programs are not the subject of this report.
In March 2014, IRS’s Chief Risk Officer, who oversees its agency-wide  program to identify and assess risks, completed a high-level, risk-based  review of the IRS audit selection process. The review focused on the  potential for bias based on the judgment of the Risk Officer and not on  analysis against objective standards, such as comparing steps in the  process to the internal control standards. Even so, the Risk Officer  concluded that IRS maintained sound internal controls in its audit  programs and that the risk of partiality in IRS’s audit selection was very  low. The risk of partiality appeared lowest in the automated selection  programs. It appeared to be slightly higher for manual selection and  referral programs because greater employee judgment was involved.
section_title: SB/SE Uses a Multiphase Process and Many Methods to Identify and Review Returns for Potential Audit; Most Returns Are Not Selected
subsections: section_title: SB/SE Uses a Multiphase Process to Select Tax Returns for Audit
paragraphs: SB/SE selects potentially noncompliant tax returns for audit using a  multiphase process intended to enable IRS to narrow the large pool of  available returns to those that most merit investment of audit resources.  As shown in figure 2, in broad terms, this process generally includes (1)  identifying an initial inventory of tax returns that have audit potential (e.g.,  reporting noncompliance), (2) reviewing that audit potential to reduce the  number of returns that merit selection for audit (termed “classification”),  (3) selecting returns by assigning them to auditors based on a field  manager’s review of audit potential given available resources and needs,  and (4) auditing selected returns.
section_title: SB/SE Uses More Than 30 Methods to Identify and Review Returns for Potential Audit
paragraphs: SB/SE uses 33 methods, called workstreams, to identify and review tax  returns that may merit an audit. These workstreams can be categorized  into seven groups based on how the return was initially identified (see  appendix IV for a table of workstreams by group). We have listed these  groups in general order of how much discretion is involved in identifying,  reviewing, and selecting returns, starting with those that involve more  discretion. This ordering does not correspond to the number of audits  conducted. For example, although referrals generally involve more  discretion in selecting returns for audit, they do not make up the largest  percentage of SB/SE field audits (see figure 3).
Referrals. IRS employees and units, as well as external sources,  such as other agencies and citizens, can refer potentially  noncompliant taxpayers to SB/SE. SB/SE may start an audit if the  referral indicates significant potential for noncompliance. Referrals  can involve, among others, those promoting shelters created to avoid  taxation, whistleblowers, and those not filing required tax returns.
Related pickups. After opening an audit, SB/SE may identify the  taxpayer’s prior or subsequent year returns or returns of related  taxpayers to audit.
User-developed criteria. These criteria use filters or rules embedded  in computer software to identify returns with specific characteristics,  often for projects. These characteristics generally involve a specific  tax issue known or suspected to have high noncompliance in a  particular geographic area, industry, or population. For example, the  criteria may be used for projects that explore or test ways to uncover  noncompliance or improve compliance.
Computer programs. Computer programs use rules or formulas to  identify potential noncompliance across a type of tax return, rather  than for a specific tax issue. For example, IRS uses a computer  algorithm, the discriminant function (DIF), to determine the probability  of noncompliance somewhere on the tax return. When a return  receives a high enough score, SB/SE may review the return for audit  potential.
Data matching. When information on a tax return—such as wages,  interest, and dividends—does not match information provided to IRS  by states, employers, or other third parties, these discrepancies may  prompt SB/SE to review returns for audit potential. An example of a  workstream that uses data matching is the payment card income pilot,  which uses information from credit card transactions to identify  income that may be underreported.
Taxpayer-initiated. When taxpayers contact IRS to request an  adjustment to their respective tax returns, tax refunds, or tax credits,  or request to have a previous audit reconsidered, SB/SE may initiate  an audit after reviewing these requests.
Random identification. The National Research Program (NRP)  studies tax compliance through audits of a randomly-identified sample  of tax returns. Specifically, NRP measures voluntary compliance in  reporting income, deductions, and credits, among other categories,  and generalizes those measures to the population being studied.
section_title: SB/SE Selection Methods Have Similarities but Also Vary
paragraphs: All of SB/SE’s selection methods or workstreams follow the general  multiphase selection process to identify and review potentially  noncompliant returns before selecting and actually auditing them.  Workstreams also share some common characteristics. For example,  multiple staff are involved in the various phases so that one person  cannot control the entire process. About one-third of the workstreams use  some form of automation to identify the returns that should enter the  workstream. Most workstreams involve some form of manual review to  determine which returns have audit potential. For example, IRS auditors  review (i.e., classify) tax returns identified as having audit potential to  determine which returns have the highest potential and which parts of the  return should be audited. Finally, all workstreams screen out returns as  part of the review process. This winnowing means that the large pool of  returns initially identified as having audit potential becomes a much  smaller pool of returns that are selected for audit.
However, variations exist among the workstreams, particularly between  the field and campus. For example, the field process generally uses more  review steps and manual involvement (e.g., classification) than for  campus. The latter generally focuses on a single compliance issue and  relies more on automated filters and rules to identify returns. Among field  workstreams, the extent of review varies. For example, a few  workstreams use a committee to review proposals and authorize new  projects or investigations before returns can enter the workstream. Also,  for field audits, group managers generally decide whether to assign, hold,  or screen out returns for audit, whereas returns selected for campus  audits are generally assigned through automated processes after campus  analysts review the returns to ensure that they adhere to the selection  rules embedded in the automated processes. Some workstreams, such  as taxpayer claims and some referrals, involve more manual processes to  identify and review returns; other workstreams involve both manual and  automated processes or are almost entirely automated. Finally, the  procedures for screening out returns vary across workstreams.
section_title: SB/SE Relied on Different Methods in Its Field and Campus Locations to Select Most Returns for Audit
paragraphs: In fiscal year 2014, related pickups from various identification methods or  workstreams accounted for about 50 percent of SB/SE closed field  audits. Most of these pickups were related to various ways in which  taxpayers attempt to shelter income from taxation and DIF-sourced  returns. The DIF workstream alone (part of the computer program  identification group) accounted for over 22 percent of SB/SE closed field  audits, and various referral workstreams accounted for nearly 7 percent,  as shown in figure 3. For details on the workstreams included in the  categories shown in figure 3, see appendix VI.
For campus audits closed in fiscal year 2014, available IRS data showed  that 31 percent focused on the Earned Income Tax Credit (EITC).  SB/SE relies on a computer program known as the Dependent Database  (DDb) to identify most of the returns to be audited for EITC issues. DDb is  a rules-based system that identifies potential noncompliance related to  tax benefits based on the dependency and residency of children.  According to IRS, DDb rules are reviewed yearly for changes, and no  additional filtering or review is needed on the cases that are selected for  audit. In fiscal year 2014, DDb identified more than 77 percent of the  closed EITC audits. The other approximate 23 percent of closed EITC  audits were identified using various other methods, such as referrals from  within IRS and pickups related to audits of other tax returns.
section_title: Most Returns SB/SE Identified for Potential Audit Were Not Selected
paragraphs: SB/SE does not have complete data on the number of returns that are  initially identified as having audit potential, reviewed, and selected for  audit for all 33 workstreams. Using data that are available, table 1  illustrates differences in the extent to which returns are winnowed from  identification through selection for two workstreams. For example, about  half of the DIF-sourced returns reviewed were selected for audit, and  almost all returns reviewed for NRP were selected for audit.
section_title: Some SB/SE Procedures for Selecting Returns for Audit Met Internal Control Standards, but Objectives Were Unclear and Documentation and Monitoring Procedures Were Inconsistent
paragraphs: An effective internal control system can help federal agencies achieve  their missions and objectives and improve accountability. As set forth in  Standards for Internal Control in the Federal Government, also known as  the Green Book, internal controls comprise the plans, methods, and  procedures used to meet an entity’s mission, goals, and objectives, which  support performance-based management. Internal controls help agency  program managers achieve desired results. They also provide reasonable  assurance that program objectives are being achieved through, among  other things, effective and efficient use of resources. Internal control is not  one event, but rather a series of actions and activities that occur  throughout an entity’s operations and on an ongoing basis. Two examples  of internal control standards are the establishment of clearly defined  objectives and a commitment to documenting significant events.
SB/SE has some procedures in place that are consistent with internal  control standards. However, we identified some internal control  weaknesses that leave SB/SE vulnerable to inconsistent return selection  for audit or the perception of it.
subsections: section_title: Some SB/SE Procedures Met Internal Control Standards
paragraphs: Our review of IRS and SB/SE procedures on selecting returns for audit  found several procedures that adhered to internal control standards which  provided some assurance of fairness and integrity in the selection  process. For our review, we relied on documentation demonstrating that  the standards were employed and did not independently test whether the  standards were systemically applied.
Ethics. SB/SE demonstrated a commitment to promoting ethical  behavior among staff, which provides some high-level assurance that  it may be able to meet its goal of integrity and fair treatment of  taxpayers in general. For example, IRS’s ethics training and annual  certification process provide some assurance that IRS staff should be  aware of the need to act ethically and impartially.
Awareness of internal controls by managers. SB/SE has  demonstrated a commitment to employ internal control activities to  ensure accountability in achieving its mission. All managers are  required to do an annual self-assessment of internal control  procedures. To the extent that SB/SE managers report deficiencies  and SB/SE uses the results, the annual self-assessment can provide  assurance that the importance of internal control is understood in  SB/SE. Our work was not designed to test how effectively IRS used  the self-assessments to identify and address deficiencies.
Segregation of duties. All of SB/SE’s selection workstreams involve  multiple parties so that no individual can control the decision-making  process. For example, staff who classify a return cannot later audit the  same return. Also, for field audits, IRS coordinators in an area office  generally determine which returns will be assigned to the field offices,  rather than field offices and auditors generating their own work.  SB/SE also has procedures to ensure that managers review about 10  percent of returns classified for the DIF and NRP workstreams. Also,  managers must approve auditors’ requests to open audits for prior or  subsequent year and related returns. Although not every step in the  selection process is reviewed, these procedures provide some  assurance that the decision to audit a return is not determined  unilaterally.
Safeguarding data/systems. SB/SE demonstrated that safeguards  are in place to restrict system access to authorized users. IRS has  procedures on system security and uses a multitiered authentication  process to control system access, which we observed.
section_title: SB/SE Has Not Clearly Defined or Communicated “Fairness” in Its Return Selection Process
paragraphs: The mission statements for both IRS and SB/SE declare the strategic  goal of administering the “tax law with integrity and fairness to all.” SB/SE  officials stated that integrity and fairness are core values of IRS.  However, they did not define these terms or provide evidence that staff  know what is to be achieved by this strategic goal. Without a clear  definition of fairness that has been communicated to staff, SB/SE has  less assurance that its staff consistently treat all taxpayers fairly.
Internal Control Standard: Define  objectives  Internal control standards call for program  objectives to be clearly defined in measurable  terms to enable the design of internal control  for related risks. Specific terms should be fully  defined and clearly set forth so they can be  easily understood at all levels of the entity.  Consistent information must be reliably  communicated throughout the entity if the  entity is to achieve its goals. “The purpose of the Internal Revenue Service is to collect the proper amount of tax  revenues at the least cost to the public, and in a manner that warrants the highest degree  of public confidence in our integrity, efficiency and fairness.”  “All  must perform their professional responsibilities in a way that supports the  IRS Mission. This requires auditors to provide top quality service and to apply the law with  integrity and fairness to all.”  “The obligation to protect taxpayer privacy and to safeguard the information taxpayers  entrust to us is a fundamental part of the Service’s mission to apply the tax law with  integrity and fairness to all.”  “Requirements governing the accuracy, reliability, completeness, and timeliness of  taxpayer information will be such as to ensure fair treatment of all taxpayers.”
These references point to the overall concept of fairness without  explaining what it means, particularly when selecting tax returns for audit.  Fairness can be difficult to define because everyone may have different  concepts of what constitutes fair treatment. We heard different  interpretations of fairness and integrity from IRS participants involved in  the selection process during the eight focus groups we conducted. Given  the different interpretations, not having a clear definition of fairness  unintentionally can lead to inconsistent treatment of taxpayers and create  doubts as to how fairly IRS administers the tax law. In our focus groups,  SB/SE staff stated that they viewed audit selection as fair when they:  focus on large, unusual, and questionable items, do not consider taxpayer’s name, location, etc., avoid auditing taxpayers they know or may be in their neighborhood,  treat issues consistently across returns, apply same standards,  treat all taxpayers the same, account for varying costs across locations (e.g., housing costs), and avoid being influenced by personal preferences.
Each comment represents someone’s concept of fairness. According to  SB/SE officials, IRS relies on the judgment of its staff to determine what is  fair. Although many concepts sound similar, they can be different, or even  incompatible. For example, some participants said that not considering a  taxpayer’s name or geographic location was fair treatment. However,  other participants said that considering geographic location was  necessary to avoid auditing taxpayers they knew or to determine whether  expenses were reasonable for that location (e.g., larger expenses may be  reasonable for high-cost locations). Also, some audit projects focus on  indications of certain types of noncompliance in specific locations, such  as an IRS area or a state. SB/SE officials stated that both views of  fairness regarding location may be appropriate for classification.
We reviewed training materials used to instruct revenue agents in the  decision-making process when selecting returns to audit, as well as the  orientation briefing provided to staff assigned to classification details.  Our review of the documentation, as well as discussions with focus group  participants involved in classification, indicate that the training materials  and the briefing have not defined fairness or how to apply it consistently  when selecting returns for audit.
Another challenge to treating all taxpayers consistently or under the same  standard arises when the group manager in the field has to manage  resource constraints. Some group managers talked about not having the  right type and grade of auditor in a location to select a particular return  that was deemed worth auditing. Others talked about not having enough  travel money for auditors to justify selecting some tax returns. Group  managers in other locations may be able to select a similar return  because they have fewer of these constraints.
In addition, SB/SE officials said that what is fair may vary depending on  the role of the IRS staff involved. They said IRS staff members may have  different perspectives of what is “fair” depending on their responsibilities  and position, such as IRS staff who are analysts or managers in  headquarters versus analysts, auditors, and their managers in the field.
section_title: SB/SE Has Not Established Objectives for Fair Selection of Returns for Audit, Which Challenges Performance Measurement and Risk Management
paragraphs: SB/SE has not established objectives on the fair selection of returns.  Without a definition of fairness, SB/SE cannot be assured that an  objective for fair selection clearly indicates what is to be achieved. For  example, objectives could be based on definitions of fairness that we  heard in our focus groups, such as the extent to which selection occurs  because of large, unusual, and questionable items on a return or because  SB/SE is applying the same standards to similar tax returns.
Internal Control Standard: Assess risks  and performance to objectives  Internal control standards call for  management to set program objectives that  align with an entity’s mission, strategic plan,  goals, and applicable laws and regulations.  Clearly-defined objectives can enhance the  effectiveness and efficiency of a program’s  operations and are necessary to assess risks.  Objectives should clearly define what is to be  achieved, who is to achieve it, and how and  when it will be achieved. Documenting  objectives promotes consistent  understanding.
SB/SE develops audit objectives in its annual work plan. For fiscal year  2014, audit objectives included (1) review workload identification and  selection models, collaborate with other IRS units to revise  processes/guidelines, and develop guidance and monitoring tools to  ensure consistent application; and (2) use more research data to develop  alternative workload identification streams and delivery. These objectives  address the process of selecting returns but not whether returns are  selected fairly. For example, applying selection models and processes  consistently does not ensure that the models and processes were  designed to achieve fairness. Further, IRS has not identified a level of  consistency that would indicate that fairness has been achieved.
Without clearly-defined objectives aligned to its mission and a clear  understanding across SB/SE of how fairness is defined, SB/SE has less  assurance that it is measuring progress toward or achieving its strategic  goal of treating taxpayers fairly.
subsections: section_title: IRS Has Established Performance Measures, but None Directly Assessing Fair Selection of Returns for Audit
paragraphs: Given that SB/SE does not have clearly-defined objectives on fair  selection, it also does not have performance measures aligned with these  objectives and explicitly tied to integrity or fairness. For example, if IRS  defined fairness as focusing on large, unusual, and questionable items  and developed an objective based on this definition, performance  measures could assess the quality and extent to which auditors focused  on these items. SB/SE officials pointed to a variety of existing  performance measures that they believe assess whether selection  processes were impartial and consistent. Examples of these performance  measures include:  IRS’s Customer Satisfaction survey asks taxpayers to rate their  satisfaction with the auditor’s explanation for how the return was  selected for audit. However, SB/SE did not show how answers were  used to assess whether the selection process was fair or modify the  process to make it fair. Further, taxpayer dissatisfaction is subjective,  and taxpayers would not have context to know why their returns were  selected compared to others.
SB/SE conducts business reviews to assess how well its selection  process is performing. However, concerns raised in these reviews  focused on selection process steps, such as ordering returns and  conducting research projects, instead of the underlying fairness of  selecting a return.
All employees are to be evaluated on how well they provide fair and  equitable treatment to taxpayers as required by the Internal Revenue  Service Restructuring and Reform Act of 1998; the IRM provides  examples of behaviors that would meet this requirement. These  behaviors may be consistent with IRS’s mission, but they focus on  how taxpayers were treated after the audit started rather than how  auditors reviewed returns for potential audit selection.
Without performance measures that align with objectives to achieve fair  selection, SB/SE lacks assurance that it can measure progress toward  fair return selection.
section_title: IRS Has Taken Steps to Identify Risks, but Linkage to Audit Selection Objectives Is Needed
paragraphs: IRS’s efforts to identify risks and assess whether and how to manage  them operate under two complementary approaches.
Internal controls framework. The procedures in IRM 1.4.2 govern  IRS’s processes for monitoring and improving internal controls, which  include the identification and mitigation of risks. Managers are  expected to understand the risks associated with their operations and  ensure that controls are in place and operating properly to mitigate  those risks.
Enterprise Risk Management (ERM). ERM is broader in scope than  internal controls, focusing on agency-wide risks. ERM is intended to  help organizations in setting strategy to consider risk and how much  risk the organization is willing to accept. IRS implemented ERM in  February 2014 to increase awareness by IRS management of IRS- wide risks and to serve as an early-warning system to identify  emerging challenges and address them before they affect  operations.
Both approaches to risk management require clear, defined objectives in  measurable terms to identify and analyze risks that could challenge  achieving desired outcomes. Risks toward achieving those objectives can  be identified and analyzed, and risk tolerances can be determined.
Understanding the significance of the risks to achieving objectives  provides the basis for responding to the risks.
Without clear audit selection objectives on fairness, SB/SE lacks  assurance that it can identify and assess risks to the fair selection of  returns to audit. Absent risk identification and assessments linked to  program objectives, vulnerabilities may go unaddressed, which could lead  to unfair return selection.
section_title: SB/SE Has Not Consistently Documented Audit Selection Procedures and Decisions
paragraphs: We found many instances where SB/SE documented the review and  selection of returns for audit. However, we also found several instances  where SB/SE did not document various aspects of its return selection  process nor locate documentation in time for our review.
Internal Control Standard: Document  transactions  Internal control and all transactions and other  significant events need to be clearly  documented, and the documentation should  be readily available for review.
Audit plan changes. Changes to the field audit plan are documented  during the annual planning process, but SB/SE did not document its  process for modifying the field audit plan during the year. According to  SB/SE officials, they modify the plan during the year as additional  budget and staffing information from IRS’s finance unit becomes  available. Officials stated that changes to this audit plan are  documented by the budget information received and by the  recalculated plan. However, SB/SE did not document how it translated  the budget and staffing information into changes in the inventory  targets or staffing nor why some targets were changed but not others.
Selection decisions and rationale. SB/SE did not consistently  document decisions for selecting certain tax returns over others for  audit and the rationale behind the decisions. SB/SE does not require  all of these decisions and rationales to be documented. Returns that  are stored electronically and are deemed to be excess inventory can  be screened out without documentation such as a form, stamp, or  signature. For discriminant function (DIF)-sourced returns, SB/SE’s  primary workstream for field audits, and some referrals, only a group  manager stamp is required to screen out the returns, rather than also  documenting the rationale for screening them out. Documentation  requirements also vary within a workstream. For example, for returns  involving a tax shelter fostered by a promoter, audit screen-out  rationales are required to be documented at the group level in the field  but not at the area office level. Officials said that, aside from the Form  1900 for certain returns, they generally do not document why a return  was not selected. To illustrate, we found nine files without  documentation of the screen-out decision or rationale in our file review  of 30 screened-out returns. Regardless of whether a form is  required, the screen-out decision should be documented.
Files not located. IRS could not locate 18 of the 233 files we  requested in time for our review. For example, for non-DIF pickup  returns, 5 out of 24 files requested were not located in time. For all  types of referrals we reviewed, we were unable to review 8 out of 56  files requested because they were not located in time. According to  officials, IRS could not locate these files because files for one audit  may be stored with files for any number of related audits, files for  open or recently closed audits may not yet be available, and files may  have been stored in the wrong location.
In addition to internal control standards, the IRM requires all records to be  efficiently managed until final disposition.
Having procedures to ensure that selection decisions and rationale are  clearly and consistently documented helps provide assurance that  management directives are consistently followed and return selection  decisions are made fairly. Further, being able to find files efficiently can  aid congressional and other oversight, and prevent unnecessary taxpayer  burden if IRS later needs to contact the taxpayer regarding material that  would have been in the file.
section_title: SB/SE Has Not Regularly Monitored Decisions Made and Coding Used for Audit Selection
paragraphs: As discussed earlier in this report, SB/SE has procedures that, if  implemented, help provide some assurance that its return selection  process is generally monitored. However, we found that SB/SE did not  have requirements to monitor certain steps in the selection process.
Internal Control Standard: Monitor  controls  Program managers should have a strategy  and procedures to continually monitor and  assure the effectiveness of its control  activities. Key duties and responsibilities  should be divided among different people to  reduce the risk of error and to achieve  organizational goals. Program managers need  operational data to determine whether they  are meeting their strategic and annual  performance plans and their goals for  effective and efficient use of resources.
Dollar threshold for campus audits. We found that the dollar  threshold for selecting some returns for campus audits has remained  constant or has been adjusted informally based on inventory needs.  SB/SE has not evaluated whether the threshold should change or be  changed more formally. According to officials, the dollar threshold is  the break-even point for collecting enough tax to justify the audit.  However, the threshold is only a guide; sometimes the threshold can  be higher depending on how many returns need to be audited to meet  the audit plan. According to one official, the threshold amount has  been in place at least 4 years and possibly as long as 10 years.
Classification review. We also found that classification decisions are  not always required to be reviewed. For DIF and NRP returns, about  10 percent of classified returns are required to be reviewed for  accuracy and adherence to classification guidelines. However, other  field audit selection methods, including some referrals, do not include  a formal classification quality review. Likewise, campus audit  selections by analysts are not formally reviewed.
Review of group manager decisions. SB/SE does not always  require that group manager return selection decisions (i.e., screen- out) be reviewed. Even though multiple people are involved, in some  cases, the group manager can independently make the final selection  or screen-out decision. For state and agency referrals, and others to  varying degrees, screen-out decisions by group managers are not  reviewed. For example, in our file review of 30 screened-out returns, 8  were screened out by group managers. We did not see  documentation of the approval for screening out these returns  because such documentation was not required. According to SB/SE  officials, group managers are the most knowledgeable about the  resources available to meet audit goals. The managers also consult  with territory and area managers to determine which returns should be  screened out. For campus audits, approvals are not required to  screen out returns from audit. Officials said that workload selection  analysts communicate about the status of current and upcoming work  to determine which returns are excess inventory and not needed to  meet the annual audit plan or unable to be worked because of  resource limitations.
Source codes. We found that some codes for identifying the return to  be audited, called source codes, were mislabeled, not used, or not  well defined, even though the IRM states that all data elements in IRS  databases should be defined and documented. In our review of 215  files, six returns were coded as non-Tax Equity and Fiscal  Responsibility Act of 1982 (TEFRA) related pickups. SB/SE officials  later explained that these returns were mislabeled and should be  moved to the source code used for TEFRA-related work. We also  found two files that were coded as information referrals that should  have been coded as related pickup audits, one file that was coded as  a DIF-sourced return that should have been coded as a claim by a  taxpayer to adjust a return he or she had filed, and three files that  were coded as compliance initiative projects that should have been  coded as returns selected to train auditors. For campus audits, source  codes are assigned to each return audited but are not used to identify,  select, or monitor campus inventory and do not serve any other  purpose in campus audits. As a result, a source code may not  represent the actual source of the inventory. Further, we found two  source codes that were not well defined. One source code associated  with about 35 percent of campus audits completed in fiscal year 2014  included references to DIF that were generally not applicable, since  these returns were not related to or identified using DIF scoring.  Another source code associated with about 18 percent of campus  audits completed in fiscal year 2014 was labelled as two different  items and did not accurately describe many of the returns using this  code.
Spreading responsibility for reviewing selection and screen-out decisions  can reduce the potential for error and unfairness. In addition, adequate  controls can help ensure that audits are appropriately coded so that IRS  has accurate information to better ensure the efficient and effective use of  resources. For example, having better controls on how returns are coded  decreases the risk that data elements are misleading, which can hinder  the decision-making process, such as prioritizing returns to select for  audit and analyzing whether goals are met.
section_title: Conclusions
paragraphs: SB/SE relies on a variety of sources and processes to select returns for  audit. This complexity underscores the importance of having a robust  internal control system to support the selection process and achieve  SB/SE’s mission of administering the “tax law with integrity and fairness  to all.” SB/SE has some procedures in place that are consistent with  internal control standards. However, we identified some internal control  weaknesses that leave its audit program vulnerable to inconsistent return  selection or the perception of it. Without effective internal controls,  including defining fairness in selecting returns, SB/SE cannot know if it is  achieving its mission and whether its return selection policies and  procedures are aligned with its mission. Further, IRS will not be able to  manage risk or monitor performance as well as it otherwise could. Finally,  IRS risks the appearance that its return selection process is unfair to  taxpayers because it is unable to communicate key pieces of information,  such as its definition of fairness, to the public.
section_title: Recommendations for Executive Action
paragraphs: To help ensure SB/SE’s audit selection program meets its mission and  selects returns fairly, we recommend that the Commissioner of Internal  Revenue take the following actions:
Clearly define and document the key term “fairness” for return  selection activities.
Clearly communicate examples of fair selections to staff to better  assure consistent understanding.
Develop, document, and implement program-level objective(s) to  evaluate whether the return selection process is meeting its mission of  applying the tax law with integrity and fairness to all.
To help ensure that SB/SE’s audit selection objective(s) on fairness are  used and met, we recommend that the Commissioner of Internal  Revenue take the following actions:
Develop, document, and implement related performance measures  that would allow SB/SE to determine how well the selection of returns  for audit meets the new objective(s).
Incorporate the new objective(s) for fair return selection into the  SB/SE risk management system to help identify and analyze potential  risks to fair selections.
In addition, we recommend that the Commissioner of Internal Revenue  take the following actions:
Develop and implement consistent documentation requirements to  clarify the reasons for selecting a return for audit and who reviewed  and approved the selection decision.
Develop, document, and implement monitoring procedures to ensure  that decisions made and coding used to select returns for audit are  appropriate.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Commissioner of Internal  Revenue for review and comment. The Deputy Commissioner for  Services and Enforcement provided written comments on November 23,  2015, which are reprinted in appendix VII. IRS stated that it agrees with  the importance of sound internal controls and is committed to their  improvement, especially in the areas we recommended. IRS stated that it  agreed with our seven recommendations. Accordingly, the enclosure to  the letter listed specific IRS actions planned to implement the  recommendations. IRS also provided technical comments, which we  incorporated where appropriate.
As IRS’s letter mentioned, its audit program includes various features that  are intended to promote fair return selection, such as documents that  convey the importance of “fairness,” existing objectives and measures,  and types of monitoring. However, as our report discusses, these features  do not clarify what fair selection of returns for audit entails and how IRS  would know whether fair selections are occurring, except for when  someone such as a taxpayer questions the fairness of return selection.
For our recommendations on defining and documenting “fairness” for  return selection activities and communicating examples of fair selections  to staff, IRS stated that the concept of fairness has both collective and  individual attributes. IRS noted that fairness for return selection  encompasses three components—pursuing those who fail to comply,  objectively selecting noncompliant returns across all areas of  noncompliance, and respecting and adhering to taxpayers’ rights. As  such, IRS has taken the first step to implement our recommendation.  However, to fully implement our recommendation, IRS will need to clarify  how each component relates to return selection. For example, the first  and third components also cover what happens after return selection,  such as pursuing noncompliance and interacting with taxpayers during  the audit.
In regard to our recommendations on developing one or more program  objectives and related measures on return selection related to fairness,  as our report discusses, IRS’s current program objectives and measures  do not address fair selection of returns. We believe that IRS should  develop at least one objective and related measure that tie to its definition  of fairness. Doing so would allow IRS to more conclusively demonstrate  and assess whether its selection decisions were fair.
We also recommended that IRS improve the documentation and  monitoring of selection decisions. Our report acknowledges that  documentation and monitoring does occur in many areas but provides  examples of the need for more in other areas. As such, IRS needs  additional documentation and monitoring as opposed to merely a plan to  evaluate the need to take these actions.
We note three other clarifications based on statements in IRS’s letter.
First, IRS’s letter correctly stated that our report did not identify  any instances where the selection was considered inappropriate  or unfair. We did not design our study to look for inappropriate and  unfair selections, but rather to assess the internal controls that  help ensure a fair selection process. Further, even if we did design  our study to look for unfair selections, our design would be  hampered by the lack of a definition for fairness and related  objective(s) and measures(s) to evaluate whether selections were  fair.
Second, IRS’s letter stated that the seven groupings in our report  do not reflect how IRS views its workstreams for identifying  returns for potential audit selection. As discussed in the report, our  groupings are based on how a return was initially identified rather  than on IRS’s workstreams. For example, related pickups,  including DIF-related pickups, are identified by auditors, whereas  DIF-selected returns are identified by a computer algorithm.  Therefore, we separately grouped DIF-related pickups from DIF- selected returns. Furthermore, IRS could not provide complete  data on the number of returns audited from each of its  workstreams but could provide data on audits selected from other  sources, such as related pickups. While some of these sources  could be associated with a workstream, it was not possible for all.  As a result, we used the available IRS data to show how all SB/SE  audits were distributed by these audit identification workstreams  and sources (shown in the report as figure 3).
Third, DIF return selections do not involve the least amount of  discretion, as IRS’s letter stated. As discussed in our report, many  returns that were initially identified through DIF automation as  having audit potential were not audited. The actual audit  selections do not occur until multiple IRS staff review those  returns, requiring some human discretion. Our report discusses  other groupings with less staff discretion than DIF, such as when  taxpayers request that IRS review their returns or when IRS  randomly selects returns for a research program.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Chairmen and  Ranking Members of other Senate and House committees and  subcommittees that have appropriation, authorization, and oversight  responsibilities for IRS. We will also send copies of the report to the  Secretary of the Treasury, Commissioner of Internal Revenue, and other  interested parties. In addition, this report is available at no charge on the  GAO website at http://www.gao.gov.
If you or your staff have any questions or wish to discuss the material in  this report further, please contact me at (202) 512-9110 or  mctiguej@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  Key contributors to this report are listed in appendix VIII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report (1) describes the processes for selecting Small Business/Self- Employed (SB/SE) returns for audit, and (2) assesses how well the  processes and controls for selecting those returns support SB/SE’s  mission of “applying the tax law with integrity and fairness to all.”
For the first objective, we reviewed Internal Revenue Service (IRS)  documents that describe the processes and criteria for selecting SB/SE  returns for audit. These documents included sections of the Internal  Revenue Manual (IRM), procedures documents, process flowcharts, and  summaries of selection processes prepared by SB/SE officials. We also  interviewed IRS officials responsible for overseeing audit selection. To  provide information on closed IRS and SB/SE audits, we analyzed data  for 2011 through 2014 from the Compliance Data Warehouse Audit  Information Management System (AIMS) closed table. We compared the  results of our analyses of data in AIMS to the IRS data book to assess  consistency of results. We determined that these data were sufficiently  reliable for the purposes for which they were used in this engagement.
For the second objective, we reviewed SB/SE’s procedures for selecting  returns for audit and related internal controls intended to help SB/SE  achieve its stated mission of “enforcing the tax law with integrity and  fairness to all.” We then assessed whether these procedures followed  standards from Standards for Internal Control in the Federal Government  that were relevant to return selection. To determine which standards  were most relevant, we used our Internal Control Management and  Evaluation Tool, in conjunction with observations from our preliminary  audit work. We selected the most relevant internal control standards as  criteria in consultation with SB/SE officials and our financial management  and assurance and information technology teams.
We also conducted eight focus groups with selected SB/SE staff who are  responsible for reviewing or selecting SB/SE returns for audit. We held  two groups with field office staff who review returns for audit potential, two  groups with area office staff who coordinate the review process, two  groups with field office group managers who select returns for audit, one  group with campus staff who review and select returns for audit, and one  group with specialty tax group managers who select returns for audit.  Within these five populations, we randomly selected participants who met  our criteria of having more than 2 years of IRS work experience, working  in different IRS offices nationwide, and covering a range of compliance  issue areas. In total, our groups involved 58 participants with an average  of about 9 years of IRS experience, with a range from 3 to 32 years of  experience. The focus groups were held by telephone. We asked  questions on internal control related topics, such as the clarity of SB/SE  procedures and the adequacy of guidance to apply these procedures.
To assess the extent to which SB/SE implemented its procedures, we  conducted a file review. We used IRM sections and SB/SE procedures  documents as criteria. We obtained the population of SB/SE audits  opened from March 2014 to February 2015 as shown in the open AIMS  database and selected a nonprobability sample of 173 returns to review.  Although the results of our file review cannot be projected to the  population of SB/SE audits, they represent a variety of types of returns,  sources, and selection processes. We focused on processes that  required more manual review or affected a large number of taxpayers. As  reflected in table 2, we reviewed more files for referrals and compliance  initiative projects because they involve more human discretion in deciding  whether to include the return in the selection inventory and in reviewing  the returns for audit potential than for some other categories. We also  reviewed more files for discriminant function (DIF) returns compared to  some other categories because DIF returns are the largest portion of  SB/SE’s field audit workload by selection method or workstream. We  reviewed the files to determine if decisions were documented and if staff  followed procedures, such as documenting the rationale and approval for  selecting or screening out returns. In sum, table 2 reflects the different  types of returns we sampled, the type of files we reviewed, and the  population and sample size of the files.
As shown in the last two rows of table 2, we also reviewed  nongeneralizable, random samples of 30 returns that had been surveyed  (i.e., screened out) and 30 classification quality review records for the  same general time period as the audit files we reviewed. We created a  separate sample of screened-out returns because audits were not  opened on these returns. The database we used to create the audit file  sample only contained returns that had been audited. We obtained the  population of screened-out returns from SB/SE officials and randomly  selected our sample from this population. We created a separate sample  for classification quality review records because SB/SE reviews  classification decisions per auditor rather than per return. We obtained  the population of auditors that were reviewed during the same general  time period as the files for the other samples. We identified  subpopulations by region and selected a stratified random sample of  these subpopulations.
Finally, we interviewed SB/SE officials about the procedures and  discussed deficiencies we identified. We designed uniform data collection  instruments for our file review to consistently capture information on the  completeness of required documentation and approvals related to return  selection. IRS reviewed the instruments and the data we captured. To  ensure accuracy, two of our analysts reviewed each file we assessed and  reconciled any differences in responses. We then analyzed the results of  these data collection efforts to identify main themes and develop  summary findings.
We conducted this performance audit from September 2014 to December  2015 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Summary of Small Business/Self-Employed (SB/SE) Audit Results, Fiscal Year 2014
section_title: Appendix III: Description of Small Business/Self-Employed (SB/SE) Selection Methods or Workstreams
paragraphs: 1.  Area Office Referral - Area office field personnel refer potential leads  with correspondence audit issues to Campus Reporting Compliance  (CRC).  2.  Audit Information Management Systems (AIMS)/AIMS Computer  Information System (A-CIS)/Previously Adjusted Exam Issues on  Subsequent-year Filings - Quarterly A-CIS reports are run to identify  every campus case closed agreed or default in each of the  discretionary audit programs. The subsequent year returns are  classified for the same issues that are on the closed audit cases.  3.  Audit Reconsideration - Reevaluates the results of a prior audit  where additional tax was assessed and remains unpaid, or a tax  credit was reversed. IRS also uses the process when the taxpayer  contests a Substitute for Return determination by filing an original  delinquent return.  4.  Campus Reporting Compliance (CRC) Compliance Initiative  Project (CIP) Usage - CRC uses CIP Authorization (Form 13498) to  document approval for testing potential new inventory in  correspondence audits.  5.  Category A Claims for Refund - Accounts Management staff refer  claims for refunds that meet criteria indicating audit potential directly  to Classification and Claim Teams within the campuses.  6.  Criminal Investigation Referral - CRC uses IRS’s databases to  determine if the issues Criminal Investigation identified exist on the  referred returns.  7.  Claim - A request for refund or an adjustment of tax paid or credit not  previously reported or allowed.  8.  Collection Referral - CRC receives two kinds of referrals from  collection each year. CRC receives three referrals yearly of potential  nonfiler leads from the collection queue. CRC also receives  occasional referrals of Form 3949 Information Item referrals.  9.  Compliance Data Environment Release 3 - Identifies potential  audits through user-defined filters and queries, and forwards those  selected to the correct treatment stream.  10. Compliance Data Warehouse/Potential Unreported Heavy Use  Tax - Identifies Form 2290 returns (Heavy Highway Vehicle Use Tax  Return) with potential unreported heavy use tax.  11. Compliance Initiative Project (CIP) – When IRS identifies potential  noncompliance in specific groups of taxpayers, CIPs are used to  contact or audit taxpayers or collect taxpayer data within that group  when another method to identify such workload is not already in  place.  12. Discriminant Function (DIF) - A mathematical technique to estimate  or “score” the potential merit of auditing a particular tax return based  on its characteristics.  13. Discretionary Exam Business Rules (DEBR) - DEBR rules were  developed to identify non-Earned Income Tax Credit returns with the  highest audit potential for additional tax assessment for certain return  conditions.  14. Employee Audit - Any employee selected for audit under any and all  methods of inventory identification (e.g., DIF (see definition above),  referrals). It also includes inventory that is specifically identified based  on the individual’s position within IRS. Inventory identification is  designed to ascertain compliance among IRS employees while  maintaining their right to privacy.  15. Employment Tax Referral - Specialty tax personnel refer potential  audit leads relating to possible unfiled payroll tax returns to CRC (see  definition above).  16. Estate & Gift Tax Form 1041 - Filters identify Form 1041 returns  reporting charitable contributions, fiduciary fees, and other  miscellaneous deductions.  17. Estate & Gift (E&G) Referrals - E&G tax personnel refer potential  audit leads relating to possible unreported executor fees to CRC.  18. Government Liaison and Disclosure (GLD) Referrals - GLD  personnel refer information to CRC from sources outside IRS, such as  states and the Puerto Rican Tax Authority (see definition below), that  are potential audit leads.  19. High Income Nonfiler - Strategy designed to address the filing  compliance of taxpayers with known sources of income exceeding  $200,000.  20. Information Reports - Reports and referrals that may include  information on substantial civil tax potential and significant potential  for fraud, or are related to returns for tax years not yet required to be  filed.  21. National Research Program (NRP) - A comprehensive effort by IRS  to measure compliance for different types of taxes and various sets of  taxpayers. It provides a statistically valid representation of the  compliance characteristics of taxpayers.  22. Offers-In-Compromise/Doubt as to Liability - An offer in  compromise is an agreement between the taxpayer and IRS that  settles a tax debt for less than the full amount owed. Doubt as to  liability exists where there is a genuine dispute as to the existence or  amount of the correct tax debt under the law.  23. Payment Card Income Pilot - Potential underreporters are flagged  when Form 1099-K receipts, as a portion of gross receipts, are  significantly greater than for similar taxpayers, suggesting cash  underreporting.  24. Promoter Investigations and Client Returns - SB/SE auditors, as  well as other IRS or external sources, refer potentially abusive  transaction promoters/preparers for audit. Client returns are audited to  determine whether penalties and/or an injunction are warranted.  25. Puerto Rican Tax Authority Nonfiler - The Puerto Rican Tax  Authority provides information to IRS through the Government Liaison  Office about residents in Puerto Rico who fail to file their federal tax  return.  26. Research Referral - Research personnel refer potential audit leads  relating to NRP, possible nonfilers, and problem preparers to CRC.  27. Return Preparer Program Action Cases and Client Returns -  Clients of questionable preparers are audited to determine whether  preparer penalties and/or injunctive actions are warranted. These are  limited to preparer misconduct or incompetence that is pervasive and  widespread.  28. Submissions Processing - Submission Processing staff refer  potential audit leads relating to the Alternative Minimum Tax program,  math error, and unallowables to CRC or campus classifiers.  29. State Audit Referral Program (SARP) - SARP utilizes the audit  report information submitted to IRS by various taxing agencies to  address areas of noncompliance.  30. State/Other Agency Referral - Federal, state, and local  governmental agencies share relationships and data with IRS through  the Governmental Liaison staff to increase compliance levels, reduce  the tax gap, reduce taxpayer burden, and optimize use of resources.  31. Treasury Inspector General for Tax Administration (TIGTA)
Referral - TIGTA personnel refer potential audit leads relating to  TIGTA investigations to CRC.  32. Tip Program Referral - Employees who do not report at or above the  tip rate as agreed upon by the employer under various agreements  with IRS may be referred for audit.  33. Whistleblower Claim - Allegations of violation of federal tax laws  made by a person who requests a reward.
section_title: Appendix IV: Small Business/Self Employed (SB/SE) Selection Methods by Broad Identification Source
paragraphs: Table 5 shows the selection methods or workstreams by how the returns  were identified.
section_title: Appendix V: Examples of Similarities and Variations across Selection Methods
paragraphs: Figures 4 and 5 represent general similarities and variations in the Small  Business/Self-Employed (SB/SE) return selection process at its field and  campus locations, respectively. They do not include every process that  occurs in the various methods or workstreams. In addition, the phases  and processes in the figures are not necessarily discrete events but may  overlap and involve other processes and staff.
section_title: Appendix VI: Small Business/Self-Employed (SB/SE) Field Audit Sources and Audit Information Management System (AIMS) Source Codes
paragraphs: The AIMS source code indicates the initial source of how the return was  identified for audit. Table 6 shows the number of field audits closed by  source code and by grouping of source codes into categories for fiscal  year 2014.
section_title: Appendix VII: Comments from the Internal Revenue Service
section_title: Appendix VIII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Tom Short (Assistant Director),  Sara Daleski, Hannah Dodd, David Dornisch, Elizabeth Fan, Ted Hu, Ada  Nwadugbo, Robert Robinson, Ellen Rominger, Stewart Small, Andrew J.  Stephens, and Elwood White contributed to this report.