oversight

Tax Administration: Factors Affecting Results from Audits of Large Corporations

Published by the Government Accountability Office on 1997-04-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Commissioner, Internal
                Revenue Service



April 1997
                TAX
                ADMINISTRATION
                Factors Affecting
                Results from Audits of
                Large Corporations




GAO/GGD-97-62
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             General Government Division

             B-261745

             April 17, 1997

             The Honorable Margaret Milner Richardson
             Commissioner of Internal Revenue

             Dear Ms. Richardson:

             This report focuses on the second phase of our work on 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)—IRS’ program to audit the returns from the largest and most complex
             corporations.1 In the first phase, in a comparison of data from fiscal years
             1988 and 1994, we found that IRS had invested additional time in these
             audits of large corporations but revenue agents recommended fewer
             additional taxes per audit hour.2 For these years, IRS ultimately assessed
             27 percent of the recommended taxes against these corporations.3

             This assessment rate and these audit results raise issues about the
             productivity of such audits. Initiated under our basic legislative authority,
             this review identified factors that contributed to the assessment rate and
             audit results.


             For audit purposes, IRS splits large corporations (those reporting
Background   $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.4 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,


             1
              We identified factors affecting CEP audits and appeals in an earlier report. See Tax Administration:
             Compliance Measures and Audits of Large Corporations Need Improvement (GAO/GGD-94-70, Sept. 1,
             1994).
             2
              Tax Administration: Audit Trends and Taxes Assessed on Large Corporations (GAO/GGD-96-6, Oct.13,
             1995).
             3
              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.
             4
              In fiscal year 1994, IRS audited about 10,400, or 24 percent, of the large corporations.



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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.5 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.

IRSdata 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.


5
 Hazards of litigation include the probability of a taxpayer prevailing in court.



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                   IRSis investing more in audits of large corporations and getting less in
Results in Brief   return. 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 (i.e., no-change rate). During this 7-year period, IRS
                   assessed 27 percent of the additional taxes revenue agents recommended.
                   Our 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.

                   First, the complexity and vagueness of the tax code caused legitimate
                   differences in interpretation between IRS and corporations over the correct
                   tax liability. 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. Such
                   recommended taxes, lacking clear evidence, were less likely to survive the
                   Appeals process and be assessed. 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.

                   Second, Examination and Appeals used different performance measures.
                   Examination focused on the amount of additional taxes recommended and
                   time spent to do the audit and Appeals focused on whether they settled tax
                   disputes without litigation and the time spent to do so. This difference in
                   measures resulted in a lower assessment rate. Revenue agents may
                   recommend as much tax as possible in some cases without developing
                   sufficient evidence, particularly with vague and complex tax laws. Appeals
                   officers may settle some disputes without litigation even when the
                   recommended taxes have some justifiable basis under the tax laws.

                   Third, revenue agents had difficulty developing sufficient support to
                   recommend tax changes that could survive an appeal due to various
                   aspects in the audit process. 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—not just large corporate audits. Further, audit staff had a limited
                   basis on which to classify and select returns that had the most audit
                   potential. Unlike the approaches for selecting other corporate returns, 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. Finally, the



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                     agents had difficulty obtaining information in a timely manner from large
                     corporations. In sum, all of 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.

                     Fourth, Appeals usually did not share with Examination information that
                     could be used to educate revenue agents. Appeals’ staff shared new
                     information submitted by large corporations in less than half of our
                     sample cases because of the time pressures to settle cases or their
                     uncertainty in defining “significant.” Appeals is required to share only
                     significant new information with Examination. Without the new
                     information, revenue agents have a harder time understanding the
                     rationale(s) Appeals used in resolving a dispute. 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. Further, although
                     Appeals usually shared the final settlement on disputed issues,
                     Examination management often did not distribute those results to the
                     revenue agents. Such feedback can help agents decide whether and how to
                     audit similar issues in the future with better support for any recommended
                     taxes.


                     Our objective was to determine what factors affected the results of
Objectives, Scope,   auditing large corporations as well as the amount of additional taxes
and Methodology      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 1994.6 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.



                     6
                      We chose fiscal year 1994 because it was the most recent year for which data were available on such
                     closed audits.



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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).7 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.



7
 TEI represents about 3,600 of the largest corporations, including most CEP corporations.



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                      Our 1995 report on large corporate audit trends provided statistics on IRS
Recent Statistics     audits of large corporations between fiscal years 1988 and 1994. These
Raise Issues About    statistics covered the audit results and assessment rate over this 7-year
Audits of Large       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
Corporations          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.


                      We identified four factors that affected the assessment rate and/or audit
Factors Affecting     results, such as the lower recommended taxes per audit hour in 1994
Assessment Rate and   compared to 1988. Although the exact impact is unknown, each factor can
Audit Results         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



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                           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’   IRSand large corporate taxpayers can have legitimate differences over how
Audits of Large            tax laws should be interpreted. We found that complex, ambiguous laws
Corporations               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.8 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.9 Appeals officers in our universe cited the

                           8
                           Tax System Burden: Tax Compliance Burden Faced by Business Taxpayers (GAO/T-GGD-95-42,
                           Dec. 9, 1994).
                           9
                            Because the revenue agent and appeals officer questionnaires pertain to a sample of tax returns,
                           rather than to all returns, all 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.



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                          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.10 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.

                          Our interviews of Examination, Appeals, and Counsel officials at the
                          national and field levels showed a consistent belief that IRS’ system created
                          little risk for corporations in appealing the recommended taxes. In a letter
                          to us, the National Director of Appeals wrote:

                          “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.11 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     IRS’ overall mission is to collect the proper amount of taxes in a manner
Examination and Appeals   that is efficient and fair and promotes public confidence. The Examination
May Have Reduced the      and Appeals functions also have important missions that should contribute
                          to IRS’ overall mission. Revenue agents are charged with protecting the
Assessment Rate           government’s interest in receiving the proper amount of tax. They are

                          10
                            The 95 percent confidence interval (plus or minus 32 percent) ranges from 24 to 86 percent.
                          11
                            GAO/GGD-94-70, Sept. 1, 1994.



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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



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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.12 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


12
  Given Examination’s mission and the complex tax laws, revenue agents still will raise some issues
that are unlikely to be sustained upon appeal.



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                                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             Audits of these large corporations can be complex and technical but are
Hindered Revenue Agents         generally done by a single revenue agent. Although they worked alone,
From Developing                 these revenue agents received little assistance from district counsel or
                                their group managers. Also, IRS’ approach for classifying and selecting
Recommended Taxes That          these large corporate returns did not help ensure that revenue agents
Could Be Sustained              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       IRS officials said the level of large corporate auditing experience for
Audit Experience and Training   revenue agents was not as high as they would like it to be. For the large
Limited                         corporations in our study, the average return was audited by a single
                                revenue agent with about 8.5 years of corporate auditing experience.13 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.14 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

                                13
                                 For comparison, CEP revenue agents averaged about 18 years of corporate auditing experience.
                                Unlike revenue agents conducting large corporate audits, CEP revenue agents also tended to
                                continually audit CEP corporations. Further, CEP revenue agents were assisted by other revenue
                                agents and specialists, including counsel. An on-site team coordinator directed the work of the agents
                                and reported to a CEP case manager, who usually oversaw several audits.
                                14
                                  According to a National Office official, IRS compliance staffing, including revenue agents, is expected
                                to decrease further during fiscal year 1997.



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                        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.15 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.16 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     Working alone on these corporate audits, revenue agents may need
Managerial Assistance   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’

                        15
                          The Western Region Corporate Results Task Force Report, dated March 1995.
                        16
                         The purpose of continuing professional education is to provide revenue agents with the current
                        knowledge and skills needed to successfully conduct audits.



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agreement.17 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.18

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,

17
  The 95 percent confidence interval (plus or minus 15 percent) ranges from 40 to 70 percent.
18
 District Counsel officials said they can provide informal assistance more quickly at a lower cost
compared to formal assistance. They did not provide data on the differences.



Page 13                                             GAO/GGD-97-62 Audits of Large Corporations
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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.




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                              B-261745




Inconsistent Approach Among   Compared to CEP tax returns, the approach for selecting these large
Districts for Selecting       corporate returns was more subjective and varied. To determine which
Corporate Returns for Audit   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.19

                              Also, IRS is developing the Examination Operational Automated Database
                              in an attempt to capture audit results by issue and industry. Examination

                              19
                                A market segment is a specific group of taxpayers that share certain characteristics and behaviors.



                              Page 15                                             GAO/GGD-97-62 Audits of Large Corporations
                             B-261745




                             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.20 Such audits can result in
                             ineffective use of IRS’ as well as the corporations’ resources.

Difficulty in Obtaining      During audits, revenue agents may question items on the return, such as
Information to Support Tax   income, deductions, or credits. If a corporation cannot provide adequate
Recommendations              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.21 Appeals officers for some of the audits noted that


                             20
                              As discussed earlier, the nationwide no-change rate doubled (not decreased) between fiscal years
                             1988 and 1994.
                             21
                               Because large corporations can appeal numerous issues, our questionnaire focused on the three
                             disputed issues involving the highest amounts of recommended adjustments. In these instances
                             taxpayers may have provided Appeals new information on at least one of the top three dollar issues.



                             Page 16                                            GAO/GGD-97-62 Audits of Large Corporations
                          B-261745




                          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      During the appeals process for large corporate audits, coordination
Appeals and Examination   between Appeals and Examination was limited. Appeals generally did not
Was Limited               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



                          Page 17                                 GAO/GGD-97-62 Audits of Large Corporations
B-261745




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.22 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.23 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

22
  Proposed Procedure for Settlement of CEP Cases in Appeals (Western Region).
23
  The 95 percent confidence interval (plus or minus 14 percent) ranges from 29 to 57 percent.



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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



Page 19                                GAO/GGD-97-62 Audits of Large Corporations
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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.24 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,

24
 Appeals is studying the effectiveness of the written summary and whether it can be shorter. One
Appeals official told us about concerns with reducing the discussion of important settlement
considerations. Any reduction could also reduce insights that revenue agents garner from the
summaries.



Page 20                                            GAO/GGD-97-62 Audits of Large Corporations
              B-261745




              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.


              Our analysis of questionnaire responses and interviews with IRS officials
Conclusions   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



              Page 21                                GAO/GGD-97-62 Audits of Large Corporations
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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



Page 22                               GAO/GGD-97-62 Audits of Large Corporations
                         B-261745




                         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.


                         To improve the audits of tax returns filed by large corporations, we
Recommendations          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.


                         We obtained comments on a draft of this report in a meeting on
Agency Comments          February 20, 1997, with IRS officials who represented you. These officials
and Our Evaluation       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.




                         Page 23                               GAO/GGD-97-62 Audits of Large Corporations
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    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.




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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.




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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



Page 26                                GAO/GGD-97-62 Audits of Large Corporations
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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.

Sincerely yours,




Lynda D. Willis
Director, Tax Policy and
  Administration Issues




Page 27                              GAO/GGD-97-62 Audits of Large Corporations
Contents



Letter                                                                                                1


Appendix I                                                                                           30
                        Sample Selection Methodology                                                 30
Sampling and Data
Analysis Methodology
Appendix II                                                                                          35

Revenue Agent
Questionnaire Results
Appendix III                                                                                         54

Group Manager
Questionnaire Results
Appendix IV                                                                                          71

Appeals Officer
Questionnaire Results
Appendix V                                                                                           91

Offices Visited and
Officials Interviewed
Appendix VI                                                                                          92

Major Contributors to
This Report
Tables                  Table I.1: Corporate Audits Closed Agreed in Examination or                  30
                          Appeals During Fiscal Year 1994 With $75,000 or More in
                          Additional Taxes Recommended
                        Table I.2: Response Rate and Disposition of Initial Sample                   33
                          Selection by Type of Questionnaire
                        Table V.1: District and Appeals Offices Visited and Officials                91
                          Interviewed




                        Page 28                               GAO/GGD-97-62 Audits of Large Corporations
Contents




Abbreviations

AIMS       Audit Information Management System
BMF        Business Master File
CEP        Coordinated Examination Program
IRM        Internal Revenue Manual
IRS        Internal Revenue Service
SEC        Securities and Exchange Commission
TEI        Tax Executives Institute


Page 29                           GAO/GGD-97-62 Audits of Large Corporations
Appendix I

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.


                                          In order to send questionnaires to IRS audit and Appeals staff and
Sample Selection                          taxpayers, we identified a universe of corporate taxpayers related to
Methodology                               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.


Table I.1: Corporate Audits Closed Agreed in Examination or Appeals During Fiscal Year 1994 With $75,000 or More in
Additional Taxes Recommended
                                                                                   Dollars                            Dollars
Range of additional taxes                    Number of                     recommended                              assessed
recommended on returns                          audits Percent of total       (in millions) Percent of total     (in millions)
$3 million and more                                 117                   9       $1,961.5               76            $459.5
$1 million to $2,999,999                            194                  15          343.0               13             162.1
$300,000 to $999,999                                334                  26          188.9                 7            118.7
$75,000 to $299,999                                 621                  49           96.9                 4             69.5
Totals                                           1,266                  100       $2,590.4              100            $809.8
                                          Source: GAO analysis using IRS data.



                                          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




                                          Page 30                                   GAO/GGD-97-62 Audits of Large Corporations
                Appendix I
                Sampling and Data Analysis Methodology




                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 1995.25 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   We developed four mail-out questionnaires to obtain the views of IRS
Methodology     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

                25
                 In August 1995, IRS was organized with 63 district offices nationwide. However, those 63 district
                offices were consolidated into 33 districts as of October 1995.



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Appendix I
Sampling and Data Analysis Methodology




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.




Page 32                                  GAO/GGD-97-62 Audits of Large Corporations
                                          Appendix I
                                          Sampling and Data Analysis Methodology




Table I.2: Response Rate and
Disposition of Initial Sample Selection                                             Revenue          Appeals           Group
by Type of Questionnaire                                                              agent           officer        manager          Taxpayer
                                          Initial sample size                             500             500               215                500
                                               Ineligible sample selections                 0             199a               20b                3c
                                               Eligible sample selections                 500             301               195                497
                                          Questionnaires not completed                    174             161                28                333
                                                                                              d                 e
                                               No response                                 97                 21             21                333
                                               Recipient no longer                         64                 21              7                 0
                                               availablef
                                               IRS could not locate                        13             119                 0                 0
                                               individual associated with
                                               case
                                          Questionnaires received                         326             140               167                164
                                          Response rateg                                   65%                47%            86%               33%
                                          a
                                           Included 196 audits in which the taxpayers did not exercise their appeal rights; two audits in
                                          which the taxpayers exercised their right to appeal, but Appeals subsequently returned the case
                                          to Examination, where it was ultimately settled; and one audit that was still open in Appeals.
                                          b
                                              Managers were not responsible for any large corporate audits.
                                          c
                                          Taxpayers involved in ongoing disputes with IRS.
                                          d
                                           Included one audit in which the revenue agent could not remember the case well enough to
                                          complete the questionnaire.
                                          e
                                           Included three audits in which the appeals officers did not complete the questionnaire because
                                          they lacked support records.
                                          f
                                           Included individuals who had retired prior to receiving the questionnaire, transferred to another
                                          agency, or had died.
                                          g
                                           Computed response rate by dividing the number of questionnaires received by the eligible
                                          sample selection.



                                          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                   Because the survey results come from samples, all results are estimates
Estimates Used in the                     that are subject to sampling errors. We calculated sampling errors for all
Report                                    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



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Appendix I
Sampling and Data Analysis Methodology




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.




Page 34                                  GAO/GGD-97-62 Audits of Large Corporations
Appendix II

Revenue Agent Questionnaire Results




                                                         U.S. General Accounting Office

                                                         IRS' Audits of Large Corporations -
                                                         Revenue Agent Questionnaire


                                                                                                               1
                                                                                                                                     Case ID - 1 (1-7)
              INTRODUCTION

              The U.S. General Accounting Office (GAO), an agency of             GAO will safeguard the privacy of your responses to this
              Congress, is conducting a study of IRS' audits of corporations     questionnaire. They will be combined with those of other
              with assets of $10 million or more (activity codes 219 to 225).    respondents and will be reported only in summary form. The
              The scope of our review does not include corporate returns in      control number is included only to aid us in our follow-up
              the Corporate Examination Program (CEP). The overall               efforts. We will not identify specific taxpayer information in
              objective of our study is to determine what factors affect the     our report.
              rate at which taxes recommended by revenue agents on these
              corporate returns get assessed. We are surveying a random          This questionnaire should take about 1 hour to complete. If
              sample of revenue agents who worked on corporate audits            you have any questions concerning any part of this survey,
              closed agreed in either Exam or Appeals during fiscal year         please call Mr. Kirk Boyer at (913) 384-7570.
              1994.
                                                                                 Please return the completed questionnaire in the enclosed pre-
              You have been selected to complete this questionnaire due to       addressed envelope within 2 weeks from the time you receive
              your involvement with the corporate returns for the tax years      it. In the event the envelope is misplaced, the return address
              indicated at the bottom of this page. Because of your work on      is:
              this case, your response to this questionnaire will help us to
              identify the factors that affected these audits, both positively       U.S. General Accounting Office
              and negatively. We cannot develop meaningful information               Kansas City Regional Office
              without your frank and honest answers to the questions.                Attn: Mr. Kirk Boyer
                                                                                     5799 Broadmoor - Suite 600
                                                                                     Mission, Kansas 66202

                                                                                 Thank you for your assistance.


                                                                    Case Information:

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




                              Page 35                                                       GAO/GGD-97-62 Audits of Large Corporations
                  Appendix II
                  Revenue Agent Questionnaire Results




I.   RE SPONDE NT INFORMAT IO N

     Please provide us your current work telephone number to           2.   Please answer the following as it applied to you at the
     assist us if we need to clarify a response:                            time the audit shown on page 1 began: (ENTER "00" IF
                                                                            NONE OR UNDER 6 MONTHS.)                             (10-19)
     (______)______________________________
                                                                            a.   Total number of years of IRS experience
                                                                                 in the Examination Division . . . . . . . 17.3            Years
                                                                                                                                         N=1,266
                                                                            b.   Number of years as a revenue agent . . 16.3 Years
                                                                                                                                         N=1,266
     Were you assigned to audit the corporate tax returns                   c.   Number of years auditing corporations
     shown on page 1?                                                            with assets of $10 million or more
                                                                                 (activity codes 219 to 225) that are
     1.      Yes   →Please continue with question 1.                             not in CEP . . . . . . . . . . . . . . . . . . . . . 6.8 Years
                                                                                                                                         N=1,247
                                                                            d.   Number of years auditing CEP
     2.      No    →STOP:      Do not continue if you were                       corporations . . . . . . . . . . . . . . . . . . . . 1.8 Years
                      not involved in the audit. Please return                                                                           N-1,217
                      the questionnaire in the enclosed                     e.   Total number of years of non-IRS
                      envelope.                                                  experience in accounting or auditing . . 1.9 Years
                                                                                                                                         N=1,253


                                                                       3.   What grade level were you when you began this audit?
                                                                            (ENTER A NUMBER.)

                                                                                 GS -      __________
                                                                                               (20-21)
1.   Approximately how many corporate income tax returns
     (activity codes 219 to 225) have you audited in the last 12            GS-11           5.2% GS-13               64.2%            N=1,262
     months? (ENTER A NUMBER.)                             (8-9)
                                                                            GS-12        30.3%   Other                0.3%

     Mean = 6.7 Number of corporate tax returns                        4.   Which of the following best describes the type of group
                                                                            you were assigned to when you worked on this audit?
                   N=314                                                    (CHECK ONE BOX.)                                       (22)


                                                                            75.7%     Non-specialized General Program group

                                                                            10.0%     Specialized General Program group targeted
                                                                                      toward large corporate tax returns

                                                                            8.0%      CEP group

                                                                            6.3%      Other (Specify) _________________________

                                                                                      N=1,253




                                                                   2




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                 Revenue Agent Questionnaire Results




5.   Within 1 year before this audit began, did you receive the following training in corporate audit procedures or issues? If you
     have received any of the following training, indicate to what extent, if at all, the training improved your ability to conduct
     this audit?
     (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.)

                                                                                                                              (23-34)


                                      Did you receive      If you received any of the following training, to what extent,
                                       the following         if at all, did it improve your ability to conduct this audit?
                                      training in that
                                           year?
                                       Yes        No         Very      Great     Moderate      Some      Little     No
                                                             great     extent     extent       extent    extent    extent
                                                            extent
                                       (1)        (2)         (3)       (4)         (5)         (6)       (7)       (8)
a.   Advanced corporate training     14.3%     85.7%        7.8%      15.7%       44.0%        22.6%     7.4%      2.4%
     or equivalent of Phase 5                               N=180
                          N=1,258
b.   Corporate training or           12.6%     87.4%        7.7%      30.5%       43.1%        8.2%      10.6%     0.0%
     equivalent of Phase 4                                  N=157
                          N=1,248
c.   IRS training (3 days or         4.1%      95.9%        17.6%     36.7%       38.9%        6.8%      0.0%      0.0%
     more) related to this                                  N=52
     taxpayer's primary industry
     (including industry
     specialization program (ISP)
     training)             N=1,255
d.   Non-IRS training or seminars    2.4%      97.6%        15.8%     36.4%       42.9%        4.9%      0.0%      0.0%
     on any issues related to the                           N=31
     taxpayer's industry N=1,255
e.   Training on developing          15.4%     84.6%        4.6%      15.9%       53.2%        15.5%     8.5%      2.3%
     complex technical and/or                               N=184
     legal issues        N=1,228
f.   Other (Specify)                 40.7%     59.3%        22.2%     10.3%       33.4%        16.8%     17.4%     0.0%
                       N=415                                N=169
     _______________________

     _______________________




6.   Was there any other training that you had not received that you felt you needed to improve your ability to conduct this audit?
      (CHECK ONE BOX.)                                                                                                       (35-36)



     37.8%    Yes   →     Please describe the training needed:

                       _________________________________________________________________________________________

                       _________________________________________________________________________________________

     62.2% No
           N=1,224




                                                                 3




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                 Appendix II
                 Revenue Agent Questionnaire Results




II. G ENE RAL CAS E INFORMAT IO N



7.    Which of the following best describes how this corporate tax return was selected for audit? (CHECK ONE BOX.)                     (37)


      13.7%   I selected it because it was classified with the greatest audit potential among the corporate tax returns available

      10.8%   I selected it for some other reason (Specify) _____________________________________________________

      57.9%   My manager assigned it to me

      17.7% Other (Specify) ____________________________________________________________________________

              N=1,239

8.    Overall, how satisfied or dissatisfied were you with the following factors related to the audit shown on page 1 of this
      questionnaire? (CHECK ONE BOX IN EACH ROW. DO NOT CHECK IN THE SHADED AREA.)                                                  (38-43)



                                              Very       Generally         Neither       Generally         Very            Not
                                            satisfied    satisfied      satisfied nor    dissatisfie    dissatisfied     Applicable
                                                                         dissatisfied         d
                                               (1)           (2)              (3)                           (5)             (6)
                                                                                            (4)
                                                                                                                       AAAA
                                                                                                                       AAAAAAAA AAAA
                                                                                                                       AAAA AAAAAAAA
                                                                                                                       AAAAAAAA AAAA
 a.    Your experience in auditing          28.9%       47.8%           17.3%           4.5%           1.5%
       these corporations      N=1,258                                                                                 AAAA AAAA
                                                                                                                            AAAA
                                                                                                                                AAAA
                                                                                                                                AAAA
                                                                                                                       AAAA
                                                                                                                       AAAAAAAAAAAA
                                                                                                                            AAAAAAAA
 b.    Your knowledge of tax laws,          33.0%       53.8%           10.1%           3.1%           0.0%            AAAA
                                                                                                                       AAAAAAAAAAAA
                                                                                                                            AAAAAAAA
       rules and regulations  N=1,258                                                                                  AAAA
                                                                                                                       AAAA AAAAAAAA
                                                                                                                       AAAAAAAA
                                                                                                                            AAAAAAAA
                                                                                                                                AAAA
 c.    Your knowledge of the                11.9%       31.8%           38.3%           15.4%          2.5%            AAAA
                                                                                                                       AAAAAAAAAAAA
                                                                                                                            AAAAAAAA
                                                                                                                       AAAAAAAA AAAA
       taxpayer's industry
                                                                                                                       AAAAAAAA
                                                                                                                       AAAA AAAAAAAA
                                                                                                                                AAAA
                                N=1,258                                                                                AAAA AAAAAAAA
                                                                                                                       AAAAAAAAAAAA
 d.    Any out-of-district audit            4.1%        8.7%            10.7%           2.7%           1.6%             72.2%
       assistance or support audit
                                 N=1,265
 e.    Extent to which other IRS staff      12.2%       18.6%           12.4%           5.6%           3.5%             47.8%
       (including specialists) adequately
       developed the issues      N=1,258
 f.    Other (Specify)      N=314           9.6%        4.2%            2.6%            6.8%           7.5%             69.3%
       _______________________

       _______________________




                                                                   4




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                       Appendix II
                       Revenue Agent Questionnaire Results




     9.   Did you do any of the following related to this taxpayer's primary industry during this audit? If yes, please indicate to what
          extent these resources helped you develop complex or technical industry 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" OR "DON'T KNOW" TO THE FIRST PART, THEN GO TO THE NEXT
          LINE.)
                                                                                                                                     (44-57)



                                         Did you do any of the             If yes, to what extent did your use of these resources help you
                                              following?                            develop complex or technical industry issues?
                                       Yes       No        Don't        Very        Great      Moderate       Some         Little      No
                                                           Know         great       extent      extent        extent       extent     extent
                                                                       extent
                                       (1)         (2)       (3)         (4)          (5)         (6)          (7)           (8)         (9)
a.    Contacted the industry
      coordinator to discuss any      21.3%      76.0%     2.7%        17.4%      35.0%        24.0%       12.4%         3.7%         7.4%
      issue related to this taxpayers                                  N=266
      primary industry        N=1,248
b.    Obtained a position paper on 24.9%         73.2%     2.0%        31.8%      29.0%        24.8%       8.8%          0.0%         5.6%
      an issue             N=1,252                                     N=291
c.    Contacted the market segment 9.5%          87.5%     3.0%        11.8%      27.0%        26.9%       16.5%         7.6%         10.2%
      coordinator to discuss any                                       N=108
      issue                 N=1,229
d.    Obtained the market segment 13.2%          84.8%     1.9%        15.3%      30.2%        25.9%       14.7%         7.9%         5.9%
      audit guide         N=1,222                                      N=143
e.    Reviewed a District Office
      memorandum discussing an      14.8%        80.8%     4.3%        9.2%       43.9%        20.0%       20.3%         4.7%         2.0%
      issue related to this N=1,219                                    N=166
       taxpayer's primary industry
f.    Contacted revenue agents in
      other districts on specialized 17.9%       80.8%     1.4%        24.5%      46.3%        15.4%       9.4%          1.6%         2.9%
      industries/issues      N=1,245                                   N=211
g.    Other (Specify)
      ______________________   44.6%             50.8%     4.6%        29.6%      39.9%        14.6%       5.5%          7.0%         3.5%
                         N=309                                         N=121
      ______________________


     10. Did you reduce the additional taxes recommended from this audit because of net operating losses (NOLs) or credit
         carrybacks? (CHECK ONE BOX.)                                                                                                  (58)


          15.0%   Yes → Continue to question 11.
          72.5%   No
                                                Skip to question 12.
          12.5%   Don't know
                  N=1,259

     11. If there was an NOL or credit carryback to your primary tax year audited, how was the carryback brought to your attention?
         (CHECK ALL THAT APPLY.)                                                                                               (59-63)


          56      Form 1120X

          104     Application for tentative refund (Form 1139)

          11      Informal claim by the taxpayer during the audit

          18      Your review of audit results from another tax year

          52      Other (Specify) __________________________________________________________________________________



                                                                       5




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                 Appendix II
                 Revenue Agent Questionnaire Results




III. STAFFING RE SOURCE S



12. In all, how many revenue agents (excluding specialists)               15. Which of the following best describes the reason that
    worked on the audit shown on page 1 of this                               additional revenue agents did not work on this audit?
    questionnaire? (ENTER A NUMBER.)                      (64)                (CHECK ONE BOX.)                                            (68)


    _______ Number of revenue agents                                          21.5%   Additional revenue agents were not requested
    1 82.0% 4 0.7%
    2 13.4% 5 0.1%               N=1,263                                      12.8%   Revenue agents were not available when the audit
    3 3.5%         Oth 0.4%                                                           began
13. In your opinion, were additional revenue agents needed
    during this audit? (CHECK ONE BOX.)                  (65)                 18.2%   Revenue agents were available but temporarily
                                                                                                 diverted to other activities/collateral
    8.4%     Yes   →     Continue with question 14.                                              duties during the course of the audit


    91.6% No       →   Skip to question 16.
                                                                              15.3%   Request(s) for additional revenue agents to be
                                                                                                   assigned was denied
             N=1,266                                                          3.3%    Request(s) for additional revenue agents to be
                                                                                      assigned was granted, but the staff was (were)
14. If additional revenue agent(s) were needed, to what extent,                       assigned later than needed
    if at all, did not having their services negatively affect the
    results of this audit? (CHECK ONE BOX.)                 (66-67)
                                                                              29.0%   Other (Specify) ___________________________
    1.7%     Very great extent                                                        _______________________________________
    22.8%    Great extent                                                             N=101
    28.8%    Moderate extent

    34.7%    Some extent

    10.7%    Little extent
                                                                          IV. US E OF L E G AL ASSISTANCE RE SOURCE S
    1.4%    No extent
            N=106
    Please explain how it negatively impacted these audits.
                                                                          16. Were any of the following types of legal assistance
    ________________________________________________                          requested to assist you on matters of tax law or overall
                                                                              issue development during the audit shown on page 1 of
    ________________________________________________                          this questionnaire? (CHECK ALL THAT APPLY.) (69-72)

    ________________________________________________                          171     District Counsel assistance

    ________________________________________________                          99      National office Chief Counsel verbal advice
                                                                              32        National office Chief Counsel written technical
                                                                                        advice
                                                                              ------------------------------------------
                                                                              1,010 No legal assistance requested → Skip to
                                                                                        question 18.




                                                                      6




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                    Appendix II
                    Revenue Agent Questionnaire Results




17. Please indicate below what type of legal assistance you received. For each type of legal assistance you received, indicate (1)
    whether it was provided in a timely manner and (2) if it positively or negatively affected Exam's ability to obtain agreement
    with the taxpayer.
    (CHECK AT LEAST ONE BOX IN EACH ROW. IF YOU ANSWER "YES" TO THE FIRST PART, THEN ANSWER
    THE NEXT PARTS. IF YOU ANSWER "NO" OR "DON'T KNOW" TO THE FIRST PART, THEN GO TO THE NEXT
    LINE.)                                                                                                                    (73-82)

                             Was the legal        If yes, was it provided   How did this assistance affect
                          assistance received?       to you in a timely      Exam's ability to obtain the
                                                          manner?           taxpayer's agreement on these
                                                                                        issues?
                                    (1)                     (2)                            (3)
 a.    District           96.4%    Yes →          88.8%      Yes            21.4% Very positively
       counsel            1.0%     No             6.0%      No              33.3% Positively
       assistance         2.5%     Don't know     5.2%      Don't know      41.0% Neither positively nor
                          0.0%     Not            0.0%      Not                   negatively
                                   applicable               applicable      0.0%  Negatively
                                         N=169                     N=163    2.1%  Very negatively
                                                                            2.2%  Don't know      N=158
 b.    National office    98.2%     Yes →         98.2%      Yes            15.4%    Very positively
       Chief Counsel      1.8%      No            0.0%       No             33.5%    Positively
       verbal             0.0%      Don't know    1.8%       Don't know     41.4%    Neither positively nor
       assistance         0.0%      Not           0.0%       Not                     negatively
                                   applicable               applicable      0.0%     Negatively
                                          N=99                      N=96    1.8%     Very negatively
                                                                            7.8%     Don't know       N=82
 c.    National office    86.8%     Yes →         66.2%      Yes            27.0%     Very positively
       Chief Counsel      13.2%     No            33.8%      No             21.4%     Positively
       written            0.0%      Don't know    0.0%       Don't know     30.2%     Neither positively nor
       technical          0.0%      Not           0.0%       Not                     negatively
       assistance                  applicable               applicable      0.0%     Negatively
                                          N=32                      N=28    21.4%     Very negatively
                                                                            0.0%      Don't know       N=28


If you were not satisfied with the timeliness of any legal assistance or you did not receive it, please explain why?
__________________________________________________________________________________________________________
__________________________________________________________________________________________________________
__________________________________________________________________________________________________________

V. US E OF S P ECIAL IST RE SOURCE S

18. Were the services of specialists needed to help you                19. Were the services of specialists obtained when you
    develop any of the issues for this audit? (CHECK ONE                   believed they were needed to help you develop the issues
    BOX.)                                               (83)               for this audit? (CHECK ONE BOX.)                      (84)



      42.5%         Yes   →       Continue with question 19.                81.7%   All of the needed specialists were obtained when
                                                                                    needed   → Skip to question 21.
      55.0%         No
                                     Skip to question 23.                   14.1%   Some but not all of the needed specialists were
      2.5%          Don't know                                                      obtained when needed → Continue with
                                                                                    question 20
                    N=1,260
                                                                            4.2%    None of the needed specialists were obtained
                                                                                    when needed    →    Continue with question 20.
                                                                                    N=535




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20. For those specialist(s) that you needed but did not obtain, please identify (1) the specialist(s) that was not obtained, (2) the
    primaryreason why you were not able to obtain them, and (3) the affect of not having this specialist on your ability to obtain
    the taxpayer's agreement on proposed adjustments. To answer the second column, refer to the reason codes below the
    matrix
.   (IDENTIFY THE TYPE OF SPECIALIST. FOR EACH ONE IDENTIFIED, CHECK TWO BOXES IN EACH ROW.
    ATTACH AN ADDITIONAL SHEET IF MORE THAN THREE SPECIALISTS WERE NEEDED.)                                                       (85-93)




               What type of             Primary reason why the      In your opinion, how did not having
       specialist(s) was needed but       needed specialist(s)      the specialist(s) affect your ability to
               not obtained?              were not obtained?         obtain the taxpayer's agreement on
                                           (Codes are listed                     these issues?
                                                below.)
                    (1)                           (2)                                 (3)

     30.4 %    Issue/Industry               A.   16.0%             9.9%  Very positively
     26.3%     Engineer                     B.   40.2%             16.3% Positively
     14.5%     CAS                          C.   0.0%              40.1% Neither positively nor
     10.7%     International                D.   0.0%                    negatively
      5.7%     Employee Plans               E.   37.6%             3.8%  Negatively
      4.4%     Valuation                    F.   6.2%              0.0%  Very negatively
       2.3%    Economist                                           23.9% Don't know
       5.7%    Other          N=75                         N=69                                       N=67

     50.0% CAS                              A.   100%           50.0% Very positively
     50.0% Issue/Industry                   B.   0.0%           0.0%  Positively
                                            C.   0.0%           0.0%  Neither positively nor
                                            D.   0.0%                 negatively
                                            E.   0.0%           0.0%  Negatively
                                            F.   0.0%      N=13 0.0%  Very negatively
                                N=13                            50.0% Don't know                      N=13

                                            A.   0.0%              0.0%     Very positively
                                            B.   0.0%              0.0%     Positively
                                            C.   0.0%              0.0%     Neither positively nor
                                            D.   0.0%                       negatively
                                            E.   0.0%              0.0%     Negatively
                                            F.   0.0%              0.0%     Very negatively
                                 N=0                               0.0%     Don't know

                          RE ASON CO DE S DE FINING W HY S P ECIAL IST(S) W AS NOT OBTAINE D:

             A . The district did not have the needed specialist(s) on staff

             B . Request was not met/denied because of other priority work

             C. There was not enough time remaining in the audit

             D. Request not met because of non-exam time reasons such as leave, training, collateral duties.

             E . Other (Specify)      ________________________
             F . Don't know




                            If you did not obtain any of the needed specialists, please skip to
                                                      question 22.


                                                                   8




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                                                                                                                         Repeat ID - 2 (1-7)

21.      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)




           What type of                Did the specialist(s)       How did the services of the
        specialist(s) assisted         provide you timely           specialist(s) affect Exam's
                you?                       assistance?                 ability to obtain the
                                                                  taxpayer's agreement on these
                                                                               issues?
                     (1)                            (2)                          (3)
       36.3%    Engineer         89.9%          Yes          24.8% Very positively
       31.8%    International    9.1%           No           29.0% Positively
       11.2%    Issue/Industry   1.0%           Don't know   32.2% Neither positively nor
       10.3%    CAS                                    N=488       negatively
       3.3%     Valuation                                    7.1%  Negatively
       1.4%     Economist                                    5.1%  Very negatively
       5.5%     Other      N=488                             1.8%  Don't know          N=483

       38.3% Engineer         89.0%             Yes          25.9% Very positively
       33.5% CAS              11.0%             No           22.8% Positively
       10.9% Employee plan    0.0%              Don't know   29.8% Neither positively nor
       6.7%  Issue/Industry                            N=138       negatively
       4.4%  International                                   4.8%  Negatively
       2.5%  Economist                                       9.0%  Very negatively
       3.6%  Other      N=138                                7.8%  Don't know          N=133

       27.7% Issue/Industry   84.4%             Yes          32.7% Very positively
       24.0% International    15.6%             No           14.4% Positively
       15.6% CAS              0.0%              Don't know   45.7% Neither positively nor
       8.4%  Engineer                                   N=21       negatively
       8.4%  Valuation                                       7.2%  Negatively
       16.0% Other       N=21                                0.0%  Very negatively
                                                             0.0%  Don't know           N=21


22. Was the specialist's manager involved in this audit? (CHECK ONE BOX.)                                                             (17-19)



      36.2%    Yes    →
                           How satisfied or dissatisfied were you with the specialist(s) manager's involvement, or lack of involvement,
      51.9% No       → on this audit?     (CHECK ONE BOX.)

                           19.0%   Very satisfied
                           32.5%   Satisfied
                           35.1%   Neither satisfied nor dissatisfied
                           10.3% Dissatisfied
                           3.0%    Very dissatisfied
                                   N=350
                           If you were dissatisfied with the specialist(s) manager's involvement, please explain why.
                           ________________________________________________________________________________________
                           ________________________________________________________________________________________
      11.9% Don't know
            N=509



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VI. Y O UR MANAG ER'S INVO LVE ME NT IN AUDIT S



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)



                                       Was your manager          How did his/her involvement, or lack of involvement, affect the
                                         involved in the                           effectiveness of this audit?
                                      following aspects of
                                           this audit?
                                                                  Very       Somewhat        Neither      Somewhat        Very
                                       Yes           No         positively   positively     positively    negatively    negatively
                                                                                               nor
                                                                                            negatively
                                        (1)          (2)            (3)          (4)           (5)           (6)           (7)
  a.   Selecting this corporate     55.0%         45.0%        20.0%         8.0%           70.4%         1.4%          0.2%
       tax return for audit                                    N=964
                          N=1,243
  b.   Identifying or selecting     8.5%          91.5%        13.0%         5.8%           79.9%         1.3%          0.0%
       issues for audit                                        N=784
                          N=1,245
  c.   Requesting out-of-district   3.3%          96.7%        7.0%          1.8%           89.1%         1.1%          1.0%
       audit work or assistance                                N=700
                         N=1,198
  d.   Requesting specialists       17.1%         82.9%        13.2%         9.3%           75.6%         1.0%          0.8%
                         N=1217                                N=785
  e.   Meeting with the taxpayer    16.6%         83.4%        15.4%         12.1%          70.3%         1.7%          0.4%
       to obtain requested                                     N=787
       information       N=1,249
  f.   Discussing complex or        45.6%         54.4%        23.8%         26.5%          46.3%         2.3%          1.1%
       technical issues with you                               N=942
                          N=1,252
  g.   Reviewing proposed           58.3%         41.7%        21.8%         26.5%          48.9%         1.6%          1.2%
       adjustments     N=1,252                                 N=1005
  h.   Resolving disputed issues    28.6%         71.4%        22.7%         8.8%           64.4%         3.1%          1.1%
       with the taxpayer N=1,228                               N=863
  i.   Preparing written response   6.1%          93.9%        11.1%         2.2%           85.1%         1.2%          0.5%
       to the taxpayer's protest                               N=709
                          N=1,189




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       VII. OTH ER AUDIT RE SOURCE S

       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)



                                           Were the following resources       If no , to what extent, if at all, did the lack of resource(s) negatively
                                                    adequate?                            affect your ability to develop identified issues?


                                            Yes        No         Not         Very         Great       Moderate        Some         Little       No
                                                                 needed       great        extent       extent         extent       extent      extent
                                                                              extent
                                            (1)         (2)        (3)         (4)          (5)           (6)            (7)         (8)          (9)
                                          92.2%      1.0%        6.8%         0.0%        0.0%        48.2%           0.0%         25.9%       25.9%
  a.     Travel funds for local travel                                        N=13
                             N=1,260
  b.     Travel funds for out-of-         6.9%       3.7%        89.4%        14.3%       9.6%        19.1%           5.2%         5.2%        46.7%
         district audit work N=1,252                                          N=34
  c.     Out-of-district assistance or    12.3%      3.6%        84.1%        5.2%        29.7%       12.7%           0.0%         0.0%        52.3%
         support audit         N=1,226                                        N=34
  d.     Computer equipment               66.8%      13.8%       19.3%        6.4%        22.0%       35.0%           14.1%        4.3%        18.3%
                          N=1,251                                             N=156
  e.     Computer software                56.0%      20.9%       23.2%        6.2%        20.5%       36.2%           8.4%         12.7%       16.1%
                              N=1,247                                         N=239
  f.     Research materials               72.4%      19.8%       7.8%         8.6%        37.9%       36.4%           8.6%         5.6%        2.9%
                              N=1,254                                         N=226
  g.     Audit aides                      17.0%      14.5%       68.5%        2.8%        15.6%       36.7%           21.1%        7.9%        15.9%
                              N=1,244                                         N=170
  f.     Other (Specify)                  1.6%       5.6%        92.7%        0.0%        27.0%       73.0%           0.0%         0.0%        0.0%
                           N=309                                              N=17
         ______________________




VIII.        INFORMAT IO N RE Q UE STE D F RO M T H E T AXP 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)


       1,234    Issued written information requests to the taxpayer or the taxpayer's representative

       983      Verbally requested information from the taxpayer or the taxpayer's representative

       249      Discussed obtaining third-party information with the taxpayer or the taxpayer's representative

       70       Discussed a summons with the taxpayer or the taxpayer's representative

       31       Issued a summons to the taxpayer or the taxpayer's representative

       55       Other (Specify) __________________________________________________________________________________



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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)



                                                   Very       Generally       Neither        Generally        Very            Not
                                                 satisfied    satisfied      satisfied      dissatisfied   dissatisfied     Applicable
                                                                                nor
                                                   (1)           (2)        dissatisfied        (4)            (5)             (6)
                                                                                (3)
  a.    That the information requested was       43.0%       44.7%          6.6%           4.4%            1.7%             0.0%
        obtainable by the taxpayer
                                   N=1,245
                                                                                                                          AAAA
                                                                                                                          AAAA AAAAAAAA
  b.    The timeliness of the taxpayer's         31.8%       39.6%          9.6%           13.1%           5.9%           AAAAAAAA
                                                                                                                               AAAAAAAA
                                                                                                                                    AAAA
                                                                                                                          AAAAAAAA
                                                                                                                               AAAAAAAA
        responses                  N=1,247                                                                                AAAA
                                                                                                                          AAAA AAAA
                                                                                                                                    AAAA
                                                                                                                                   AAAA
  c.    The completeness of the information      26.8%       46.8%          10.8%          10.4%           5.2%           AAAA
                                                                                                                          AAAAAAAA
                                                                                                                               AAAAAAAA
                                                                                                                                    AAAA
                                                                                                                          AAAAAAAA
                                                                                                                               AAAAAAAA
        provided by the taxpayer N=1,247                                                                                  AAAA
                                                                                                                          AAAA AAAA
                                                                                                                                    AAAA
                                                                                                                                   AAAA
  d.    The relevance of the information         30.3%       54.6%          9.8%           4.1%            1.2%           AAAA
                                                                                                                          AAAAAAAA
                                                                                                                               AAAAAAAA
                                                                                                                                    AAAA
                                                                                                                          AAAAAAAA
                                                                                                                               AAAAAAAA
        provided by the taxpayer N=1,245                                                                                  AAAA      AAAA
                                                                                                                          AAAAAAAAAAAA
  e.    The overall cooperation of the           42.3%       40.5%          7.3%           5.1%            4.8%           AAAA
                                                                                                                          AAAAAAAA
                                                                                                                               AAAA AAAA
                                                                                                                                    AAAA
                                                                                                                          AAAAAAAAAAAA
        taxpayer to provide information                                                                                   AAAAAAAAAAAA
                                                                                                                          AAAA      AAAA
                                                                                                                          AAAA AAAA
                                                                                                                               AAAA AAAA
                                    N=1,245
                                                                                                                          AAAAAAAAAAAA
  f.    The overall cooperation of the           23.2%       37.4%          11.0%          4.3%            4.1%             20.1%
        taxpayer's representative(s) to
        provide information           N=1,239

If you were not satisfied with any of the above, please explain why.

___________________________________________________________________________________________________________

___________________________________________________________________________________________________________

___________________________________________________________________________________________________________



27. Did you receive all of the information you requested from the taxpayer before the case closed out of Exam? (CHECK ONE
    BOX.)                                                                                                                 (67-68)


       84.5%   Yes

       13.4%   No    →      If no, did the missing information prevent you from proposing certain adjustments?
                                       (CHECK ONE BOX.)

                            9.9%    Yes

                            75.1%   No

                            15.0%   Don't know
                                    N=168
       2.1%    Don't know
               N=1,254




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IX. CAS E CL OSURE INFORMAT IO N



                                                                     30. How satisfied or dissatisfied were you with Exam's
28. How satisfied or dissatisfied were you with the length of            emphasis on attempting to obtain more agreements with
    time it took to complete this audit? (CHECK ONE BOX.)                taxpayers on proposed adjustments at the lowest level?
                                                          (69-70)
                                                                         (CHECK ONE BOX.)                                     (72-73)

    17.5%   Very satisfied                                               34.0%    Very satisfied

    46.0%   Generally satisfied                                          34.3%    Generally satisfied
                                                                         26.0%    Neither satisfied nor dissatisfied
    18.7%   Neither satisfied nor dissatisfied
                                                                         4.2%     Generally dissatisfied
    14.3%   Generally dissatisfied
                                                                         1.6%     Very dissatisfied
                                                                                  N=1,239
    3.5%    Very dissatisfied
                                                                         Please explain your dissatisfaction.
            N=1,250
    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                       21.1%    Taxpayer did not change their compliance
    BOX.)                                                                         behavior
                                                              (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)                                                        N=1,240

    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
            requests
    8.4%     Exam work took longer than anticipated
    15.5% Other (Specify)____________________________
          N=1,119
          _________________________________________




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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)



                                             Very great       Great       Moderate        Some           Little      No extent
                                               extent         extent       extent         extent         extent
                                                 (1)            (2)           (3)           (4)           (5)           (6)
        a.   Identify balance sheet and      36.5%          44.0%         13.9%         5.3%          0.3%           0.0%
             Schedule M issues
                                 N=1,236
        b.   Probe for unallowable           27.7%          43.1%         24.1%         2.6%          1.2%           1.3%
             expenses
                                N=1,238
        c.   Examine corporate tax           11.6%          16.7%         20.9%         6.7%          9.7%           34.5%
             returns in this taxpayer's
             industry             N=1,207
        d.   Examine corporation's books     34.5%          44.8%         15.6%         3.2%          1.5%           0.4%
             and records
                                N=1,233
        e.   Develop complex or              33.7%          40.8%         19.3%         4.1%          2.2%           0.0%
             technical issues
                               N=1,245
        f.   Adequately communicate          36.3%          49.5%         11.7%         1.6%          0.7%           0.1%
             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       36.9%          48.9%         9.4%          3.2%          0.7%           0.9%
             liability
                              N-=1,250
        h.   Other (Specify)                 27.5%          10.6%         10.6%         0.0%          16.8%          34.6%
                                N=79
             _______________________




    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.)
    ______________________________________________________________________________________________________
    ______________________________________________________________________________________________________
    ______________________________________________________________________________________________________
    _______________________________________________________________________________________________________




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X. T AXP AY ER'S P ROTE ST OF ADDIT IO NAL T AXE S RE CO MME NDE D B Y E XAM

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
    56.4%   No
                               → Skip to question 42.
    7.1%    Don't know
            N=1,251

34. Was a written response to the taxpayer's protest provided to Appeals? (CHECK ONE BOX.)                                        (85)


    74.3%   Yes
    12.1%   No
    12.1%   Don't know
    1.5%    Not applicable (no protest filed)
            N=451

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)



                                                                               Yes      No      Don't
                                                                                                know
                                                                                (1)     (2)      (3)
                                     a.   The interpretation of the law        86.4%   8.1%     5.5%
                                                                      N=438
                                     b.   The facts of the case                35.0%   54.9%    10.1%
                                                                       N=401
                                     c.   The Appeals settlement on a prior    8.7%    61.2%    30.0%
                                          case for this taxpayer    N=393
                                     d.   The Appeals settlement for a         15.0%   47.3%    37.7%
                                          different taxpayer         N=394
                                     e.   Other (Specify)                      60.2%   10.7%    29.1%
                                                                N=100
                                          _________________________

                                          _________________________
                                     f.   Other (Specify)                      11.4%   24.1%    64.5%
                                                                 N=44
                                          _________________________

                                          _________________________


36. In order to consider the relevant facts in this case, did you discuss the disputed issues with Appeals? (CHECK ONE BOX.)
                                                                                                                                  (92)
    59.2%   Yes
    33.1%   No                    N=448
    7.6%    Don't know




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37. Did Appeals ask you about any of the following: (CHECK ONE BOX IN EACH ROW.)                                                               (93-98)



                                                                                       Yes               No               Don't
                                                                                                                        remember
                                                                                        (1)              (2)               (3)
           a.   The facts relevant to the disputed issue(s)           N=448      49.0%               39.9%              11.0%
           b.   Your legal position on the disputed issue(s)          N=444      41.8%               47.4%              10.7%
           c.   Records provided to Appeals by the taxpayer           N=443      17.1%               68.0%              15.0%
           d.   Information in the unagreed report, 90-day letter, or the        36.3%               47.5%              16.2%
                written response to the protest                      N=440
           e.   Alternative positions proposed by the taxpayer during            16.4%               64.2%              19.4%
                appeal                                              N=443
           f.   Other (Specify)                                          N=75    45.6%               38.3%              16.2%
                _________________________________________


                                                                                                                                   Repeat I D - 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)



                                              Did you learn        If yes, to what extent, if at all, did this feedback on Appeals final
                                              about Appeals             resolution help you understand how Appeals resolved the
                                            final resolution in                               disputed issues?
                                               the following
                                                   ways?

                                              Yes         No         Very        Great        Moderate         Some       Little      No
                                                                    great        extent        extent          extent     extent     extent
                                                                    extent
                                              (1)         (2)         (3)         (4)           (5)             (6)         (7)         (8)
  a.   Exam contacted Appeals to           10.8%        89.2%      25.3%        0.0%          15.3%            5.3%       15.3%     38.8%
       obtain the final resolution                                 N=33
                                  N=385
  b.   Appeals provided Exam the           61.0%        39.0%      22.2%        33.1%         20.7%            10.7%      1.6%      11.7%
       Appeals Case Memorandum or                                  N=218
       supporting statement   N=405
  c.   Appeals contacted Exam after        20.5%        79.5%      18.3%        34.9%         24.9%            14.4%      5.0%      2.5%
       they resolved the disputed                                  N=70
       issues                   N=376
  d.   The taxpayer told Exam N=366        6.5%         93.5%      91.5%        0.0%          0.0%             8.5%       0.0%      0.0%
                                                                   N=20
  e.   Other (Specify)                     69.3%        30.7%      42.3%        0.0%          0.0%             15.9%      0.0%      41.8%
                                  N=78                             N=38




                                   If you did not receive any feedback on Appeals' final resolution of this
                                                       audit, please skip to question 42




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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.)                              (18-19)




                                                Very great     Great extent     Moderate        Some             Little       No
                                                  extent                         extent         extent           extent      extent

                                                   (1)             (2)             (3)            (4)             (5)          (6)

        a.      Potential issues dropped        3.1%           8.6%             6.0%           7.4%            7.8%         67.2%
                on cases in-process N=367

        b.      Issues not raised on future     6.0%           10.0%            5.7%           13.8%           7.2%         57.3%
                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.)                                                                                                                             (20-21)



                                                  Very great     Great extent      Moderate           Some        Little     No extent
                                                    extent                          extent            extent      extent

                                                       (1)             (2)               (3)            (4)           (5)       (6)

           a.    Similar issues on future         25.6%          35.5%            10.5%           10.0%         4.4%         14.1%
                 audits for the same
                 taxpayer             N=369

           b.    Similar issues for different     14.5%          30.6%            19.5%           13.9%         5.2%         16.3%
                 taxpayers             N=374




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.)                                                                           (22-23)




    9.1%        Excellent

    25.2%       Good

    32.4%       Adequate

    18.4% Poor

    14.9%   Very poor
            N=361
    If you believe the quality of Appeals' resolutions are poor or very poor, please explain your response.

    ______________________________________________________________________________________________________

    ______________________________________________________________________________________________________

    ______________________________________________________________________________________________________

    ______________________________________________________________________________________________________




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VII.        G ENE RAL Q UE STIO NS AND CO MME NT S

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.)                                                (24-30)




                                                    Very       Somewhat        Neither       Somewhat        Very          Don't
                                                  positively   positively     positively     negatively    negatively      know
                                                                                 nor
                                                                              negatively
                                                     (1)          (2)            (3)             (4)           (5)          (6)
       a.     The revenue agent's workload        13.0%        13.1%         39.7%          28.2%          3.5%           2.5%
                                     N=1,257
       b.     The revenue agent's group/case      7.2%         7.6%          60.8%          15.9%          0.8%           7.7%
              manager's workload      N=1,257
       c.     The revenue agent's skills and      57.9%        25.6%         7.1%           7.0%           1.6%           0.9%
              knowledge                N=1,253
       d.     The complexity of the tax laws      16.3%        21.6%         14.4%          33.3%          12.9%          1.5%
                                      N=1,250
       e.     Appeals resolution of disputed      8.6%         8.2%          23.2%          20.5%          14.2%          25.3%
              issues from a prior audit of this
              taxpayer                 N=1,214
       f.     Appeals resolution of disputed      3.8%         10.7%         24.4%          26.5%          13.2%          21.4%
              issues from a different taxpayer
                                        N=1,217
       g.     Other (Specify)                     15.6%        2.7%          18.7%          2.8%           21.2%          39.0%
                                   N=174
              ________________________




43. In your opinion, to what extent, if at all, do audits of large corporations unreasonably burden those taxpayers selected for audit?
    (CHECK ONE BOX.)                                                                                                                  (31)




       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




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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.




                                                                19




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Appendix III

Group Manager Questionnaire Results




                                                    U.S. General Accounting Office

                                                    IRS' Audits of Large Corporations -
                                                    Group/Case Manager Questionnaire


                                                                                                                                                Case ID - 1 (1-7)


               INTRODUCTION                                                        I.    RE SPONDE NT INFORMAT IO N

               The U.S. General Accounting Office (GAO), an agency of                    Please provide us your current work telephone number to
               Congress, is conducting a study of IRS' audits of corporations            assist us if we need to clarify a response:
               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                Do you currently have corporate income tax returns
               corporate returns get assessed. We are surveying a random                 (activity codes 219 to 225) in your inventory?
               sample of group or case managers who are currently
               responsible for these large corporate audits.
                                                                                         1.             Yes →        Please continue with the questions.
               You have been selected to complete this questionnaire due to
               your involvement with these audits of large corporations.                 2.             No →         STOP: Do not continue if you do
               Your response to this questionnaire will help us to identify the                                      not currently have these corporate
               factors that affect these audits, both positively and negatively.                                     tax returns in your inventory.
               We cannot develop meaningful information without your frank                                           Please return the questionnaire in
               and honest answers to the questions.                                                                  the enclosed envelope.

               GAO will safeguard the privacy of your responses to this
               questionnaire. They will be combined with those of other            1.    Please answer the following as it applies to you :
               respondents and will be reported only in summary form. The                 (ENTER "00" IF NONE OR UNDER 6 MONTHS.)
               control number is included only to aid us in our follow-up                                                                                   (8-17)
               efforts.                                                                 a. Total number of years of IRS experience
                                                                                           in the Examination Division . . . . . . . . . . 20.8            Years
               This questionnaire should take about 45 minutes to complete.                                                                               N=506
               If you have any questions concerning any part of this survey,            b. Number of years auditing corporations
               please call Mr. Kirk Boyer at (913) 384-7570.                               with assets of $10 million or more
                                                                                           (activity codes 219 to 225) that are
               Please return the completed questionnaire in the enclosed pre-              not in CEP . . . . . . . . . . . . . . . . . . . . . .   5.5    Years
               addressed envelope within 2 weeks from the time you receive                                                                                N=506
               it. In the event the envelope is misplaced, the return address           c. Number of years as a group manager
               is:                                                                         over these corporate audits (activity
                                                                                           codes 219 to 225) that are not in CEP . . . 7.5                 Years
                     U.S. General Accounting Office                                                                                                       N=506
                     Kansas City Regional Office                                        d. Number of years auditing CEP
                     Attn: Mr. Kirk Boyer                                                  corporations . . . . . . . . . . . . . . . . . . . . .   2.2    Years
                     5799 Broadmoor - Suite 600                                                                                                           N=503
                     Mission, Kansas 66202                                              e. Total number of years of non-IRS
                                                                                           experience in accounting or auditing               . . . 1.5    Years
               Thank you for your assistance.                                                                                                             N=500




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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                      28.7         Number of corporate income tax returns
               auditors)
                                                                                               N=464
      4.8%     Specialized General Program group targeted
               toward large corporate audits

      14.4%    CEP group

      13.8%    Other (Specify) ___________________________
               N=503


II.     F ACT O RS RE L AT E D T O AUDIT S
        OF L ARG E CO RPORAT IO NS

4. To what extent, if at all, are you currently involved in the following on audits of large corporations?              (CHECK ONE BOX
   IN EACH ROW.)                                                                                                                           (22-33)



                                                                          Very       Great        Moderate     Some     Little     No
                                                                          great      extent        extent      extent   extent    extent
                                                                         extent
                                                                           (1)           (2)           (3)      (4)      (5)       (6)
        a. Selecting corporate returns to audit                      12.6%          27.5%         22.2%        16.2%    14.4%    7.2%
                                                       N=503
        b. Identifying or selecting issues for audit                 3.0%           13.1%         36.3%        20.2%    19.0%    8.3%
                                                       N=506
        c. Requesting out-of-district audit work or                  3.0%           8.5%          9.1%         20.6%    23.6%    35.2%
           assistance
                                                       N=497
        d. Requesting specialists                                    6.0%           21.0%         21.0%        31.1%    14.4%    6.6%
                                                       N=503
        e. Discussing complex or technical issues with the           17.9%          33.3%         31.0%        15.5%    1.8%     0.6%
           revenue agent                             N=506
        f. Improving the taxpayer's timeliness and/or                11.3%          22.6%         32.7%        16.1%    13.1%    4.2%
           completeness in responding to information
           requests                                   N=506
        g. Reviewing proposed adjustments                            13.7%          42.3%         26.8%        10.7%    4.2%     2.4%
                                                       N=506
        h. Discussing proposed adjustments with the                  7.2%           15.0%         31.1%        20.4%    18.0%    8.4%
           taxpayer during interim meetings         N=503
        i. Discussing proposed adjustments with the                  11.5%          25.5%         29.1%        21.2%    7.3%     5.5%
           taxpayer at the closing conference       N=497
        j. Discussing unagreed issues with the revenue               25.7%          42.5%         22.8%        7.8%     0.6%     0.6%
           agent                                     N=503
        k. Developing an unagreed case (such as the agent's          6.0%           19.8%         26.9%        15.0%    22.2%    10.2%
           report, statutory notice letter, or written response
           to the taxpayer's protest)                     N=503
        l. Discussing unagreed issues with Appeals                   3.6%           10.8%         19.8%        18.0%    25.7%    22.2%
                                                       N=503



                                                                          2




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                Appendix III
                Group Manager Questionnaire Results




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)



                                                     Very           Generally       Neither        Generally        Very
                                                   satisfied        satisfied    satisfied nor    dissatisfied   dissatisfied
                                                                                  dissatisfied
                                                     (1)               (2)             (3)              (4)          (5)
    a. Length of these audits                   4.2%            45.2%            20.2%           26.8%           3.6%
                                      N=506
    b. Thoroughness of these audits             12.5%           66.7%            15.5%           4.8%            0.6%
                                      N=506
    c. Any out-of-district audit work or        0.0%            19.7%            63.7%           12.7%           3.8%
       assistance                     N=473
    d. Extent to which other IRS staff          3.6%            56.6%            25.3%           13.3%           1.2%
       (including specialists) adequately
       developed the issues            N=500
    e. Timeliness of taxpayers' responses to    1.2%            38.1%            22.6%           36.3%           1.8%
       information requests           N=506
    f. Cooperation of taxpayers to provide      1.2%            45.8%            26.8%           24.4%           1.8%
       information                   N=506
    g. Cooperation of taxpayers'                0.6%            43.5%            20.2%           32.7%           3.0%
       representatives to provide information
                                       N=506
    h. Overall level of cooperation of          1.8%            51.2%            26.2%           19.0%           1.8%
       taxpayers                       N=506
    i. Overall level of cooperation of          0.6%            44.0%            26.2%           27.4%           1.8%
       taxpayers' representatives      N=506
    k. Corporate taxpayers' compliance with     0.0%            41.9%            37.7%           19.8%           0.6%
       the tax laws                  N=503
    l. Other (Specify)                 N=15     0.0%            0.0%             20.0%           40.0%           40.0%




                                                                3




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                Group Manager Questionnaire Results




III.   RE SOURCE S US ED T O AUDIT
       L ARG E CO RPORAT IO NS

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)



                                                                 90-100%    60-89%      40-59%         10-       Less
                                                                  of the     of the      of the       39%        than
                                                                   time       time        time       of the     10% of
                                                                                                      time     the time
                                                                     (1)      (2)         (3)          (4)        (5)
       a. Contact the industry coordinator or specialist to      20.5%     27.1%       22.9%        17.5%     12.0%
          discuss any issue related to this taxpayers primary
          industry                                      N=500
       b. Obtain a position paper on an issue                    16.9%     12.0%       13.9%        30.1%     27.1%
                                                       N=500
       c. Contact the market segment coordinator to discuss      9.1%      18.8%       19.4%        30.3%     22.4%
          any issue                                  N=497
       d. Obtain or review the market segment audit guide        17.7%     22.0%       14.6%        25.0%     20.7%
                                                     N=494
       e. Review a District Office memorandum discussing         14.5%     16.3%       18.7%        25.9%     24.7%
          an issue related to this taxpayer's primary industry
                                                        N=500
       f. Contact revenue agents or group managers in other      9.0%      17.5%       18.7%        28.3%     26.5%
          districts on specialized industries/issues N=500
       g. Other (Specify)                                        16.7%     33.3%       33.3%        0.0%      16.7%
                                               N=18
          __________________________________________

          __________________________________________




                                                                 4




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                Appendix III
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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)



                                                  Very          Generally        Neither        Generally         Very
                                                 satisfied       satisfied      satisfied      dissatisfied    dissatisfied
                                                                                   nor
                                                                               dissatisfied
                                                    (1)              (2)           (3)             (4)             (5)
         a. Identifying income issues          35.9%           49.7%           10.2%           3.6%            0.6%
                                   N=503
         b. Probing for unallowable            42.8%           51.2%           4.2%            1.2%            0.6%
            expenses              N=500
         c. Applying the tax laws to           46.7%           44.9%           5.4%            2.4%            0.6%
            corporate tax returns
                                   N=503
         d. Examining corporate tax            32.9%           50.9%           13.8%           1.8%            0.6%
            returns in various industries
                                    N=503
         e. Examining the corporation's        40.1%           49.7%           7.8%            1.8%            0.6%
            books and records     N=503
         f. Developing complex or              37.7%           47.9%           9.6%            3.6%            1.2%
            technical issues     N=503
         g Determining when to request         41.0%           42.2%           16.3%           0.0%            0.6%
           the services of a specialist
                                   N=500
         h. Determining when to request        28.7%           47.3%           21.6%           1.8%            0.6%
            legal assistance from District
            Counsel or national office
                                   N=503
         i. Securing taxpayer agreement        30.5%           54.5%           12.0%           2.4%            0.6%
            on audit issues       N=503
         j. Computing corporate tax            53.0%           43.4%           3.0%            0.0%            0.6%
            liability             N=500
         k. Other (Specify)                    16.7%           0.0%            33.3%           33.3%           16.7%
                                      N=18




                                                                 5




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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)




                                        Very         Great      Moderate     Some       Little       No
                                        great        extent      extent      extent     extent     extent
                                       extent
                                         (1)          (2)            (3)       (4)       (5)         (6)
      a.     Travel funds for         36.3%        42.9%        14.3%        5.4%      1.2%       0.0%
             local travel  N=506
      b.     Travel funds for out-    7.4%         6.7%         16.6%        17.8%     22.7%      28.8%
             of- district audit
             work          N=491
      c.     Out-of-district          1.9%         7.4%         22.2%        28.4%     23.5%      16.7%
             assistance or support
             audit           N=488
      d.     Computer equipment       3.6%         28.1%        32.3%        25.1%     9.6%       1.2%
                          N=503
      e.     Computer software        3.0%         21.4%        28.6%        23.2%     22.6%      1.2%
                          N=506
      f. Research materials           4.8%         30.4%        33.9%        21.4%     8.3%       1.2%
                          N=506
      g. Audit aides                  1.8%         11.3%        20.2%        15.5%     20.2%      31.0%
                            N=506
      f. Other (Specify)              20.0%        0.0%         0.0%         0.0%      40.0%      40.0%
                             N=15




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

                    _________________________________________________________________________________

                    _________________________________________________________________________________

     44.1%   No

             N=485




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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)

                                          90-100%        60-89%       40-59%      10-39%       Less than
                                           of the         of the       of the     of the        10% of
                                            time           time         time       time        the time
                                             (1)            (2)          (3)        (4)           (5)
                                       AAAA
                                       AAAAAAAA
                                                AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
                                       AAAAAAAA
                                                AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
                                       AAAAAAAA
                                            AAAAAAAA
                                                AAAAAAAAAAAA
                                                     AAAA
                                                          AAAAAAAA
      L egal assistance:                                          AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
                                                              AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAA
      a.   District Counsel              7.1%          17.9%         11.9%        28.6%       34.5%
           assistance
                               N=506
      b.   National office technical     0.6%          7.7%          12.5%        23.8%       55.4%
           advice
                              N=506
      c.   National office Chief         0.6%          6.0%          8.4%         20.4%       64.7%
           Counsel assistance other
           than technical advice
                              N=503
                                       AAAA
                                       AAAAAAAA
                                            AAAA
                                                 AAAA
                                                 AAAAAAAA
                                                      AAAAAAAA
                                                          AAAA
                                                               AAAA
                                                               AAAAAAAA
                                                                   AAAAAAAA
                                                                        AAAA
                                                                             AAA
                                                                             AAAAAAA
                                                                                AAAAAAAA
                                                                                     AAAA
                                                                                          AA
                                                                                          AAAAAA
                                                                                            AAAAAAAA
                                                                                                 AAAA
                                                                                                      AAAA
                                                                                                      AAAA
      Specialist assistance:           AAAA AAAAAAAA
                                       AAAAAAAAAAAAAAAA
                                                          AAAAAAAA
                                                      AAAAAAAAAAAAAAAA
                                                                        AAAAAAA
                                                                   AAAAAAAAAAAAAAA
                                                                                     AAAAAA
                                                                                AAAAAAAAAAAAAA
                                                                                                 AAAAAAAA
                                                                                            AAAAAAAAAAAA
      d.   Computer audit specialist     22.8%         20.4%         16.2%        18.0%       22.8%
                             N=503
      e.   Engineer                      15.6%         22.8%         28.1%        26.9%       6.6%
                               N=503
      f.   International examiner        12.5%         23.2%         21.4%        23.2%       19.6%
                              N=506
      g.   Economist                     1.2%          4.2%          13.1%        19.0%       62.5%
                               N=506
      h.   Financial products            5.4%          6.6%          10.8%        17.5%       59.6%
           specialists        N=500
      i.   Other (Specify)               0.0%          16.7%         5.6%         16.7%       61.1%
                               N=54
                                       AAAA
                                       AAAAAAAA
                                            AAAA AAAAAAAA AAAAAAAAAAAAAAAAAAA AAAAAAAAAA AAAAAAAAAAAA
                                       AAAA AAAAAAAA
                                                 AAAAAAAAAAAA
                                                          AAAAAAAA
                                                              AAAAAAAAAAAA
                                                                      AAAAAAA
                                                                           AAAAAAAAAAA
                                                                                  AAAAAA
                                                                                       AAAAAAAAAA
                                                                                             AAAAAAAA
                                       AAAAAAAAAAAAAAAA
                                                     AAAAAAAAAAAAAAAA
                                                                  AAAAAAAAAAAAAAA
                                                                              AAAAAAAAAAAAAA
      Other assistance:                                                                           AAAA
                                                                                         AAAAAAAAAAAA
      j.   Additional revenue agents     5.6%          11.3%         13.8%        24.4%       45.0%
                             N=482
      k.   Discussions with Appeals      0.0%          4.2%          7.9%         27.3%       60.6%
           while the audit is open
                               N=497




    If you checked box 4 or 5 (10-39% or Less than 10%) anywhere in the above matrix, please explain your response.

    ______________________________________________________________________________________________________

    ______________________________________________________________________________________________________

    ______________________________________________________________________________________________________

    ______________________________________________________________________________________________________

    ______________________________________________________________________________________________________




                                                                7




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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)


    9.6%     Very positively

    50.0% Somewhat positively

    31.3% Neither positively nor negatively

    7.8%     Somewhat negatively

    1.2%     Very negatively

             N=500

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)



                                         Very          Great         Moderate         Some           Little     No basis
                                         great        extent          extent          extent        or no          to
                                        extent                                                      extent       judge
                                          (1)          (2)             (3)             (4)            (5)         (6)
                                     AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
                                     AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
      L egal assistance:             AAAA
                                     AAAAAAAA
                                          AAAAAA
                                              AAAAAA
                                                AAAAAAAA
                                                     AAAAAAAA
                                                         AAAAAAAA
                                                             AAAAAAAA AAAAAA
                                                                  AAAAAAAA AAAAAA
                                                                             AAAAAAAA
                                                                                  AAAAAAAA
                                                                                      AAAAAAAA AAAAAAA
                                                                                          AAAAAAAA AAAAAAA
                                                                                                      AAAAAAAA
                                                                                                           AAAAAAA
                                                                                                               AAA
      a.   District Counsel           11.9%        31.5%          25.0%            11.9%          7.7%          11.9%
           assistance       N=506
      b.   National office            7.1%         28.0%          19.0%            19.0%          8.3%          18.5%
           technical advice N=506
      c.   National office Chief      6.0%         18.5%          19.0%            16.1%          11.9%         28.6%
           Counsel assistance
           other than technical
           advice           N=506
                                     AAAA
                                     AAAAAAAA
                                          AAAA AAAAAA AAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAA AAAAAAAAAAA AAAAAAAAAAA
                                                                                                               AAA
                                     AAAA AAAAAA
                                               AAAAAAAAAA
                                                      AAAAAAAA
                                                          AAAAAAAAAAAA
                                                                  AAAAAAAA
                                                                       AAAAAA
                                                                           AAAAAAAAAA
                                                                                 AAAAAAAA
                                                                                      AAAAAAAAAAAA
                                                                                              AAAAAAA
                                                                                                   AAAAAAAAAAA
                                     AAAAAAAAAAAAAA
                                                 AAAAAAAAAAAAAAAA
                                                              AAAAAAAAAAAAAAAAAA
                                                                             AAAAAAAAAAAAAAAA
                                                                                          AAAAAAAAAAAAAAA
      Specialist assistance:                                                                              AAAAAAA
                                                                                                      AAAAAAAAAAA
      d.   Computer audit             7.2%         26.9%          29.3%            18.0%          9.0%          9.6%
           specialist     N=503
      e.   Engineer                   6.6%         38.3%          31.7%            15.6%          4.8%          3.0%
                             N=503
      f.   International examiner     7.8%         40.1%          25.1%            11.4%          5.4%          10.2%
                            N=503
      g.   Economist                  3.0%         15.1%          18.1%            15.1%          10.8%         38.0%
                             N=500
      h.   Financial products         4.8%         16.8%          17.4%            10.8%          7.2%          43.1%
           specialists      N=503
      i.   Other (Specify)            12.5%        6.3%           12.5%            0.0%           6.3%          62.5%
                          N=48
           __________________
                                     AAAA AAAA
                                          AAAAAA
                                               AAAAAA
                                                 AAAAAAAA
                                                      AAAAAAAA
                                                          AAAAAAAA
                                                              AAAAAAAA
                                                                   AAAAAAAA
                                                                            AAAAAA
                                                                              AAAAAAAA
                                                                                   AAAAAAAA
                                                                                       AAAAAAAA
                                                                                           AAAAAAAA
                                                                                                     AAAAAAA
                                                                                                        AAAAAAAA
                                                                                                                 AAA
                                     AAAA                              AAAA
                                                                       AAAAAA
                                                                                                AAAA
                                                                                                AAAAAAA
                                                                                                             AAAAAAA
                                     AAAA
                                     AAAAAAAA
                                          AAAAAA
                                               AAAAAA
                                                 AAAAAAAA
                                                      AAAAAAAA
                                                          AAAAAAAA
                                                              AAAAAAAA      AA
                                                                            AAAAAA
                                                                              AAAAAAAA
                                                                                   AAAAAAAA
                                                                                       AAAAAAAA
                                                                                                     AAA
                                                                                                     AAAAAAA
                                                                                                        AAAAAAAA
                                                                                                             AAAAAAA
      Other assistance:
                                                                   AAAAAAAA                AAAAAAAA              AAA
      j.   Additional revenue         6.1%         24.2%          21.8%            16.4%          11.5%         20.0%
           agents          N=497
      k.   Discussions with           3.0%         10.1%          20.8%            20.2%          18.5%         27.4%
           Appeals while the audit
           is open          N=506




                                                                 8




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IV. CAS E CL OSURE INFORMAT IO N

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

             N=503

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)


    29.3%    Very satisfied

    37.7%    Generally satisfied

    25.7%    Neither satisfied nor dissatisfied

    6.6%     Generally dissatisfied           →
                                                                        Please explain your dissatisfaction:
    0.6%     Very dissatisfied                →

             N=503
                                             ____________________________________________________

                                             ____________________________________________________

                                             ____________________________________________________



                                                                                                                         Repeat ID - 2 (1-7)




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




                                                                 9




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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

             N=467


V. E XAM'S INT E RACT IO N W IT H AP P EAL S

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)


    17.3%    90-100% of the time

    20.2%    60-89% of the time                               If Appeals returns cases 40% or more of the time, how often,
                                                              has Exam requested this or similar information from the taxpayers
    10.1%    40-59% of the time                               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
    --------------------------
                                                                         9.2%     40-59% of the time
    28.6% Do not know
                                                                         0.0%     10-39% of the time
             N=506
                                                                         2.6%      Less than 10% of the time
                                                                         --------------------------

                                                                         13.2%    Do not know

                                                                                  N=229




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


                                                                 10




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19. How often, if at all, do you or your revenue agents discuss the following with Appeals?   (CHECK ONE BOX IN EACH
    ROW.)
                                                                                                                      (13-18)



                                             90-100%      60-89%      40-59%       10-39%      Less than     No
                                              of the       of the      of the       of the      10% of     basis to
                                               time         time        time         time      the time     judge
                                                (1)          (2)         (3)          (4)         (5)         (6)
        a.   The facts relevant to the      11.3%        10.7%        9.5%        18.5%        26.8%       23.2%
             protest                N=506
        b.   Legal position cited by the    8.9%         10.1%        8.3%        21.4%        27.4%       23.8%
             revenue agent          N=506
        c.   Records provided to Appeals    10.2%        9.0%         10.2%       17.4%        25.1%       28.1%
             by the taxpayer      N=503
        d.   Information in the unagreed    10.7%        10.1%        10.7%       16.7%        28.0%       23.8%
             report (i.e., RAR) or the
             written response to the
             protest                N=506
        e.   Alternative positions          6.5%         8.9%         6.5%        17.9%        28.6%       31.5%
             considered by Appeals to
             resolve disputed issues
                                    N=506
        f.   Other (Specify)                12.5%        0.0%         0.0%        6.3%         0.0%        81.2%
                                    N=48
             __________________




                                                                11




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     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)



                             How often, if at all, do you obtain the following        To what extent, if at all, did these types of feedback on
                             feedback on Appeals' final resolution of disputed         Appeals final resolution help Exam understand how
                                                   issues?                                    Appeals resolved the disputed issues?

                              90-       60-       40-     10-39%      Less than      Very     Great     Moderate      Some        Little      Not
                            100%       89%       59%       of the       10%          great    extent     extent       extent      or no      appli-
Feedback by...              of the    of the    of the      time       of the       extent                                        extent     cable
                             time      time      time        (4)        time
                              (1)       (2)       (3)                    (5)          (1)       (2)         (3)         (4)        (5)          (6)
a.    Exam contacting       4.3%      7.5%      9.9%      16.8%       61.5%         3.8%      16.7%     16.0%         16.0%     21.2%       26.3%
      Appeals to obtain                                                             N=470
      the final
      resolution N=485
b.    Appeals               27.5%     21.9%     13.7%     14.4%       22.5%         7.0%      22.8%     26.6%         20.9%     15.8%       7.0%
      providing Exam                                                                N=476
      the Appeals Case
      Memorandum or
      supporting
      statement N=482
c.    The Appeals           3.1%      5.6%      5.6%      13.8%       71.9%         5.7%      16.5%     15.2%         11.4%     22.2%       29.1%
      officer contacting                                                            N=476
      Exam after they
      resolved the
      disputed issues
                  N=482
d.    The taxpayer          1.9%      3.8%      5.0%      16.3%       73.1%         0.6%      5.1%      8.2%          13.9%     31.6%       40.5%
      telling Exam of                                                               N=476
      the final
      resolution N=482
e     Other (Specify)       0.0%      0.0%      0.0%      0.0%        100%          0.0%      0.0%      0.0%          25.0%     25.0%       50.0%
                  N=12                                                              N=12
      ______________




     VI. APPEALS RESOLUTION
         OF DISPUTED ISSUES

     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.)                                                                                      (29-31)




                                                           Very       Somewhat         Neither         Somewhat        Very            No
                                                         positively   positively      positively       negatively    negatively      basis to
                                                                                         nor                                          judge
                                                            (1)             (2)       negatively           (4)           (5)            (6)
                                                                                         (3)
           a.   Level   of cooperation between           2.5%         11.0%         30.1%              35.6%         9.8%            11.0%
                Exam    and Appeals          N=491
           b.   Level   of cooperation between           1.2%         9.8%          26.4%              36.8%         16.0%           9.8%
                Exam    and the taxpayer     N=491
           c.   Level   of taxpayer compliance           1.2%         8.6%          18.4%              38.0%         20.9%           12.9%
                                             N=491

                                                                       12




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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)




                                          Very great      Great extent      Moderate        Some             Little        No
                                           extent                            extent         extent           extent       extent

                                              (1)              (2)             (3)            (4)              (5)          (6)

     a.   Potential issues dropped        5.5%            20.7%           22.0%          26.8%           13.4%          11.6%
          on cases in-process N=494

     b.   Issues not raised on future     9.7%            26.1%           21.2%          20.6%           12.7%          9.7%
          audits               N=497




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)




                                           Very great     Great extent       Moderate        Some            Little        No
                                             extent                           extent         extent          extent       extent

                                               (1)             (2)              (3)            (4)            (5)          (6)

     a.   Similar issues on future        14.5%           32.7%            25.5%           17.0%         5.5%          4.8%
          audits for the same
          taxpayer              N=497

     b.   Similar issues for different    8.5%            26.1%            32.1%           19.4%         9.1%          4.8%
          taxpayers              N=497




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.)                                                                              (36-37




                                          Very great      Great extent      Moderate       Some          Little           No
                                           extent                            extent        extent        extent          extent

                                              (1)              (2)             (3)          (4)            (5)             (6)

     a.   Fair and impartial to the       12.7%           31.6%           33.5%          12.7%        4.4%             5.1%
          taxpayer
                               N=476

     b.   Fair and impartial to the       1.9%            10.8%           32.9%          27.8%        19.6%            7.0%
          government
                               N=476




                                                                     13




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                   Appendix III
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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)


       0.6%     Excellent

       17.4% Good

       59.0%    Adequate

       18.0% Poor

       5.0%     Very poor

               N=485
       If you believe the quality of Appeals' resolutions are poor or very poor , please explain your response.

       ______________________________________________________________________________________________________

       ______________________________________________________________________________________________________

       ______________________________________________________________________________________________________

       ______________________________________________________________________________________________________




VII.         G ENE RAL Q UE STIO NS AND
             ANY DISTRICT OFFICE CH ANG 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)



                                                 Very       Somewhat        Neither      Somewhat        Very         Don't
                                               positively   positively     positively    negatively    negatively     know
                                                                              nor
                                                                          negatively
                                                  (1)           (2)           (3)            (4)          (5)          (6)
        a.    Your workload                    1.2%         10.2%        58.4%           19.3%         5.4%         5.4%
                                       N=500
        b.    Revenue agent's workload         3.6%         17.6%        50.3%           21.8%         1.8%         4.8%
                                       N=497
        c.    Revenue agent's skills and       41.9%        32.3%        7.2%            12.0%         4.2%         2.4%
              knowledge                N=503
        d.    Complexity of the tax laws       9.6%         14.5%        17.5%           40.4%         15.1%        3.0%
                                       N=500
        e.    Appeals resolution of disputed   4.2%         7.8%         21.7%           39.8%         16.9%        9.6%
              issues from a prior audit of
              this taxpayer            N=500
        f.    Appeals resolution of disputed   1.8%         6.6%         36.1%           35.5%         5.4%         14.5%
              issues from a different
              taxpayer                 N=500
        g.    Other (Specify)                  0.0%         0.0%         16.7%           0.0%          16.7%        66.7%
                                        N=18
              ________________________




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27. 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)


    0.6%     Very great extent

    4.8%     Great extent

    29.9% Moderate extent

    36.5% Some extent

    28.1% Little or no extent

             N=503




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)


     13.7%         Yes

     38.1%         No

     48.2%         Don't know

                   N=506




                                                                 15




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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)

                                                   If yes, what impact will this    Please use this space to describe the change(s).
        Has your district implemented the          change have on the amount
     following or does it plan to in the future?    of dollars recommended by
                                                          revenue agents?               (Attach additional pages if necessary.)
                                                                (2)
                     (1)                                                                                  (3)
a. Method for selecting
   returns for audit
                              54.7%    Yes    → 68.6% Positive impact
                                                3.5%  No impact
                              45.3%    No
                                                2.3%  Negative impact
                                          N=479 25.6% Don' know
                                                                    N=259
b. Assigning more
   revenue agents to
                              26.8%    Yes    → 75.6% Positive impact
                                                2.4%  No impact
                              73.2%    No
   these audits                                 4.9%  Negative impact
                                          N=473 17.1% Don't know
                                                                    N=123
c. Having revenue
   agents specialize in
                              82.1% Yes      →  66.9% Positive impact
                                                7.7%  No impact
                              17.9% No
   an industry                                  1.5%  Negative impact
                                          N=488 23.8% Don't know
                                                                    N=391
d. Placing all revenue
   agents for these
                              27.3%    Yes    → 69.0% Positive impact
                                                2.4%  No impact
                              72.7%    No
   audits in one group                          2.4%  Negative impact
                                          N=485 26.2% Don't know
                                                                    N=126
e. Requesting or using
   legal assistance or
                              41.7%    Yes    → 78.0% Positive impact
                                                6.8%  No impact
                              58.3%    No
   technical advice                             3.4%  Negative impact
                                          N=470 11.9% Don't know
                                                                    N=178
f. Involving specialists
   in more of these
                              41.6%    Yes    → 74.2% Positive impact
                                                4.8%  No impact
                              58.4%    No
   audits                                       3.2%  Negative impact
                                          N=464 17.7% Don't know
                                                                    N=187
g     Issuing summons for 36.9%
      information
                                       Yes    → 66.0% Positive impact
                                                5.7%  No impact
                          63.1%        No
                                                5.7%  Negative impact
                                          N=473 22.6% Don't know
                                                                    N=160
h. Securing agreement
   with corporate
                              46.1%    Yes    →80.6% Positive impact
                                               11.1% No impact
                              53.2%    No
   taxpayers on                                0.0%  Negative impact
   proposed audit                        N=470 8.3%  Don't know
   adjustments                                                     N=217
i. Increasing                 55.6%    Yes → 72.1% Positive impact
   management                 44.4%    No      14.0% No impact
   involvement                                 2.3%  Negative impact
                                         N=482 11.6% Don't know
                                                                   N=259
j.    Submitting proposals 17.2%       Yes → 56.0% Positive impact
      to clarify vague and 82.8%       No      12.0% No impact
      complex tax laws                         0.0%  Negative impact
                                         N=455 32.0% Don't know
                                                                     N=75
k. Other (Specify)            37.5%    Yes    →   33.3% Positive impact
                                                  0.0%  No impact
                              62.5%    No
      _____________                               33.3% Negative impact
                                             N=24 33.3% Don't know
      _____________                                                         N=9




                                                                  16




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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.



2



                                                               17




               Page 70                                                        GAO/GGD-97-62 Audits of Large Corporations
Appendix IV

Appeals Officer Questionnaire Results




                                                   U.S. General Accounting Office

                                                   IRS' Audits of Large Corporations -
                                                   Appeals Officer Questionnaire

                                                                                              3

                                                                                                                                    Case ID - 1 (1-7)
              INT RO DUCT IO N

              The U.S. General Accounting Office (GAO), an agency of             GAO will safeguard the privacy of your responses to this
              Congress, is conducting a study of IRS' audits of corporations     questionnaire. They will be combined with those of other
              with assets of $10 million or more (activity codes 219 to 225).    respondents and will be reported only in summary form. The
              The scope of our review does not include corporate returns in      control number is included only to aid us in our follow-up
              the Corporate Examination Program (CEP). The overall               efforts. We will not identify specific taxpayer information in
              objective of our study is to determine what factors affect the     our report.
              rate at which taxes recommended by revenue agents on these
              corporate returns get assessed. We are surveying a random          This questionnaire should take about 1 hour to complete. If
              sample of appeals officers who considered corporate income         you have any questions concerning any part of this survey,
              tax disputes closed from Appeals during fiscal year 1994.          please call Mr. Kirk Boyer at (913) 384-7570.

              You have been selected to complete this questionnaire due to       Please return the completed questionnaire in the enclosed pre-
              your involvement with the corporate returns for the tax years      addressed envelope within 2 weeks from the time you receive
              indicated at the bottom of this page. Because of your work on      it. In the event the envelope is misplaced, the return address
              this case, your response to this questionnaire will help us to     is:
              identify the factors that affected these audits, both positively
              and negatively. We cannot develop meaningful information                   U.S. General Accounting Office
              without your frank and honest answers to the questions.                    Kansas City Regional Office
                                                                                         Attn: Mr. Kirk Boyer
                                                                                         5799 Broadmoor - Suite 600
                                                                                         Mission, Kansas 66202

                                                                                 Thank you for your assistance.


                                                                   Case Information:

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




                              Page 71                                                       GAO/GGD-97-62 Audits of Large Corporations
                     Appendix IV
                     Appeals Officer Questionnaire Results




I. RE SPONDE NT INFORMAT IO N

   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?

   1.         Yes → Please continue with the questions.

   2.         No → 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)


   Y ears reported are m eans

   a. Total number of years of IRS experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 22.9 Years     N=630

   b. Total number of years of IRS experience in Appeals . . . . . . . . . . . . . . . . . . . . . . . .                        12.5   Years   N=630

        1.    Number of years as an Appeals Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               12.3   Years   N=630

        2.    Number of years as an Appeals Officer resolving
              deficiency disputes over $10 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            5.2 Years      N=621

        3.    Number of years as a Team Chief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               0.2 Years      N=547

   c. Total number of years as a revenue agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  9.2 Years      N=618

   d. Total number of years in other government or private industry position(s) related
      to tax/auditing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2.5 Years      N=510

        (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)


   GS   -    13          9.6%
   GS   -    14         86.1%
   GS   -    15          3.3%
   GS   -    16          1.0%

   N=623




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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?
                                        Did you receive the       Very         Great      Moderate        Some        Little       No
                                         following training       great       extent       extent        extent      extent      extent
                                           prior to being        extent
                                              assigned?            (1)          (2)           (3)          (4)         (5)         (6)
  a. Advanced corporate training          81.9% Yes →            N=502
     or equivalent of Phase 5             18.1% No               2.5%         25.5%         36.3%        16.9%        8.6%       10.3%
                           N=613
  b. Corporate training or                92.7% Yes →            N=573
     equivalent of Phase 4                 7.3% No               1.1%         25.4%         35.0%        24.0%        8.7%       5.8%
                             N=618
  c. Appeals officer training             97.7% Yes →            N=603
                                           2.3% No               7.9%         30.0%         31.5%        21.7%        6.7%       2.2%
                             N=618
  d. Training on resolving                48.9% Yes →            N=303
     complex technical and/or             51.1% No               7.0%         31.3%         38.2%        14.5%        1.1%       8.0%
     legal issues
                           N=627
  e. IRS training (3 days or                                        N=35
     more) related to this                 5.6% Yes →
     taxpayer's primary industry          94.4% No               21.3%        18.4%         43.8%         9.2%        7.3%       0.0%
     (including industry
     specialization program (ISP)
     training)
                           N=630
  f. Non-IRS training or seminars         10.6% Yes →               N=62
     on any issues related to this        89.4% No                  4.2%      41.4%         54.4%         0.0%        0.0%       0.0%
     taxpayer's primary industry
                            N=630
  g. Topical training provided by                                N=157
     Appeals, Exam, and/or                25.0% Yes →
     Counsel relevant to this             75.0% No                  5.6%      26.3%         38.3%        29.8%        0.0%       0.0%
     corporate taxpayer
                            N=626
  h. Other (Specify)                      12.8% Yes →               N=36
                                          87.2% No                  9.2%      43.1%         21.2%        26.5%        0.0%       0.0%
      _______________________
                        N=277



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 → Please describe the training needed.

                  ______________________________________________________________________________
   N=624
                  ______________________________________________________________________________

   85.4% No



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III.     T OP T H RE E DO LL AR ISSUE S
         P ROTE STE D B Y T H E T AXP AY ER




                                           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)




     Number of protested issues         Mean = 4.9
                                        N=568



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 → → →                               Type of related entities                              Tax years for
                                                (e.g., S corp, partnership, individual, etc.)                     each type


                                            32.2%    Form 1120C                                           1.

                                            31.1% Form 1040C                                              2.

                                            16.2% Form 1120                                               3.

                                             8.4% Form 1065                                               4.

                                             6.2% Form 1120S                                              5.

                                             5.8% Other                                                   6.

                                            N=151
        73.1%      No

       N=560




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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.


                                              Issue #1                              Issue #2                                 Issue #3
                                   (Largest dollar adjustment)                 (Second largest dollar             (Third largest dollar adjustment)
                                                                                    adjustment)
     a.    Identify the                                          (63)                                      (64)                                  (65)

           issue as shown      ___________________________              ___________________________                __________________________
           on the ACM
                               ___________________________              ___________________________                __________________________
     b.    Identify the                                          (66)                                      (67)                                  (68)

           applicable IRC      ___________________________              ___________________________                __________________________
           section

     c.    Exam's                                                (69)                                      (70)                                  (71)

           Adjustment was     97.0% Taxable income                      83.3% Taxable income                      89.4% Taxable income
           to:                 1.4% Credit                               9.8% Credit                               3.7% Credit
                               1.6% Other                  N=606         6.9% Other                 N=408          7.0% Other          N=295
     d.    Adjustment per                                   (72-80)                                     (81-89)                               (90-98)

           Exam                          Mean = $6,383,953                      Mean = $5,519,661                       Mean = $2,699,566
                                                          N=630                                     N=403                                N=297
                              Repeat ID - 2                  (8-16)
     e.    Final                                                                                        (17-25)                               (26-34)

           adjustment per                     $2,360,910                            $2,440,946                               $906,316
           Appeals                                         N=563                                    N=407                                  N=293
     f.    Basis for                                        (35-41)                                     (42-48)                               (49-55)

           Adjustment         430     Legal interpretation               249 Legal interpretation                 169 Legal interpretation
           (Check all that      58    Unsupported deductions             59 Unsupported deductions                 46 Unsupported deductions
           apply.)             129    Valuation                          56 Valuation                              47 Valuation
                               130    Allocation                         67 Allocation                             39 Allocation
                                 5    Whipsaw                             0 Whipsaw                                 0 Whipsaw
                                93    Timing                             69 Timing                                 29 Timing
                               137    Other (Specify)                    72 Other (Specify)                        47 Other (Specify)

                                                            (56-60)
     g.    Dispute                                                                                      (61-65)                               (66-70)

           between Exam       460 Disagreement over                     269 Disagreement over                     183 Disagreement over
           and taxpayer           interpretation of law                     interpretation of law                     interpretation of law
           involved:          387 Disagreement over                     266 Disagreement over                     200 Disagreement over
           (Check all that        facts/evidence                            facts/evidence                            facts/evidence
           apply.)              6 Appeals settlement on                  9 Appeals settlement on                   6 Appeals settlement on
                                  prior tax years                           prior tax years                           prior tax years
                                3 Appeals settlement of same             0 Appeals settlement of same              0 Appeals settlement of same
                                  issue on a different taxpayer             issue on a different taxpayer             issue on a different taxpayer
                               73 Pending litigation of same             8 Pending litigation of same              0 Pending litigation of
                                  issue for a different taxpayer            issue for a different taxpayer            same issue for a different
                                                                                                                      taxpayer




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                                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.
                                                           Issue #1                Issue #2              Issue #3


                     Reason Code # 1
                     (Highest Impact)                       _____                    _____                 _____
                     Reason Code #2
                     (2nd Highest Impact)                   _____                    _____                 _____


       Reason Code #1                                                                                             Reason Code #2
Issue 1    Issue 2    Issue 3                         Reason Codes As Follows                             Issue 1       Issue 2    Issue 3
13.3%      18.1%      30.2%      A= Appeals/Counsel fully sustains the issue                               0.0%             0.0%   2.6%
0.6%        1.2%      0.8%       B= Continuing issue - followed prior cycle settlement                     0.0%             1.5%   2.6%
7.2%        9.8%      7.4%       C= New facts/evidence obtained and evaluated by Appeals/Counsel           8.9%         18.7%      12.6%
5.0%        3.7%      1.9%       D= New facts/evidence obtained and evaluated by Exam                      1.6%             1.2%   2.0%
30.9%      30.2%      30.8%      E= Hazards - Facts/evidence are open to judgement                         18.1%        20.3%      21.6%
9.7%        5.8%      0.0%       F = Hazards - Conflict between Service position and case law              4.7%             6.9%   11.6%
29.1%      24.0%      23.1%      G= Hazards - Application or interpretation of law                         24.6%        29.3%      15.6%
0.6%        0.8%      1.9%       H= Offsetting considerations                                              13.7%        15.5%      22.0%
0.0%        1.4%      0.0%       I = Changes in law                                                        13.5%            3.8%   2.6%
0.0%        1.2%      0.0%       J = Whipsaw                                                               0.0%             0.0%   0.0%
1.8%        3.2%      3.8%       K= Technical error                                                        4.8%             0.0%   2.0%
1.9%        0.6%      0.0%       L= Tax Court decision                                                     10.0%            2.9%   4.8%
N=573      N=416      N=305                                                                               N=355         N=215      N=127



  9.    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)


                                                           Issue #1                  Issue #2                    Issue #3

                                                                   N=566                  N=401                     N=297
                Did you document your               87.4% Yes              88.1% Yes              74.0% Yes
                position in the written             12.6% No                2.0% No                 2.2% No
                summary?                            0.0% Not applicable     9.8% Not applicable    23.8% Not applicable
                                                         (fully sustained)      (fully sustained)      (fully sustained)



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IV.EXAM'S DE VE L O P ME NT O F
T H E T OP T H RE E DO LL AR ISSUE S



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 →Skip to question 13.

    26.9% No →Continue with question 11.
    N=601

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 →Continue with question 12.

    49.4% No →Please explain below and then skip to question 13.
    N=155

    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)


                              Did Exam provide you the            If yes , was the feedback      Was the feedback helpful
                               feedback you requested?          provided to you in a timely      in resolving the disputed
                                                                           manner?                         issue?
                                          (1)                                 (2)                            (3)

      Issue #1              75.2% Yes                          95.6% Yes                        95.6% Yes
                             0.0% No                 N=79       4.4% No                          4.4% No
                            24.8% Not applicable
                                  (Issue fully developed)      N=59                             N=59

      Issue #2              74.6% Yes                          93.9% Yes                        100% Yes
                             4.5% No                 N=57       6.1% No                          0.0% No
                            20.9% Not applicable
                                  (Issue fully developed)      N=43                             N=43




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      Issue #3              65.7% Yes                         90.7% Yes                            100% Yes
                                                      N=42     9.3% No                              0.0% No
                            34.3% Not applicable
                            (Issue fully developed)           N=28                                 N=28




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 → Continue with question 14.

    68.2% No      → Skip to question 16.
    N=596
                                                                                                                          Repeat I D - 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      Identify the       To what extent, if at all, did the use of their services help you
              consultant used               related issue.                       resolve the disputed issues?
                                                                Very         Great      Moderat      Some        Little           No
                                                             great extent    extent     e extent     extent      extent          extent
                                                                 (1)          (2)          (3)        (4)         (5)             (6)
      Engineer                   62.4%     77.9%   Issue #1 N=189
      International               7.3%     13.2%   Issue #2   14.5%          22.3%       28.0%       10.9%        8.8%           15.5%
      Valuation                   6.5%      7.5%   Issue #3
      Issue/Industry              6.0%               N=189
      Engineer                   65.5% 14.7%       Issue #1 N=34
      Issue/Industry             19.4% 56.1%       Issue #2   9.7%           24.4%       26.0%       39.8%        0.0%            0.0%
      Valuation                  10.5% 24.5%       Issue #3
      Economist                   4.6%                N=56
      International              45.3% 19.6%       Issue #1 N=8
      Issue/Industry             19.6% 29.7%       Issue #2   38.6%           0.0%       30.7%       30.7%        0.0%            0.0%
      Valuation                  19.6% 50.7%       Issue #3
      Economist                  15.6%                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


     39.7% No → Please describe why you did not consult with them.

    N=189              ______________________________________________________________________________

                       ______________________________________________________________________________




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


       9.7% Yes                                 80.9% Issue #1             Economist                           30.9%
      90.3% No                                    4.9% Issue #2            Engineer                            24.6%
                                     N=575        9.3% Issue #3            Valuation                           20.4%
                                                N=53                       Issue/Industry                      14.8%


       1.8% Yes                                 100% Issue #2              International                       35.8%
      98.2% No                                                             Issue/Industry                      35.8%
                                     N=506      N=9                        Other                               28.4%

       2.4% Yes                                 100% Issue #3              Engineer                            43.2%
      97.6% No                                                             Issue/Industry                      28.4%
                                     N=470      N=11                       Other                               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         If yes , to what extent, if at all, did it help you resolve the taxpayer's disputed
                            technical advice?                                                issues?
                                                      Very               Great      Moderate       Some             Little   No extent
                                                   great extent          extent      extent        extent           extent
                                                       (1)                (2)         (3)           (4)              (5)         (6)
    Issue #1               4.7%    Yes →           N=27
                          89.6%    No                 0.0%               59.7%        0.0%         30.8%            0.0%       9.5%
                 N=577    5.7%     Don't know
    Issue #2               3.0%    Yes →           N=12
                          96.4%    No                 0.0%               0.0%        51.2%         48.8%            0.0%       0.0%
                 N=406    0.6%     Don't know
    Issue #3               2.7%    Yes →           N=9
                          97.3%    No                 0.0%               70.3%        0.0%         29.7%            0.0%       0.0%
                 N=323    0.0%     Don't know




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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?



           Issue #1                  6.3% Yes
                                    91.2% No
                           N=580     2.5% Not applicable (Technical advice used)
           Issue #2                  2.6% Yes
                                    94.4% No
                           N=409     2.9% Not applicable (Technical advice used)
           Issue #3                  2.1% Yes
                                    95.2% No
                           N=314     2.8% Not applicable (Technical advice used)




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V. ADDIT IO NAL INFORMAT IO N P RO VIDE D B Y T H E
   T AXP AY ER F O R T H E T OP T H RE E DO LL AR ISSUE S



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 → Continue with question 20.

    46.9% No → Skip to question 22.
    N=586


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 → Continue with question 21.

    56.8% No → Please explain below and then skip to question 22.
    N=303
    ______________________________________________________________________________________________________

    ______________________________________________________________________________________________________

    ______________________________________________________________________________________________________

    ______________________________________________________________________________________________________




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 Exam provide you         If yes , did Exam provide     Did this feedback help you in
                           the feedback you           the feedback to you in a      resolving the disputed issue?
                              requested?                   timely manner?                        (3)
                                  (1)                            (2)

      Issue #1           86.5% Yes →                N=103                           N=103
                          0.0% No                   100% Yes                        97.5% Yes
                 N=119   13.5% Not applicable        0.0% No                          2.5% No

      Issue #2           46.4% Yes →                N=38                            N=38
                          7.6% No                   100%     Yes                    100%     Yes
                 N=81    46.0% Not applicable        0.0%    No                      0.0%    No

      Issue #3           35.1% Yes →                N=21                            N=21
                         10.2% No                   100%     Yes                    100%     Yes
                 N=60    54.7% Not applicable        0.0%    No                      0.0%    No




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V. AP P EAL S P RO CE SSING OF T H E T OP T H RE E DO LL AR ISSUE S

22. Were any of the top three dollar issues disputed by this taxpayer recurring (i.e., the same issue) from previously audited tax
    returns? If yes, please explain what you did, if anything, to resolve the recurring issue(s).
    (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.)                                                                                                                     (50-55)




                           Was this a recurring
                                 issue?                 If yes , what did you do, if anything, to resolve these recurring issues?
                                   (1)                                                     (2)
        Issue #1           4.9%     Yes →
                          86.3%     No
                 N=601     8.8%     Don't know
        Issue #2           4.1% Yes →
                          81.3% No
                 N=424    14.5% Don't know
        Issue #3           1.0% Yes →
                          86.6% No
                 N=322    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)


                                         Did you discuss this issue with       If yes , to what extent, if at all, did it help
                                               District Counsel?                   you resolve the taxpayer's disputed
                                                       (1)                                       issues?
                                                                                                    (2)
              Issue #1                                                          19.7%   Very great extent             N=151
                                      27.0% Yes →                               28.3%   Great extent
                                      67.0% No                                  26.1%   Moderate extent
                                                                                 8.2%   Some extent
                                       6.0% Not necessary                        8.9%   Little extent
                                                                       N=579     8.9%   No extent
              Issue #2                                                          16.5%   Very great extent              N=69
                                      16.9% Yes →                               31.5%   Great extent
                                      76.9% No                                  30.2%   Moderate extent
                                       6.2% Not necessary                        9.5%   Some extent
                                                                       N=405     3.8%   Little extent
                                                                                 8.5%   No extent
              Issue #3                                                           0.0%   Very great extent              N=36
                                      11.7% Yes →                               29.7%   Great extent
                                      79.5% No                                  14.2%   Moderate extent
                                       8.9% Not necessary                       49.0%   Some extent
                                                                       N=312     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)




                         Issue #1                      Issue #2                      Issue #3
                                 N=598                         N=421                          N=322
                           14.0% Yes                      4.2% Yes                      100% Yes
                           86.0% No                      95.8% No                        0.0% No




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VII. G ENE RAL Q UE STIO NS RE L AT ING T O T H ES E T AX RE T URNS




                                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   →    Continue with question 26.
    14.8%   No
                               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)


      4.5% Very great extent
    19.6%   Great extent
    30.4%   Moderate extent
    23.4%   Some extent
    11.8%   Little extent
    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     → To what extent, if at all, did this discussion help you resolve the taxpayer's disputed issues?   (CHECK
                       ONE.)
                       9.1%      Very great extent
                       20.7%     Great extent
N=248
                       32.3%     Moderate extent
                       25.5%     Some extent
                        6.6%     Little extent
                        5.7%     No extent
                       N=173
     28.3% No




                                                                13




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28. Were you satisfied or dissatisfied with the level of cooperation between you and Exam? (CHECK ONE.)                             (70)


    26.6%    Very satisfied
    31.8%    Generally satisfied
    16.1%    Neither satisfied nor dissatisfied
       0.9% Generally dissatisfied
      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)




                                        P osition                             Yes             No          Don't know
                                                                              (1)             (2)            (3)


                   a.   CPA firm                              N=539      75.7%            17.6%           6.7%


                   b.   Attorney                              N=482      62.9%            18.0%          19.1%


                   c.    Engineer                             N=377       5.4%            61.8%          32.7%


                   d.    Economist                            N=369       5.5%            61.9%          32.5%


                   e.   Appraiser                             N=393      16.2%            55.6%          28.3%


                   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)



                                              Very       Generally        Neither        Somewhat           Very         No basis
                                            satisfied    satisfied       satisfied       dissatisfied    dissatisfied    to judge
                                                                            nor
                                                  (1)        (2)        dissatisfied         (4)             (5)            (6)
                                                                            (3)
  a.    Overall attitude/cooperation of
        the taxpayer              N=607      32.7%         48.5%            9.5%            5.9%            0.0%           3.4%
  b.    The timeliness of taxpayer's
        responses to information             28.4%         47.4%            9.2%           10.3%            1.0%           3.7%
        requests                 N=607
  c.    The completeness of
        information provided by the          26.1%         49.0%           15.5%            7.2%            0.5%           1.7%
        taxpayer                N=604
  d.    The relevance of the
        information provided by the          29.4%         49.9%           16.0%            2.1%            1.0%           1.7%
        taxpayer                N=604


                                                                   14




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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)




                                             Did the taxpayer file any of the        If yes , did you refer these to Exam?
                                             following while this case was in
                                                  Appeals' jurisdiction?
                                                           (1)                                        (2)

          a.   File a claim for a refund   3.0%    Yes →                            82.1%     Yes
                                           97%     No                     N=601     17.9%     No                     N=18

          b.   Raise an affirmative        12.9%   Yes →                            31.5%     Yes
               issue                       87.1%   No                     N=607     68.5%     No                     N=78

          c.   File a request for a          2.1% Yes →                             25.8%     Yes
               tentative refund            97.9% No                       N=593     74.2%     No                     N=13
               (e.g., NOL carryback)




                             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".)

Taxable income         0.0% Increased      100% Decreased      by . . . .Mean = $23,445,831                                         (87-96)
N=66                                                                                                                    Repeat I D - 4 (1-7)

Credits                100% Increased      0.0% Decreased      by . . . .Mean = $18,753                                              (8-17)
N=6

33.Were any of the above the result of a carryback from a subsequently filed return? (CHECK ONE.)           (18)


33.9% Yes

66.1% No
N=91




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34.Was this work unit assigned to an Appeals Team Chief? (CHECK ONE.)                    (19)



 3.8% Yes    →        Skip to question 37.
96.2% No     →       Continue with question 35.
N=614


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)


                                              Very great          Great       Moderate             Some           Little         No extent
                                               extent            extent        extent             extent         extent             (6)
                                                 (1)              (2)           (3)                 (4)            (5)
     a.     Associate chief meeting with
            the taxpayer                         0.4%            2.7%             0.0%            1.1%            3.5%            92.3%
                                  N=583

     b.     Associate chief providing
            you guidance, advice, or             0.8%            3.8%             9.1%            7.2%            8.9%            70.2%
            other assistance      N=588

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)


                                              Very       Great            Moderate         Some           Little        No               Not
                                             great      extent             extent         extent         extent        extent         applicable
                                             extent
                                               (1)         (2)              (3)             (4)            (5)             (6)               (7)
       a.    Associate chief's
             meetings with the               0.0%          2.3%            0.0%           1.5%             1.6%            3.8%           90.9%
             taxpayer
                                 N=582
       b.    Associate chief's
             providing you guidance,
             advice, or other                0.0%          3.1%            6.8%           9.4%             5.2%            3.0%           72.5%
             assistance        N=582

Please explain your response.

______________________________________________________________________________________________________
______________________________________________________________________________________________________
______________________________________________________________________________________________________




                                                                     16




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                 Appendix IV
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37. How did you inform Exam, if at all, of the final resolution of the disputed issues? (CHECK ALL THAT APPLY.)                   (26-29)

    218      Discussed the final resolution with Exam
    535      Sent the Appeals Case Memorandum to Exam
      82     Other (Specify) _______________________________________________________________________
      20     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)



                                               Very         Positively        Neither       Negatively        Very             Not
                                             positively                    positively nor                   negatively      applicable
                                                                            negatively
                                                   (1)          (2)              (3)            (4)             (5)            (6)
     a.    Exam's documentation of
           audit issues                           13.1%       53.4%             26.6%          4.3%            1.1%           1.5%
                                N=581
     b.    Exam's factual development
           of the issues                          13.1%       56.3%             21.3%          6.6%            1.1%           1.5%
                                 N=581
     c.    Exam's development of the
           legal positions for the issues         12.6%       36.5%             40.1%          5.3%            1.7%           3.8%
                                   N=581
     d.    IRS specialist assistance in
           developing audit issues                10.9%       12.5%             12.7%          2.8%            0.0%           61.2%
                                   N=594
     e.    Legal assistance from District
           Counsel or national office             15.6%       17.5%             7.8%           0.0%            0.0%           59.0%
           used to develop the issues
                                  N=589
     f.    Other (Specify)
                                  N=243           14.6%       0.0%              2.7%           0.0%            0.0%           82.7%


39. Were you satisfied or dissatisfied with the length of time it took to resolve the taxpayer's disputed issues? (CHECK ONE.)
                                                                                                                           (36-37)

     14.9% Very satisfied
     57.8% Generally satisfied
    20.9%    Neither satisfied nor dissatisfied
      5.4% Generally dissatisfied
                                             If dissatisfied, please explain.
       1.0% Very dissatisfied
                                             _______________________________________________________________________
    N=614
                                             _______________________________________________________________________
                                             _______________________________________________________________________




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                   Appendix IV
                   Appeals Officer Questionnaire Results




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)




                                            Very great       Great        Moderate         Some        Little    No extent
                                              extent        extent         extent         extent      extent
                                               (1)            (2)           (3)             (4)         (5)         (6)
      a.    Recurring issues for this
            taxpayer                          16.0%         23.9%          7.2%           5.4%        10.2%        37.2%
                               N=594
      b.    Similar issues for
            different taxpayers               5.6%          15.1%          10.7%          6.8%         8.7%        53.1%
                                  N=596

    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)




                                               Very great       Great         Moderate              Some        Little        No
                                                 extent         extent         extent              extent       extent       extent
                                                  (1)            (2)            (3)                  (4)         (5)          (6)

           a.   Fair and impartial to the
                taxpayer                         41.1%          51.4%              4.0%            0.0%         0.0%         3.5%
                                    N=601

           b.   Fair and impartial to the
                government                       40.3%          50.3%              5.4%            0.5%         0.0%         3.5%
                                    N=601




                                                                     18




                   Page 88                                                           GAO/GGD-97-62 Audits of Large Corporations
                Appendix IV
                Appeals Officer Questionnaire Results




VI. G ENE RAL



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)


    14.0% Excellent

    53.4%    Good

    22.9%    Adequate

      9.2% Poor

     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)


     0.5%    Very great extent

     0.4%    Great extent

     9.5%    Moderate extent

    14.2%    Some extent

    75.3% Little or no extent
    N=598




                                                                  19




                Page 89                                                          GAO/GGD-97-62 Audits of Large Corporations
               Appendix IV
               Appeals Officer Questionnaire Results




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)




                                               T hank 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.




                                                               20




               Page 90                                                        GAO/GGD-97-62 Audits of Large Corporations
Appendix V

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.


Table V.1: District and Appeals Offices Visited and Officials Interviewed
                                                     District      Chief of      Examination      District        Chief of
Offices visited                                      Director      Examination   Branch Chiefs    Counsel         Appeals
Atlanta, Georgia                                      √          √               √                √               √
Baltimore, Maryland                                                              √                                √
Chicago, Illinois                                                √               √                                √
Dallas, Texas                                         √          √               √                √               √
Hartford, Connecticut                                 √          √                                                √
Manhattan, New York                                   √          √               √                √               √
Oklahoma City, Oklahoma                               √          √                                                √
San Francisco, California                             √          √               √                √               √
San Jose, California                                  √          √                                                √
St. Louis, Missouri                                   √          √               √
Totals                                                8          9               7                4               9

                                            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.




                                            Page 91                                  GAO/GGD-97-62 Audits of Large Corporations
Appendix VI

Major Contributors to This Report


                        Thomas D. Short, Assistant Director
General Government      James M. Fields, Senior Social Science Analyst
Division, Washington,   Stuart M. Kaufman, Senior Social Science Analyst
D.C.
                        Royce L. Baker, Tax Issue Area Coordinator
Kansas City Regional    Terry Tillotson, Evaluator-in-Charge
Office                  Kirk R. Boyer, Senior Evaluator
                        Kathleen J. Squires, Evaluator
                        Bradley L. Terry, Evaluator
                        Thomas N. Bloom, Computer Specialist




(268661)                Page 92                             GAO/GGD-97-62 Audits of Large Corporations
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