The Internal Revenue Service (IRS) audits approximately 1,700 of the largest and most complex taxpayers (primarily corporations) through its Coordinated Examination Program (CEP). Teams of senior revenue agents and specialists, which may include computer analysts, engineers, and economists, audit taxpayers in the CEP. Examinations include 2 or more tax years and require 18 or more months to complete.

The Peer Review is the IRS’ quality review process in the CEP. To be a value-added process, quality review should provide management with an independent assessment of the extent to which the organization complies with its standards, policies and procedures. This assessment should provide valuable feedback to top management on how well the organization achieves its quality goals.

Under the IRS’ new business unit structure, the Quality Assurance and Performance Management function in the Large and Mid-Size Business (LMSB) Division will quality review CEP examinations. The process for quality reviewing CEP examinations in the LMSB Division was recently drafted.

We evaluated the CEP Peer Reviews to determine whether the process was efficient and effective in improving the CEP.

The CEP Peer Reviews did not have program components, such as well-defined goals, objectives, detailed plans, and controls. Neither the Examination function nor we could determine whether the program was effective in improving audit quality. The Examination function was not able to provide us with reliable cost figures, but its estimated salary costs for the last CEP Peer Review ranged from $250,000 to over $1 million; travel figures exceeded $150,000. Consequently, neither the Examination function nor we could ascertain whether the program was cost-beneficial.

The CEP Peer Reviews did not have well-defined goals, program objectives, and detailed plans for conducting reviews. Individual CEP Peer Reviews conducted were not consistent in sample selections and in the issues selected for review. We could not determine overall CEP improvement from one peer review to the next because of the changes in methodologies used to review CEP examinations over an 8-year period.

No follow-up system existed to ensure corrective actions were taken on recommendations made during the CEP Peer Reviews. We could not determine if any corrective actions were taken or whether improvements occurred from one review to the next. In fact, many issues identified as needing improvement were repeated from one CEP Peer Review to another.

No system existed to track costs associated with the CEP Peer Reviews. Resources from Examination, International, Counsel, and Appeals were expended to conduct the last review, which IRS officials estimated cost from $400,000 to over $1 million. Consequently, we could not evaluate the CEP Peer Review effectiveness and cost-benefits.

To improve the quality review of CEP examinations, the LMSB Division’s Director, Quality Assurance and Performance Management, needs to ensure that program goals and objectives are established that integrate into the overall LMSB Division’s goals. Reviews should be based on written planning documents that fully explain the premise for the review and define the scope, objectives, and sample methodology used.

In addition, the Director, Quality Assurance and Performance Management, should establish a system that tracks findings and recommendations from the CEP Peer Reviews to ensure that corrective actions are taken timely. Program costs should also be tracked so they can be associated with program activities to determine whether the CEP Peer Reviews are cost-beneficial.

Management’s Response: Management’s response was due on September 20, 2000. As of September 22, 2000, management had not responded to the draft report.