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Treasury Inspector General for Tax Administration

Press Release

December 6, 2011
TIGTA - 2011-86
Contact: David Barnes
(202) 622-3062

TIGTA: IRS Should Improve the Quality of its Audits of Small Corporations

WASHINGTON -- The Internal Revenue Service (IRS) should continue to improve the quality of its audits of small corporations, according to a new report released publicly today by the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA reviewed whether IRS examiners followed proper procedures and guidelines when auditing the returns of small corporations. The IRS defines small corporations as corporations with assets of less than $10 million.

Many corporations in the United States are considered closely held because they are owned by one shareholder or a closely knit group of shareholders. As such, these shareholders typically have a significant amount of control over managing and directing the day-to-day operations of the corporation. This, in turn, provides opportunities to improperly structure transactions that reduce the amount of income taxes owed by the small corporation or its shareholders.

TIGTA found that the IRS established many key procedures and guidelines for auditing these returns, which may have contributed to an upward trend in the amount of recommended additional taxes the audits generate.

TIGTA reviewed a nonstatistical sample of 51 closed corporate audits and found potential quality concerns in 19 of them. For example, IRS examiners did not always document the steps taken to investigate significant differences between the labor costs deducted in the corporate return and the amounts reflected on employment tax returns filed with the IRS.

"Corporations and shareholders that understate their tax liabilities can create an unfair burden on honest taxpayers and diminish the public's respect for the tax system," said J. Russell George, Treasury Inspector General for Tax Administration.

TIGTA recommended that the IRS provide additional guidance to first-line managers to improve the feedback provided to field examiners on using the IRS's automated information systems to enhance the quality of their required filing checks for audits of small corporations.

IRS officials agreed with the recommendation and plan to issue a memorandum to first-line managers concerning the use of automated information systems to enhance required filing checks and address feedback provided to field examiners.

Read the report.


Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.

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