GAO reviewed the Internal Revenue Service's (IRS) program to audit the tax returns of about 45,000 large corporations that are not in the Coordinated Examination Program (CEP), focusing on factors that contributed to the assessment rate and audit results.

GAO noted that: (1) IRS invested 25 percent more hours in audits of large corporations during 1994 than it did in 1988, yet it recommended 23 percent less additional tax per hour and doubled the rate at which it closed audits with no tax changes; (2) during this 7-year period, IRS assessed 27 percent of the additional taxes revenue agents recommended; (3) GAO's analysis of questionnaire responses and interviews of officials from across IRS identified at least four factors that had a negative effect on both the audit results and the assessment rate; (4) the complexity and vagueness of the tax code caused legitimate differences in interpretation between IRS and corporations over the correct tax liability; (5) this complexity and vagueness made it difficult for IRS revenue agents to find the necessary evidence to clearly support any additional recommended taxes without investing a lot of audit hours; (6) such recommended taxes were less likely to survive the IRS Office of Appeals process and be assessed; (7) also, complex and vague tax laws increased the tax burden on large corporations by increasing their uncertainty about what actions they had to take to comply with the tax code; (8) the IRS Examination Division and Office of Appeals used different performance measures; (9) this difference in measures resulted in a lower assessment rate; (10) these revenue agents worked alone on complex audits without much assistance from district counsel or their group managers, who tended to be responsible for managing all types of audits; (11) further, audit staff had a limited basis on which to classify and select returns that had the most audit potential; (12) IRS' approach for these large corporate returns gave a great deal of discretion to audit staff, however the staff had little information on previously audited corporations or industry issues to serve as guideposts; (13) all these aspects can contribute to a reduction in the amount of taxes recommended per audit hour and, with the possible exception of the problems in selecting returns, can affect the assessment rate; (14) Appeals usually did not share with Examination information that could be used to educate revenue agents; (15) even if Appeals did share information, revenue agents did not always have time to review the new information due to time pressures to do other audits; (16) although Appeals usually shared the final settlement on disputed i*

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