Wednesday, October 22, 2014

IRS Did Not Conduct 63% of Partnership Audits Correctly!

The IRS may have failed to follow one or more of the correct procedures for partnership audits in nearly 1,700 examinations in fiscal year 2012, Treasury Inspector General for Tax Administration said in a report released Oct. 22, 2014.

The agency needs to do a better job of making sure its examiners follow the procedures for these audits set out in response to the Tax Equity and Fiscal Responsibility Act, the Treasury Inspector General for Tax Administration (TIGTA) watchdog office said.

Based on a sample of 35 partnership audits subject to TEFRA in FY 2012, auditors didn't follow one or more of the correct procedures for 22 of them (63%). 

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 or 63% 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.
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.
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