GAO Faults IRS Audit Selection Process

A pair of reports from the Government Accountability Office found serious problems with the Internal Revenue Service’s processes for determining which individuals and businesses should be audited.

In one report, on the IRS’s Small Business/Self-Employed Division, the GAO found the IRS needs to strengthen certain internal controls for the audit. The GAO noted that the SB/SE division uses over 30 methods, called workstreams, to identify and review tax returns that may merit an audit. The returns were initially identified through seven sources which include referrals; computer programs that run filters, rules, or algorithms to identify potentially noncompliant taxpayers; and related returns that are identified in the course of another audit.

For fiscal year 2013, IRS reported that SB/SE's primary workstream for field audits identified approximately 1.6 million returns as potentially most noncompliant. About 77,500 returns (5 percent) were selected for audit, a much smaller pool of returns than was initially identified.

The GAO noted the SB/SE division has control procedures for safeguarding data and segregating duties across the overall selection process, among others, but it has not implemented other key internal controls. “The lack of strong control procedures increases the risk that the audit program's mission of fair and equitable application of the tax laws will not be achieved,” said the report.

The GAO gave some examples of internal control deficiencies, such not clearly defining the concept of “fairness.”

“Fairness is specified in SB/SE's mission statement and referenced in IRS's procedures for auditors,” said the report. “However, IRS has not defined fairness or program objectives for audit selection that would support its mission of treating taxpayers fairly. GAO heard different interpretations of fairness from focus group participants. Not having a clear definition of fairness can unintentionally lead to inconsistent treatment of taxpayers and create doubts as to how fairly IRS administers the tax law. Further, the lack of clearly articulated objectives undercuts the effectiveness of SB/SE's efforts to assess risks and measure performance toward achieving these objectives.”

In addition, the report found the IRS’s procedures for documenting and monitoring selection decisions are not consistent.

The GAO recommended that IRS take seven actions to help ensure that the audit selection program meets its mission, such as establishing and communicating program objectives related to audit selection and improving procedures for documenting and monitoring the selection process. In commenting on a draft of this report, IRS agreed with the recommendations.

“In the SB/SE Examination sphere, the concept of fairness has both a collective and individual component,” wrote IRS Deputy Commissioner for Services and Enforcement John M. Dalrymple in response to the report. “The IRS takes into account the responsibilities and obligations that all taxpayers share. We pursue those individuals and businesses who fail to comply with their tax obligations to ensure fairness to those who do and to promote public confidence in our tax system, and we discharge these important responsibilities with a focus on taxpayer rights, as embodied in the Taxpayer Bill of Rights (TBOR) and formally adopted by the IRS.”