Academic journal article Journal of Accountancy

GAO Says IRS Needs More Financial Status Audit Guidance

Academic journal article Journal of Accountancy

GAO Says IRS Needs More Financial Status Audit Guidance

Article excerpt

What type of car do you drive? How much money is in your bank account? Let me know a little more about your credit card debt. These are the kinds of questions asked during an IRS financial status audit--an audit the IRS uses to identify unreported income.

Congress had asked the General Accounting Office to determine how frequently financial status audit techniques were used, how they were applied, whether they were intrusive and burdensome for the taxpayer and, also, how the IRS measured its quality control. In a report to Congressman Bill Archer (R-Texas), chairman of the House Committee on Ways and Means, the GAO said financial status audits were useful in collecting unreported income but the IRS needed to provide its staff with guidance on when and to what extent to use such audits to ensure they are not overly intrusive.

Probing too soon

In 1992, the IRS estimated that the tax gap--the amount of tax taxpayers owe but have not paid--was $95.3 billion. Because of this, the IRS urged its auditors to consider a taxpayer's financial status and to probe for unreported income, initiating a financial status audit program in 1994.

According to the GAO report, Tax Administration: More Criteria Needed on IRS' Use of Financial Status Audit Techniques, by early 1995, the IRS was criticized for certain techniques used in its financial status audits. The AICPA, members of Congress and various other taxpayer groups argued that IRS auditors were asking financial status questions before and during the initial interview with the taxpayer without any evidence of underreported income, thus blurring the difference between probing for unreported income and a fraud investigation. …

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