TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Better Documentation Is Needed To Support Office of Appeals' Decisions on International Cases

Final Report Issued on September 28, 2017

Highlights

Highlights of Reference Number:  2017-10-068 to the Internal Revenue Service Chief, Appeals.

IMPACT ON TAXPAYERS

The Office of Appeals (Appeals) is an independent function within the IRS whose mission is to resolve disputes on a fair and impartial basis without litigation.  Appeals is the only IRS function that is authorized to consider the hazards of litigation in attempting to reach a settlement.

In Fiscal Year 2015, the Appeals International Teams did not sustain about $407 million (94 percent) of $435 million in proposed deficiencies from IRS examinations that were appealed.  It is important that Appeals apply and document a consistent methodology to ensure that taxpayers and the Government receive fair and impartial resolutions.

WHY TIGTA DID THE AUDIT

This audit was initiated because international tax issues are a major area of concern for the IRS.  The overall objective was to determine whether controls over international appeals cases are designed to ensure that cases are processed according to IRS criteria and whether Appeals decisions to concede assessments were adequately supported. 

WHAT TIGTA FOUND

TIGTA determined that Appeals Officers adequately documented their conclusions for 12 of 39 cases in TIGTA’s judgmental sample.  The 39 cases included $348 million of the $407 million not sustained by the International Appeals Teams in Fiscal Year 2015.  The 12 cases (involving $272 million in proposed deficiencies) were adequately documented or were resolved without considering the hazards of litigation. 

For 27 of the 39 cases in our sample, Appeals did not sustain $76 million of the Examination function’s proposed deficiency; however, it was not apparent, based on the documentation in the case file, how the Appeals Officers arrived at their decision to concede in favor of the taxpayer.  Although most case files contained an extensive analysis of facts and tax issues, there was not always a clear connection between the Appeals Officer’s analysis and the final decision to concede the Government’s position.  Because Appeals did not fully document the basis for its decision to concede the proposed deficiencies, TIGTA could not establish if Appeals settled these cases on a basis that was fair and impartial to the taxpayer and the Government.

Further, the IRS could not timely locate nine cases selected for our review and thus could not support Appeals actions in reducing proposed assessments of $49 million.  This is of significant concern due to IRS requirements to retain Federal records.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the Chief, Appeals, reinforce internal guidance to Appeals personnel focusing on how cases settled under the hazards of litigation should be documented to include the weighted hazards for the taxpayer’s and the Government’s positions and show how settlement amounts or percentages were determined.  TIGTA also recommended that the IRS should attempt to secure the unlocated case files, determine the reason(s) the files were not locatable, and implement controls to ensure accessibility of case files.

In their response, IRS management generally agreed with the recommendations and stated that they plan to continue to take steps to reinforce the importance of fully documenting settlement rationales and they plan to review their policies and procedures regarding case routing.  They also stated that they plan to continue to participate in IRS-wide efforts to improve record retention processes.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

https://www.treasury.gov/tigta/auditreports/2017reports/201710068fr.pdf.