Tax Administration: Factors Affecting Results from Audits of Large Corporations
Released: 1997-04-17T00:00:00

Letter

Background

For audit purposes, IRS splits large corporations (those reporting $10 million or more in gross assets) into two groups. Of the 46,700 large corporations in 1994, IRS placed about 1,700 corporations, usually exceeding $250 million in assets, into CEP. IRS audits the large corporations not in CEP (hereafter referred to as “large corporations”) under the Examination Division’s general program. The Examination Division audits tax returns to determine whether taxpayers paid the correct amount of tax.

As discussed later in detail, IRS audit staff are to take various steps before auditing a return. First, the staff must classify and select a return for audit. IRS classifies returns to highlight tax issues (e.g., income, deductions, credits) that should be audited. Then, an IRS revenue agent is to plan how to audit such issues and collect information from the large corporation, as needed. If the corporation does not provide all requested information in a reasonable period without a valid excuse, IRS may issue a legal summons to compel the taxpayer to comply. The Department of Justice works with IRS to enforce the summons in court.

For each audit issue, if the revenue agent views this information as insufficient support for the position taken on the return, the agent is to recommend adjustments to the return and compute a corrected tax liability. On the other hand, if the information supports the return filed by the large corporation, the agent is to recommend no tax change. The revenue agent presents the audit results to the large corporation officials, who may either agree or disagree. If the large corporation agrees, any additional tax that the revenue agent recommended becomes assessed. If the large corporation disagrees, it may file a protest with IRS’ Office of Appeals, which is tasked with settling tax disputes without litigation on the basis of what is fair to the government and the taxpayer.

An appeals officer is to evaluate the relative strengths of the government’s and taxpayer’s positions by reviewing the facts, including additional information provided by the taxpayer, pertinent court decisions, and the results of informal conferences with the taxpayer. To settle a tax dispute, an appeals officer can consider the hazards of litigation. The officer is then to negotiate mutual concessions in an attempt to arrive at a settlement. If a case is settled, any additional tax is assessed and the appeals officer is to prepare an Appeals case memorandum, or written summary, of how the case was handled. The summary is to include the issues raised; pertinent facts; applicable regulations, rulings, and court decisions; and the merits and hazards of litigation of each side. If a case is not settled, Appeals is required to issue a notice of deficiency and the taxpayer has 90 days to file a petition with the Tax Court. Even after a case is docketed in court, IRS District Counsel, by itself or by reengaging Appeals, may attempt to settle the case prior to trial.

IRS data showed that in fiscal year 1992, Examination sent 2,235 large corporate cases to Appeals. As of late fiscal year 1995, Appeals had settled about 1,800 of those cases. Of those not settled by Appeals, three were settled by District Counsel, two were settled by trial, and the remainder were still open in Appeals.

Objectives, Scope, and Methodology

Our objective was to determine what factors affected the results of auditing large corporations as well as the amount of additional taxes recommended in these audits that are ultimately assessed. To accomplish our objective, we used two methodologies. First, we sent questionnaires to IRS revenue agents, IRS appeals officers, and corporate taxpayers associated with a nationally representative sample of audits in which a large corporation agreed with the additional recommended taxes at the end of either the audit or appeals processes during fiscal year 1994. To focus on larger audits, we restricted this questionnaire study to the universe of large corporate audits with $75,000 or more in recommended additional taxes and concentrated about one-third of the sample in a stratum with recommended taxes of $1 million or more. Our sample of 500 included about $2.3 billion of the $2.6 billion in recommended additional taxes and $648 million of the $810 million in taxes assessed from the 1,266 large corporate audits in our universe. Appendix I provides a detailed description of our sample selection methodology.

We also sent a more general questionnaire to IRS group managers because, being responsible for many types of audits, they were not as likely as the above respondents to recall information about specific audits of large corporations. We randomly sampled group managers nationwide who had large corporate audits in their inventories as of August 1995. Questionnaire results for revenue agents, group managers, and appeals officers are presented in appendices II through IV, respectively. Because the questionnaires were sent to a sample rather than all members of their respective universes, all of the sample results are subject to sampling error. Unless otherwise noted, all estimates presented in this report have a 95 percent confidence interval of less than plus or minus 10 percent. Questionnaire results for the large corporations are not included because of a low response rate that did not allow us to develop estimates.

Second, we obtained input from various IRS staff. We visited IRS’ National Office, its 4 regional offices, and 7 of its 33 district and appeals offices to interview key officials. During the design phase of our review, we visited three additional districts and two additional appeals offices. In the National Office, we contacted officials in the Examination Division, National Appeals Office, and the Strategic Planning Division. In conjunction with our site visits, we interviewed selected Appeals, District Counsel, and Examination officials to obtain their views. Appendix V lists all locations visited and the officials interviewed at each location. In addition, we asked the Examination Chiefs in all 33 IRS district offices nationwide and Appeals Chiefs in all 33 appeals offices nationwide to give us their written comments on certain factors related to these large corporate audits. We received responses from 31 (94 percent) of the Examination Chiefs and 30 (91 percent) of the Appeals Chiefs. Their views are incorporated throughout this report.

We obtained oral comments on a draft of our report from IRS and the Tax Executives Institute (TEI). We discuss such comments and our evaluation of them at the end of this letter. Overall, we conducted our work at IRS’ National Office, 4 regional offices, 10 of the 33 district offices, and 9 of the 33 appeals offices. In addition, we used questionnaires received from all of IRS’ 33 district offices. We also asked Examination Chiefs and Appeals Chiefs nationwide to give us their comments on factors related to these large corporate audits. We did our work from May 1995 to November 1996 in accordance with generally accepted government auditing standards.

Recent Statistics Raise Issues About Audits of Large Corporations

Our 1995 report on large corporate audit trends provided statistics on IRS audits of large corporations between fiscal years 1988 and 1994. These statistics covered the audit results and assessment rate over this 7-year period. Neither we nor IRS knows what the assessment rate should be, but these statistics indicate that IRS has been investing a lot of time and money recommending additional taxes that do not get assessed.

For example, in a comparison of data for 1988 and 1994, we found that IRS invested more resources in large corporate audits but recommended less additional tax per hour. IRS spent 25 percent more hours and audited only 3 percent more returns. Even so, the amount of taxes recommended (in constant dollars) dropped 23 percent per audit hour and 7 percent per audited return. In addition, IRS’ no-change rate doubled from 8 percent to 16 percent.

Further, for the 7-year period, we computed that IRS assessed, on average, 27 percent of the additional taxes that IRS revenue agents recommended in these audits. The assessment rate includes the amount of recommended taxes that the large corporations agreed to pay at the end of the audit as well as those amounts sustained after any appeal. Over the 7 years, large corporations appealed between 66 and 85 percent of the additional taxes recommended and agreed to pay the rest. Since 1990, corporate taxpayers have been appealing a lower percentage of the recommended taxes and agreeing to a higher percentage.

Factors Affecting Assessment Rate and Audit Results

We identified four factors that affected the assessment rate and/or audit results, such as the lower recommended taxes per audit hour in 1994 compared to 1988. Although the exact impact is unknown, each factor can affect both the rate and results. For example, three of the four factors—complex tax laws, conflicting performance measures between Examination and Appeals, and limited coordination between these two IRS functions—can produce a lower assessment rate.

As for lower audit results, the three factors can each have a different impact. Complex laws cause IRS’ audits to be very time consuming, which can lower the amount of recommended taxes per hour. Although Examination’s performance measures would encourage higher amounts of recommended tax, Appeals measures would not be as likely to affect the audit results. Limited coordination between Appeals and Examination was unlikely to affect the audit results being disputed by corporations because the audits had already been done. On the other hand, future audit results on similar tax issues were likely to be reduced when revenue agents did not receive feedback on which disputed issues were conceded and why; such knowledge could enhance future audits.

The fourth factor entailed a number of aspects of an audit that could reduce the taxes recommended per audit hour or the assessment rate. Because revenue agents generally worked alone without much assistance from counsel or their management, they needed more time to develop enough support to recommend taxes that could be assessed after an appeal. These agents also did not have a sufficient basis for selecting corporate tax returns with potential for significant tax changes. Generally, audits of returns with low potential were more likely to result in recommendations for little or no tax change and were less likely to be appealed. Thus, these audits would generally have little effect on the assessment rate. However, when a revenue agent tried to recommend taxes without sufficient support, such recommended taxes would not likely be sustained in Appeals, and the assessment rate would be lower. The following sections discuss each of these four factors in more detail.

Tax Law Complicates IRS’ Audits of Large Corporations

IRS and large corporate taxpayers can have legitimate differences over how tax laws should be interpreted. We found that complex, ambiguous laws have created opportunities for both large corporations and IRS to interpret the tax laws differently. This discretion, in turn, increased the likelihood of tax disputes. Without clear tax laws, resolution of these disputes can get complicated and can ultimately depend on the negotiating skills of the IRS and corporate representatives. Because the corporate representatives have usually prevailed in Appeals or the courts, recommended additional taxes have tended not to be assessed.

We have previously reported that the federal tax laws are complex, difficult to understand, and in some cases indecipherable. Some of the large corporate officials who responded to our survey indicated that a major reason for disputing recommended taxes was revenue agents’ interpretation of tax laws. We estimate that revenue agents judged that about 86 percent of the corporate tax disputes were due to different interpretations of the tax laws. Appeals officers in our universe cited the hazards of litigation as the primary reason for resolving these interpretive differences in favor of the corporations for an estimated 56 percent of the additional taxes being appealed. The National Director of Appeals told us in a letter that these audits often raise issues involving substantial doubt or variances of opinion because these issues are complex and not definitively answered by litigation.

The complex tax laws also affected IRS’ ability to conduct audits, according to 21 of the 33 Examination Chiefs and 27 of the 33 Appeals Chiefs nationwide. Such complexity, in combination with the broad scope of the tax laws, made it difficult for IRS to ensure that its revenue agents stayed current in their tax law knowledge and for large corporations to comply with the tax laws. “Taxpayers are aware of the difficulty of determining with exactness the liability that they have. They are also aware that the courts cannot resolve all disputes arising out of the audit process. Therefore, the Service must pursue the administrative resolution of these cases whenever possible. The fact that the Service is highly motivated to resolve cases without litigation means that compromises on difficult and controversial issues will take place. Knowing this, taxpayers naturally take advantage of the process to dispute those issues on which some doubt exists.”

To help resolve problems with tax law complexity and recurring issues in CEP audits, our 1994 report recommended that IRS should more strongly propose changes to the tax laws. IRS agreed and has established a work group to evaluate ways to implement this recommendation. To the extent that IRS is successful in getting Congress to simplify the various complex tax issues, large corporations are likely to benefit as well as IRS.

Differing Measures in Examination and Appeals May Have Reduced the Assessment Rate

IRS’ overall mission is to collect the proper amount of taxes in a manner that is efficient and fair and promotes public confidence. The Examination and Appeals functions also have important missions that should contribute to IRS’ overall mission. Revenue agents are charged with protecting the government’s interest in receiving the proper amount of tax. They are instructed to make their audit recommendations without deviating from IRS’ legal positions or considering the hazards of litigation (i.e., the chance of losing in court). On the other hand, appeals officers are charged with resolving tax controversies without litigation to the extent possible while being fair and impartial to both the government and the taxpayer. They are instructed to consider the hazards of litigation and may concede the recommended taxes in part or in whole on that basis.

Performance measures typically move a function toward desired ends within a mission. In doing so, the performance measures within the two functions reflect their respective missions and may not encourage the functions to work together effectively to accomplish IRS’ overall mission. For example, Examination has traditionally focused on measuring the amount of additional taxes recommended per audit and per audit hour. On the other hand, Appeals has focused on measuring the number of tax disputes settled as quickly as possible without litigation. These different measures have the potential to lead to a lower assessment rate. The audit measures may encourage revenue agents to propose tax adjustments regardless of whether they can be sustained on appeal and discourage agents from fully developing issues because of time pressures to close the audits. Appeals’ measures may encourage appeals officers to settle more cases in less time even when some of the recommended taxes have a justifiable basis under vague or complex tax laws. As a result, a high proportion of recommended taxes may not be assessed, but Examination could claim success for recommending high amounts of taxes and Appeals could claim success for settling the case without litigation.

In our 1994 CEP report, we reported a similar situation for CEP audits and recommended that IRS add an IRS-wide measure, such as the collection rate, to the functional measures. Although IRS disagreed with this recommendation when commenting on a draft of the CEP report, IRS officials subsequently told us they plan to implement such an IRS-wide measure in some form during fiscal year 1998. Such a measure could similarly be applied to various types of audits, including audits of other large corporations.

An IRS-wide measure such as the collection and/or assessment rate could encourage IRS functions to work together to accomplish IRS’ overall mission of collecting the proper amount of tax. National Office Examination and Appeals officials expressed concerns about possible unintended effects from creating such a measure. For example, they said an overall IRS measure such as the assessment rate could encourage revenue agents to avoid raising difficult audit issues or appeals officers to settle disputes just to drive up the assessment rate. However, this measure of the tax outcomes also would be likely to encourage revenue agents to more fully develop audit issues that could be sustained if appealed. As discussed later, such a measure also could encourage appeals officers to coordinate with Examination while still remaining impartial and independent in settling tax disputes.

As measures are emphasized over time, they become ingrained, making changes very difficult. At every location we visited, we heard about the driving force of existing measures from Examination or Appeals officials and the difficulty of changing or adding to them. These officials noted that as new measures are introduced, the culture of the organization will resist change and cling to the past.

Many Examination and Appeals managers we contacted also expressed concerns over using an assessment rate as a measure for the large corporate program. In part, they pointed to impurities in IRS’ databases that do not allow them to separate audit actions from nonaudit actions, such as claims or net operating losses. IRS has been developing a new database to help identify these problems and their impacts on the revenue collected due to audits and other enforcement efforts.

One case in our sample epitomizes the concerns about the assessment rate being skewed by nonaudit actions. In this case, the revenue agent recommended several hundred million dollars in additional taxes. Appeals sustained 100 percent of the issues and the taxes recommended by the revenue agent. However, the large corporation submitted additional information as well as a net operating loss and other claims during the Appeals process. Appeals accepted and approved these losses and claims. The losses and claims almost completely offset the additional taxes recommended by the revenue agent. As a result, about 1 percent of the recommended taxes was assessed. Until the databases account for them, nonaudit actions that are considered during the Appeals process will continue to overstate or understate the rate at which taxes recommended in audits get assessed.

On the other hand, of the 40 regional and district officials we interviewed, 14 told us they supported using the assessment rate. One Appeals Chief told us “The measurement standards would be more appropriately based on dollars ultimately assessed and collected.” In addition, at least one official from each function—Appeals, Counsel, and Examination—in the four regions told us that both Examination and Appeals should be accountable for the assessment rate. Further, 7 of 33 Chiefs of Examination said they already used a cross-functional measure, such as the amount of additional taxes recommended that gets assessed, as an additional way to evaluate audit effectiveness.

Audit Circumstances Hindered Revenue Agents From Developing Recommended Taxes That Could Be Sustained

Audits of these large corporations can be complex and technical but are generally done by a single revenue agent. Although they worked alone, these revenue agents received little assistance from district counsel or their group managers. Also, IRS’ approach for classifying and selecting these large corporate returns did not help ensure that revenue agents spent their audit time on the most noncompliant returns. Finally, the agents had difficulty obtaining information from the large corporations. In combination, these circumstances made it difficult for revenue agents to recommend taxes that had enough support to be assessed without investing a lot of time.

Revenue Agents’ Corporate Audit Experience and Training Limited

IRS officials said the level of large corporate auditing experience for revenue agents was not as high as they would like it to be. For the large corporations in our study, the average return was audited by a single revenue agent with about 8.5 years of corporate auditing experience. IRS has lost about 1,800 experienced revenue agents over the past 3 years. IRS National Office Examination officials as well as regional and district officials interviewed noted that if IRS continues to lose its senior revenue agents without being able to replace them, corporate audits will become less productive. Furthermore, these agents could not easily develop corporate expertise because they generally conducted many other types of audits, such as those of partnerships and individuals.

Given the level of experience of these revenue agents and the complexity of the tax law, training in corporate income tax practices and the tax laws is important. In this regard, the revenue agents in an estimated 38 percent of the audits in our study population believed that they needed, but had not received, training that would have improved their ability to conduct their audits. A common need cited was for more industry-related training. Further, 25 of the 33 Examination Chiefs nationwide indicated that additional training in specific industries would enhance audits of complex, technical issues. A regional task force cited a need for additional training so revenue agents could become more proficient in recognizing and developing corporate issues. In February 1997, National Office Examination officials told us they were developing a specific course that will be used to train all revenue agents assigned to large corporate audits. To help guide revenue agents doing large corporate audits, they also planned to have audit criteria and procedures in place by the end of calendar year 1998.

However, six Examination Chiefs pointed out the difficulty in providing additional training when training funds have been diverted to other areas because of budget limitations. For example, one Examination Chief told us that for fiscal year 1996 the training budget was cut so severely that Examination could not conduct continuing professional education for revenue agents. National Office Examination officials told us during November 1996 that IRS added $10 million to fiscal year 1997 training funds across IRS, of which Examination received $1.4 million. According to one of the officials, these funds should help Examination provide most, but not all, of the basic continuing professional education training to its revenue agents. Moreover, this official said funding for training is unlikely to improve for fiscal year 1998 under the current budget environment.

Limited Counsel and Managerial Assistance

Working alone on these corporate audits, revenue agents may need assistance in planning and developing their audits. However, we found that revenue agents usually did not request assistance from district counsel or their group managers on planning and doing the audits.

Revenue agents for most of the 1,266 audits in our study population said they did not request any legal assistance on matters of tax law or overall issue development. We estimate that revenue agents reported requesting assistance from the Office of District Counsel for about 14 percent of the audits, and from the Office of Chief Counsel for about 8 percent of the audits. However, for an estimated 55 percent of those audits in which revenue agents requested assistance, they judged that such assistance had a positive or very positive effect on their ability to obtain the taxpayers’ agreement. Appeals officers consulted with district counsel during resolution of an estimated 20 percent of the most significant issues raised by revenue agents. For about half of these consultations, the appeals officers indicated that District Counsel helped them to resolve the disputes to a great or very great extent.

Our interviews with district office officials identified a major reason for infrequent requests for legal assistance. These officials were concerned about revenue agents and appeals officers not receiving the assistance in a timely manner. Counsel officials in the four districts we visited acknowledged that responding to requests for formal legal assistance can be time-consuming. However, these officials told us they could help improve the effectiveness of the large corporation audits by assisting the revenue agent in developing audit issues and obtaining requested information. They believed that such involvement could be justified and helpful. In February 1997, National Office Examination officials told us that Counsel involvement in CEP cases is working well and support looking for ways to increase Counsel’s involvement in the large corporate cases. However, Counsel officials cautioned that increased involvement would have to be on a selective and informal basis due to staffing constraints.

Less than half of the revenue agents in our universe indicated their group managers were involved in identifying audit issues, discussing complex audit issues, obtaining information from the taxpayer, or resolving disputed issues. In well over half of those audits in which revenue agents indicated their managers were involved, the revenue agents indicated that such involvement helped them. For example, we estimated that in 207 of the audits in our population, revenue agents indicated that their group managers were involved in obtaining requested information from taxpayers; in an estimated 83 percent of those audits, the revenue agents viewed such involvement as either very positive or somewhat positive.

Examination officials and the regional task force report provided insights on why managers were not more frequently involved in agents’ audits. For example, they said most group managers did not have sufficient experience or time to substantially assist revenue agents. Examination officials from the districts we visited told us that group managers were responsible for many revenue agents and other auditors who audit a range of tax entities, from individual returns through complex corporate returns, that involve different tax rules and issues. Officials said that group managers tended to focus their attention on newer staff and administrative duties. They said that as a result, revenue agents were left to conduct these corporate audits with minimal managerial involvement, and group managers lost the opportunity to develop their corporate audit experience.

Both the Examination officials and the regional task force report concluded that these large corporate audits were more effective when group managers with corporate audit experience were actively involved. For example, 20 of the Examination Chiefs nationwide indicated that group manager involvement was crucial to the success of these audits.

To increase managerial involvement and audit effectiveness, four districts we visited had recently created groups of existing revenue agents that specialized in large corporate audits. Managers with extensive corporate auditing experience led these groups to help their agents get assistance in selecting, planning, and doing audits. District officials believed that these groups, although fairly new, have improved the effectiveness of large corporate audits because, in part, of the focus and assistance of group managers.

IRS’ National Office has not yet issued any uniform guidance on how to measure the success of these groups. Accordingly, not all districts were consistently measuring the impacts; some were focusing on different audit results (e.g., recommended taxes per hour versus no-change rate). National Office Examination officials told us that they would like to learn more about the impacts of these specialized groups across the districts that had created them.

In evaluating these groups, it is important to recognize that some districts may not have enough corporate workload or revenue agents to justify these specialized groups. That is, such districts may wish to maintain flexibility in using revenue agents on other than large corporate audits. At least one Examination Chief was concerned about the potential impacts on audit results in the short term. Even so, officials in these districts believed that these specialized groups will ultimately yield better large corporate audit results, cancelling out any initial decline in the results. And, if the districts who were experimenting with such groups maintain a similar level of investment in large corporate audits, shifting the agents into specialized groups would not necessarily increase IRS’ costs or reduce resources for other types of audits.

Inconsistent Approach Among Districts for Selecting Corporate Returns for Audit

Compared to CEP tax returns, the approach for selecting these large corporate returns was more subjective and varied. To determine which large corporations to select for CEP, IRS scores corporate tax returns on specific criteria, such as corporate structure, assets, and income. IRS does not have a consistent approach or criteria for classifying and selecting tax returns for large corporations not in CEP. The approach and criteria varied by district.

In general, revenue agents and/or their group managers selected the returns to audit, depending on the IRS district. Many districts charged revenue agents with both classifying and selecting issues for audit, and some districts had other auditors do the initial selection and classification. Some districts relied on service center staff to classify large corporate returns, using criteria provided by that district, or subjectively without using any such criteria before sending the selected returns to the district.

In sum, our analysis of questionnaire responses and our interviews with IRS officials showed that the IRS staff doing the selection and classification had to ultimately rely on their experience and judgment about audit potential. They had limited criteria and little information on (1) any previous audits of the large corporation or (2) overall large corporate audit results by issue and industry to guide their decisions. Some of these staff may be sufficiently experienced to find returns that would be productive to audit. However, the audit results in fiscal year 1994 showed that more returns were audited without any recommended tax changes or with lower amounts of recommended tax per audit hour than in fiscal year 1988.

National Office Examination officials have expressed similar concerns about their selection and classification system for large corporate audits. They established a task force to develop a more structured system, but budget constraints have stalled the task force’s efforts. In lieu of the task force, the National Office is testing the benefits of providing additional information on a corporation, such as Securities and Exchange Commission (SEC) reports, to the revenue agent reviewing the corporate return. Examination is also testing potential improvements to the classification system; none of the tests are far enough along to have useable results. Selected IRS districts are testing classification of returns by market segment.

Also, IRS is developing the Examination Operational Automated Database in an attempt to capture audit results by issue and industry. Examination officials believe that this database could be used to enhance any selection and classification system by providing feedback on tax issues (e.g., unreported gross receipts, overstated travel expenses) by industry (e.g., manufacturing, wholesale trade) that have proven to be productive to audit. That is, IRS could identify issues and industries in which audits generated more recommended taxes per audit hour. By tracking such audit results, Examination officials believed that this database will be particularly helpful in classifying audit issues. These officials said IRS already had most of the necessary hardware and software. They estimated that enhancements in fiscal year 1997 would cost about $320,000 and that administrative costs would average a staff year per district. This system is being tested in two IRS districts and is expected to be operational by the end of calendar year 1998.

Further, IRS officials from some districts with groups specializing in audits of large corporations told us such groups have helped improve the return selection and classification processes at these districts. These groups can improve not only the selection process but ultimately the productivity of these corporate audits. For example, in one district, an Examination official told us that while the overall percentage of audits closed with no additional tax recommended was about 10 percent, the rate within the specialized group was only about 3 percent. Such audits can result in ineffective use of IRS’ as well as the corporations’ resources.

Difficulty in Obtaining Information to Support Tax Recommendations

During audits, revenue agents may question items on the return, such as income, deductions, or credits. If a corporation cannot provide adequate information as support, the revenue agent may adjust the items, which usually results in additional taxes being recommended. Both the revenue agents and large corporations contributed to problems in obtaining such information. Not having the information hindered IRS’ ability to do effective audits and support tax recommendations.

Appeals and Counsel officials in all four districts we visited told us that revenue agents do not always have adequate information to support recommended taxes. Taxpayers provided information to Appeals that had not been provided to the revenue agents in an estimated 53 percent of the disputed audits. Appeals officers for some of the audits noted that revenue agents had provided insufficient information to justify their development of an audit position. For example, appeals officers for an estimated 27 percent of the disputed audits indicated that not all of the top three dollar issues had been fully developed by the revenue agents during the audit.

Examination and Appeals officials told us that some corporate taxpayers did not always provide requested information in a timely manner, if at all. Corporations can have difficulty providing information when IRS’ requests are vague, for old data, or made late in the audit. On the other hand, corporations have little incentive to provide all information, particularly if it will lead revenue agents to make adjustments or to audit other areas on the tax return. IRS officials we interviewed believed that problems in obtaining all the information needed to support tax recommendations were becoming more prevalent.

Examination, Appeals, and Counsel officials said agents should ensure that they have adequate information to support tax recommendations. They also expressed the opinion that the recently formed specialized groups can increase managerial and counsel involvement in helping revenue agents obtain the information needed to support their recommended taxes. They noted that these group managers, when involved, were usually able to help agents obtain requested information from taxpayers.

Counsel officials told us that their involvement, including the discussion and issuance of summons when needed, could help secure information. They noted that revenue agents need to make information requests early in the audit so that the summons process, if needed, can begin as soon as possible, enhancing its effectiveness. IRS generally uses a summons as a last resort, meaning IRS has tried all other administrative means of obtaining requested information. Although used infrequently, a summons can prompt large corporations to provide the requested information. If it does, the investment in time and money can prove to be worthwhile compared to spending time awaiting information that may not be received.

Coordination Between Appeals and Examination Was Limited

During the appeals process for large corporate audits, coordination between Appeals and Examination was limited. Appeals generally did not share with Examination new information from large corporations. Sharing this information would give revenue agents the opportunity to review it and provide their comments to Appeals before the settlement. After the final settlement, Examination did not always distribute Appeals’ summary of that settlement to its revenue agents. Our work showed that such limited coordination resulted from insufficient requirements and incentives to coordinate. Although Appeals’ independence in settling tax disputes is critical, limited coordination between the two functions can hinder IRS’ efforts to reach a balanced settlement as well as to improve future audits.

Appeals officers for an estimated 25 percent of the disputed audits indicated they had no interaction with revenue agents while resolving the disputed tax issues. Appeals and Examination officials have acknowledged such limited coordination overall. An Appeals task force draft report cited Examination’s concerns about the current Appeals process not providing Examination with an opportunity to present its views on key issues prior to resolution. Knowing that large corporations usually have unlimited access to the appeals officer to discuss the dispute, Examination officials said limited involvement and coordination with Appeals creates the appearance that the government’s interest is not fairly represented and that the Appeals process is not balanced.

This appearance of bias can be aggravated when an appeals officer does not share with Examination staff new information provided by large corporations. Appeals officers for an estimated 53 percent of the disputed audits in our study population indicated that large corporations provided additional factual information for at least one of the top three dollar issues. However, the appeals officers asked Examination to review the new information in 139, or an estimated 43 percent, of those disputed audits in which corporations provided new information. Revenue agents reported a similar lack of coordination. They indicated that Appeals asked them about new information in only an estimated 17 percent of all disputed audits. Neither we nor IRS knows whether the appeals officers should have shared the new information in these cases. Our CEP work indicated that CEP corporations are more likely to win more disputes when they provide information to Appeals that Examination has not had the opportunity to review.

In addition, Examination officials told us that Appeals seldom shared the proposed settlement with Examination so that revenue agents could have one last look at how the dispute was to be settled and whether any new information played a part. National Office Examination officials told us in February 1997 that they do not believe it is realistic for Appeals to share proposed settlements in every case. However, Examination wanted the opportunity to review and discuss new information submitted after the audit closed.

Two reasons help explain this limited sharing with Examination staff. First, although IRS does require appeals officers to share significant new information with Examination, it left the definition of “significant” to the discretion of each appeals officer, recognizing that sharing all new information would not be realistic. Given the uncertainty over this requirement, Appeals could not ensure that the significant information had been shared. Without a definition of significant and without adequate controls to ensure that all significant new information is shared, neither we nor IRS knew whether the appeals officers involved with our study population had met the requirement for sharing significant new information. Also, IRS did not require Appeals to share its proposed settlements with Examination.

Second, the limited sharing partially resulted from the differing roles and incentives driving the work of Examination and Appeals. Appeals Chiefs we interviewed said they encourage appeals officers to involve the revenue agents in reviewing new information but advised their appeals officers to be conscious of the time and costs to do so. That is, if the appeals officers believe they can review the information in a shorter period of time than a revenue agent can, the appeals officers should most likely do it. Our interviews with Examination officials also indicated that many revenue agents have little incentive to spend time reviewing new information on a case that Examination has already closed. Further, both Appeals and Examination officials at the National Office said that sharing all new information would be unnecessary and too time-consuming. In February 1997, these Appeals officials told us they believed much of the new information submitted by taxpayers was not significant.

Regardless, sharing significant new information, especially that relating to issues that may not be sustained, would help IRS to maintain its designed separation of duties—revenue agents could audit the new information and appeals officers could focus on settling the entire dispute. To help meet this end, our 1994 CEP report recommended that IRS improve controls to ensure that Appeals provides CEP teams an opportunity to comment on proposed settlements. IRS disagreed at the time, but Appeals subsequently proposed a procedure to promote better communication with Examination and better settlement of key issues in CEP cases. Under that proposal, Examination could identify five key issues in a case nearing settlement and Appeals would not settle the key issues until it had considered feedback from Examination. This way, Examination would have the opportunity to review the proposed settlement and advise Appeals of any significant facts, laws, or other factors that may need further consideration. According to many Examination and Appeals officials we interviewed in the districts, allowing Examination to provide this input could add balance to the appeals process without adversely affecting Appeals’ independence. The proposed procedure also could help ensure that Appeals provides Examination with significant new information that taxpayers submit and an opportunity to comment just prior to settling a case.

Recognizing that taking these steps could involve some additional time, both Examination and Appeals officials told us during our field visits in early 1996 that the steps were worth taking. However, in November 1996, National Office Appeals officials told us that IRS had recently decided not to implement testing of this proposed procedure because of concerns by both Appeals officials and large corporations that such a procedure could impede Appeals’ ability to independently settle tax disputes. However, these Appeals officials said that Appeals’ independence would not necessarily have to suffer under this proposal.

Regarding final settlements, Appeals has a procedure for sending a copy of the final written summary to Examination, but Examination has no process in place to ensure that this feedback reaches the appropriate revenue agent. Revenue agents indicated that they received the written summary in an estimated 61 percent of the disputed audits. Examination officials and revenue agents told us that this summary can provide insights on why a recommended tax adjustment was or was not sustained on appeal. For example, the summary typically discusses the reasons for settling the disputes, such as hazards of litigation. Without knowledge of significant facts or laws followed in the settlement, the revenue agents lose an opportunity to learn about the types of tax issues involved in the case and the support needed to sustain future tax disputes.

In summary, Appeals attempts to provide large corporations with a review of their tax disputes that is independent of Examination or other IRS functions before these corporations decide whether to litigate. However, both Examination and Appeals officials told us that increased coordination and communication could help to improve their working relationship and to correct the appearance of imbalances during appeals without reducing the independence. To illustrate this point, a Regional Chief Compliance Officer told us about the need for more balance whenever large corporations withhold information during the audit but provide that information to Appeals. Examination Chiefs told us more interaction would afford an opportunity for their agents to better explain their recommended taxes as well as any difficulties they may have had in obtaining information to support their recommendations.

Conclusions

Our analysis of questionnaire responses and interviews with IRS officials identified at least four factors that contributed to the low assessment rate or decline in audit results for 1988 to 1994. First, complex tax laws impeded revenue agents’ efforts to determine the correct tax liability and appeals officers’ efforts to fairly settle tax disputes. Second, differing performance measures prompted revenue agents to recommend as much tax as soon as possible and appeals officers to settle tax disputes without litigation as soon as possible. We recommended in our 1994 report that IRS more strongly propose legislative changes to reduce tax law complexity and consider cross-functional measures, such as the collection and/or assessment rate. IRS is taking action on both of these recommendations. We make no new recommendations on these issues because our 1994 recommendations can also apply to audits of other large corporations.

Third, various aspects of the audit process impeded revenue agents’ ability to develop recommended taxes that can survive appeals. IRS recognized these aspects but faced constraints in surmounting them. Budget pressures limited the use of team auditing to buttress agents’ lack of expertise in auditing large corporations. The broad and complex nature of tax administration complicated efforts to carve out more time for group managers and district counsels to formally assist revenue agents—who often work alone without much assistance. Revenue agents viewed such assistance, whether formal or informal, as helpful in identifying and discussing audit issues, requesting corporate information, and pursuing requests that have not been answered. Further, IRS initiated efforts, such as a task force to study ways to improve return selection and classification, but these efforts stalled due to budget constraints.

Some IRS districts have taken a step that could address many of these problems. They have combined senior revenue agents and managers into groups that specialize in large corporate audits. Examination officials in districts that created these groups believed that their initial experiences indicated that the groups helped improve return selection and classification, information gathering, and audit productivity. They also believed that the groups allowed managers and agents to share knowledge and assistance in a focused, timely way. However, the districts generally had limited data on the actual impacts of these groups, and IRS’ National Office has not provided criteria or oversight to guide the measurement of the impacts. National Office Examination officials said they would like to learn about the impacts of these groups across the districts.

Fourth, the Appeals and Examination functions did not always share information. Unlike CEP teams that have an ongoing audit presence, revenue agents who audit these large corporations move on to other audits. We recognize that sharing all information would not be realistic; however, Appeals could inform Examination officials of any new information that would cause the appealed issues to not be fully sustained. Doing so would help IRS to maintain the intended separation of duties. Examination could have an opportunity to audit the new information and Appeals officers could then focus on their responsibility for settling the entire dispute. After a dispute was settled, Examination did not have a system for regularly sharing Appeals’ summaries of the final settlements with revenue agents. Knowing about the final settlement could help agents to learn about and support tax issues that could sustain appeals. For any form of enhanced sharing, maintaining Appeals’ independence would be paramount.

In recommending improvements, we tried to recognize the costs and constraints to IRS. Most of our recommendations will entail limited costs. For example, providing more specific, objective guidance and criteria on return selection need not be an expensive proposition, particularly if the new database on audit results helps to identify the types of large corporations and tax issues that have proven productive to audit. The use of more informal legal assistance would create some costs, but that assistance could be provided more quickly and at less cost than formal assistance. Further, providing more structure and guidance to districts on evaluating the impacts of the specialized audit groups should not cost much and could provide big dividends if IRS had more certainty about the impacts of these groups on the productivity of large corporate audits. Appeals’ sharing of significant new information with Examination could add some time to resolving the disputes, but that investment should be worthwhile if the revenue agents learn how to do better audits or help to determine the correct tax liability. Even if some costs increase, the accompanying improvements should help IRS to better invest its limited enforcement funds in trying to ensure that large corporations are paying the correct amount of taxes.

Recommendations

To improve the audits of tax returns filed by large corporations, we recommend that the IRS Commissioner provide more specific objective criteria and procedures to guide the selection of large corporate tax returns and classification of tax issues with high audit potential across the districts; develop criteria and procedures to guide the evaluation across the districts of the impacts of groups specializing in audits of large corporations; encourage District Examination management to work with District Counsel officials on finding cost-effective ways to provide revenue agents with the necessary legal assistance; require Appeals to notify Examination of new information received from a large corporation that could cause the appealed issues to not be fully sustained, and require Examination to (1) indicate whether it wishes to review the new information and, if so; (2) review the information and notify Appeals of the results of the review as soon as possible; and require Examination management to provide feedback to its revenue agents on the final settlements that Appeals reaches with large corporations.

Agency Comments and Our Evaluation

We obtained comments on a draft of this report in a meeting on February 20, 1997, with IRS officials who represented you. These officials included a representative of the Commissioner’s Office of Legislative Affairs, a representative of the Chief of Staff to the Assistant Commissioner of Examination, as well as representatives of the Large Business Examination Programs, and representatives of the National Director of Appeals.

In general, they agreed with our findings and conclusions and provided a few technical comments on specific sections of the draft. We have incorporated these comments, such as on additional training funds for revenue agents, Appeals’ discretion to share significant new information, and performance measures, in the sections of the report where appropriate.

As for our five recommendations, IRS agreed to implement four, as discussed below.

First, IRS officials said they have already started to analyze closed large corporation audits to develop an objective system for better classifying and selecting large corporation returns to audit. IRS plans to begin testing this system in selected districts within each IRS region by the summer of 1997 and to implement it by the end of 1998.

Second, IRS officials said they plan to develop criteria and procedures to guide the evaluation of the district groups that specialize in audits of large corporations. IRS hopes to finish these actions during 1998.

Third, IRS officials said they plan to issue an IRS-wide memo by May 1997 to encourage district Examination management to work with District Counsel officials on finding cost-effective ways to provide revenue agents with the necessary legal assistance, including the use of field service advice and technical advice memoranda.

Fourth, IRS Examination management said it plans to change the Internal Revenue Manual to require that revenue agents be provided with feedback on Appeals’ final settlements with large corporations. Because the next series of changes to the Manual will not be done until the end of fiscal year 1997, Examination officials plan to issue a memorandum on this requirement during May 1997.

IRS officials did not agree to implement the fifth recommendation that would require Appeals to share its proposed settlements with Examination so that Examination could see whether the large corporation provided new information that affected the settlement. Examination officials said they want to see significant new information, but requiring Appeals to share all proposed settlements may be too formalized and too strong a process for obtaining the new information.

Appeals officials expressed concern that sharing proposed settlements could create perceptions that Appeals’ settlement authority would be subject to an Examination veto. This perception could prompt large corporations to close off Examination’s reinvolvement by taking the dispute to court. They also believed that this sharing would add time to the settlement process that usually would be significant and would not change the final settlement. Finally, they believed that reinvolving Examination could produce an adversarial relationship to the extent that appeals officers felt pressured to justify their settlement proposals.

We also asked TEI to provide comments on the same draft report. We met with TEI officials on February 21, 1997, to obtain their comments. They also supported or had no opposition to the same four recommendations that IRS agreed to implement. Although we made no recommendations on these topics, they supported creating an IRS-wide performance measure and more training for revenue agents as well as applying CEP processes to non-CEP audits. Like IRS, they expressed similar concerns with the recommendation on sharing proposed settlements with Examination so that it could see how new information affected the settlements. They also expressed the concern that sharing the proposed settlement may prompt Examination to go beyond the new information and try to re-audit other issues.

In recommending that Appeals share proposed settlements to allow Examination to see whether new information significantly affected the settlement, we did not intend to undercut Appeals’ settlement authority or grant Examination veto power over settlements; in fact, our draft report pointed to the importance of retaining Appeals’ independence in settling disputes. Thus, we did not envision that the act of sharing would require a highly formalized process or much time in the majority of cases.

Rather, our intent was, and still is, to provide an inducement for appeals officers as well as large corporations to share significant information with Examination. We believed that some control or check was needed to better ensure that Examination had the opportunity to play its appropriate role in reviewing information to determine the correct tax liability and protect the government’s revenue. We intended that the requirement to share would provide a control over the appeals officers’ use of discretion in judging the need to share new information. We also intended that this requirement would send a signal that large corporations cannot intentionally bypass the audit process by providing new information to appeals officers during negotiations over tax liability.

Our focus on the need for a control stems from responses to our questionnaires and to our interviews with district office officials during 1996. Although Examination officials recognized that communication with Appeals has been improving, Examination officials and staff still pointed to instances in which they did not have a chance to review significant new information that a large corporation had provided to Appeals. In some cases, they noted that they had asked for similar information during the audit.

Even so, we understand the concerns expressed by Appeals and TEI officials about sharing the significant new information through the proposed settlements. We discussed several other ways to address the concerns and still have IRS provide a control over Appeals’ sharing of new information with Examination. These discussions prompted us to change our recommendation on how to better ensure that Examination has an opportunity to review the new information. Under our changed recommendation, Appeals would notify Examination as soon as possible after a large corporation provided new information that could cause the disputed issues to not be fully sustained. Upon notification, Examination could choose to do nothing, ask for details, or ask to review the information. Examination and Appeals would need to develop procedures on how much time Examination has to request and review the information, how the information would be shared, how extensive the review would be, and how the results of the review would be communicated to Appeals.

We believe that this option would provide Examination the opportunity to fulfill its intended roles—determine the correct tax liability and protect the government’s revenue—while mitigating the concerns raised by Appeals and TEI. As we envision it, this recommendation would not delay or disrupt many final settlements because the information would be shared soon after being received. One exception, of course, would be if the information was significant enough and the review was revealing enough to change the settlement that the appeals officer would have made without Examination’s involvement. Even with this exception, settlement authority would still rest with the appeals officers.

This report contains recommendations to you. As you know, the head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on the recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight not later than 60 days after the date of this letter. A written statement also must be sent to the House and Senate Committees on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of this letter.

Copies of this report are being sent to the Chairmen and Ranking Minority Members of the House Committee on Ways and Means and the Senate Committee on Finance, various other congressional committees, the Director of the Office of Management and Budget, the Secretary of the Treasury, and other interested parties. We also will make it available to others upon request. Major contributors to this report are listed in appendix VI. Please contact me on (202) 512-8633 if you or your staff have any questions about this report.

Sampling and Data Analysis Methodology

This appendix describes how we identified our universe of large corporate audits closed agreed in Examination or Appeals during fiscal year 1994 and our sampling methodology. In addition, it discusses our methodology for developing and administering questionnaires to IRS audit and Appeals staff and taxpayers for our sample.

Sample Selection Methodology

In order to send questionnaires to IRS audit and Appeals staff and taxpayers, we identified a universe of corporate taxpayers related to corporate audits closed agreed in Examination or Appeals during fiscal year 1994. We chose fiscal year 1994 for two reasons. First, it provided us with the most recent cases closed agreed in Examination or Appeals. Second, IRS revenue agents and appeals officers and taxpayers would be more likely to recall specific case information on the most recent closed cases.

Our computer analysis of IRS’ databases identified a total population of 1,266 audits closed in fiscal year 1994 with $75,000 or more in additional taxes recommended. Table I.1 shows the division of the 1,266 audits by additional taxes recommended.

Dollars assessed (in millions)

We determined that a survey of the revenue agents, appeals officers, and taxpayers associated with a nationally representative, stratified random sample of 500 audits would be sufficient to accomplish our objective. The sample is divided into six strata based on the assessment rate and the amount of additional taxes recommended. Since those audits with the greatest amount of dollars recommended have the most affect on the assessment rate, the sample includes a relatively large number of the larger dollar cases. We included in our sample all of the 117 audits with $3 million or more in additional taxes recommended; 133 of those audits with between $1,000,000 and $2,999,999 in additional taxes recommended; 120 of those audits with between $300,000 and $999,999 in additional taxes recommended; and 130 of those audits with between $75,000 and $299,999 in additional taxes recommended.

The 500 cases in our sample accounted for $2.3 billion, or 88 percent, of the total $2.6 billion in additional taxes recommended in our population. Similarly, the $648 million in additional taxes recommended that were assessed accounted for 80 percent of the total $810 million assessed from the corporate audits shown in table I.1. In the study analyses, the sample selections have been properly weighted to represent the total population of 1,266 audits with $2.6 million in recommended additional taxes.

Because group managers are responsible for a large number of audits of different entities, not just corporations, we sampled these managers without respect to their involvement in any particular audit. To do this we asked the 63 district offices to identify all group managers having large corporate audits in their inventories as of August 1995. The districts identified 555 group managers meeting this criterion. From this universe we randomly selected a sample of at least a third of the group managers at each of the 63 district offices. This resulted in a total sample of 215 group managers. In our analyses, the 215 sample selections have been properly weighted to represent the total population of 555 group managers.

Questionnaire Methodology

We developed four mail-out questionnaires to obtain the views of IRS revenue agents, appeals officers, group managers, and corporate taxpayers on the factors affecting the audit and appeals processes, such as obtaining needed information, the effect of the tax laws, and the interaction between Appeals, Counsel, and Examination staff involved with these audits.

We pretested the questionnaires on several separate occasions for technical accuracy. We tested the revenue agent and group manager questionnaire in the Baltimore, Chicago, and St. Louis District Offices; the appeals officer questionnaire in the Baltimore and St. Louis Appeals Offices; and the taxpayer questionnaire in the St. Louis District Office. In addition to these pretests, we asked National Office Examination and Appeals officials to review, for technical accuracy, all questionnaires for IRS staff. We asked the Tax Executives Institute (TEI) officials to review the taxpayer questionnaire for technical accuracy. From comments received from both IRS and TEI, we made changes to the questionnaires as appropriate.

In August 1995, we sent letters to IRS’ 33 district offices requesting the names and addresses of the revenue agents responsible for the 500 corporate audits in our sample. We also requested the districts to provide us the names and addresses of their group managers who had corporate income tax audits in their inventories as of that date. In addition, we requested from the National Appeals Office the names and addresses of the appeals officers who considered any tax disputes involving any of our sample cases.

We initially mailed revenue agent and group manager questionnaires in October 1995. We subsequently sent follow-up questionnaires in November 1995. We initially mailed the appeals officer questionnaires in November 1995 and sent follow-up questionnaires in December 1995. We initially mailed the taxpayer questionnaires in January 1995 with follow-up questionnaires sent in February 1996. Table I.2 shows the response rate and disposition of initial sample selection by type of questionnaire.

Questionnaire results for the revenue agent, group manager, and appeals officer questionnaires are presented in appendixes II, III, and IV respectively. Results from the taxpayer questionnaire are not presented in this report nor are they used in the report because of the low response rate to the questionnaire.

Sampling Errors for Key Estimates Used in the Report

Because the survey results come from samples, all results are estimates that are subject to sampling errors. We calculated sampling errors for all of the survey results presented in this report. These sampling errors measure the extent to which samples of these sizes and structure can be expected to differ from their total populations. Each of the sample estimates is surrounded by a 95 percent confidence interval. This interval indicates that we are 95-percent confident that the results for the total population fall within this interval.

In addition to the reported sampling errors, the practical difficulties of conducting any survey may introduce other types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted, in the sources of information that are available to respondents, or in the types of people who do not respond can introduce unwanted variability into the survey results. We included steps in our audit for the purpose of minimizing such nonsampling errors. For example, we carefully pretested the questionnaires and made follow-up mailings to people who did not initially respond.

Revenue Agent Questionnaire Results

Case ID - 1 (1-7)

For the specialist(s) that assisted you during this audit, please identify (1) the type of specialist(s) that assisted you, (2) whether they provided you timely assistance, and (3) the affect their assistance had on your ability to obtain agreement with the taxpayer. (IDENTIFY THE TYPE OF SPECIALIST. FOR EACH ONE IDENTIFIED, CHECK TWO BOXES IN EACH ROW.)

(8-16)

Did the specialist(s) provide you timely specialist(s) affect Exam's you? assistance? taxpayer's agreement on these issues? (1) (2) (3)

36.3% Engineer 31.8% International 11.2% Issue/Industry 10.3% CAS 3.3% Valuation 1.4% Economist 5.5% Other 89.9% Yes 9.1% No 1.0% Don't know 24.8% Very positively 29.0% Positively 32.2% Neither positively nor negatively 7.1% Negatively 5.1% Very negatively 1.8% Don't know 38.3% Engineer 33.5% CAS 10.9% Employee plan 6.7% Issue/Industry 4.4% International 2.5% Economist 3.6% Other 89.0% Yes 11.0% No 0.0% Don't know 25.9% Very positively 22.8% Positively 29.8% Neither positively nor negatively 4.8% Negatively 9.0% Very negatively 7.8% Don't know 27.7% Issue/Industry 24.0% International 15.6% CAS 8.4% Engineer 8.4% Valuation 16.0% Other 84.4% Yes 15.6% No 0.0% Don't know 32.7% Very positively 14.4% Positively 45.7% Neither positively nor negatively 7.2% Negatively 0.0% Very negatively 0.0% Don't know 22. Was the specialist's manager involved in this audit? (CHECK ONE BOX.) (17-19)

36.2% Yes ﬁ

How satisfied or dissatisfied were you with the specialist(s) manager's involvement, or lack of involvement, on this audit? (CHECK ONE BOX.) 35.1% Neither satisfied nor dissatisfied If you were dissatisfied with the specialist(s) manager's involvement, please explain why. ________________________________________________________________________________________ 11.9% Don't know N=509 VI. YOUR MANAG ER'S INVO LVEMENT IN AUDITS 23. Was your manager involved in the following on the audit shown on page 1 of this questionnaire?

In your opinion, how did his/her involvement, or lack of involvement, positively or negatively affect the effectiveness of this audit? (CHECK TWO BOXES IN EACH ROW.) (20-37)

How did his/her involvement, or lack of involvement, affect the effectiveness of this audit? this audit? (1) (2) (3) (4) (5) (6) (7)

N=1,189 VII. OTH ER AUDIT RESOURCES 24. In your opinion, did you receive adequate resources in the following areas? If not, please indicate to what extent, if at all, the lack of these resources negatively affected your ability to develop all identified issues. (CHECK AT LEAST ONE BOX IN EACH ROW. IF YOU ANSWERED "NO" IN THE FIRST PART, THEN ANSWER THE SECOND PART. IF YOU ANSWER "YES" OR "NOT NEEDED" TO THE FIRST PART, THEN GO TO THE NEXT LINE.) (38-53)

If no, to what extent, if at all, did the lack of resource(s) negatively adequate? affect your ability to develop identified issues? (1) (2) (3) (4) (5) (6) (7) (8) (9)

f. Other (Specify)

INFORMATION REQUESTED F RO M TH E TAXP AY ERS 25. Which of the following did you use in obtaining information from the taxpayer or the taxpayer's representative (i.e., power of attorney)? (CHECK ALL THAT APPLY.) (54-59)

Issued written information requests to the taxpayer or the taxpayer's representative

Verbally requested information from the taxpayer or the taxpayer's representative Discussed obtaining third-party information with the taxpayer or the taxpayer's representative Discussed a summons with the taxpayer or the taxpayer's representative Issued a summons to the taxpayer or the taxpayer's representative Other (Specify) __________________________________________________________________________________ 26. Regarding the information you requested from the taxpayer or his/her representative for this audit, how satisfied or dissatisfied were you with the following? (CHECK ONE BOX IN EACH ROW. DO NOT CHECK IN THE SHADED AREA.) (60-66) (1) (2) (4) (5) (6) (3) (67-68)

84.5% Yes

If no, did the missing information prevent you from proposing certain adjustments? (CHECK ONE BOX.) 15.0% Don't know 2.1% Don't know N=1,254 IX. CAS E CLOSURE INFORMATION 30. How satisfied or dissatisfied were you with Exam's 28. How satisfied or dissatisfied were you with the length of time it took to complete this audit? (CHECK ONE BOX.) emphasis on attempting to obtain more agreements with taxpayers on proposed adjustments at the lowest level? (CHECK ONE BOX.) (72-73) (69-70)

17.5% Very satisfied

Please explain your dissatisfaction.

Please explain your dissatisfaction.

31. In your opinion, how did the overall outcome of this audit for this taxpayer affect their compliance with the tax laws since this audit? (CHECK ONE BOX). (74)

29. If the audit closed later than you expected, which of the

34.5% Taxpayer became more compliant following reasons best describes why this audit closed out after the expected completion date? (CHECK ONE BOX.) (71)

1.8% Taxpayer became less compliant 51.8% Not applicable (the audit was completed in a 42.7% No basis to judge timely manner) 0.5% IRS delays in beginning audit 3.8% IRS staff/specialists not available when needed 2.5% Taxpayer or taxpayer representative not available 17.4% Taxpayer delays in responding to information 8.4% Exam work took longer than anticipated 15.5% Other (Specify)____________________________ N=1,119 _________________________________________ 32. Taking into consideration IRS' corporate audit environment and your district's policies and procedures at the time of this audit, to what extent, if at all, were you able to sufficiently do the following on this audit? (CHECK ONE BOX IN EACH ROW.) (75-83) (1) (2) (3) (4) (5) (6)

Identify balance sheet and Schedule M issues b. Probe for unallowable returns in this taxpayer's industry d. Examine corporation's books your position on issues in written reports (e.g., RAR or written response to taxpayer's protest) N=1,238 g. Compute the corporate tax h. Other (Specify)

Please comment on factors that you believe adversely affect your ability to do the above items. If the policies and/or procedures have changed, briefly discuss the change(s) and its affect. (ATTACH ADDITIONAL SHEETS IF NECESSARY.) _______________________________________________________________________________________________________ X. TAXP AY ER'S P ROTEST OF ADDITIONAL TAXES RECO MMENDED BY EXAM 33. After this audit closed from Exam, did Appeals consider any disputed tax issues? (CHECK ONE BOX.) (84)

34.6% Yes, as a result of the taxpayer's protest

Continue with question 34.

1.9% Yes, as a result of a statutory 90-day letter Skip to question 42.

7.1% Don't know 34. Was a written response to the taxpayer's protest provided to Appeals? (CHECK ONE BOX.) (85)

12.1% Don't know

1.5% Not applicable (no protest filed) 35. For any disputed issues from this audit, did the following factor(s) cause the taxpayer to disagree? (CHECK ONE BOX IN EACH ROW. ) (86-91) (1) (2) (3) a. The interpretation of the law b. The facts of the case c. The Appeals settlement on a prior N=393case for this taxpayer d. The Appeals settlement for a e. Other (Specify) f. Other (Specify) 36. In order to consider the relevant facts in this case, did you discuss the disputed issues with Appeals? (CHECK ONE BOX.) (92)

7.6% Don't know

37. Did Appeals ask you about any of the following: (CHECK ONE BOX IN EACH ROW.) (93-98) (1) (2) (3) a. The facts relevant to the disputed issue(s) b. Your legal position on the disputed issue(s) c. Records provided to Appeals by the taxpayer Information in the unagreed report, 90-day letter, or the written response to the protest e. Alternative positions proposed by the taxpayer during f. Other (Specify)

Repeat ID - 3 (1-7)

38. How, if at all, did you learn about Appeals final resolution of disputed issues from this audit? To what extent, if at all, did this

feedback help you understand how Appeals resolved the disputed issues? (CHECK AT LEAST ONE BOX IN EACH ROW. IF YOU ANSWER "YES" TO THE FIRST PART, THEN ANSWER THE SECOND PART. IF YOU ANSWER "NO" TO THE FIRST PART, THEN GO TO THE NEXT LINE.) (8-17)

If yes, to what extent, if at all, did this feedback on Appeals final resolution help you understand how Appeals resolved the disputed issues? ways? (1) (2) (3) (4) (5) (6) (7) (8) a. Exam contacted Appeals to b. Appeals provided Exam the Appeals Case Memorandum or supporting statement c. Appeals contacted Exam after they resolved the disputed issues d. The taxpayer told Exam N=366 e. Other (Specify)

If you did not receive any feedback on Appeals' final resolution of this audit, please skip to question 42 39. Based on Appeals' resolution of disputed issues in this case, to what extent, if at all, were potential issues (a) dropped on your cases in-process or (b) not raised on future audits you were assigned? (CHECK ONE BOX IN EACH ROW.) (1) (2) (3) (4) (5) (6)

Potential issues dropped on cases in-process N=367 Issues not raised on future audits N=372 40. In general, in your opinion, to what extent, if at all, does Appeals final resolution of disputed issues cause Exam to alter the way it develops similar issues on future audits of either the same taxpayer or different taxpayers? (CHECK ONE BOX IN EACH ROW.) (1) (2) (3) (4) (5) (6) a. Similar issues on future audits for the same taxpayer b. Similar issues for different 41. Taking everything into consideration, what is your opinion on the quality of Appeals' overall resolution of disputed issues on these corporate income tax returns? (CHECK ONE BOX.)

If you believe the quality of Appeals' resolutions are poor or very poor, please explain your response. ______________________________________________________________________________________________________ VII. G ENERAL QUESTIONS AND CO MMENTS 42. In your opinion, how positively or negatively do each of the following factors affect the amount of additional taxes recommended by revenue agents that are ultimately assessed? (CHECK ONE BOX IN EACH ROW.) (1) (2) (3) (4) (5) (6)

The revenue agent's workload The revenue agent's group/case manager's workload The revenue agent's skills and knowledge The complexity of the tax laws e. Appeals resolution of disputed issues from a prior audit of this taxpayer Appeals resolution of disputed issues from a different taxpayer g. Other (Specify)

In your opinion, to what extent, if at all, do audits of large corporations unreasonably burden those taxpayers selected for audit? (CHECK ONE BOX.) 0.3% To a very great extent 2.5% To a great extent 27.1% To a moderate extent 34.9% To some extent 35.2% To a little or no extent N=1,255 44. Please use the space below to provide any additional comments about this case or IRS' audit and appeals processes for these large corporate taxpayers. You may attach additional sheets if necessary. (32)

Thank you for your assistance. Please return the questionnaire in the pre-addressed envelope.

Group Manager Questionnaire Results

(1-7)

The U.S. General Accounting Office (GAO), an agency of Congress, is conducting a study of IRS' audits of corporations with assets of $10 million or more (activity codes 219 to 225). The scope of our review does not include corporate returns in the Corporate Examination Program (CEP). The overall objective of our study is to determine what factors affect the rate at which taxes recommended by revenue agents on these corporate returns get assessed. We are surveying a random sample of group or case managers who are currently responsible for these large corporate audits.

Please provide us your current work telephone number to assist us if we need to clarify a response: Do you currently have corporate income tax returns (activity codes 219 to 225) in your inventory? 1.

Please continue with the questions.

You have been selected to complete this questionnaire due to your involvement with these audits of large corporations. Your response to this questionnaire will help us to identify the factors that affect these audits, both positively and negatively. We cannot develop meaningful information without your frank and honest answers to the questions.

2.

STOP: Do not continue if you do not currently have these corporate tax returns in your inventory. Please return the questionnaire in the enclosed envelope.

GAO will safeguard the privacy of your responses to this questionnaire. They will be combined with those of other respondents and will be reported only in summary form. The control number is included only to aid us in our follow-up efforts.

1. Please answer the following as it applies to you : (ENTER "00" IF NONE OR UNDER 6 MONTHS.) (8-17)

This questionnaire should take about 45 minutes to complete. If you have any questions concerning any part of this survey, please call Mr. Kirk Boyer at (913) 384-7570. in the Examination Division . . . . . . . . . . 20.8 Years N=506 b. Number of years auditing corporations with assets of $10 million or more (activity codes 219 to 225) that are not in CEP . . . . . . . . . . . . . . . . . . . . . .

U.S. General Accounting Office Kansas City Regional Office Attn: Mr. Kirk Boyer 5799 Broadmoor - Suite 600 Mission, Kansas 66202 d. Number of years auditing CEP . . . . . . . . . . . . . . . . . . . . .

Thank you for your assistance. . . . 1.5 Years N=500 2. Which of the following best describes the type of group 3. How many corporate income tax returns (activity codes you currently manage? (CHECK ONE BOX.) (18)

219 to 225) do you currently have in your inventory? (ENTER NUMBER.) (19-21)

67.1% Non-specialized General Program group (i.e., a

mixture of revenue agent grades and/or office auditors)

Specialized General Program group targeted toward large corporate audits 13.8% Other (Specify) ___________________________ F ACTORS RELATED TO AUDITS OF LARG E CORPORATIONS 4. To what extent, if at all, are you currently involved in the following on audits of large corporations?

IN EACH ROW.) (22-33) (1) (2) (3) (4) (5) (6)

N=503 5. Overall, how satisfied or dissatisfied are you with the following factors related to large corporate audits? (CHECK ONE BOX IN EACH ROW.) (34-44) (1) (2) (3) (4) (5) a. Length of these audits b. Thoroughness of these audits c. Any out-of-district audit work or d. Extent to which other IRS staff (including specialists) adequately developed the issues e. Timeliness of taxpayers' responses to f. Cooperation of taxpayers to provide g. Cooperation of taxpayers' representatives to provide information N=506 h. Overall level of cooperation of i. Overall level of cooperation of k. Corporate taxpayers' compliance with N=503the tax laws l. Other (Specify)

RESOURCES US ED TO AUDIT LARG E CORPORATIONS 6. How often, if at all, do you or your revenue agents do any of the following during these corporate audits? (CHECK ONE BOX IN EACH ROW.) (45-51)

10% of the time (1) (2) (3) (4) (5) a. Contact the industry coordinator or specialist to discuss any issue related to this taxpayers primary industry b. Obtain a position paper on an issue c. Contact the market segment coordinator to discuss d. Obtain or review the market segment audit guide e. Review a District Office memorandum discussing an issue related to this taxpayer's primary industry f. Contact revenue agents or group managers in other N=500districts on specialized industries/issues g. Other (Specify) __________________________________________ 7. Consider the revenue agents you assign to these large corporate audits. How satisfied or dissatisfied are you with their ability to audit large corporations in each of the following areas? (CHECK ONE BOX IN EACH ROW. ) (52-62) (1) (2) (3) (4) (5) b. Probing for unallowable c. Applying the tax laws to e. Examining the corporation's g Determining when to request the services of a specialist h. Determining when to request legal assistance from District Counsel or national office i. Securing taxpayer agreement k. Other (Specify)

N=18 8. In your opinion, to what extent, if at all, do the revenue agents conducting these audits receive adequate resources in the following areas? (CHECK ONE BOX IN EACH ROW.) (63-70) (1) (2) (3) (4) (5) (6)

Travel funds for local travel Travel funds for out- of- district audit workN=491 Out-of-district assistance or support N=488 audit f. Other (Specify) 9. When revenue agents are assigned corporate income tax returns to audit, do you consider each revenue agents' financial interests to determine if any potential conflicts of interest exist? (CHECK ONE BOX.) (71-72)

55.9% Yes ﬁ

Please explain how you are made aware of the revenue agents' financial interests.

N=485 10. How often, if at all, are any of the following types of assistance used during these large corporate audits? (CHECK ONE BOX IN EACH ROW.) (73-84)

10% of the time (1) (2) (3) (4) (5) b. National office technical Counsel assistance other than technical advice i. Other (Specify) j. Additional revenue agents N=482 while the audit is open If you checked box 4 or 5 (10-39% or Less than 10%) anywhere in the above matrix, please explain your response. ______________________________________________________________________________________________________ 11. In your opinion, does the use of IRS specialists positively or negatively affect Exam's ability to obtain the taxpayer's agreement on large corporate audit issues? (CHECK ONE BOX.) (85)

31.3% Neither positively nor negatively

12. In your opinion, to what extent, if at all, does assistance from each of the following improve the development of issues in these large corporate audits? (CHECK ONE BOX IN EACH ROW.) (86-96) (1) (2) (3) (4) (5) (6)

Counsel assistance other than technical advice i. Other (Specify)

Appeals while the audit is open N=506 IV. CAS E CLOSURE INFORMATION 13. During the past 12 months, how often, if at all, were potential issues dropped by your revenue agents in these audits of large corporations because these taxpayers did not provide all of the requested information? (CHECK ONE BOX.) (97)

0.0% 90-100% of the time 2.4% 60-89% of the time 0.6% 40-59% of the time 12.0% 10-39% of the time 85.0% Less than 10% of the time 14 How satisfied or dissatisfied are you with Exam's emphasis on attempting to obtain more agreements with the taxpayers on proposed adjustments at the Exam level? (CHECK ONE BOX.) (98-99)

25.7% Neither satisfied nor dissatisfied

Please explain your dissatisfaction: 15. How often, if at all, do these large corporate taxpayers provide Exam a written protest of additional taxes recommended by revenue agents? (CHECK ONE BOX.) (8)

50.0% 90-100% of the time 19.3% 60-89% of the time 12.7% 40-59% of the time 13.9% 10-39% of the time 4.2% Less than 10% of the time N=500 16. How often, if at all, does your district conduct post-audit critiques on these large corporate audits to determine if the audit standards were met? (CHECK ONE BOX.) (9)

8.4% 90-100% of the time 6.5% 60-89% of the time 7.7% 40-59% of the time 21.3% 10-39% of the time 56.1% Less than 10% of the time V. EXAM'S INTERACTION WITH APPEALS 17. In cases where taxpayers provide new information to Appeals, how often, if at all, does Appeals request Exam to review and verify this information? (CHECK ONE BOX.) (10-11)

If Appeals returns cases 40% or more of the time, how often, has Exam requested this or similar information from the taxpayers but had not received it? (CHECK ONE BOX.)

13.7% 10-39% of the time 44.7% 90-100% of the time 10.1% Less than 10% of the time -------------------------- 30.3% 60-89% of the time 40-59% of the time 28.6% Do not know 10-39% of the time 2.6% Less than 10% of the time -------------------------- 13.2% Do not know 18. When Exam receives a written protest, how often, if at all, do you or your revenue agents provide a written response to the taxpayer's protest to Appeals in these large corporate cases? (CHECK ONE BOX.) (12)

48.8% 90-100% of the time 19.3% 60-89% of the time 8.4% 40-59% of the time 7.8% 10-39% of the time 15.7% Less than 10% of the time N=500 19. How often, if at all, do you or your revenue agents discuss the following with Appeals?

ROW.) (13-18)

10% of the time (1) (2) (3) (4) (5) (6) a. The facts relevant to the b. Legal position cited by the c. Records provided to Appeals N=503by the taxpayer d.

Information in the unagreed report (i.e., RAR) or the written response to the protest considered by Appeals to resolve disputed issues f. Other (Specify) __________________ 20. How often, if at all, do you receive the following feedback on Appeals' final resolution of disputed issues from these audits?

To what extent, if at all, does this feedback help you or the revenue agent understand how Appeals resolved the disputed issues? (CHECK TWO BOXES IN EACH ROW.) (19-28)

To what extent, if at all, did these types of feedback on Appeals final resolution help Exam understand how issues?

Appeals resolved the disputed issues?

Feedback by... (4) (1) (2) (3) (5) (1) (2) (3) (4) (5) (6)

Appeals to obtain the final resolution N=485 16.0% 21.2% 26.3% 27.5% 21.9% 13.7% 14.4% 20.9% 15.8% 7.0% providing Exam the Appeals Case Memorandum or supporting statement N=482 11.4% 22.2% 29.1% officer contacting Exam after they resolved the disputed issues 13.9% 31.6% 40.5% telling Exam of the final resolution N=482 e Other (Specify)

25.0% 25.0% 50.0% 21. In your opinion, does Appeals' resolution of disputed issues for these large corporate audits positively or negatively affect the following: (CHECK ONE BOX IN EACH ROW.) (1) (2) (4) (5) (6) (3)

N=491 22. Based on Appeals' resolution of disputed issues, to what extent, if at all, are potential issues dropped on cases in-process or not raised on future audits? (CHECK ONE BOX IN EACH ROW.) (32-33) (1) (2) (3) (4) (5) (6) a. Potential issues dropped Issues not raised on future audits 23. In your opinion, to what extent, if at all, does Appeals' final resolution of disputed issues cause Exam to alter the way it develops similar issues on future audits of either the same taxpayer or different taxpayers? (CHECK ONE BOX IN EACH ROW.) (34-35) (1) (2) (3) (4) (5) (6) a. Similar issues on future audits for the same taxpayer b. Similar issues for different 24. In your opinion, to what extent, if at all, was Appeals' consideration of this case fair and impartial to both the government and the taxpayer? (CHECK ONE BOX IN EACH ROW.) (1) (2) (3) (4) (5) (6)

N=476 25. Taking everything into consideration, what is your opinion on the quality of Appeals' overall resolution of disputed issues on these corporate income tax returns? (CHECK ONE BOX.) (38-39)

If you believe the quality of Appeals' resolutions are poor or very poor, please explain your response.

G ENERAL QUESTIONS AND ANY DISTRICT OFFICE CHANG ES 26. In your opinion, how positively or negatively do each of the following factors affect the amount of those additional taxes recommended by revenue agents that are ultimately assessed? (CHECK ONE BOX IN EACH ROW.) (40-46) (1) (2) (3) (4) (5) (6) b. Revenue agent's workload Revenue agent's skills and knowledge d. Complexity of the tax laws e. Appeals resolution of disputed issues from a prior audit of this taxpayer Appeals resolution of disputed issues from a different taxpayer g. Other (Specify) ________________________ In your opinion, to what extent, if at all, do audits of large corporations unreasonably burden those taxpayers selected for audit? (CHECK ONE BOX.) (47)

28.1% Little or no extent

28. Have you or your district modified any audit procedure for these large corporate cases due to IRS national office's task force teams reviewing corporate workload identification and/or compliance strategies? (CHECK ONE BOX.) (48)

N=506 29. Please indicate if your district has implemented or plans changes to its policies or procedures for any of the following. If yes, briefly describe each change and the impact you believe these changes will have on the amount of dollars recommended in Exam. (CHECK ONE BOX IN COLUMN 1 IN EACH ROW. IF YOU ANSWER THE FIRST PART "YES" THEN ANSWER THE REMAINING PARTS OF THE QUESTION.) (49-81)

Please use this space to describe the change(s).

Has your district implemented the following or does it plan to in the future? revenue agents? (Attach additional pages if necessary.) (2) (1) a. Method for selecting (3)

Involving specialists in more of these audits 74.2% Positive impact 4.8% No impact 3.2% Negative impact 17.7% Don't know 66.0% Positive impact 5.7% No impact 5.7% Negative impact 22.6% Don't know with corporate taxpayers on proposed audit adjustments Increasing management involvement 80.6% Positive impact 11.1% No impact 0.0% Negative impact 8.3% Don't know 72.1% Positive impact 14.0% No impact 2.3% Negative impact 11.6% Don't know to clarify vague and complex tax laws 56.0% Positive impact 12.0% No impact 0.0% Negative impact 32.0% Don't know k. Other (Specify)

N=9 30. Please use the space below to provide any additional comments about this case or IRS' audit and appeals processes for these large corporate taxpayers. You may attach additional sheets if necessary. (82)

Thank you for your assistance. Please return the questionnaire in the pre-addressed envelop.

Appeals Officer Questionnaire Results

Case ID - 1 (1-7)

The U.S. General Accounting Office (GAO), an agency of Congress, is conducting a study of IRS' audits of corporations with assets of $10 million or more (activity codes 219 to 225). The scope of our review does not include corporate returns in the Corporate Examination Program (CEP). The overall objective of our study is to determine what factors affect the rate at which taxes recommended by revenue agents on these corporate returns get assessed. We are surveying a random sample of appeals officers who considered corporate income tax disputes closed from Appeals during fiscal year 1994.

GAO will safeguard the privacy of your responses to this questionnaire. They will be combined with those of other respondents and will be reported only in summary form. The control number is included only to aid us in our follow-up efforts. We will not identify specific taxpayer information in our report.

This questionnaire should take about 1 hour to complete. If you have any questions concerning any part of this survey, please call Mr. Kirk Boyer at (913) 384-7570.

You have been selected to complete this questionnaire due to your involvement with the corporate returns for the tax years indicated at the bottom of this page. Because of your work on this case, your response to this questionnaire will help us to identify the factors that affected these audits, both positively and negatively. We cannot develop meaningful information without your frank and honest answers to the questions.

Thank you for your assistance.

After completing the questionnaire, please remove the case information sticker before returning your completed questionnaire.

Please provide us your current work telephone number to assist us if we need to clarify a response: Were you assigned to resolve the disputes on the corporate tax returns shown on page 1?

Please continue with the questions.

STOP: Do not continue if you were not involved in resolving the disputes on these corporate tax returns. Please return the questionnaire in the enclosed envelope. 1. Please answer the following as it applied to you at the time you were assigned to the work unit shown on page 1: (ENTER "00" IF NONE OR UNDER 6 MONTHS.) (8-21)

Years reported are m eans

a. Total number of years of IRS experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. Total number of years of IRS experience in Appeals . . . . . . . . . . . . . . . . . . . . . . . . 1. Number of years as an Appeals Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Number of years as an Appeals Officer resolving deficiency disputes over $10 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Number of years as a Team Chief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. Total number of years as a revenue agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. Total number of years in other government or private industry position(s) related to tax/auditing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Specify the position(s) you've held under d above) ___________________________________________ 2. What grade level were you at the time you were assigned to this work unit? (ENTER NUMBER.) (22-23)

N=623 3. Did you receive the following formal training prior to being assigned the work unit shown on page 1 of this questionnaire? If yes, indicate to what extent, if at all, the training improved your ability to resolve the taxpayer's disputed issues? (CHECK AT LEAST ONE BOX IN EACH ROW. IF YOU ANSWER "YES" TO THE FIRST PART, THEN ANSWER THE SECOND PART OF THE QUESTION. IF YOU ANSWER "NO" TO THE FIRST PART, GO TO THE NEXT LINE.) (24-39)

If yes, to what extent, if at all, did it improve your ability to resolve the taxpayer's disputed issues? assigned? (1) (2) (3) (4) (5) (6) a. Advanced corporate training or equivalent of Phase 5 b. Corporate training or complex technical and/or legal issues e. IRS training (3 days or more) related to this taxpayer's primary industry (including industry specialization program (ISP) training) f. Non-IRS training or seminars on any issues related to this taxpayer's primary industry g. Topical training provided by Appeals, Exam, and/or Counsel relevant to this corporate taxpayer h. Other (Specify) 4. Was there any training that you had not received before you were assigned to this corporate work unit that you believe you needed to improve your ability to resolve the taxpayer's disputed issues? (CHECK ONE.) (40-41)

14.6% Yes ﬁ

Please describe the training needed.

Y ou will need the Appeals Case Mem orandum to com plete this section. 5. For the corporate entity shown on page 1 of this questionnaire, how many issues were protested by the taxpayer? (ENTER NUMBER.) (42-43)

6. Did this return have any related entities?

If yes, please indicate the type(s) of related entities and the tax years associated with each type. (CHECK ONE BOX. IF YOU ANSWER "YES", THEN COMPLETE THE REMAINING PARTS. IF YOU ANSWER "NO", GO TO THE NEXT QUESTION.) (44-62)

26.9% Yes ﬁ

(e.g., S corp, partnership, individual, etc.)

1. 2. 3. 4. 5. 6.

N=560 7. Please provide the following information on the top three dollar adjustments to income or credit protested by the taxpayer for the entity shown on page 1 of this questionnaire. (Largest dollar adjustment) (Third largest dollar adjustment) adjustment) (63) (64) (65)

Identify the

(66) (67) (68)

c. Exam's

(69) (70) (71)

Adjustment was

(72-80) (81-89) (90-98)

Exam

(8-16) (17-25) (26-34)

Appeals

(35-41) (42-48) (49-55)

Adjustment

apply.)

137 Other (Specify)

72 Other (Specify)

47 Other (Specify) (56-60) (61-65) (66-70)

between Exam

apply.)

Questions 8 through 24 relate specifically to the three top dollar adjustments to income or credit you identified in question 7. 8. Please identify the reason code(s) (from those listed below) which best describe your basis for resolving these issues. (ENTER THE LETTER CORRESPONDING TO THE REASON IN THE APPROPRIATE BOX.) (71-76)

Please note:

In many cases, a single reason will be adequate. However, you may select two codes if necessary, to adequately describe the action taken on these issues. If more than one reason code is selected, please list them in the order of impact on the resolution of these issues. (Highest Impact) (2nd Highest Impact) 30.2% A= Appeals/Counsel fully sustains the issue B= Continuing issue - followed prior cycle settlement C= New facts/evidence obtained and evaluated by Appeals/Counsel D= New facts/evidence obtained and evaluated by Exam 30.8% E= Hazards - Facts/evidence are open to judgement F = Hazards - Conflict between Service position and case law 23.1% G= Hazards - Application or interpretation of law I = Changes in law If you did not fully sustain any of these top three dollar issues, did you document your position in the written summary (i.e., Appeals Case Memorandum)? (CHECK ONE BOX FOR EACH ISSUE.) (77-79) summary? (fully sustained) (fully sustained) (fully sustained)

IV.EXAM'S DEVELOPMENT O F TH E TOP THREE DO LLAR ISSUES 10. Were all of the top three dollar issues you listed in question 8 fully developed when the case was transferred to Appeals? (CHECK ONE.) (80)

73.1% Yes ﬁ Skip to question 13.

26.9% No ﬁ Continue with question 11. 11. For the issue(s) that were not fully developed, did you request that Exam further develop the issue(s) before you attempted to resolve the taxpayer's dispute? (CHECK ONE.) (81-82)

50.6% Yes ﬁ Continue with question 12.

49.4% No ﬁ Please explain below and then skip to question 13.

If you did not request Exam to further develop the issue(s), please explain why. 12. For the issue(s) you requested Exam to further develop, did they (1) provide you the requested feedback, (2) provide it to you in a timely manner, and (3) did it help you resolve the disputed issues? (CHECK AT LEAST ONE BOX IN EACH ROW. IF YOU ANSWER "YES" TO THE FIRST PART, THEN ANSWER THE REMAINING PARTS. IF YOU ANSWER "NO" TO THE FIRST PART, THEN GO TO THE NEXT ISSUE.) (83-91)

If yes, was the feedback feedback you requested? provided to you in a timely manner? issue? (1) (2) (3)

Issue #1

(Issue fully developed)

Issue #2

(Issue fully developed)

Issue #3

(Issue fully developed) 13. Did Exam use an IRS specialist(s) or outside consultant(s) to develop any of these three issues? (CHECK ONE BOX.) (92)

31.8% Yes ﬁ

Continue with question 14.

Skip to question 16.

Repeat ID - 3 (1-7)

14. Identify the specialist(s) or outside consultant(s) that Exam used to develop any of these three issues.

(IDENTIFY THE SPECIALIST OR OUTSIDE CONSULTANT. FOR EACH ONE IDENTIFIED, CHECK TWO BOXES IN EACH ROW.) (8-17)

Type of IRS specialist or outside

To what extent, if at all, did the use of their services help you related issue. resolve the disputed issues? (1) (2) (3) (4) (5) (6)

62.4% 7.3% 6.5% 6.0% 77.9% Issue #1 13.2% Issue #2 7.5% Issue #3 N=189 65.5% 19.4% 10.5% 4.6% 14.7% Issue #1 56.1% Issue #2 24.5% Issue #3 N=56 45.3% 19.6% 19.6% 15.6% 19.6% Issue #1 29.7% Issue #2 50.7% Issue #3 N=17 15. Did you consult with any of the specialist(s) and/or outside consultant(s) listed above while you were considering the disputed issues? (CHECK ONE BOX.) (18-19)

60.3% Yes

Please describe why you did not consult with them. ______________________________________________________________________________ 16. In your opinion, did Exam need, but not obtain, an IRS specialist or outside consultant to develop any of these three top dollar issues? If yes, please identify the type of IRS specialist(s) or outside consultant(s) that Exam needed, but did not obtain, for each issue. (CHECK ONE BOX IN EACH ROW. IF "YES", IDENTIFY THE ISSUE AND THE NEEDED SPECIALIST OR OUTSIDE CONSULTANT.) (20-28)

Did Exam need but not obtain an IRS specialist or outside consultant?

Identify the type of IRS specialist or outside consultant needed but not obtained.

80.9% Issue #1 4.9% Issue #2 9.3% Issue #3 N=53 30.9% 24.6% 20.4% 14.8% 100% Issue #235.8% 35.8% 28.4% 100% Issue #3 43.2% 28.4% 28.4% 17. For each of the top three dollar issues identified, did Exam obtain technical advice to develop the issue? If yes, please indicate to what extent, if at all, the technical advice helped you resolve the taxpayer's disputed issues. (CHECK AT LEAST ONE BOX IN EACH ROW. IF YOU ANSWER "YES" TO THE FIRST PART, THEN CHECK ONE BOX IN THE SECOND PART. IF YOU ANSWER "NO" OR "DON'T KNOW" TO THE FIRST PART, THEN GO TO THE NEXT LINE.) (29-34)

Did Exam obtain technical advice?

If yes, to what extent, if at all, did it help you resolve the taxpayer's disputed issues? (1) (2) (3) (4) (5) (6)

89.6% No 5.7% Don't know 96.4% No 0.6% Don't know 97.3% No 0.0% Don't know 18. For those issue(s) that Exam did not obtain technical advice, do you believe Exam should have obtained technical advice from the national office? (CHECK ONE BOX FOR EACH ISSUE.) (35-37)

Should Exam have obtained technical advice from the national office? 6.3% Yes 91.2% No 2.5% Not applicable (Technical advice used) 2.6% Yes 94.4% No 2.9% Not applicable (Technical advice used) 2.1% Yes 95.2% No 2.8% Not applicable (Technical advice used)

V. ADDITIONAL INFORMATION P ROVIDED BY TH E TAXP AY ER FOR TH E TOP THREE DO LLAR ISSUES 19. For any of the top three dollar issues you identified, did the taxpayer provide additional factual information or documentation to Appeals to support its protest on the issue? (CHECK ONE.) (38)

53.1% Yes ﬁ Continue with question 20.

Skip to question 22. 20. For those issues that the taxpayer provided additional factual information, did you request that Exam review or verify the accuracy of the information? (CHECK ONE.) (39-40)

43.2% Yes ﬁ Continue with question 21.

Please explain below and then skip to question 22. 21. For those issues that you requested Exam to verify additional information, did Exam (1) provide you the requested feedback, (2) provide the feedback to you in a timely manner, and (3) was the feedback helpful in resolving the taxpayer's disputed issues? (CHECK AT LEAST ONE BOX IN EACH ROW. IF YOU ANSWER "YES" TO THE FIRST PART, THEN ANSWER THE REMAINING PARTS. IF YOU ANSWER "NO" OR "NOT APPLICABLE" TO THE FIRST PART, THEN GO TO THE NEXT LINE.) (41-49)

Did this feedback help you in resolving the disputed issue? requested? timely manner? (3) (1) (2)

V. APPEALS P ROCESSING OF TH E TOP THREE DO LLAR ISSUES 22. Were any of the top three dollar issues disputed by this taxpayer recurring (i.e., the same issue) from previously audited tax returns? (CHECK ONE BOX IN EACH ROW. IF YOU ANSWER "YES" TO THE FIRST PART, THEN COMPLETE THE SECOND PART. IF YOU ANSWER "NO" OR "DON'T KNOW" TO THE FIRST PART, THEN GO TO THE NEXT LINE.)

If yes, please explain what you did, if anything, to resolve the recurring issue(s). (50-55) issue?

If yes, what did you do, if anything, to resolve these recurring issues? (1) (2)

86.3% No 8.8% Don't know 81.3% No 14.5% Don't know 86.6% No 12.4% Don't know 23. Did you discuss any of the top three dollar issues (either formally or informally) with District Counsel? If yes, did this discussion positively or negatively affect your ability to resolve the taxpayer's disputed issues? (CHECK AT LEAST ONE BOX IN EACH ROW. IF YOU ANSWER "YES" TO THE FIRST PART, THEN ANSWER THE SECOND QUESTION. IF YOU ANSWER "NO" OR "NOT NECESSARY" TO THE FIRST PART, THEN GO TO THE NEXT LINE.) (56-61)

District Counsel? you resolve the taxpayer's disputed (1) issues? (2)

67.0% No 6.0% Not necessary 19.7% Very great extent 28.3% Great extent 26.1% Moderate extent 8.2% Some extent 8.9% Little extent 8.9% No extent 76.9% No 6.2% Not necessary 16.5% Very great extent 31.5% Great extent 30.2% Moderate extent 9.5% Some extent 3.8% Little extent 8.5% No extent 79.5% No 8.9% Not necessary 0.0% Very great extent 29.7% Great extent 14.2% Moderate extent 49.0% Some extent 0.0% Little extent 7.1% No extent 24. Were any of the top three dollar issues referred to Counsel for litigation? (CHECK ONE BOX FOR EACH ISSUE.) (62-64)

Please consider the entire case (not just the three issues you identified previously) as you answer the rem aining questions. 25. Did Exam provide you with a written response to the taxpayer's protest? (CHECK ONE.) (65)

43.5% Yes ﬁ

Continue with question 26.

Skip to question 28.

41.7% Don't know N=611 26. To what extent, if at all, did this written response help you resolve the taxpayer's disputed issues? (CHECK ONE.) (66-67)

10.2% No extent N=266 Please explain your response.

27. Did you discuss (e.g., telephone calls, meetings, etc.) the written response with Exam? (CHECK ONE.) (68-69)

71.7% Yes ﬁ

To what extent, if at all, did this discussion help you resolve the taxpayer's disputed issues? (CHECK ONE.) 9.1% Very great extent 28.3% No 28. Were you satisfied or dissatisfied with the level of cooperation between you and Exam? (CHECK ONE.) (70)

0.4% Very dissatisfied --------------------------- 24.2% Not applicable (No interaction with Exam) N=607

29. Did the taxpayer use any of the following specialist(s) or representative(s) to assist them with the resolution of the disputed issues? (CHECK ONE BOX IN EACH ROW.) (71-76)

Yes (1)

No (2) (3) c. d. f. Other (Specify) 30. Overall, how satisfied or dissatisfied were you with the following concerning the taxpayer? (CHECK ONE BOX IN EACH ROW.) (77-80) (1) (2) (4) (5) (6) (3)

N=604 31. Did the taxpayer file any of the following while this case was in Appeals' jurisdiction? If yes, did you refer these to Exam? (CHECK AT LEAST ONE BOX IN EACH ROW. IF YOU ANSWER "YES" TO THE FIRST PART, THEN ANSWER THE SECOND QUESTION. IF YOU ANSWER "NO" TO THE FIRST PART, GO TO THE NEXT LINE.) (81-86)

If yes, did you refer these to Exam?

Appeals' jurisdiction? (1) (2) a. File a claim for a refund 82.1% Yes 17.9% No b. Raise an affirmative 31.5% Yes 68.5% No c. File a request for a tentative refund (e.g., NOL carryback)

25.8% Yes 74.2% No Continue with question 32 if you checked "Yes" to any box above.

If the taxpayer did not file a claim for a refund, raise an affirm ative issue, or file a request for tentative refund, skip to question 34. 32. How much did you increase or decrease the taxable income or credits because of the claim(s), affirmative issue(s), or requests(s) for tentative refund identified in the previous question? (CHECK THE APPROPRIATE INCREASE OR DECREASE BOX AND ENTER THE APPROPRIATE AMOUNT. IF NONE, DO NOT CHECK A BOX AND ENTER "00".) (87-96)

Repeat ID - 4 (1-7) (8-17)

66.1% No N=91

Skip to question 37.

Continue with question 35. 35.To what extent, if at all, did the associate chief participate in resolving these disputed issues by (1) meeting with the taxpayer, and (2) providing you guidance, advice, or other assistance.? (CHECK ONE BOX IN EACH ROW.) (20-22) (6) (1) (2) (3) (4) (5)

Please explain your response. 36.To what extent, if at all, did the associate chief's participating in the following ways improve your ability to resolve these disputed returns? (CHECK ONE BOX IN EACH ROW. IF ASSOCIATE CHIEF DID NOT PARTICIPATE, CHECK "NOT APPLICABLE".) (23-25) (1) (2) (3) (4) (5) (6) (7)

Please explain your response. ______________________________________________________________________________________________________ 37. How did you inform Exam, if at all, of the final resolution of the disputed issues? (CHECK ALL THAT APPLY.) (26-29)

Discussed the final resolution with Exam Sent the Appeals Case Memorandum to Exam Other (Specify) _______________________________________________________________________ No feedback provided to Exam 38. Considering the overall case, did the following positively or negatively affect your ability to resolve the taxpayer's disputed issues for the case shown on page 1 of this questionnaire? (CHECK ONE BOX IN EACH ROW.) (30-35) (1) (2) (3) (4) (5) (6)

If dissatisfied, please explain. _______________________________________________________________________ 40. In your opinion, to what extent, if at all, did the Appeals' final resolution of these disputed issues influence the way Appeals will consider (a) recurring issues for this taxpayer, and (b) similar issues for different taxpayers? (CHECK ONE BOX IN EACH ROW.) (38-40) (1) (2) (3) (4) (5) (6) a. Recurring issues for this b. Similar issues for Please explain your response. 41. In your opinion, to what extent, if at all, was Appeals' dispute resolution processing of this case fair and impartial to both the taxpayer and the government? (CHECK ONE BOX IN EACH ROW.) (41-42) (1) (2) (3) (4) (5) (6)

N=601 42. Taking everything into consideration, what is your opinion on the quality of Exam's overall development of the issues on this case? (CHECK ONE BOX.) (43-44)

0.5% Very poor N=607

If you believe the quality of Exam's issue development is poor or very poor, please explain your response. 43. In your opinion, to what extent, if at all, did the dispute resolution process for large corporations unreasonably burden this taxpayer selected for audit? (CHECK ONE BOX.) (45)

75.3% Little or no extent N=598

44. Please use the space below to provide any additional comments about this case or IRS' audit and appeals processes for these large corporate taxpayers. You may attach additional sheets if necessary. (46)

Thank you for your assistance.

Please rem ove the yellow case inform ation sticker from page 1 and return the questionnaire in the pre-addressed return envelope.

Offices Visited and Officials Interviewed

This appendix describes the various IRS offices we visited and the officials we interviewed. In addition, it discusses the scope of our requests to selected officials for written comments on factors related to large corporate audits. Included in this appendix is table V.1, which shows the offices we visited and officials we interviewed.

In addition to the questionnaires, we interviewed numerous IRS National Office, regional, district office, and Appeals officials to obtain their views on the factors that affected the amount of additional taxes recommended by revenue agents that were ultimately assessed. At the National Office we interviewed the Executive Director, Corporate Audits Section; the National Director, Strategic Planning Division; the National Director of Appeals; and selected members of their staffs. At each of IRS’ four regional offices we interviewed the Regional Compliance Chief, Regional Counsel, and the Assistant Regional Director for Appeals. In addition, we visited 10 of IRS’ 33 district offices and 9 appeals offices. Table V.1 shows the district offices and appeals offices we visited and the titles of the individuals we interviewed.

Further, we also asked Examination Chiefs in all 33 IRS district offices nationwide and Appeals Chiefs in all 33 appeals offices nationwide to give us their comments on certain factors related to these large corporate audits. We received written responses from 31 of the Examination Chiefs and 30 of the Appeals Chiefs. Their views are incorporated throughout this report where appropriate.

Major Contributors to This Report

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