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United States General Accounting Office: 
GAO: 

Report to the Chairman and Ranking Minority Member, Committee on 
Finance, U.S. Senate: 

June 2002: 

Tax Administration: 

New Compliance Research Effort Is on Track, but Important Work Remains: 

GAO-02-769: 

Contents: 

Letter: 
Results in Brief: 
Background: 
Scope and Methodology: 
NRP’s Design and Major Components: 
NRP Is on Track To Meet Objectives, but Critical Cadre Development and 
NRP Testing Steps Remain: 
Conclusions: 
Recommendations for Executive Action: 
Agency Comments: 

Appendix I: GAO Products Related to Measuring Voluntary Compliance 

Appendix II: NRP Sample: 

Appendix III: Comments from the Internal Revenue Service: 

Table: 

Table 1: National Research Program Sample Design: 

Figure: 

Figure 1: Estimated NRP Sample by Level of Taxpayer Contact: 

Abbreviations: 

EITC: Earned Income Tax Credit: 

GPRA: Government Performance and Results Act: 

IRS: Internal Revenue Service: 

NRP: National Research Program: 

RGS: Report Generation Software: 

TCMP: Taxpayer Compliance Measurement Program: 

[End of section] 

United States General Accounting Office: 
Washington, DC 20548 

June 27, 2002: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Minority Member: 
Committee on Finance: 
United States Senate: 

The U.S. tax system is based on taxpayers voluntarily complying with 
the tax laws. However, the Internal Revenue Service (IRS) last 
measured taxpayers’ rate of compliance with the tax laws using 1988 
tax returns. IRS uses the compliance rate to help understand the 
effectiveness of its programs to promote and enforce compliance. IRS 
also uses the information from its compliance studies as the basis for 
its audit selection formulas. The intent of the formulas is to target 
noncompliant returns for audits while avoiding audits of compliant 
returns. As time has passed since the last compliance study, IRS has 
become concerned that its ability to understand the effectiveness of 
its programs and target audits on noncompliant returns has 
deteriorated, potentially resulting in poorer service to taxpayers, 
reduced confidence in the fairness of the tax system, and unnecessary 
audits of compliant taxpayers. 

IRS has not conducted more recent studies of compliance because of 
concerns about the burden such studies impose on taxpayers. Past 
compliance studies relied on intensive, line-by-line audits of a 
randomly selected sample of tax returns. A study proposed in 1994 
would have included about 150,000 taxpayers in the sample. Taxpayers, 
Congress, and the media all criticized the proposal because of the 
demands that would have been placed on compliant taxpayers to produce 
records verifying every line of their tax returns. 

Recognizing the need for current compliance data, IRS is now planning 
a new compliance study called the National Research Program (NRP). As 
we reported earlier this year, NRP is intended to produce compliance 
data useful for management and targeting of enforcement audits while 
minimizing the burden on taxpayers selected for the study.[Footnote 1] 

In order to identify potential design or implementation problems with 
NRP, you asked us to assess IRS’s plans for the program. Accordingly, 
this report (1) describes NRP’s overall design and major components 
and (2) assesses whether it is likely to produce the compliance data 
IRS needs, be conducted in a manner that minimizes taxpayer burden, 
and be successfully implemented. 

To describe and assess IRS’s plans to measure compliance and assess 
its progress towards implementing those plans, we reviewed documents 
describing NRP in general and documents related to specific program 
elements. We also held frequent discussions with the IRS officials 
designing the program. We examined IRS’s plans to conduct NRP and 
compared them to IRS’s own objectives, government program planning 
principles, and general research design guidance. As NRP was largely 
still under development throughout the time of our review and key 
documents were still in draft at the time this report was prepared, 
our assessment of NRP should be considered preliminary, pending the 
program’s final design. The NRP descriptions and other information in 
this report were current as of May 2002. 

Results in Brief: 

NRP is designed to review about 49,000 individual tax returns randomly 
selected from the population of over 129 million such returns (Form 
1040s). According to the NRP plan, IRS will review each sampled return 
to determine whether the taxpayer has complied with statutory income, 
expense, and tax reporting requirements. Unlike past compliance 
studies, not all of the reviews will include contacting taxpayers. The 
reviews will be conducted by specially trained IRS examiners who will 
first use IRS and third-party databases to verify as much information 
as possible on the sampled returns. IRS estimates that it will be able 
to verify the information on about 8,000 of the sampled returns 
without contacting taxpayers. For line items that could not be 
verified from available databases, IRS will ask taxpayers for 
supporting information. IRS estimates that about 9,000 of these 
contacts will cover one or two simple issues and be handled through 
correspondence. The remaining contacts will require face-to-face 
audits but, unlike past compliance studies, most of these audits will 
cover only lines IRS was unable to otherwise verify. Generally, the 
face-to-face audits will involve self-employed and high-income 
taxpayers. To determine and correct any bias resulting from its plan 
not to subject all sampled returns to audits, IRS plans to conduct 
full line-by-line audits of 1,683 returns in the NRP sample. 

Based on our assessment of NRP in light of government guidance on 
performance measurement and data reliability, research design 
guidelines, and IRS’s goals for the program, we found that NRP’s 
design is likely to yield the sort of detailed information that IRS 
needs to measure overall compliance, develop formulas to select likely 
noncompliant returns for audit, and identify compliance problems for 
the agency to address. The sample is adequately sized for these tasks, 
and IRS has designed NRP processes and procedures in such a way that 
they are likely to meet the goals the agency has set for NRP. IRS has 
included quality checks in NRP and has developed a plan for using the 
data that NRP generates. 

One key goal for IRS has been to minimize the burden that NRP poses 
for the 49,000 taxpayers with returns in the sample. IRS’s plan meets 
this goal by eliminating the need for some taxpayers to be contacted 
at all, by limiting the amount of information other taxpayers will 
have to provide to verify the information on their returns, and by 
limiting the scope of most of the audits that will be carried out 
under NRP. IRS’s proposal to develop a specially trained cadre of 
examiners to carry out NRP audits will also, if implemented, serve to 
minimize the burden on taxpayers. 

IRS has made substantial progress towards fully implementing NRP later 
this year, though important tasks remain. Although IRS may not meet 
its scheduled October 1, 2002, date for the start of taxpayer contacts 
under NRP, extending that date to later in the year will not likely 
cause problems for the program as a whole, according to IRS officials. 
IRS has completed work on both the NRP sample and most of the 
procedures the program will employ. However, IRS may not have given 
itself enough time to complete several important steps before 
determining which returns need to be audited and the level of audit 
needed. These steps include testing and modifying NRP procedures and 
selecting the cadre of examiners to carry out NRP. Accordingly, we are 
recommending that IRS complete testing of NRP procedures before 
training the NRP cadre, determining the scope of audit needed, if any, 
or making any taxpayer contacts. We are also recommending that IRS 
select and appropriately train the cadre of examiners before starting 
to determine which returns to audit. 

In written comments from the Commissioner of Internal Revenue and 
subsequent discussions with IRS’s Director of Research, Analysis and 
Statistics, IRS agreed with our recommendations. IRS’s comments are 
discussed later in this report. The Commissioner’s letter is reprinted 
in appendix III. 

Background: 

The Government Performance and Results Act (GPRA) of 1993 requires 
federal agencies to establish measures to determine the results of 
their activities. Such measures are a prerequisite for making informed 
decisions on allocating scarce resources to areas likely to attain 
results that advance the agency’s mission and achieve its goals. One 
of IRS’s strategic goals is to ensure taxpayer compliance, but the 
agency lacks current measures of taxpayers’ voluntary compliance. 
Having such measures would give IRS an understanding of current 
compliance levels and help to identify steps that are likely to lead 
to improved compliance. 

There are three types of voluntary compliance measures: filing 
compliance, which measures the percent of taxpayers who file returns 
in a timely manner; payment compliance, which measures the percent of 
tax payments that are paid in a timely manner; and reporting 
compliance, which measures the percent of actual tax liability that is 
reported accurately on returns. Although IRS’s NRP plans include 
reviews of all three types of compliance, the majority of their 
efforts have been devoted to the development of reporting compliance 
measurement procedures. Reporting compliance is also the only aspect 
of NRP that will include audits of taxpayers. 

For many years, IRS has periodically used random audits of tax returns 
to measure the level of voluntary reporting compliance. However, IRS 
last measured voluntary reporting compliance over a decade ago when it 
did line-by-line audits of about 50,000 individual tax year 1988 tax 
returns. IRS planned to measure reporting compliance using 1994 
returns in an ambitious effort involving over 150,000 randomly 
selected returns, including 92,000 individuals (including sole 
proprietorships and farmers) as well as corporations, partnerships, 
and S-corporations. Before beginning the audit process, however, IRS 
canceled the study because of its cost and because of criticism from 
Congress, the media, tax community, and taxpayers about the size of 
the sample and the burden imposed by the audits on compliant taxpayers. 

IRS’s compliance research studies provided more than just a measure of 
voluntary compliance. They have also been used by IRS to identify 
compliance trends and to allow IRS to suggest changes in tax laws and 
regulations to improve voluntary reporting compliance. 

Voluntary reporting compliance study results have also been the basis 
for formulas to help IRS select returns for enforcement audits. IRS 
conducts hundreds of thousands of enforcement audits each year as part 
of its overall enforcement efforts. Unlike compliance study audits, 
enforcement audits are not random. IRS targets enforcement audits on 
likely noncompliant returns—those returns with a high probability that 
an audit would detect improperly reported tax liability. According to 
IRS, return selection formulas—first used to select 1968 tax returns 
for audit—have reduced the number of audits that resulted in no change 
to tax liability. No change enforcement audits are a burden on 
compliant taxpayers and use scarce IRS resources. In the year before 
the formulas were first used, the no change rate was 46 percent. For 
returns filed in 1994, the no change rate was about 19 percent. These 
formulas were last updated using 1988 tax return data, however, and as 
they become more out of date, the percentage of formula-identified 
enforcement audits resulting in no change has increased. IRS reports 
that 24 percent of enforcement audits of 1998 returns resulted in no 
change, and the agency projects that this rate will grow to 27 percent 
for returns filed in 2005. 

We have previously reported on the need for IRS to conduct new 
compliance research. In 1996, we recommended that IRS develop a cost-
effective, long-term strategy to ensure the continued availability of 
reliable compliance data and reiterated the need for new compliance 
research studies in subsequent reports and testimonies. (See app. I 
for a list of reports we have issued relating to compliance 
measurement.) Others, including the IRS Commissioner and the IRS 
Oversight Board, recognize the need for IRS to measure voluntary 
compliance. The IRS Commissioner has said that measuring voluntary 
compliance is a critical part of IRS’s overall organizational 
transformation. In its fiscal year 2001 annual report, the IRS 
Oversight Board supports the National Research Program and requested 
congressional support for the program. 

Scope and Methodology: 

To describe NRP, we have been in frequent contact with representatives 
of IRS’s NRP Office and other IRS officials as they have designed the 
program and planned for its implementation. We reviewed IRS’s draft 
prospectus and the detailed plans that act as a blueprint for the NRP 
processes and components. These documents describe the program’s 
objectives and the steps needed to implement the program. We also 
received briefings from the program’s designers and discussed the 
program with other IRS officials, including representatives of the 
Office of Research and the Large and Mid-Sized Business, Small 
Business/Self Employed, and Wage and Investment operating divisions. 
The NRP descriptions and other information in this report were current 
as of May 2002. 

We assessed NRP’s design and progress towards implementation in light 
of several criteria. We considered how well NRP addresses government 
guidance on performance measurement and data reliability. GPRA, for 
example, requires agencies to establish meaningful performance goals 
aligned with their mission and measure progress using sound, objective 
performance data.[Footnote 2] In addition, the Office of Management 
and Budget issued guidelines in February 2002 that require agencies to 
ensure that information they generate be objective and reliable. 
[Footnote 3] We also considered how well NRP meets general research 
design guidelines, such as GAO’s draft guidelines for ensuring the 
reliability of computer-based data. We also reviewed past taxpayer 
compliance research efforts and discussed the program with former IRS 
commissioners. Furthermore, we assessed how well the program meets the 
design principles IRS has defined, assessed whether NRP appears suited 
to accomplish IRS’s stated objectives for voluntary reporting 
compliance research, identified key steps in IRS’s NRP implementation 
plans and schedules, and assessed IRS progress towards meeting those 
milestones. As NRP was largely still under development throughout the 
time of our review and key documents were still in draft at the time 
this report was prepared, our assessment of NRP should be considered 
preliminary pending the program’s final design. 

At the time of our study, IRS was also having its sample design 
reviewed by two outside contractors. These reviews were not complete 
at the time we were preparing this report. In light of these reviews, 
we did not independently replicate calculations for the overall NRP 
sample or the sizes of individual strata. With respect to the NRP 
sample, we held detailed discussions with the IRS officials 
responsible for developing the sample design and discussed with them 
the rationale for their decisions regarding the sample. We also 
reviewed statistical analyses and other studies done by IRS to justify 
sample design decisions. 

We conducted our work between September 2001 and May 2002 in 
accordance with generally accepted government auditing standards. 

NRP’s Design and Major Components: 

The purpose of NRP is to produce data that IRS can use to measure 
overall reporting compliance, update existing audit selection 
formulas, and identify potential ways to improve voluntary compliance. 
Under NRP, IRS will review randomly selected individual tax returns to 
determine whether the taxpayer has complied with statutory income, 
expense, and tax reporting requirements. The major components of the 
program include (1) a random sample of individual tax returns large 
enough to meet program objectives; (2) a specially trained cadre of 
examiners; (3) an assortment of casebuilding tools to verify as many 
items reported on tax returns as possible without contacting the 
taxpayer; (4) a tax return classification process for determining the 
level of audit, if any, a return warrants and which items must be 
verified; and (5) an examination process that uses structured 
procedures and managerial reviews. IRS has also developed a data 
analysis plan that describes how it plans to use the data to address 
each of the program objectives. 

NRP Sample Design and Return Selection: 

According to IRS, the NRP sample is designed so that the results are 
representative of the population of individuals and self-employed 
taxpayers who filed tax year 2001 Form 1040 tax returns. The sample is 
intended to produce estimates of noncompliance and potential tax 
change as well as capture differences in reporting compliance levels 
between this study and subsequent ones. 

The NRP sample consists of a total of about 49,000 returns 
representing the population of about 129 million individual Form 1040 
filers.[Footnote 4] These filers include sole proprietor business 
owners who file schedule C (Profit or Loss From Business – Sole 
Proprietorship) and farmers who file schedule F (Profit or Loss From 
Farming), as well as taxpayers whose income consists solely of wages 
and investment income. The NRP sample is stratified or divided by type 
of Form 1040 filer and by income level. The sample includes some 
substratification of higher-income taxpayers, which was done at the 
request of the IRS business operating divisions that will be key users 
of NRP data. The purpose of the stratification is to permit IRS to 
develop audit selection formulas and other information specific to 
different types of taxpayers. Returns in each strata will be weighted 
to make the sample representative of the overall population. See 
appendix II for a description of the NRP sample. 

NRP Cadre Selection and Training: 

IRS plans to select a cadre of examiners and other staff from its 
current employees and train them to implement the program. IRS 
estimates that it will have over 1,000 full-time equivalent staff 
working on the program during the peak examination phase, which is 
expected to be in fiscal year 2003. Most of the cadre will consist of 
revenue agents from the Small Business/Self Employed operating 
division, but the cadre will also include correspondence examiners 
from the Wage and Investment operating division.[Footnote 5] According 
to NRP’s plans, the cadre will undergo substantial training designed 
to ensure consistency and quality in NRP implementation. IRS plans 
state that the extensively trained cadre represents a sizable 
investment in human capital and an attempt to develop lasting 
institutional knowledge for subsequent NRP studies. 

NRP Casebuilding Process and Data Sources: 

The NRP proposal includes using casebuilding tools to aid examiners in 
determining whether IRS needs to have any contact with taxpayers to 
verify the accuracy of information reported on their tax returns. The 
casebuilding tools consist of data from both IRS and third-party 
sources. 

IRS’s internal casebuilding tools include return information from the 
prior 3 years, audit history, payment and filing history, information 
return data reported by third parties (banks, lending institutions, 
and others), and bank reports on large cash transactions. Use of these 
data is intended to rule out compliance issues that can be verified 
without contacting taxpayers. Casebuilding tools also include data 
from two third-party sources. The first is ChoicePoint, an external 
public database containing real estate and other asset ownership 
information (e.g., motor vehicle registrations and ownership of luxury 
items like watercraft and aircraft). 

For NRP purposes, ChoicePoint is to enable examiners to confirm basic 
asset information. The other third-party data source is the Dependent 
Data Base, which is a combination of Department of Health and Human 
Services and the Social Security Administration data. These data are 
to provide custody information that can be used to help determine the 
validity of dependent and Earned Income Tax Credit (EITC) claims. 
According to IRS, although information from IRS and other databases 
will help NRP classifiers determine whether or not a return warrants 
an audit, the data will only be used to validate return items or 
identify potential problems and not to make changes to tax liability. 
IRS officials stressed that NRP-recommended changes to tax liability 
will always be based on information obtained by audit. 

NRP Classification Process: 

IRS plans for NRP cadre members to use the data compiled during 
casebuilding to classify the returns in the sample according to the 
level of audit, if any, they should be given. IRS plans to train about 
100 members of the NRP cadre to classify returns according to NRP 
guidelines. These specially trained staff are to classify returns as 
either accepted as filed (i.e., all line items are verified without 
any taxpayer contact) or as needing some form of audit. IRS’s 
preliminary estimates are that about 8,000 returns will be accepted 
without any taxpayer contact, most of them coming from nonbusiness 
income returns. For returns needing an audit, classifiers will also 
specify which line items need verification and determine whether the 
additional information needs to be obtained through correspondence or 
a face-to-face audit.[Footnote 6] 

For correspondence examinations, the returns are to contain no more 
than two simple tax issues, such as those dealing with filing status, 
exemptions and dependent claims, various tax credits besides the EITC 
(e.g., education credit, fuel tax credit) and alimony deductions. 
[Footnote 7] IRS’s preliminary estimates are that about 9,000 returns 
will be classified into the correspondence audit category. 

If a classifier determines that some line item information cannot be 
verified with casebuilding materials or simple correspondence, the 
line items will be noted on a check sheet along with a brief 
explanation and sent for a face-to-face audit. IRS will require 
taxpayers whose returns fall into this category to verify information 
on their returns in person with an examiner from the NRP cadre. IRS’s 
preliminary estimates are that about 30,000 returns, including most 
self-employed taxpayers and high-income individuals, will fall into 
the face-to-face audit category. 

IRS plans to have NRP managers review many classification decisions. A 
supervisory review team will review all “accept as filed” 
classification decisions throughout NRP. This team will also review a 
sample of classification decisions indicating the need for an audit. 

As part of the classification process, IRS plans to select about 1,683 
returns-—561 from each of the three classification categories—-that 
would otherwise have been accepted as filed or sent for correspondence 
or face-to-face audits to undergo intensive line-by-line audits. IRS 
determined that, since it plans to accept return information as 
accurate without getting additional information from taxpayers, the 
study results might misstate compliance levels. Therefore IRS 
developed this subsample of classified returns to compare NRP study 
results with what might have been detected by comprehensive line-by-
line audits. According to IRS, this is to provide it with some 
insights as to the accuracy of the casebuilding and classification 
processes, the bias (if any) introduced by the NRP approach, a basis 
for correcting any bias in the aggregate NRP measures, and indications 
of where future studies might be improved. IRS has termed this 
comparison a “calibration” of the study results. 

Figure 1 is a breakdown of the NRP sample by the level of IRS contact 
that taxpayers with returns in the NRP sample will experience. The 
number of returns in the face-to-face audit, correspondence audit, and 
no contact categories are IRS’s preliminary estimates and may change 
based on the results of upcoming tests of NRP processes. The actual 
number of returns in each of these categories will depend on the 
results of the NRP classification process. The number of returns to be 
selected for line-by-line audits, however, has been predetermined and, 
according to IRS, will not change. 

Figure 1: Estimated NRP Sample by Level of Taxpayer Contact: 

[Refer to PDF for image: horizontal bar graph] 

Line-by-line audits: 1,683 returns - 561 from each of 3 categories; 
face-to-face audits, correspondence audits, and no contact; 
Estimated contacts: less than 1,000. 

Face-to-face audits: Most will cover schedule C, E, or F filers; 
Estimated contacts: 30,000. 

Correspondence audits: Questions limited to one or two line items; 
Estimated contacts: 10,000. 

No contact: Most will cover wage and investment returns; 
Estimated contacts: 8,000. 

Note: Except for line-by-line audits, numbers are IRS’s preliminary 
estimates. 

Source: IRS’ NRP office data. 

[End of figure] 

NRP Examination Procedures and Data Collection Mechanism: 

Returns that cannot be fully verified using casebuilding data will be 
sent for examination – either through correspondence or face-to-face 
audits. Correspondence audits will be done with relatively simple 
returns that have potential underreporting or unverifiable information 
in one or two areas. In a correspondence audit, IRS will request that 
the taxpayer send documentation verifying the line items in question. 

According to IRS, in many ways, NRP face-to-face audits (with the 
exception of those in the calibration sample) will resemble IRS’s 
enforcement audits.[Footnote 8] Examiners will determine whether the 
information reported on the return is accurate or adjustments need to 
be made. If they determine that a taxpayer’s tax liability is 
understated, the additional tax will be assessed. In other ways, 
however, NRP audits will differ from enforcement audits. For example, 
examiners use classification check sheets to guide their enforcement 
audits, but they are not limited to the line items flagged during 
classification. IRS has established examination guidelines for NRP 
examiners to follow that require justification to audit unclassified 
line items. IRS officials have said that these guidelines help ensure 
that research consistency and the promise of minimizing taxpayer 
burden are not compromised. IRS officials also say that NRP guidelines 
will require examiners to record all tax changes, regardless of 
amount, though taxpayers will not be asked to pay additional taxes 
uncovered by an NRP audit that fall below a predetermined limit. 

IRS’s plans state that the examination component of NRP will be 
subject to reviews both while the examinations are underway and after 
the examinations are complete. NRP managers will review ongoing 
examinations periodically. Also, all cases will be subject to IRS’s 
regular quality review steps for all examinations, as well as a 
special review conducted by NRP managers. 

IRS will use the Report Generation Software (RGS) system to capture 
NRP results. Included in the database of NRP results will be examiners’
 determinations of the reasons for any noncompliance that they found. 
IRS examiners will use the RGS menu of 46 reason codes to categorize 
reasons for taxpayer noncompliance.[Footnote 9] NRP examiners will 
also prepare electronic workpapers that will be attached to each RGS 
case file to aid researchers using the NRP database. The RGS case 
files, including these workpapers, will be archived in a database. 

NRP Data Analysis Plan: 

The NRP Office has drafted a plan to guide the usage of data gathered 
in NRP classification and examination. IRS specifies how NRP data will 
allow the agency to conduct the following four broad categories of 
analysis that IRS describes as both critical to the IRS mission and 
not possible using alternative data sources: 

* Measure overall compliance (the voluntary reporting rate[Footnote 
10] and the underreporting portion of the tax gap). 

* Update existing audit selection and resource allocation systems and 
develop new ones. 

* Estimate impact on compliance and revenue of legislative and 
administrative changes. 

* Identify potential ways to improve voluntary compliance. 

The plan also outlines specific uses of NRP results by IRS’s Office of 
Research and by the business operating divisions. For example, the 
Office of Research will focus on the development of compliance 
measures for the taxpayer population as a whole while the operating 
divisions will use NRP data to look at compliance issues for their 
specific customers. These measures are essentially based on a 
comparison of misreported amounts, by line item, with what the amounts 
should have been. In another example, IRS expects the operating 
divisions to be able to use information about the characteristics of 
specific pockets of noncompliance, including the causes of the 
noncompliance, to identify solutions. For example, if a large number 
of problems appear to be due to ignorance of IRS rules, the affected 
operating division could consider developing a new taxpayer education 
program. 

The analysis plan also describes how the Small Business/Self-Employed 
division will use NRP data, for example, to identify differences in 
compliance in dissimilar geographical areas, by industry and by type 
of business organization. The Wage and Investment division plans to 
focus on other NRP data, such as the relationship between Earned 
Income Tax Credit returns that are filed on time and paid in full and 
those that are not. 

NRP Is on Track To Meet Objectives, but Critical Cadre Development and 
NRP Testing Steps Remain: 

Based on our assessment of NRP in light of government guidance on 
performance measurement and data reliability, IRS appears likely to 
meet the objectives the agency has set for NRP. IRS has designed NRP 
to meet the agency’s need for up-to-date reporting compliance data, 
including overall compliance rate information, data to support 
updating audit selection formulas, and information on specific pockets 
of noncompliance. At the same time, IRS has included several features 
in NRP that will meet the important goal of minimizing NRP’s 
intrusiveness and the burden on taxpayers whose returns are in the NRP 
sample. IRS has made substantial progress towards the implementation 
of NRP, though important steps remain to be completed. 

Successful NRP Implementation Should Provide the Data IRS Needs: 

IRS designed NRP to address its need for up-to-date reporting of 
compliance research data. The sample is of sufficient size to meet 
both IRS’s need for information about the Form 1040 filing population 
in general and specific information about particular types of filers. 
The data IRS plans to capture includes the sort of detailed 
information that the agency will need to determine overall compliance 
levels, update selection formulas, and identify specific compliance 
problems. IRS has developed appropriate quality assurance mechanisms 
for NRP data collection, and its data analysis plan appropriately 
shows how IRS is to use the data it collects. If implemented as 
planned, NRP should produce sound, objective, and reliable performance 
data in accord with government guidance on performance measurement and 
data reliability. 

We evaluated the NRP sampling plan and found that the design is 
appropriate to meet IRS’ goals of producing a measure of voluntary 
compliance and development of return selection formulas. The sample of 
about 49,000 returns is designed to be representative of the 
population of about 129 million Form 1040 returns. The sample is 
stratified by type of return and amount of income, and we found that 
the sample is reasonably designed for making compliance measures for 
the taxpayer population as a whole and for subgroups of taxpayers. 
Also, the sample is stratified to provide adequate data for developing 
return selection formulas for examinations of Small Business/Self 
Employed returns and high-income Wage and Investment returns.[Footnote 
11] 

The amount of data IRS plans to capture should be sufficient to 
identify specific compliance issues. NRP plans include capturing 
information about discrepancies between amounts reported on returns 
and what those amounts should have been, regardless of the size of the 
difference. The plans also specify that examiners are to determine the 
reasons for any noncompliance that they find – an improvement over 
past compliance data that could prove very useful to users of NRP 
data. IRS also plans to ensure that all workpapers developed by NRP 
examiners be prepared in electronic format and included in the NRP 
database. This represents another improvement over past compliance 
research efforts and should provide a valuable source of information 
for researchers and other users of NRP data. 

IRS has also included quality assurance mechanisms in NRP to help 
ensure that the data collected is complete and accurate. For example, 
IRS will have supervisors review all “accept as filed” classification 
decisions and a sample of decisions to send returns for either 
correspondence or face-to-face audits, providing assurance that 
classification decisions will be made accurately and consistently. 
This corresponds with both IRS’s NRP goal of getting accurate data as 
well as general research design principles. NRP’s use of line-by-line 
audits to calibrate the program’s results also provides a useful check 
on the accuracy of the classification process. The NRP guidelines also 
include procedures to check the quality of examination decisions, 
including the use of the Examination Quality Management System, which 
IRS uses for enforcement audits, and additional quality review steps 
developed specifically for NRP. 

One characteristic of good research designs is that they have a 
detailed analysis plan ensuring that study objectives are met with 
appropriate data. The NRP data analysis plan meets this criterion 
because it describes IRS’s goals for this research and how it will 
make appropriate use of the data NRP generates. The plan describes how 
NRP data will enable IRS to meet each of the four objectives it has 
laid out — measure overall reporting compliance, update existing audit 
selection and resource allocation systems and develop new ones, 
estimate impact on compliance and revenue of legislative and 
administrative changes, and identify potential ways to improve 
voluntary compliance. The plan includes specific questions that the 
Office of Research and the business operating divisions will be able 
to answer using the data generated by NRP. For example, the plan 
describes how IRS will be able to use NRP data to identify potential 
causes of noncompliance, which can be used to develop programs to 
reduce the incidence of noncompliance. Such research into the causes 
of noncompliance should be enhanced by NRP’s inclusion of reason codes 
and electronic workpapers in the NRP database. 

As Planned, NRP Implementation Should Entail Minimal Taxpayer Burden: 

IRS has included important features in NRP that will minimize the 
time, expense, and overall intrusiveness associated with taxpayer 
contacts under the program. IRS has set minimizing taxpayer burden as 
one of the guiding principles of NRP, and its plans show that it has 
met that goal through (1) the use of IRS and third-party information 
to minimize the amount of information requested of taxpayers, (2) the 
development of classification guidelines to ensure that taxpayer 
contacts are limited to auditing only those line items on returns that 
cannot be verified without an audit, and (3) the development of a 
specially trained cadre of examiners to carry out NRP audits. 

By using information it has in its own files plus data from third-
party sources, IRS has taken a substantial step towards minimizing the 
intrusiveness of the audits that will take place under NRP. By 
reviewing as much information as is available without taxpayer 
contact, IRS will eliminate the need for some taxpayers to be 
contacted at all, while others only will be asked to verify 
information that cannot be verified any other way. To ensure that 
casebuilding tools are used properly, IRS has drafted training 
materials and Internal Revenue Manual sections that describe the 
various casebuilding tools and their uses. We reviewed these documents 
and found that they meet the overall NRP design concept and goals set 
by IRS to minimize taxpayer burden. 

The decision not to audit every line on every return but, instead, 
classify the returns in the NRP sample to determine what needs to be 
verified also represents a substantial change from past compliance 
research efforts and an important step towards IRS’s goal of 
minimizing the impact on taxpayers in the NRP sample. Our assessment 
of IRS’s quality review procedures, draft training material, and draft 
Internal Revenue Manual sections on the processes and procedures to be 
used in classifying returns showed that, if properly implemented, they 
should aid classifiers in correctly determining which of the three-
taxpayer contact categories returns should be placed. These decisions 
are vital to minimizing taxpayer burden. 

The NRP cadre is another important element of IRS’s ability to 
minimize the burden associated with taxpayer contacts under NRP. IRS 
has defined what it wants from a cadre of examiners – specifically 
that these staff be experienced, well-trained, and supplied with 
appropriate information, tools, and management support. The NRP cadre 
training materials and plans that we reviewed are sufficiently 
detailed to meet the goals IRS has spelled out for NRP, in particular 
that the cadre be prepared to keep the intrusiveness of NRP audits to 
a minimum and otherwise make the necessary distinctions between 
regular enforcement audit procedures and procedures specific to NRP. 

IRS Has Made Progress Towards Successfully Implementing NRP, but 
Important Steps Remain: 

IRS’s progress so far indicates that the agency is on track to 
complete its development of NRP and begin auditing taxpayers under the 
program in late 2002, though not necessarily by the currently 
scheduled date of October 1, 2002. However, important work remains for 
IRS to complete before the agency can be confident that NRP will 
successfully generate the reporting compliance data it needs. 
Specifically, IRS needs to select and train a cadre of examiners to 
conduct NRP, complete testing NRP classification processes before they 
are implemented, and test the suitability of existing IRS information 
systems to capture and store NRP data. 

IRS Has Made Substantial Progress Towards Implementation: 

IRS met its goal to finalize its sample design by early February 2002. 
The agency needed its sample defined by that date in order to make 
sure that returns in the NRP sample were not selected for enforcement 
audits or for other research efforts, and to be able to separate 
returns after they were processed normally but before they were 
shipped off to storage. IRS met this deadline and is currently 
identifying and setting aside returns for NRP. The remaining work for 
IRS related to the NRP sample is for the agency to continue 
identifying and retrieving the returns selected for NRP. 

IRS has substantially completed the tasks associated with developing 
guidelines and training materials for casebuilding, classification, 
and examination of returns in the NRP sample. We assessed these 
guidelines and training materials and found that they meet the overall 
NRP design concept and goals set by IRS and general research design 
and data quality standards. 

Examiners Not Yet Selected and Trained: 

According to IRS, plans for how it will identify the cadre of 
examiners to conduct NRP are complete but have not been implemented. 
However, important deadlines requiring a trained cadre are quickly 
approaching. The current NRP plan indicates that, as of May 2002, 
selecting the cadre should already be complete and cadre training 
should already be underway, but IRS has not met these milestones. 
Having the right people to perform NRP classification and examination 
tasks is very important. IRS’s plans for NRP and general research 
program design principles point to the importance of consistency and 
accuracy in all aspects of a research program like NRP, and the 
experience and commitment of the NRP cadre is an important part of 
ensuring this consistency and accuracy. Taxpayer contacts will also be 
of critical importance to how this program is perceived by the public 
and, again, having the right people in the examiner cadre will have 
much to do with the public’s acceptance of NRP. 

IRS now plans to begin training the NRP cadre in August 2002. This may 
impact IRS’s ability to begin classifying returns in August 2002. This 
may also mean that IRS may not meet the currently scheduled date of 
October 1, 2002, to begin taxpayer contacts. IRS officials pointed out 
both that this date may not be met, but also that the overall goals of 
the program will not suffer if taxpayer contacts start later in the 
year. The officials noted that it is more important to make sure that 
the design, testing, and implementation of NRP be complete before 
taxpayers are contacted than it is that IRS meet a self-imposed 
deadline. 

Casebuilding and Classification Testing Not Yet Completed: 

IRS recognized that it needs to test its NRP procedures, particularly 
as they relate to casebuilding and classification, and to modify 
procedures based on what those tests show. IRS has completed two tests 
of NRP casebuilding and classification procedures, but has extended 
the date of an important pre-implementation test to a date close to 
the start of the actual implementation of these steps. 

IRS has conducted two tests of NRP casebuilding and classification 
procedures. In October 2001, IRS conducted a preliminary 
classification process test to aid in the development of 
classification guidelines, including the use of casebuilding tools. 
The test consisted of two phases— one making classification decisions 
without the use of casebuilding tools and the other using casebuilding 
tools. The test results indicated that casebuilding tools were useful 
in detecting misreported income, but that specific guidelines were 
needed for using the tools and for making classification decisions 
regardless of the amount of misreporting found. A second test, 
conducted in early May 2002, was done on 30 previously audited returns 
that were part of a tax year 1999 EITC compliance study. This test was 
to assess draft classification guidelines and to test for consistency 
among classifiers. The test resulted in changes to training materials 
and classification guidelines. 

IRS plans to do additional pre-implementation evaluations of the NRP 
casebuilding and classification process, but only a very limited 
evaluation of this process using actual audited returns. The agency 
plans to conduct an additional test in July 2002 using unaudited 
returns as was done in the October 2001 test, as well as some 
previously audited EITC returns. The July 2002 test will involve 
actual NRP processes in order to provide IRS with an opportunity to 
make final adjustments to those processes prior to NRP implementation. 
One of the purposes of this test is to determine whether the 
classification guidelines will result in consistent classification 
decisions among classifiers. To test the guidelines, more than one 
classifier will classify each return and the results will be compared. 
IRS expects that this test will allow it to make changes to the 
guidelines so that more consistent classification decisions are made. 
Since most of the returns used in the test will have not been 
previously audited, the results give IRS little assurance that, even 
collectively, the classification decisions are correct but only that 
the decisions were consistent. Testing the NRP classification process 
using previously audited returns would allow a comparison of 
classification results with actual audit findings. As in the May 2002 
test, such a test using a small number of recently audited returns 
would give IRS more assurance that NRP classification will result in 
correct decisions. 

Another part of the July 2002 test will entail classifying a larger 
group of the previously audited EITC compliance study returns that 
were used in the May test. The primary purpose of this test will be as 
a pre-test of an analysis planned for later in the year when final NRP 
processes are applied to a sample of previously audited EITC returns. 
That analysis will provide a basis for a decision whether NRP will be 
a suitable substitute for separate EITC compliance research studies 
and, if so, what adjustments need to be made to NRP results to make 
them comparable to the EITC compliance studies. The July 2002 pre-test 
will also provide a check on classification accuracy for this 
particular type of return, but these only represent a small portion of 
the NRP sample. 

Until IRS completes its July classification test, it cannot update its 
classification guidelines and procedures or train the staff who are to 
classify the returns. Depending on the results of the test and the 
number and types of changes that may have to be made to the 
classification procedures, IRS may not be in a position to begin 
classifying returns in August, as planned. 

Information Systems Testing Not Yet Completed: 

IRS plans to use its existing information systems to capture and store 
the data generated by NRP. Modifications to these systems—RGS and the 
Examination Operational Automated Database—are planned in order to 
support NRP. IRS plans to evaluate the suitability of these systems 
for these purposes, but has not yet completed these evaluations. 
Identifying information system issues early enough to deal with them 
before NRP is implemented will permit the rest of NRP’s processes to 
run more smoothly than if problems are encountered later. IRS 
management told us that they have made implementing any information 
system changes needed to support NRP a top priority for the agency. 

Conclusions: 

IRS needs accurate and up-to-date information on taxpayers’ compliance 
with the tax laws in order to help it understand the effectiveness of 
its programs to promote and enforce compliance and target its 
enforcement audits on noncompliant returns. The design of NRP 
addresses this need while limiting the burden imposed on taxpayers 
selected for NRP reviews. 

IRS has been taking steps to implement NRP and, while it may not meet 
the October 1, 2002, date in its current schedule, it is currently on 
track to begin contacting taxpayers, when necessary, in late 2002. 
Because of the risk of increasing taxpayer burden, we agree with IRS 
that it is more important that design, testing, and implementation of 
NRP be complete before taxpayers are contacted, than it is that the 
agency meet a self-imposed deadline. While IRS has shown flexibility 
about the date to begin taxpayer contacts, the interim milestone for 
beginning to classify returns remains fixed at August 2002. Adhering 
to this milestone may pose problems because NRP plans call for several 
sequential steps to be completed before classification begins. 
Although IRS’s plans call for completing these steps, there may not be 
sufficient time to complete them, in their proper sequence, before 
August 2002. Specifically, testing and modifying casebuilding and 
classification procedures must be finished before NRP examiners can be 
trained in the finalized procedures. Such tests will be most useful if 
they include the classification of some recently audited returns. In 
addition, IRS must select and then train the cadre of NRP examiners. 
While completing these steps before classification begins will not 
guarantee successful NRP implementation, it would provide added 
assurance that implementation will proceed smoothly. 

Recommendations for Executive Action: 

We recommend that the Commissioner of Internal Revenue: 

* Ensure that testing and modification of NRP casebuilding and 
classification procedures is complete before IRS begins cadre 
training, classifying NRP returns, or making any taxpayer contacts. 
IRS should use some previously audited, non-EITC tax returns to 
evaluate NRP classification procedures and classifier training; and; 

* Implement plans to select and appropriately train the cadre of 
examiners and other staff before NRP classification begins. 

Agency Comments: 

On June 18, 2002, we received written comments on a draft of this 
report from the Commissioner of Internal Revenue (see app. III). The 
commissioner agreed with our recommendations as they concern the 
completion of NRP process testing, cadre selection, and cadre training 
prior to the start NRP casebuilding and classification. He expressed IRS
’s commitment to not compromising the quality of the program in order 
to meet the agency’s scheduled date for commencement of taxpayer 
contacts under NRP. The commissioner also noted that draft reports 
from the two contractors evaluating the NRP sample indicate that the 
sample is valid for IRS’s goals of precision and workload selection 
development. 

The commissioner expressed concern with our recommendation that IRS 
use previously audited, non-EITC returns in the final stages of NRP 
casebuilding and classification testing. Specifically, he noted that 
IRS would not be able to produce all of the casebuilding data that 
relate to previously audited, non-EITC returns, and that IRS would not 
have a clear understanding of why the non-EITC returns were selected 
for audit and what guidance the examiners were given in conducting the 
audits. We agree that these are issues that a full-scale evaluation of 
NRP using previously audited returns would have to address. In 
subsequent discussions with IRS’s Director of Research, Analysis and 
Statistics, the senior IRS official responsible for NRP, we pointed 
out that our recommendation was not for IRS to conduct a full-scale 
evaluation of NRP, but for a smaller review of some previously audit 
returns. As we note in the report, a small test, such as the one IRS 
conducted in May 2002 using 30 previously audited EITC returns, would 
give IRS more assurance that NRP classification will result in correct 
decisions. The Director of Research, Analysis and Statistics agreed 
that such a test using non-EITC returns would be feasible and useful 
and that IRS will conduct the test before beginning taxpayer contacts. 

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
after its date. At that time, we will send copies of this report to 
the Secretary of the Treasury, the Commissioner of Internal Revenue, 
and other interested parties. The report is also available at no 
charge on the GAO web site at [hyperlink, http://www.gao.gov]. 

If you or any of your staff have any questions, please contact Ralph 
Block at (415) 904-2150 or me at (202) 512-9110. Key contributors to 
this assignment were Wendy Ahmed, Jeffrey Baldwin-Bott, and David 
Lewis. 

Signed by: 

James R. White: 
Director, Tax Issues: 

[End of section] 

Appendix I: GAO Products Related to Measuring Voluntary Compliance: 

GAO report: Tax Administration: IRS’ Plans to Measure Tax Compliance 
Can Be Improved. GAO/GGD-93-52. (Washington, D.C.: April 5, 1993); 
Summary: Summarizes uses of Taxpayer Compliance Measurement Program 
(TCMP) data and outlines who uses the data. Identifies weaknesses of 
proposed changes and establishes criteria for evaluating proposed 
changes to measures of voluntary compliance. 

GAO report: Tax Compliance: Status of the Tax Year 1994 Compliance 
Measurement Program. GAO/GGD-95-39. (Washington, D.C.: December 30, 
1994); 
Summary: Summarizes IRS’s plans for the 1994 TCMP and discusses 
promising changes. Identifies several weaknesses in the plan that the 
Internal Revenue Service (IRS) needs to fix before implementing the 
project. 

GAO report: Tax Compliance: 1994 Taxpayer Compliance Measurement 
Program. GAO/T-GGD-95-207. (Washington, D.C.: July 18, 1995); 
Summary: Testimony on 1994 TCMP before the House Subcommittee on 
Oversight, Committee on Ways and Means. Discusses uses of TCMP data 
and status of planned 1994 TCMP effort. Discusses some of the 
criticisms of TCMP. Identifies GAO reports where TCMP data were used. 

GAO report: Letter to the Commissioner on TCMP Errors. GAO/GGD-95-99R. 
(Washington, D.C.: July 19, 1995); 
Summary: Summarizes errors in audits for 1988 TCMP and suggests 
changes 1to codes to be used to categorize the cause of noncompliance 
for the planned 1994 TCMP project. 

GAO report: Tax Administration: Information on IRS’ Taxpayer 
Compliance Measurement Program. GAO/GGD-96-21. (Washington, D.C.: 
October, 6, 1995); 
Summary: Follow-up on issues raised in our December 1994 report 
concerning timeliness and the types of data IRS planned to gather for 
TCMP audits. Also, briefly discusses other sources of data on voluntary 
compliance and the relevance of TCMP data for alternative tax system 
proposals. Indicates how IRS responded to our recommendations. 

GAO report: Tax Administration: Alternative Strategies to Obtain 
Compliance Data. GAO/GGD-96-89. Apr. 26, 1996. (Washington, D.C.: 
April 26, 1996); 
Summary: Summarizes the problems caused by cancellation of the 1994 
TCMP project. This report also identifies sampling strategies that 
will reduce the sample size and still provide some data. 

GAO report: Tax Administration: Status of IRS Efforts to Develop 
Measures of Voluntary Compliance. GAO-01-535. (Washington, D.C.: June 
18, 2001); 
Summary: Describes IRS’s efforts to develop new voluntary compliance 
measures. Also discusses how federal agencies besides IRS assess 
compliance with the rules and regulations governing their programs. 

[End of table] 

[End of section] 

Appendix II: NRP Sample: 

The Internal Revenue Service (IRS) designed a sample of 49,251 returns 
from the population of Form 1040 tax returns filed for tax year 2001. 
These include returns from wage earners and from self-employed 
individuals filing Schedule C and farmers filing Schedule F. IRS 
developed a representative sample, then added returns to increase the 
precision of NRP results. Included with these additional returns are 
about 18,000 added to increase the likelihood that there would be 
enough returns to provide a basis for developing new audit selection 
formulas. The NRP sample designers used past reporting compliance 
research results to derive an estimate of the percentage of returns 
that will likely need to be audited in each of the strata. The 
designers then used those estimates to add returns to the sample, 
intending to have at least 500 sufficiently high tax change returns in 
each grouping of strata that will likely require the development of a 
unique audit selection formula. Officials explained that the 500-
return standard was used in past reporting compliance studies to 
develop audit selection formulas. The designers also said that they 
considered it important to apply the same standard in NRP. 

The NRP sample is detailed in table 1. 

Table 1: National Research Program Sample Design: 

NRP Sample design for individual taxpayers: 
SB/SE Form 1040 filers: 

Taxpayer description: TPI[A] less than $100,000, no Schedule C; 
Sample size to achieve precision requirement: 4,103; 
Additional sample size to meet other IRS requirements: 96; 
Total sample size: 4,199. 

Taxpayer description: TPI less than $100,000, with Schedule C; 
Sample size to achieve precision requirement: 2,901; 
Additional sample size to meet other IRS requirements: 452; 
Total sample size: 3,353. 

Taxpayer description: TPI $100K under $250K, no Schedule C; 
Sample size to achieve precision requirement: 2,208; 
Additional sample size to meet other IRS requirements: 51; 
Total sample size: 2,259. 

Taxpayer description: TPI $100K under $250K, with Schedule C; 
Sample size to achieve precision requirement: 1,037; 
Additional sample size to meet other IRS requirements: 244; 
Total sample size: 1,281. 

Taxpayer description: TPI $250K under $1,000K, no Schedule C; 
Sample size to achieve precision requirement: 1,110; 
Additional sample size to meet other IRS requirements: 344; 
Total sample size: 1,454. 

Taxpayer description: TPI $250K under $1,000K, with Schedule C; 
Sample size to achieve precision requirement: 436; 
Additional sample size to meet other IRS requirements: 2,112; 
Total sample size: 2,548. 

Taxpayer description: TPI $1000K and over, no Schedule C; 
Sample size to achieve precision requirement: 479; 
Additional sample size to meet other IRS requirements: 257; 
Total sample size: 736 

Taxpayer description: TPI $1000K and over, with Schedule C; 
Sample size to achieve precision requirement: 138; 
Additional sample size to meet other IRS requirements: 228; 
Total sample size: 366. 

Taxpayer description: Schedule C – TGR[B] less than $25K, AGI[C] less 
than $10K; 
Sample size to achieve precision requirement: 353; 
Additional sample size to meet other IRS requirements: 130; 
Total sample size: 483. 

Taxpayer description: Schedule C - TGR less than $25K, AGI more than 
or equal to $10K; 
Sample size to achieve precision requirement: 294; 
Additional sample size to meet other IRS requirements: 2,551; 
Total sample size: 2,844. 

Taxpayer description: Schedule C - TGR $25K under $100K, AGI less than 
$25K; 
Sample size to achieve precision requirement: 499; 
Additional sample size to meet other IRS requirements: 2,292; 
Total sample size: 2,791. 

Taxpayer description: Schedule C - TGR $25K under $100K, AGI more than 
or equal to $25K; 
Sample size to achieve precision requirement: 1,095; 
Additional sample size to meet other IRS requirements: 26; 
Total sample size: 1,120. 

Taxpayer description: Schedule C - TGR $100K under $250K, AGI less 
than $50K; 
Sample size to achieve precision requirement: 308; 
Additional sample size to meet other IRS requirements: 3,852; 
Total sample size: 4,159. 

Taxpayer description: Schedule C - TGR $100K under $250K, AGI more 
than or equal to $50K; 
Sample size to achieve precision requirement: 637; 
Additional sample size to meet other IRS requirements: 15; 
Total sample size: 652. 

Taxpayer description: Schedule C - TGR $250K under $1,000K, AGI less 
than $100K; 
Sample size to achieve precision requirement: 221;
Additional sample size to meet other IRS requirements: 2,068; 
Total sample size: 2,290. 

Taxpayer description: Schedule C - TGR $250K under $1,000K, AGI more 
than or equal to $100K; 
Sample size to achieve precision requirement: 342; 
Additional sample size to meet other IRS requirements: 18; 
Total sample size: 360. 

Taxpayer description: Schedule C - TGR $1,000K and over; 
Sample size to achieve precision requirement: 321; 
Additional sample size to meet other IRS requirements: 7; 
Total sample size: 329. 

Taxpayer description: Schedule F - TGR less than $1,000K and AGI less 
than $25K; 
Sample size to achieve precision requirement: 73; 
Additional sample size to meet other IRS requirements: 654; 
Total sample size: 727. 

Taxpayer description: Schedule F - TGR less than $1,000K and AGI more 
than or equal to $25K; 
Sample size to achieve precision requirement: 193; 
Additional sample size to meet other IRS requirements: 2,758; 
Total sample size: 2,951. 

Taxpayer description: Schedule F - TGR more than or equal to $1,000K; 
Sample size to achieve precision requirement: 12; 
Additional sample size to meet other IRS requirements: 156; 
Total sample size: 168. 

Total SB/SE returns: 
Sample size to achieve precision requirement: 16,760; 
Additional sample size to meet other IRS requirements: 18,311; 
Total sample size: 35,069. 

Wage and investment Form 1040 filers: 

1040A Type, TPI less than $25K, AGI less than $10K; 
Sample size to achieve precision requirement: 557; 
Additional sample size to meet other IRS requirements: 835; 
Total sample size: 1,392. 

1040A Type, TPI less than $25K, AGI more than or equal to $10K; 
Sample size to achieve precision requirement: 1,346; 
Additional sample size to meet other IRS requirements: 218; 
Total sample size: 1,563. 

Non-1040A Type, TPI less than $25K, AGI less than $10K; 
Sample size to achieve precision requirement: 340; 
Additional sample size to meet other IRS requirements: 41; 
Total sample size: 380. 

Non-1040A Type, TPI less than $25K, AGI more than or equal to $10K; 
Sample size to achieve precision requirement: 543; 
Additional sample size to meet other IRS requirements: 72; 
Total sample size: 614. 

TPI $25K Under $50K, AGI less than $25K; 
Sample size to achieve precision requirement: 22; 
Additional sample size to meet other IRS requirements: 1; 
Total sample size: 22. 

TPI $25K Under $50K, AGI more than or equal to $25K; 
Sample size to achieve precision requirement: 3,102; 
Additional sample size to meet other IRS requirements: 72; 
Total sample size: 3,174. 

TPI $50K Under $100K; 
Sample size to achieve precision requirement: 2,938; 
Additional sample size to meet other IRS requirements: 68; 
Total sample size: 3,006. 

TPI $100K Under $250K; 
Sample size to achieve precision requirement: 1,023; 
Additional sample size to meet other IRS requirements: 219; 
Total sample size: 1,242. 

TPI $250K Under $1,000K; 
Sample size to achieve precision requirement: 172; 
Additional sample size to meet other IRS requirements: 1,899; 
Total sample size: 2,071. 

TPI $1,000K and over;
Sample size to achieve precision requirement: 29; 
Additional sample size to meet other IRS requirements: 686; 
Total sample size: 716. 

Total wage and investment returns; 
Sample size to achieve precision requirement: 10,070; 
Additional sample size to meet other IRS requirements: 4,111; 
Total sample size: 14,182. 

Total—All Form 1040 filers; 
Sample size to achieve precision requirement: 26,830; 
Additional sample size to meet other IRS requirements: 22,421; 
Total sample size: 49,251. 

Note: Some row and column totals do not add up due to rounding. 

[A] TPI = Total Positive Income (sum of positive income amounts 
reported by the taxpayer) 

[B]TGR = Total Gross Receipts (sum of Schedule C and Schedule F gross 
receipts amounts). 

[C] AGI = Adjusted Gross Income. 

[End of table] 

[End of section] 

Appendix III: Comments from the Internal Revenue Service: 

Department of the Treasury: 
Internal Revenue Service: 
Commissioner: 
Washington, D.C. 20224: 

June 18, 2002: 

Mr. James R. White: 
Director, Tax Issues: 
United States General Accounting Office: 
Washington, DC 20548: 

Dear Mr. White: 

I have reviewed your draft report to the Chairman and Ranking Minority 
Member of the Senate Committee on Finance titled "Tax Administration: 
New Compliance Research Effort On Track, but Important Work Remains." 

Our approach to measuring compliance minimizes the burden on taxpayers 
by shifting a substantial portion of the burden of data collection 
from taxpayers to the IRS. The comments you shared helped us make 
decisions that directly respond to the concerns of our stakeholders 
and improve our ability to deliver quality voluntary compliance 
measures. 

Establishing and maintaining a compliance measurement program that 
employs reliable processes and systems, minimizes taxpayer burden, and 
delivers quality results is a major priority at the IRS. Although our 
current plans call for audits beginning in October 2002, we will not 
compromise the quality of the program in order to meet this target 
date. We will continue with all of our scheduled pre-implementation 
testing and will use the results of the tests to make any necessary 
refinements to the program. Therefore, we will complete the testing of 
casebuilding, classification procedures, and our computer and 
information systems prior to contacting taxpayers. 

We agree that, ideally, we should use previously audited tax returns 
to evaluate the NRP classification procedures and classifier training. 
We are planning to do this using a sample of previously audited EITC 
Compliance Study tax returns. However, two existing conditions make 
the use of other previously audited tax returns problematic. First, we 
would not be able to produce all of the case building tools that 
relate to each of the audited tax returns. Second, unlike the EITC 
Compliance Study tax returns, we would not have a clear understanding 
of why examiners selected the returns for audit and what specific 
guidance they may have received prior to conducting the audits.
Given these conditions, we do not believe an evaluation based on 
previously audited returns would add value to the process. 

I approved plans for identifying and training the cadre of examiners 
and other staff in late May. As soon as our work with NTEU to resolve 
any labor relations issues is complete, the Small Business/Self-
Employed operating division will designate examiner groups based 
primarily on the geographic fall-out of NRP cases. We will train all 
examiners and other staff participating in NRP before they take on 
their responsibilities. The case building and classification 
procedures and guidelines will be ready for the July simulation and 
assessment, allowing sufficient time to make any resulting adjustments 
and reproduce the materials for training in August. 

Finally, we received draft reports of the NRP sample design 
evaluations from two contractors. Both reports indicate the sample 
design to be valid for achieving our goals of precision and workload 
selection development. 

I appreciate your feedback and welcome your continued review and 
support of our efforts to measure voluntary compliance. 

Sincerely, 

Signed by: 

Charles O. Rossotti: 

[End of section] 

Footnotes: 

1. U.S. General Accounting Office, Tax Administration: Continued 
Progress Modernizing IRS Depends on Managing Risks, [hyperlink, 
http://www.gao.gov/products/GAO-02-715T] (Washington, D.C.: May 14, 
2002). 

2. GPRA and how federal agencies comply with it is described in detail 
in our report, Executive Guide: Effectively Implementing the 
Government Performance and Results Act, [hyperlink, 
http://www.gao.gov/products/GAO/GGD-96-118] (Washington, D.C.: June 
1996). 

3. Guidelines for Ensuring and Maximizing the Quality, Objectivity, 
Utility, and Integrity of Information Disseminated by Federal 
Agencies; Notice; Republication, U.S. Office of Management and Budget, 
February 22, 2002. 

4. The NRP sample was based on tax year 1999 data with projections of 
tax year 2001 return population estimates. The NRP sample design shows 
124,519,129 Form 1040 returns in tax year 1999 and projects 
129,411,510 Form 1040 returns in tax year 2001. 

5. IRS has four business operating divisions: Wage and Investment, 
Small Business/Self Employed, Large and Mid-Sized Business, and Tax 
Exempt and Government Entities. 

6. Classification will place returns into one of three categories – 
accepted as filed, correspondence audit, and face-to-face audit. 
However, where classifiers identify small discrepancies on the sampled 
return, the taxpayer will not be contacted through either a 
correspondence or a face-to-face audit, but the noncompliance will be 
noted in the NRP database. IRS refers to these returns as accepted as 
filed with adjustments. 

7. Generally, EITC-related issues, such as those dealing with filing 
status and exemptions and dependent claims, are to be considered as 
one tax issue. 

8. Enforcement audits are targeted on returns where IRS suspects 
noncompliance, often based on a computerized screening of returns that 
looks for indicators of noncompliance. 

9. Reason codes are used by examiners to identify the causes of 
incorrect information on tax returns. The 46 codes are divided into 
six categories and include codes for computational mistakes, bad 
information from a tax preparer, and intentional misrepresentation. 

10. IRS describes the voluntary reporting rate as the accuracy of the 
information taxpayers report on their timely filed returns. IRS 
defines it as equal to 100 multiplied by the total tax reported on 
timely filed returns divided by the sum of the total tax reported plus 
the estimate of tax misreported. 

11. We have evaluated IRS sample design by reviewing the documentation 
of its goals and plans for sampling as of May 2002. Contractor reviews 
may result in further adjustments to either overall or stratum-
specific sample sizes. While some changes might be made, we do not 
expect the changes to the final size or fundamental design of the 
sample to be substantial. 

[End of section] 

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