Tax Administration:

IRS' Return Selection Process

GGD-99-30: Published: Feb 22, 1999. Publicly Released: Feb 22, 1999.

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James R. White
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Pursuant to a congressional request, GAO reviewed how effectively the Internal Revenue Service (IRS) selects individual income tax returns for audit, focusing on: (1) the extent to which IRS district offices have used various sources to select these individual returns for audit; and (2) comparing the results of audits selected using these sources in terms of the rate at which audits recommended no-change to the tax reported, amount of additional taxes recommended per return audited, and rates at which IRS assessed and collected such recommended taxes after the audit.

GAO noted that: (1) of the 1.1 million closed books and records audits of returns received in 1992, 1993, and 1994, GAO's analysis showed that IRS selected 59 percent of the returns using its discrimnant function (DIF) source; (2) the other 41 percent were selected using non-DIF sources; (3) when GAO compared the results from DIF and non-DIF audits of returns received in 1992, 1993, and 1994, the non-DIF audits generally resulted in lower no-change rates and higher recommended additional taxes than DIF audits; (4) these results are consistent with IRS' policy to use non-DIF sources if the audit potential appears to be higher than it would be from a DIF audit; (5) in contrast, GAO estimated that IRS collected a greater proportion of the additional taxes recommended in DIF audits than for non-DIF audits, based on a sample of returns received in 1992; (6) an estimated 57 percent of the recommended additional taxes were collected for DIF audits versus 35 percent for non-DIF; (7) several IRS operations affect collections and GAO was unable to determine from IRS' data which of these caused the non-DIF collection rate to be lower; (8) caution is needed if one uses the three results analyzed to compare the effectiveness of DIF and non-DIF sources; (9) the no-change rate, the recommended additional tax amounts, and the collection rate on these recommended amounts do not present a complete picture of audit effectiveness; (10) for example, data are not readily available on how audits affect voluntary compliance and taxpayer burden; and (11) nor are data readily available on how other factors, such as the quality of the audits, affected the results across the selection sources.

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