Improvements Are Needed to Ensure That Procedures Are Followed During Partnership Audits Subject to the Tax Equity and Fiscal Responsibility Act of 1982

Treasury Inspector General for Tax Administration

Office of Audit

IMPROVEMENTS ARE NEEDED TO ENSURE THAT PROCEDURES ARE FOLLOWED
DURING PARTNERSHIP AUDITS SUBJECT TO THE TAX EQUITY AND FISCAL
RESPONSIBILITY ACT OF 1982

Issued on September 26, 2014

Highlights

Highlights of Report Number: 2014-30-082 to the Internal Revenue Service Commissioners for the Large Business and International and Small Business/Self-Employed Divisions.

IMPACT ON TAXPAYERS

The enactment of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) by Congress resulted in revisions to the Internal Revenue Code and the IRS’s administrative procedures for conducting audits of partnerships.  There are many reasons for the IRS to ensure that procedures are followed.  Most importantly, procedural errors can affect the validity of the tax assessments, infringe on taxpayer rights, and result in improper disclosures of tax information.

WHY TIGTA DID THE AUDIT

This audit was initiated to determine whether audits of partnerships subject to the TEFRA are initiated in accordance with applicable statutory and administrative procedures.  The review is part of our Fiscal Year 2014 Annual Audit Plan and addresses the major management challenge of Taxpayer Protection and Rights.

WHAT TIGTA FOUND

TIGTA reviewed a statistically valid sample of 35 partnership audits subject to the TEFRA that were closed during Fiscal Year 2012 and identified 22 audits that were not conducted in accordance with one or more applicable TEFRA procedures.  Specifically, TIGTA found that: (1) minimum tests were not always documented to determine whether TEFRA procedures should have been used to examine the partnership return; (2) necessary checks were not always documented to ensure that the Tax Matters Partner was qualified to represent the partnership; (3) some Forms 2848, Power of Attorney and Declaration of Representative, did not contain the required information that allows disclosure of tax return information; and (4) some Letters 1787, Notice of Beginning of Administrative Proceeding, were not issued timely.  When the sample results are projected to the population of 2,698 TEFRA audits closed during Fiscal Year 2012, TIGTA estimates that approximately 1,696 TEFRA audits were not conducted in accordance with one or more applicable TEFRA procedures.

A combination of factors contributed to the errors that TIGTA identified, and additional actions are needed to ensure that audits of partnerships are conducted in accordance with applicable TEFRA procedures.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the Commissioners, Large Business and International and Small Business/Self-Employed Divisions, ensure that the additional control procedures implemented to monitor whether examiners timely submit control documents are working as intended and that interim guidance is issued to clarify when examiners are required to submit the necessary control documents.  In addition, TIGTA recommended that quality reviews be revised to monitor the examiners’ compliance with all applicable statutory and administrative procedures and that the results of such reviews be used to provide feedback to the first-line managers and examiners.  Finally, TIGTA recommended that the IRS take steps to hold first-line managers accountable for ensuring that TEFRA audits are conducted in accordance with all procedures.

In their response to the report, IRS officials agreed with all of our recommendations and plan to take corrective actions.

READ THE FULL REPORT

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

http://www.treas.gov/tigta/auditreports/2014reports/201430082fr.html.

E-mail Address: TIGTACommunications@tigta.treas.gov

Phone Number: 202-622-6500

Website: http://www.treasury.gov/tigta