Corporate Tax Compliance: IRS Should Determine Whether Its Streamlined Corporate Audit Process Is Meeting Its Goals
Published: 2013-08-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: IRS audits of the tax returns filed by large corporations take four years, on average, to complete. Additional years can be spent in appeals. This is costly to IRS and creates years of uncertainty about a large corporation's actual tax liability. In response, IRS developed CAP in 2005. Under this process, IRS and taxpayers agree on how to report tax issues before the return is filed: compliant and cooperative taxpayers can get a streamlined IRS review of their tax return in a phase called Compliance Maintenance. GAO was asked to assess this process. In this report, GAO (1) describes the goals and potential benefits of the process, (2) assesses IRS's efforts to determine whether these goals are met, (3) assesses IRS's readiness to move more taxpayers into Compliance Maintenance, and (4) describes IRS's efforts to coordinate the process with its existing compliance processes. GAO reviewed IRS documentation and data, interviewed IRS officials and corporate tax experts, and held focus groups with tax executives of large corporations and with IRS audit staff.
section_title: What GAO Found
paragraphs: Officials GAO interviewed inside and outside of the Internal Revenue Service (IRS) generally agreed on the potential major benefits of the Compliance Assurance Process (CAP) to taxpayers and IRS as reflected in its goals. These goals include saving IRS time and resources to use for other audits while ensuring compliance, and reducing taxpayer burden while increasing certainty on tax amounts now owed.
Contrary to its guidelines, IRS has not evaluated whether the goals are being achieved or the process should be expanded. IRS officials told GAO that IRS will start developing an evaluation plan in 2013, but did not provide dates for when an evaluation would be completed. IRS cannot show the extent to which the goals are being met for two reasons.
Some goals do not have measures and none have targets. Although developing measures and setting targets for goals (such as ensuring taxpayer compliance) can be difficult, not doing so limits IRS's ability to determine whether the process is working as intended.
IRS does not have consistent and complete data for CAP. Inconsistent data make some analyses difficult to do. For instance, the average annual staff hours spent auditing a return could not be analyzed because the code to track staff time charges sometimes included non-CAP time charges. Incomplete data did not allow IRS to track progress for some goals. While IRS audit teams document tax issues in case files, IRS does not compile the data to track issue resolution. As a result, IRS cannot readily determine whether audit teams are resolving issues uniformly or identifying emerging tax compliance issues. Similarly, IRS does not have a system to track resource savings. Without a system, IRS cannot know the amount of saved resources or plan for their reallocation.
IRS has been moving taxpayers into Compliance Maintenance without documenting a plan to ensure, among other things, that IRS has the capacity to assimilate these taxpayers in an expedited fashion, as intended. In addition, IRS audit staff had concerns about guidance on moving taxpayers in and out of this phase. IRS clarified the guidance in May 2013, but has not verified whether the audit staff understand it. Without verification, IRS does not have reasonable assurance that the audit staff understand which taxpayers are right for Compliance Maintenance and when it would be appropriate to remove them.
IRS is addressing difficulties in coordinating CAP with other compliance processes. Difficulties include resolving some complex tax issues within the expedited time frames, and ensuring that all IRS specialists who assist audit teams understand the process. It is too early to tell whether IRS's efforts will work.
section_title: What GAO Recommends
paragraphs: GAO recommends that IRS evaluate the process, develop measures and targets for the goals, consistently capture data to track goal progress, track resolution of tax issues and resource savings, develop a plan to expand Compliance Maintenance, and verify that audit staff understand attempts to clarify related guidance. In written comments, IRS agreed with our recommendations.

section_title: Letter
paragraphs: In fiscal year 2012, the Internal Revenue Service (IRS) collected about  $282 billion in gross federal income tax from corporations. To ensure  compliance, IRS examines (audits) corporate tax returns of the largest  corporations every year. IRS views the continuous audits as necessary  because the largest corporations regularly engage in complex business  transactions for which determining the correct tax requires careful  interpretation of the tax code. Through these audits, IRS proposed  assessments of $20.1 billion in additional tax in fiscal year 2012.
While resulting in billions of dollars of additional tax assessed, traditional  corporate audits usually start months or years after a tax return is filed  and can take years to complete. Even after completion, more years  usually elapse before appeals are resolved and final tax assessments are  determined. For corporations, the traditional audit process leads to years  of uncertainty about their actual tax liabilities, uncertainty that must be  reflected on financial statements. For IRS, the process is costly and can  result in delays in uncovering new types of transactions that evade or  misinterpret the tax laws.
In an attempt to improve the traditional corporate audit process, IRS  developed the Compliance Assurance Process (CAP) as a pilot program  in 2005. Managed by IRS’s Large Business and International Division  (LB&I), IRS examiners and participating large corporations work to reach  agreement on how to report tax issues before their tax returns are filed.
To the extent CAP works as intended, taxpayers should achieve tax  certainty sooner with less administrative burden compared to traditional  post-filing audits, allowing taxpayers to better manage tax reserves and  more precisely report earnings on financial statements. In addition, IRS  intends for CAP to foster tax compliance while reducing its cost for  corporate audits. IRS also intends that any resources saved, particularly  in a streamlined review CAP phase known as Compliance Maintenance,  be devoted to auditing other corporations, thereby increasing audit  coverage.
You asked us to assess CAP. This report (1) describes the goals and  potential benefits of CAP, (2) assesses IRS’s efforts to determine whether  CAP is meeting its goals, (3) assesses IRS’s readiness to expand  Compliance Maintenance, and (4) describes IRS’s efforts to coordinate  CAP with existing processes for large corporate compliance. To address  these objectives, we reviewed IRS documentation, our prior work, and  other relevant literature. We also assessed IRS’s efforts on CAP with  criteria in the Government Performance and Results Act (GPRA) of  1993, GPRA Modernization Act of 2010, and the Standards for Internal  Control in the Federal Government. We attempted to replicate IRS’s  analysis of CAP and do separate analyses of CAP taxpayers. We  interviewed IRS officials responsible for managing CAP and conducting  exploratory CAP research. In addition, we interviewed 11 corporate tax  experts, including former IRS officials who were familiar with or had  experience with CAP. We held six focus groups with a total of 22 account  coordinators who are the primary IRS representative for CAP audits, two  focus groups with a total of 11 managers of IRS’s Issue Practice Groups  who are responsible for providing guidance and advice to CAP audit  teams on resolving tax issues, and one focus group with 12 tax  executives of large corporations to understand their experiences using  CAP. For details on our scope and methodology, see appendix I.
We conducted this performance audit from July 2012 to August 2013 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.
subsections: section_title: Background
paragraphs: IRS has two categories of traditional audits for large corporations:  Coordinated Industry Cases (CIC) and Industry Cases (IC). CAP includes  both CICs and ICs, with the majority being CICs (about 88 percent). The  distinction between CIC and IC is based on criteria such as the amount of  gross assets, amount of gross receipts, number of operating entities,  multiple industry status, total foreign asset amounts, and amount of  foreign taxes paid. All corporations that are designated as CICs are  audited every year by a team of IRS staff while corporations that are  designated as ICs are not held to the same requirement.
Before IRS created CAP, large corporations waited about 50 months on  average from the time a tax return was filed to IRS closing of the  traditional audit under CIC. This did not include additional time after the  audits were closed to resolve any appeals of the audit results—a process  that usually took another 2 or 3 years. Therefore, obtaining certainty  about the status of tax issues reported on the tax return for a given tax  year may have taken 6 or 7 years—if not longer. This created significant  burdens and problems for taxpayers and IRS. As already noted,  taxpayers had to reflect uncertainty about their tax liability on their  financial statements. This meant that taxpayers had to put aside reserves  in a provisional account meant for changes in taxes owed after an audit.  Large corporation tax officials we spoke to said that when corporations  have a large reserve, it lowers their expected profits. In addition, IRS  might not become aware of emerging tax issues associated with new  types of business transactions or products for years. Traditional audits of  large corporations still take years, as shown in figure 1.
IRS launched CAP in March 2005 as a pilot program to assess its viability  as an alternative approach to large corporate tax administration. For the  pilot, IRS selected voluntary, corporate taxpayers based on factors  including their working relationship with IRS, a history of not taking  aggressive tax positions, and not having major tax litigation under way.
IRS created pre-filing and post-filing stages for CAP. In pre-filing, a  taxpayer works with the CAP team to resolve issues of tax controversy  and to determine the appropriate tax treatment of completed transactions  before filing the tax return. CAP requires contemporaneous exchange of  information about a taxpayer’s completed transactions and other events  that may affect tax liability. In post-filing, the CAP audit team reviews the  tax return to confirm adherence to agreements on how tax issues should  be reported. In exchange for increased cooperation and transparency, the  taxpayer may attain tax certainty sooner and with less administrative  burden, compared to traditional post-filing audits.
After 6 years of experience with the CAP pilot, IRS management decided  to make CAP permanent in March 2011. IRS had received positive  feedback from taxpayers and employees on the CAP pilot, indicating they  wanted CAP to continue. Officials who had worked at IRS told us that IRS  did exploratory research on the pilot’s impacts on timeliness as well as on  other areas.
In making CAP permanent, IRS created three phases by adding the Pre- CAP and Compliance Maintenance phases to the existing CAP phase. To  avoid confusion, we will refer to the entire CAP program (all three phases)  as CAP to distinguish it from the CAP phase defined below.
Pre-CAP phase: To enter CAP, all audits for prior tax years must be  resolved. The large corporate taxpayer and IRS work together in the  traditional post-file audit process to close audits of tax returns filed for  previous tax years within agreed upon time frames. Closing these audits  can take significant time if, as suggested by figure 1, audits are open for  many tax years.
CAP phase: The large corporate taxpayer and IRS work to identify tax  issues and resolve how they are to be reported for the current tax year in  the pre-filing stage. IRS then confirms these issues are reported as  agreed upon during the post-filing review.
Compliance Maintenance phase: Large corporate taxpayers who  continue to meet the CAP phase eligibility requirements and expectations  may progress to Compliance Maintenance after at least 1 year in the CAP  phase. Taxpayers must continue to be compliant and transparent in filing  tax returns and pose no new tax compliance risks. IRS intends to spend  less time examining these returns when filed as well as significantly  reducing the scope and depth of the pre-filing review. IRS’s guidance  explains that the criteria for considering a taxpayer for Compliance  Maintenance include the complexity and number of issues, and the  taxpayer’s history of CAP compliance, cooperation, and transparency.
Taxpayers are expected to continue disclosing completed business  transactions, information on material items and issues that occur during  the CAP year, and their proposed tax positions on these disclosed items.  The Internal Revenue Manual states that taxpayers can be removed from  Compliance Maintenance depending on the complexity, number of  issues, or other factors.
Not every large corporation is eligible for CAP. Table 1 shows the criteria  for each phase.
Taxpayers must sign a memorandum of understanding (MOU) that  outlines their agreement to meet the CAP requirements. For Pre-CAP, the  MOU will be effective for the first Pre-CAP year and continue until audits  of tax returns for all transition years are closed and the CAP phase  selection criteria are fulfilled. For the CAP phase, the MOU applies to a  single tax year known as the CAP year. For Compliance Maintenance,  the CAP phase MOU is used. To continue in the CAP and Compliance  Maintenance phases, taxpayers must reapply and execute a new MOU  for each CAP year.
Of about 60,000 large corporate taxpayers considered for audit in fiscal  year 2012, 161 were in CAP. Figure 2 shows the growth of CAP since its  inception in 2005.
CAP taxpayers work with team and account coordinators who serve as  the primary IRS representative for all federal tax matters. In the Pre-CAP  phase, taxpayers work with an assigned team coordinator; in the CAP  phase or Compliance Maintenance phase, taxpayers work with an  assigned account coordinator. Other IRS team members include IRS  examiners, the team manager, the territory manager, and the Director of  Field Operations, as well as various IRS specialists (as needed) who offer  technical knowledge about tax issues and large corporations.
CAP work on a tax return may be concluded in one of three ways:  1.  Full Acceptance Letter—IRS provides the taxpayer with a full  acceptance letter if the pre-filing stage concludes with a taxpayer fully  complying with the MOU and with resolutions of all identified items  and issues through factual clarification, closing agreement(s), issue  resolution agreement(s), or a combination of these. The letter  constitutes written confirmation that IRS will accept the taxpayer’s  return if it is filed consistent with those resolutions and no additional  items or issues are discovered during the post-filing review that were  not previously disclosed.  2.  Partial Acceptance Letter—IRS provides the taxpayer with a partial  acceptance letter if the pre-filing stage concludes with a taxpayer fully  complying with the MOU, but IRS and the taxpayer cannot resolve all  identified items or issues before the tax return is filed. The letter  constitutes written confirmation that IRS will accept the taxpayer’s  return for the resolved items and issues if the post-filing review shows  the return is filed consistent with the agreement(s).  3.  Termination Letter—IRS can issue a termination letter at any time,  which results in the case being withdrawn from CAP and transferred  to a traditional post-filing examination. This can happen for several  reasons, including the taxpayer: not adhering to information document request (IDR) response times,  not responding to IDRs, or not providing complete IDR responses; not engaging in meaningful or good-faith issue resolution discussions; failing to thoroughly disclose prior, concurrent, and ongoing  transactions;  failing to disclose a tax shelter or listed transaction;  failing to disclose an investigation or litigation that limits access by the  IRS to current corporate records; or not adhering to any other MOU commitment(s).
Two other new reporting requirements, one financial and one tax, have  been introduced since the 2005 pilot and may reinforce CAP. The first,  Financial Accounting Standards Board Interpretation Number 48,  Accounting for Uncertainty in Income Taxes, implemented in June 2006,  requires public and private corporations subject to the U.S. Generally  Accepted Accounting Principles to disclose uncertain tax positions.  Several of the tax experts we spoke to said this gives IRS an additional  source for verifying the completeness of the disclosures that corporations  make in the CAP phase. The second, Schedule UTP, Uncertain Tax  Position Statement, has a similar disclosure purpose. IRS implemented it  in 2010 as required reporting by taxpayers that have assets equaling or  exceeding $50 million. Along with their tax returns, these taxpayers are  to disclose information on the Schedule UTP about tax positions that may  affect federal income tax liabilities or are included in audited financial  statements. According to the August 2011 UTP guidance and procedures  for CAP, CAP teams should compare the list of taxpayer disclosures  made to them during the CAP year to the issues identified on the  Schedule UTP to verify that the disclosures match.
section_title: Significant Benefits Are Envisioned from CAP As Reflected in Its Goals
paragraphs: IRS envisioned that CAP would yield significant benefits to participating  taxpayers and IRS by resolving tax issues in a pre-filing environment.  IRS’s vision is reflected in the following seven CAP goals: ensure taxpayer compliance; reduce overall examination time;  increase currency for taxpayers (e.g., working on the unfiled return for  the most recent tax year during the CAP pre-filing stage); enhance the accurate, efficient, and timely resolution of complex tax  issues;  increase audit coverage by providing more efficient use of resources;  reduce taxpayer administrative burden; and  increase certainty for taxpayers.
IRS account coordinators for CAP cases, other IRS officials, and non-IRS  officials (such as corporate tax experts and large corporation tax officials)  told us what they believe the benefits of CAP are if its goals are  achieved. Because the goals are not all mutually exclusive, some  benefits can be perceived as relating to more than one goal.
Ensure taxpayer compliance: IRS and non-IRS officials indicated  that compliance may be higher under CAP. Specifically, transactions  disclosed by taxpayers in CAP may not have been disclosed or  otherwise detected during traditional audits. For example, some  account coordinators and large corporation tax officials who  participated in our focus groups said that the risk of getting removed  from CAP sometimes prompts large corporations to over-disclose  issues and transactions.
Increase currency for taxpayers: IRS and non-IRS officials  generally agreed that CAP increases currency. Some of the officials  informed us that currency reduces taxpayers’ cost to retrieve  information as well as their interest expenses on unpaid tax liabilities.  Currency means that the appropriate documents and corporate staff  knowledgeable about a particular transaction are more likely to be  available for consultation.
Enhance the accurate, efficient, and timely resolution of complex  tax issues: IRS and non-IRS officials generally agreed that currency  could also enhance the resolution of disputes over tax issues for the  reasons given above. Having documents and responsible corporate  staff available should make it easier for IRS to understand the tax  implications of a transaction. In addition, a full or partial acceptance  letter can speed the post-filing review of resolved issues.
Increase audit coverage by providing more efficient use of IRS  resources: IRS and non-IRS officials generally agreed that CAP has  the potential to reduce IRS resources spent auditing large  corporations relative to what would have been spent on traditional  audits. Some of the officials stated that most of the resource savings  would occur in the Compliance Maintenance phase. Any resources  saved through Compliance Maintenance could be reinvested in  increasing the audit coverage of CAP and non-CAP taxpayers. As an  example of resource savings, an account coordinator informed us that  she was able to devote more time and resources to other audits  because one of her taxpayers was in Compliance Maintenance.
Reduce taxpayer administrative burden: CAP taxpayers who  participated in IRS’s 2012 survey responded that they were satisfied  that CAP had reduced their administrative burden compared to  traditional post-file audits. While CAP may reduce taxpayer  administrative burden over time, corporate tax experts indicated that  CAP requires significant upfront investment from taxpayers because  all audits for prior tax years must be resolved.
Increase certainty for taxpayers: IRS and non-IRS officials we  spoke with generally agreed that CAP can increase the certainty that  taxpayers have about their tax obligations when tax returns and  financial statements are filed. They specifically emphasized the value  to corporations of not having to maintain reserves for potential future  tax liabilities. A corporate tax expert told us that certainty is so  valuable to corporations that they may be willing to concede certain  tax issues to achieve it. Increased certainty has other effects, such as  making it less likely that state tax returns will need to be amended,  which also saves time and resources.
Both IRS officials and corporate tax experts informed us that for CAP to  achieve such benefits, taxpayers must be willing to disclose transactions  to IRS. For this reason, transparency and communication are emphasized  in the MOU. The corporate tax experts we interviewed readily  acknowledged that not all large corporate taxpayers may be good  candidates for CAP. As examples, they mentioned corporations that  consistently take aggressive tax positions, have numerous complex  transactions, or are unwilling to be cooperative and transparent with IRS.
section_title: IRS Has Not Evaluated Whether CAP Is Meeting Its Intended Goals, Has Not Established a Full Suite of Performance Measures and Targets, and Has Not Developed Consistent and Complete Data
paragraphs: Although CAP started 8 years ago and IRS is looking to further expand  CAP, IRS has not evaluated CAP’s effectiveness, whether its goals are  being accomplished, or whether it should be expanded and if so, to what  extent. The evidence in the preceding section about the benefits of CAP  is based on viewpoints of those in our focus groups which cannot be  generalized to the entire population of IRS and non-IRS officials. The  Senate Committee on Appropriations, in June 2012, urged IRS to develop  additional performance measures to evaluate the effectiveness of CAP.  The Treasury Inspector General for Tax Administration (TIGTA) in  February 2013 recommended that IRS develop an evaluation plan for  CAP and IRS agreed to do so in responding to TIGTA’s report. IRS  officials stated in May 2013 that they will start to develop a plan for  evaluating CAP during the fourth quarter of fiscal year 2013 but they did  not state when the plan would be completed or the evaluation would be  done.
IRS faces challenges in evaluating CAP. For example, it is not easy to  measure compliance by large corporations or concepts like certainty and  administrative burden. IRS has attempted exploratory research on the  impacts of CAP but these efforts were not conclusive. However, without  evaluations of CAP or its expansion, IRS does not have a credible base  of information for understanding the current effectiveness of CAP such as  for saving resources or for making decisions about any future expansion  of CAP.
IRS has guidelines for conducting program evaluations that could be  applied to CAP. According to the guidelines, a program evaluation  attempts to provide accurate, objective, and trustworthy information about  program performance and to help assess the quality or value of a  program. Conducting a program evaluation can help answer questions  decision makers have about the basic reasons the program exists and the  continuing need for it. The guidelines also allow for evaluating the costs  and benefits of continuing, revising, or ending a program.
subsections: section_title: IRS Has Created Some Performance Measures, but Has No Targets to Measure Progress Towards CAP Goals
paragraphs: The Government Performance and Results Act of 1993 (GPRA), as  enhanced by the GPRA Modernization Act of 2010, requires agencies to  set results-oriented goals, establish performance measures and related  performance indicators with targets in meeting such goals, and report  progress. Performance measures and targets are established so that  actual results can be compared to planned performance or goals.
As shown in table 2 and discussed below, IRS cannot show the extent to  which CAP goals are being met because some goals do not have  measures and none have specific targets.
Ensure taxpayer compliance: IRS officials we interviewed said that,  despite multiple attempts, they do not have measures or targets  related to CAP taxpayer compliance because of the difficulty of  measuring it. IRS has directly measured compliance for different  groups of taxpayers in the past, such as through audits of randomly- selected taxpayers. IRS has not used this approach with large  corporations because it may be a burden both for IRS and taxpayers.
An alternative to measuring the direct impact of CAP on compliance is  the use of proxy measures. During the pilot as well as after making  CAP permanent, IRS tried various approaches to measure a proxy for  compliance in paying taxes owed, such as the taxes paid before and  after audit by CAP taxpayers compared to non-CAP taxpayers. One  approach attempted to create peer groups for CAP taxpayers to  compare taxes paid by CAP taxpayers with those paid by non-CAP  peers. Another approach explored ways to estimate the impact of  CAP on effective tax rates. However, the results were not conclusive  because of the challenges of controlling for other factors that could  affect taxes paid. IRS has not researched the potential use of  another proxy measure for compliance: using the results from  measuring the quality of work by CAP teams to identify material tax  issues and to develop support for how these issues should be  reported on tax returns. Without compliance measures or related  proxy measures and accompanying targets, it will be difficult for  Congress and IRS to know whether CAP is meeting its goal for  ensuring taxpayer compliance.
Reduce overall examination cycle time: IRS has defined a measure  for this goal but its related data are inconsistent. This measure  combines IRS’s traditional cycle time metric—the number of months  or years it takes to close an audit after a tax return is filed—with the  number of months for pre-filing work. Measuring the pre-filing time  could provide insights on whether a taxpayer is a good candidate for  CAP. For example, a long pre-filing period could be an indicator of  complex tax issues or delays in providing information to IRS.  However, as discussed in the next section, we found inconsistencies  in the CAP data for use in measuring this goal. In particular, we could  not resolve inconsistencies in the reporting of cycle time data by  different sources.
Increase currency for taxpayers: LB&I has data on currency for all  CIC audits, but it has not broken out currency data for CAP pre-filing  work or post-filing audits. IRS officials stated that they believe that all  CAP cases are current (which could be a CAP target). However, they  had no measures for either the pre-filing or post-filing stages or  related targets.
Enhance the accurate, efficient, and timely resolution of complex  tax issues: IRS does not have a measure or target for this goal. IRS  knows that CAP taxpayers are satisfied with their issue resolutions.  According to IRS’s 2012 taxpayer satisfaction survey, 80 percent of  the CAP respondents were satisfied with issue resolution in CAP. It  is useful to know how taxpayers feel about issue resolution; however,  IRS does not have a system to track issues that are being audited and  resolved to provide data to help assess the goal. For example, IRS  does not track whether the same issues repeat year after year or  whether IRS and the CAP taxpayer agreed on a method to be used to  resolve the issue in future tax years. Having such tracking to measure  success in meeting this issue resolution goal could reduce the costs  of future audits.
Increase audit coverage by providing more efficient use of  resources: IRS partially measures this goal by tracking certain CAP  resources spent, such as the average staff hours for pre-filing and  post-filing activities, but does not measure whether any savings are  used to increase audit coverage.
Reduce taxpayer administrative burden: IRS partially measured  this goal through its 2012 customer satisfaction survey to determine  whether CAP taxpayers believed that the administrative burden had  decreased. However, IRS does not have a measure of the actual  burden on CAP taxpayers because it has not been able to identify  how to capture taxpayer burden (other than relying on survey  responses). IRS has been attempting to more directly measure how  CAP affects taxpayer burden but has faced challenges. In 2013, IRS’s  Research, Analysis, and Statistics (RAS) division analyzed whether  CAP taxpayers were less likely to use outside tax preparation  services. While RAS concluded that payments for such services were  significantly lower for corporations that had been in CAP for at least a  year, this result might indicate that CAP corporations choose to use  more in-house staff and fewer outside experts for work related to  taxes rather than from being in CAP. RAS also analyzed responses to  its tax year 2009 tax compliance cost survey to compare compliance  costs for CAP and non-CAP corporations while controlling for other  factors that might influence the costs. The results of this analysis were  inconclusive.
Increase certainty for taxpayers: IRS relies on its customer  satisfaction survey to measure whether taxpayer certainty has  increased. In its 2012 survey, 90 percent of CAP respondents said  that tax certainty has increased “somewhat” or “a lot” for their  corporations. In addition, an IRS official informed us in June 2013 that  IRS has begun to use data it has been collecting on the percentage of  taxpayers that are issued full acceptance or no change letters by tax  and fiscal years to reflect certainty.
IRS officials stated that the measures being used for CAP, such as cycle  time, staff hours, and taxpayer satisfaction, are derived from the  traditional LB&I balanced measures related to business results and  customer satisfaction for all of its audits. These traditional balanced  measures do not directly link to all CAP goals.
According to an IRS official, IRS has not identified targets for any of its  CAP measures because it does not traditionally set official targets for pilot  programs. The official informed us in July 2013 that IRS is developing  targets, which may be in place by the start of fiscal year 2014 pending  approval by LB&I leadership. Even if IRS implements targets, IRS does  not have an objective basis for determining whether CAP is effective  because some goals do not have measures.
section_title: IRS Does Not Have Consistent and Complete Data for CAP
paragraphs: To implement a performance measurement system, it is necessary to  collect the right data and ensure its accuracy. Standards for Internal  Control in the Federal Government calls for a variety of control activities  for data being collected to help ensure that actions are taken to reduce  risk. Even though some CAP measures exist, the IRS data being  collected are not consistent or complete to use in determining whether the  CAP goals are met.
Such inconsistencies arise in part from data collection processes. An IRS  official indicated that data used by IRS to manage CAP are manually  transferred from multiple databases into an excel spreadsheet. Without  controls or documentation to ensure and validate their consistency, we  could not be assured of the validity and accuracy of the data that IRS  uses to create the CAP report used by LB&I leadership. Furthermore, this  limits the ability to do analyses, such as: measuring the average hours spent to close a tax return and staff time  charges for a tax year by pre-filing and post-filing activities.  Specifically, tracking staff time charges on pre-filing activities for CAP  could not be done because the code used by IRS to track some  charges also included non-CAP activities; doing an analysis of CAP  time charges would help determine whether CAP saves resources  compared to traditional audits. comparing taxpayer’s returns filed before and after they entered CAP  to analyze any similarities and differences, accounting for when  taxpayers entered CAP and moved from the Pre-CAP phase to the  CAP phase. Doing an analysis may help IRS determine whether the  right taxpayers are in CAP.  replicating IRS management reports and TIGTA data tables on the  total number of CAP taxpayers, using taxpayer identification numbers,  tax years, and form types. reconciling differences in the reported number of months for cycle  time. An IRS official provided a report used by LB&I leadership  involved with CAP showing that the average cycle time for closed  CAP audits is about 20 months for both pre-filing and post-filing work,  with more than half of this time spent on post-filing work rather than  pre-filing work. However, TIGTA reported average cycle time for  closed audits to be about 24 months with more than half of this time  spent on pre-filing work rather than post-filing (over 15 months and  about 8.5 months, respectively).
IRS’s Issue Management System (IMS) has a field for the type of issues  audited, but IRS officials said that they did not have assurance that the  issue data were consistent and complete. When CAP audit teams entered  issue data into IMS, IRS did not know whether the teams were  consistently selecting the proper issue codes. IRS officials indicated that  entering the issue into IMS can be a significant burden because IRS has  tens of thousands of issue codes to consider and one issue can be  associated with multiple codes from which to choose. Furthermore, IRS  does not require this issue field to be completed and does not know  whether CAP teams entered all issues audited. As a result, the risk  increases that data are not consistent and complete. Thus, neither we nor  IRS could determine the number, types, and dollar amounts of  recommended tax changes for issues addressed in CAP.
In addition, data in CAP case files are not tracked and thus are not readily  available to assess whether the issue resolution goal is being met. IRS  has not created a system to compile data from the issue resolution  agreements between CAP teams and taxpayers to guide how issues are  to be reported on tax returns when corporations file; instead, these  agreements are kept in a case file for each CAP taxpayer. An IRS official  agreed to attempt to start electronically tracking issues reported on issue  resolution agreements and said in July 2013 that the mandatory entry of  data from the issue resolution agreements into the IMS would be  recommended to the LB&I Business Review Board in late July 2013.  Thus, the date and methodology for starting to track the issues resolved  during pre-filing are not known. Even if implemented, the planned tracking  would not cover all other audited issues and whether they were resolved  during post-filing. Without such CAP-wide data, it will be difficult for IRS to  know whether it is resolving issues uniformly across CAP taxpayers for a  current tax year or addressing the same complex tax issues year after  year for a CAP taxpayer.
Even if IRS compiled and tracked data on all audited issues, whether or  not resolved, IRS does not have a way to identify and track emerging tax  issues. Compared to traditional audits, CAP could help identify new  issues sooner for multiple CAP taxpayers because CAP occurs in real- time. Without this tracking, IRS cannot readily determine how quickly  new issues are identified or resolved in CAP. Thus, IRS could miss  opportunities to detect new types of noncompliance earlier and to share  the information IRS-wide. Account coordinators in our focus groups  informed us they used an informal process to relay information on  emerging issues, such as to the local office counsel, but the extent to  which this information circulates across IRS is not known.
Similarly, as of May 2013, IRS was not tracking data on its CAP goal for  resource savings to invest in increased audit coverage. Without the data  on the savings and a related plan for using any savings to increase audit  coverage, IRS cannot be assured that the saved resources are invested  effectively on either CAP or non-CAP taxpayers with high compliance  risks. IRS officials explained that a possible way to track the effect of the  saved resources would be to count the number of cases that account  coordinators work, expecting that some coordinators will be able to work  non-CAP cases that would not have been worked.
section_title: IRS’s Readiness to Further Expand Compliance Maintenance Is Unclear
paragraphs: IRS has been moving taxpayers into the Compliance Maintenance phase.  In this phase, IRS intends to save resources by streamlining its reviews of  corporate tax returns. IRS expects that Compliance Maintenance will start  generating resource savings in 2014. The number of taxpayers in  Compliance Maintenance has increased from 10 in early fall 2012 to 44  as of June 2013.
Although Compliance Maintenance is growing, IRS has not assessed  whether it is working as intended and has not developed a plan to expand  it. Standards for program management state that specific desired  outcomes or results should be conceptualized, defined, and documented  in the planning process as part of a road map, along with the appropriate  steps and time frames needed to achieve those results. The standard  practices also call for assigning responsibility and accountability for  ensuring the results of program activities.
Such a plan also could discuss how IRS will assimilate these taxpayers  and ensure that IRS has the capacity to manage the increased workload  within the expedited time frames envisioned for corporate taxpayers  placed into Compliance Maintenance. Without such an assessment and  plan to guide expansion, IRS will not know whether Compliance  Maintenance will help meet CAP goals, such as reducing the resources  devoted to pre- and post-filing, or increasing audit coverage while  maintaining compliance.
The lack of a documented plan for expanding Compliance Maintenance  could create risks for CAP in ensuring that this phase includes the right  types of taxpayers. Our reviews of IRS documents and our focus groups  held with account coordinators indicated that confusion exists about how  IRS would monitor taxpayers in Compliance Maintenance and how it  would remove taxpayers that no longer qualify. Account coordinators that  we included in our focus groups expressed uncertainty over how IRS  would monitor CAP taxpayers, given that some taxpayers could  potentially “game” Compliance Maintenance because this phase requires  a lighter review using less resources than the CAP phase. Account  coordinators were also uncertain about the process and criteria for  removing taxpayers when we spoke to them in March and April 2013. In  addition, they told us that a taxpayer that had been accepted into  Compliance Maintenance for tax year 2013 was expected to remain in  Compliance Maintenance until all of the work was completed for that tax  year, regardless of whether their circumstances changed (such as tax  personnel changes in the taxpayer’s business or discovery of new  complex tax issues).
We brought the concerns from account coordinators that participated in  our focus groups to the attention of IRS. In response, IRS management  informed us that they revised their draft user guide for Compliance  Maintenance at the end of May 2013 and clarified the process and criteria  for moving taxpayers from Compliance Maintenance back to the CAP  phase. An IRS official explained that moving a taxpayer out of  Compliance Maintenance would require a serious compliance risk.  According to the May 2013 draft user guide, taxpayers would remain in  Compliance Maintenance for the entire pre-filing phase. If their  compliance risk changes, such taxpayers will remain in Compliance  Maintenance for that calendar year but may be moved back to the CAP  phase in the next year. Additionally, a March 2013 notification letter to  CAP taxpayers approved for Compliance Maintenance highlighted that if  changes occurred (such as to transparency, cooperation, or tax return  filing activity) IRS might revisit whether they should remain in Compliance  Maintenance.
IRS has not yet verified whether these recent changes are uniformly  understood by account coordinators and resolve their concerns, which  they shared in our focus groups during March and April 2013. At the end  of June 2013, IRS indicated agreement that verifying the changes to the  guidance may help address the account coordinators’ concerns. Verifying  that the changes it took resolved account coordinators’ concerns could  provide IRS with reasonable assurance that its staff are including the right  types of taxpayers in Compliance Maintenance and are monitoring and  removing them appropriately.
The potential savings from Compliance Maintenance relate to multiple  CAP goals, such as increased audit coverage and taxpayer certainty, as  well as reduced overall examination cycle time. CAP may not achieve its  intended goals if IRS does not have a clear plan or criteria for how it  would expand Compliance Maintenance and monitor and ensure that the  right taxpayers are in this phase.
section_title: CAP Taxpayers and Auditors Use IRS Compliance Processes in the Same Manner as Traditional Audits but Coordination Difficulties Exist
paragraphs: Regardless of whether taxpayers are in CAP, they have access to other  existing IRS processes to help resolve tax issues with IRS. Examples  include accelerated issue resolution, advance pricing agreements (APA)  to help resolve transfer pricing issues, Appeals, early referral to  Appeals, fast track settlement, industry issue resolution, and  settlement authority for coordinated issues. For example, CAP  taxpayers retain the same appeal rights as non-CAP taxpayers if they  disagree with IRS’s audit findings. As for IRS staff, both CAP and  traditional audit teams can contact Issue Practice Groups (IPG) for  technical advice on specific tax issues. IPGs are designed to foster  effective collaboration and sharing of knowledge and expertise across  LB&I and Chief Counsel. In our focus groups, account coordinators that  requested assistance from IPGs generally reported that IPGs responded  in a timely manner and prioritized their inquiry over non-CAP audits, even  though IRS does not formally require that priority.
subsections: section_title: CAP’s Expedited Time Frames Pose Coordination Difficulties for Some Tax Issues Which IRS Is Addressing
paragraphs: According to IRS account coordinators for CAP cases, other IRS officials,  corporate tax experts, and large corporation tax officials that we  interviewed or that participated in our focus groups, the expedited nature  of a CAP audit has led to difficulties in coordinating IRS reviews of APAs  and research credits—both take longer to complete than the pre-filing  time frame of CAP allows. IRS has initiated some efforts to address  such difficulties:
For APAs, IRS highlighted in the 2013 CAP MOU that complex  transfer pricing issues may require additional time beyond the typical  CAP time frame to reach an agreement and consequently, could  result in a partial acceptance letter. The MOU also states that the  account coordinator is responsible for contacting the appropriate  Advance Pricing and Mutual Agreement (APMA) Team to ensure  ongoing coordination between the CAP and APMA programs.
For research credits, IRS implemented the General Business Credits  IPG, which consists of IRS’s technical experts on corporate tax credit  issues, to provide assistance in reaching a resolution.
As mentioned previously, IRS does not systematically track tax issues for  CAP in a centralized manner. To the extent IRS begins tracking how long  it takes to audit and resolve specific tax issues, IRS would have data to  assess the effectiveness of these efforts to better coordinate CAP with  APAs and research credit claims.
section_title: IRS Is Working to Ensure CAP’s Culture of Cooperation and Transparency Is Understood Throughout IRS
paragraphs: IRS and non-IRS officials highlighted the need for IRS specialists to better  understand the cooperative and transparent culture necessary for CAP to  succeed. For example, in IRS’s 2012 survey of taxpayers, the most  frequently cited barriers to the CAP review process were the lack of  training and urgency by specialists that CAP teams rely on for advice.  Specifically, CAP taxpayers in the survey perceived a lack of urgency and  cooperation by the specialists working on CAP audits. Moreover, account  coordinators we included in our focus groups expressed some concerns  that the need for cooperation between IRS and the taxpayer in the CAP  environment had not been fully adopted by specialists throughout IRS.
Without a cooperative and transparent environment, CAP teams are  hindered in coordinating with specialists, which may affect IRS’s ability to  achieve its goals. To address these concerns, IRS is acting on the  following efforts to improve coordination with these IRS specialists:  Joint training is being conducted on CAP to include all CAP team  members, specialists, and taxpayers.
Monthly meetings on CAP are being set up with the Tax Executives  Institute, which represents the tax executives of large corporations, to  discuss common concerns and practices, such as those with  specialists.
Procedures are being updated to help with transparency. For  example, CAP teams, including specialists, must discuss IDRs with  the taxpayer before they are filed.
Work is being done to improve specialists’ knowledge of the  corporations whose audits they are involved in, as well as their  methods of communication with such corporations.
IRS officials indicated that they have taken these actions to ensure that  coordination has improved between taxpayers and CAP teams (including  specialists), and to monitor whether taxpayer concerns about specialists  have been addressed. However, it is too early to tell whether IRS’s efforts  will work.
section_title: Conclusions
paragraphs: CAP is an ambitious effort to improve tax audits of large corporations. It  holds the promise of significant benefits for participating corporations in  the form of increased certainty about tax liability and reduced  administrative burden. It also has the potential to save IRS resources,  which could be reallocated to increase audit coverage. Attracted by these  benefits, IRS has been expanding the number of taxpayers in CAP and  the related Compliance Maintenance phase. However, despite several  efforts, IRS has not succeeded at assessing whether or not CAP is  achieving its goals. While anecdotal evidence indicates that CAP may be  effective at ensuring compliance, increasing certainty, saving resources,  and achieving other goals, a CAP-wide assessment could validate these  results and help ensure that support for CAP, both inside and outside  IRS, does not wane.
The lack of a CAP assessment is related to missing or incomplete  performance measures, nonexistent targets for the CAP goals, and  incomplete or inconsistent data. Without a full suite of measures and  targets as well as appropriate data for program evaluation, fully assessing  whether CAP is achieving its goals is not possible. The consequences of  not establishing performance measures and not collecting the data  needed to track performance can be significant. For example, one CAP  goal is to resolve complex tax issues, but IRS does not track whether they  are being resolved. As a result, IRS will not be able to tell whether CAP is  dealing with disputes over the same issues year after year. Similarly, IRS  does not track whether CAP is identifying emerging tax issues. Without  such tracking, IRS cannot share information about emerging issues  across IRS, creating a risk that some IRS audits might miss the issue or  treat taxpayers inconsistently. For its goal on increasing audit coverage  by saving resources through CAP, IRS did not have a way to collect data  on the resources saved. Without that data, IRS cannot readily plan for  how any savings will be used to increase audit coverage.
Finally, without an assessment and plan for expansion, the rationale and  pathway for expanding Compliance Maintenance are missing. In addition,  the extent to which CAP staff understand how taxpayers are to be  monitored and, if necessary, removed from Compliance Maintenance has  not been verified. Absent a clear plan for expanding Compliance  Maintenance and ensuring that account coordinators clearly understand  guidance on monitoring and removing taxpayers, it will be difficult for IRS  to provide reasonable assurance that Compliance Maintenance accepts  the most compliant and cooperative corporate taxpayers, which is  necessary for this phase to work as intended and to contribute to CAP  goals, such as generating resource savings to increase audit coverage.
section_title: Recommendations for Executive Action
paragraphs: To ensure that IRS is meeting the stated goals of CAP, we recommend  that the Principal Deputy Commissioner of Internal Revenue and Deputy  Commissioner for Services and Enforcement take the following seven  actions:
Develop an evaluation plan for CAP, using IRS’s guidelines for  conducting program evaluations, that can  track progress against the goals, and determine whether and how much to expand CAP.
Develop measures for each CAP goal and set related targets.
Consistently and completely capture data needed to track progress  against the CAP goals.
Track all CAP tax issues and at a minimum, identify whether they are resolved or not resolved, and whether any are new or emerging issues that should be shared  IRS-wide.
Track savings from Compliance Maintenance and CAP overall and  develop a plan for reinvesting any savings.
Develop a plan for expanding Compliance Maintenance.
Verify that the updated guidance for Compliance Maintenance on  monitoring and removing CAP taxpayers has resolved CAP staff  concerns about how these tasks are to be accomplished.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to IRS for review and comment.  The  Acting Deputy Commissioner for Services and Enforcement at IRS  provided written comments, which are reprinted in appendix II.  IRS plans  to implement all seven of our recommendations but was not clear on the  extent to which its plans will fully address our first six recommendations,  as highlighted below.
For the first recommendation, IRS stated that it would develop and  execute a program evaluation for CAP by June 30, 2014. However,  IRS did not state whether the plan would track progress against goals  and determine whether and how to expand CAP.
For the second recommendation, IRS stated that it will develop a  balanced measures scorecard for CAP, but it is unclear whether IRS  intends to develop measures for each CAP goal and set related  targets as part of this action.
For the third recommendation, IRS stated that it will capture additional  data points to track progress on the CAP goals, but did not indicate  how it will ensure that the data are consistent and complete,  accounting for problems we discussed in this report.
For the fourth recommendation, IRS stated that it will mandate use of  the Issue Resolution Agreement tool to track CAP issues, but did not  clarify how it will track CAP issues that were not resolved.
For the fifth recommendation, IRS stated that it will identify resource  savings from CAP by June 30, 2014, but did not mention how it will  develop a plan for reinvesting any savings.
For the sixth recommendation, IRS stated that it annually evaluates  whether a CAP taxpayer should be included in the CAP Compliance  Maintenance phase. However, IRS did not list actions it will take to  develop a plan for expanding this phase. This report provides details  on what a plan might cover (such as steps to be taken at certain times  by specified parties to achieve desired results) as well as IRS’s  capacity to assimilate more CAP taxpayers and manage the workload  within expedited time frames for this phase.
IRS also provided technical comments on the draft report, which we  incorporated as appropriate.
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 are also sending copies of the report to the  Principal Deputy Commissioner of Internal Revenue and Deputy  Commissioner for Services and Enforcement, the Secretary of the  Treasury, 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  whitej@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 III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to (1) describe the goals and potential  benefits of the Compliance Assurance Process (CAP), (2) assess the  Internal Revenue Service’s (IRS) efforts to determine whether CAP is  meeting its goals, (3) assess IRS’s readiness to expand Compliance  Maintenance, and (4) describe IRS’s efforts to coordinate CAP with  existing processes for large corporate compliance.
To address these objectives, we reviewed IRS’s strategic plan from 2009  to 2013, IRS’s guidance for CAP and conducting program evaluations, a  CAP management report, CAP research studies, results from IRS’s 2012  CAP taxpayer survey, IRS documents pertaining to other compliance  processes, our prior work on corporate audits and the tax gap, and other  relevant literature. We also assessed IRS’s efforts on CAP by comparing  them with criteria in the Government Performance and Results Act  (GPRA) of 1993, GPRA Modernization Act of 2010, and the Standards for  Internal Control in the Federal Government. We also attempted to  replicate analysis of IRS’s data and tried to conduct our own analyses of  CAP taxpayers but could not do so because of inconsistent data sources  from multiple systems.
Further, we interviewed officials from IRS’s Large Business and  International Division, who were responsible for managing CAP;  Research, Analysis, and Statistics Division, who were responsible for  conducting exploratory CAP research studies; and the Treasury Inspector  General for Tax Administration. In addition, we interviewed 11 corporate  tax experts, including former IRS employees who were familiar with CAP  or had some experience with CAP. We also conducted one focus group  with tax executives of 12 large corporations to understand their  experiences using CAP; six focus groups with 22 account coordinators  responsible for being the primary IRS representative for CAP audits; and  two focus groups with 11 managers of IRS’s Issue Practice Groups  responsible for providing guidance and advice to CAP teams on resolving  complex tax issues. To select the 22 CAP account coordinators for our six  focus groups, we received a list from IRS and drew a random sample to  ensure a variety of independent viewpoints of those employees who work  on different accounts in varied locations.
We conducted this performance audit from July 2012 through August  2013 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: Comments from the Internal Revenue Service
section_title: Appendix III: 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);  Ben Crawford; Sara Daleski; Amy Radovich; Susan Sato; Jehan Chase;  Edward Nannenhorn; and Cynthia Saunders made key contributions to  this report.
section_title: Related GAO Products
paragraphs: Tax Policy: The Research Tax Credit’s Design and Administration Can Be  Improved. GAO-10-136. Washington, D.C.: November 6, 2009.
Tax Administration: IRS’ Advance Pricing Agreement Program.  GAO/GGD-00-168. Washington, D.C.: August 14, 2000.
Tax Administration: IRS Measures Could Provide a More Balanced  Picture of Audit Results and Costs. GAO/GGD-98-128. Washington, D.C.:  June 23, 1998.
Internal Revenue Service: IRS Initiatives to Resolve Disputes Over Tax  Liabilities. GAO/GGD-97-71. Washington, D.C.: May 9, 1997.
Tax Administration: Factors Affecting Results from Audits of Large  Corporations. GAO/GGD-97-62. Washington, D.C.: April 17, 1997.
Tax Administration: Audit Trends and Taxes Assessed on Large  Corporations. GAO/GGD-96-6. Washington, D.C.: October 13, 1995.
Tax Policy: Additional Information on the Research Tax Credit.  GAO/T-GGD-95-161. Washington, D.C.: May 10, 1995.
International Taxation: Transfer Pricing and Information on Nonpayment  of Tax. GAO/GGD-95-101. Washington, D.C.: April 13, 1995.
Tax Policy: Information on the Research Tax Credit. T-GGD-95-140.  Washington, D.C.: April 3, 1995.
Tax Policy and Administration: Information on Transfer Pricing.  GAO/GGD-94-206R. Washington, D.C.: September 15, 1994.
Tax Administration: Compliance Measures and Audits of Large  Corporations Need Improvement. GAO/GGD-94-70. Washington, D.C.:  September 1, 1994.