oversight

Tax Administration: IRS' Return Selection Process

Published by the Government Accountability Office on 1999-02-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Chairman, Committee on
                Ways and Means; and the Chairman,
                Subcommittee on Oversight, Committee
                on Ways and Means, House of
                Representatives
February 1999
                TAX
                ADMINISTRATION
                IRS’ Return Selection
                Process




GAO/GGD-99-30
GAO   United States
      General Accounting Office
      Washington, D.C. 20548

      General Government Division



      B-279036

      February 22, 1999

      The Honorable Bill Archer
      Chairman, Committee on Ways and Means
      House of Representatives

      The Honorable Amo Houghton
      Chairman, Subcommittee on Oversight
      Committee on Ways and Means
      House of Representatives

      For 1992, according to the most recent estimate of the Internal Revenue
      Service (IRS), individual taxpayers, at the time they submitted their tax
      returns, did not pay about $100 billion in income tax liabilities. An audit is
      one of the enforcement tools IRS uses to try to reduce this figure.

      Recently, Congress has voiced concerns about the methods IRS uses to
      select returns for audit and the techniques used to conduct audits. These
      concerns contributed to the passage of the IRS Restructuring and Reform
      Act of 1998 (Public Law 105-206, July 22, 1998). Among other things, this
      act limits IRS’ ability to use certain audit techniques and requires that IRS
      include in information it sends to taxpayers an explanation of the reasons
      why it selects returns for audit.

      IRS has many sources from which to select tax returns for audit. IRS’
      intent is to select returns with audit potential—returns for which an audit
      is most likely to find errors and recommend changes to the reported tax.
      One source is the discrimnant function (DIF), an automated system for
      scoring individual tax returns according to their audit potential. IRS’ policy
      also allows returns to be selected through non-DIF sources (e.g., referrals
      from other federal and state government agencies) if these returns can be
      shown to have a greater audit potential than a DIF-selected return.

      In an April 1996 letter, the committee asked that, among other things, we
      explore how effectively IRS selects individual income tax returns for
            1
      audit. However, IRS does not have information on all aspects of audit
      effectiveness. Consequently, we agreed, on the basis of discussions with
      your office, to focus on audits in which auditors in IRS district offices hold

      1
       This is the third in a series of reports you requested on IRS’ audit process. The other two were: Tax
      Administration: More Criteria Needed on IRS’ Use of Financial Status Audit Techniques, (GAO/GGD-
      98-38, December 30, 1997); and IRS Audits: Workpapers Lack Documentation of Supervisory Review,
      (GAO/GGD-98-98, April 15, 1998).




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                   face-to-face meetings with individual taxpayers to review their books and
                            2
                   records. For these books and records audits, we agreed to (1) determine
                   the extent to which IRS district offices have used various sources to select
                   these individual returns for audit; and (2) compare the results of audits
                   selected using these sources in terms of the rate at which audits
                   recommended no-change to the tax reported (no-change audits), amount
                   of additional taxes recommended per return audited, and rates at which
                                                                                         3
                   IRS assessed and collected such recommended taxes after the audit. For
                   our analyses, we examined books and records audits of returns received
                                                                                           4
                   by IRS in 1992, 1993, and 1994 that were closed within a 4-year period.

                   Of the 1.1 million closed books and records audits of returns received in
Results in Brief   1992, 1993, and 1994, our analysis showed that IRS selected 59 percent of
                   the returns using its DIF source. The other 41 percent were selected using
                   non-DIF sources.

                   When we 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. 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.

                   In contrast, we 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. An estimated 57 percent of
                   the recommended additional taxes were collected for DIF audits versus 35
                   percent for non-DIF. Several IRS operations affect collections and we were
                   unable to determine from IRS’ data which of these caused the non-DIF
                   collection rate to be lower.

                   Caution is needed if one uses the three results we analyzed to compare the
                   effectiveness of DIF and non-DIF sources. 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

                   2
                    As discussed in the Scope and Methodology section and appendix I of this report, we excluded some
                   audits because they are not typical books and records audits.
                   3
                    In this report, when we refer to the recommended additional tax, this includes refunds and penalty
                   amounts, if applicable. IRS combines tax and penalties into one figure reported as “audit results.” This
                   figure cannot be separated in IRS’ data files.
                   4
                   Between 2 and 5 percent of the returns selected for audit remained open at the end of our study
                   period. See the scope and methodology section for a discussion of these open audits.




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             effectiveness. For example, data are not readily available on how audits
             affect voluntary compliance and taxpayer burden. Nor are data readily
             available on how other factors, such as the quality of the audits, affected
             the results across the selection sources.

             IRS conducts various compliance checks to determine whether taxpayers
Background   reported the correct tax liability on their returns. Initially, taxpayers may
             be contacted as IRS processes their filed returns if IRS identifies a math
             error or missing information on the return. IRS also uses computers to
             match information on the tax return with information obtained from third
             parties, such as employers and financial institutions, that report payments
             such as salaries and interest paid to individuals. During fiscal year 1996,
             IRS used computer matching to identify about 3.2 million taxpayers who
             may have underreported income on returns or not filed required returns.
             Additionally, IRS audited about 2.1 million tax returns to determine
             whether taxpayers reported the correct tax liability.

             Audits are performed at IRS’ 10 service centers and 33 district offices.
             Service centers and district offices perform different types of audits on the
             basis of complexity of the audit, training and pay grade of auditors, and
             audit techniques used. Service centers conduct correspondence audits,
             generally of a single issue such as earned income credit claims. These
             audits rely on correspondence to ask taxpayers to provide information
             about an item on the tax return. Face-to-face audits with taxpayers to
             review their books and records occur in IRS’ 33 district offices. District
             office audits are more complex, with multiple issues and often more than 1
             tax year being audited.

             IRS has developed many sources, or reasons, for selecting returns for
             audit, which can be segregated into those using DIF sources and those
                                      5
             using non-DIF sources. DIF scores are automatically calculated for all
             filed individual tax returns. This DIF calculation is based on a series of
             formulas developed by IRS that are designed to indicate the returns that
             have the highest probability of a tax change if audited. The higher the DIF
             score the greater this probability.

             Before implementing DIF, IRS had no systematic way to evaluate which
             among all filed returns had the greatest potential for changes to the
             reported tax if audited. Instead, IRS relied on its auditors across the

             5
              The exact number of source codes used varies by year because IRS periodically combines some and
             develops new ones. See appendix I for list of all source codes used by IRS during the years covered in
             this review.




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  country to identify which returns to audit by using their experience and
  judgment in reviewing returns. This process was time consuming and
  required large amounts of resources.

  Starting in 1969, IRS began using DIF as part of a multistage process to
  narrow down the number of returns to be reviewed by the auditors. This
  process change was intended not only to improve the effectiveness of
  return selection, but also to reduce the amount of judgment involved in
  selecting returns for audit. Calculating the DIF score for all filed returns is
  the first stage of this process. Then, returns with DIF scores above a
  national cutoff are to be placed in the DIF inventory, from which they may
  be selected for audit by a district office.

  In the next stage, the district offices are to indicate how many DIF-scored
  returns will be needed by their various suboffices. Returns with the highest
  DIF scores are to be pulled from the DIF inventory and reviewed by
  experienced auditors to determine whether the return will be accepted as
  filed or sent to the district for audit. In this process, known as
  classification, reviewers also are to indicate which portions of the return
  should be audited. Once in the district, returns are generally reviewed at
  multiple levels before being sent to an audit group for distribution to the
  auditors.

  Districts also use numerous non-DIF sources for identifying specific
  returns for audit. As with DIF returns, these non-DIF returns are to be
  reviewed in the district office at multiple levels and either accepted as filed
  or forwarded to audit groups. Unlike audits selected using DIF, these
  returns need not be selected by DIF score or solely from the DIF
  inventory. For the non-DIF sources we include in our review, we grouped
                             6
  these into five categories.

• IRS projects, which include audits that focus on specific types of issues,
  such as unreported income, or types of taxpayers, such as those operating
  cash businesses, whose returns have specific characteristics that indicate
  potential noncompliance;
• referrals of potentially noncompliant returns that come from both inside
  and outside IRS; for example, returns are referred by IRS’ Collection
  Division and by state tax agencies;

  6
   In this report we use the term “non-DIF sources” when referring to the five categories. IRS has many
  other non-DIF sources for audit selection at the district office. Because this review focused on the
  sources associated with the selection process for audits of taxpayers’ books and records, we did not
  analyze these other non-DIF sources. A complete list of source codes and the reasons for excluding
  them can be found in appendix I.




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              • individuals whose returns were completed by a preparer that IRS has
                identified as questionable;
              • regular classification that is a catchall group for various kinds of audits
                that had to be manually selected, such as those involving bankruptcy; and
              • all other reasons for selecting a return for books and records audits, such
                as those involving income from illegal narcotics, tax fraud, or abusive tax
                shelters.

                The DIF formulas, together with the multiple levels of review in the
                selection process, are designed to ensure that returns having the greatest
                potential for a change to the reported tax are most likely to be audited. If
                this audit potential can be justified, IRS districts can use non-DIF sources
                to select returns for audit. Specifically, the districts should show that using
                a non-DIF source would generally offer more potential for changing the
                                                                                   7
                reported tax than continuing to audit returns identified by DIF. The steps
                for selecting DIF and non-DIF returns for audit are shown graphically in
                appendix II.

                To determine the extent to which IRS district offices have used various
Scope and       sources to select returns for audit, we first reviewed return selection
Methodology     procedures and sources as outlined in the Internal Revenue Manual (IRM)
                and in attachments to the instructions for IRS’ Audit Information
                Management System (AIMS). We collected data on these sources from IRS’
                closed case data files. We talked to IRS’ Examination and Research
                Division staffs in the National Office as well as Examination staff in the
                Northern California District and Western Regional offices to understand
                the information about the procedures and sources. Finally, we collected
                data from the AIMS data files on closed audits on the extent to which IRS
                used each source in accordance with the criteria outlined below.

                To compare the no-change rate and additional tax recommended per
                audited return for the various audit selection sources, we used data from
                AIMS files on closed audits. Our primary interest was books and records
                audits of individual returns. We focused on such audits at district offices
                because service center audits were being evaluated in another assignment.
                We eliminated audits such as those coded as claims for refund, nonfilers,
                research and reference, and taxpayer requests because these are generally
                not books and records audits. In addition, we eliminated audits of related



                7
                Certain types of returns, such as those claiming large refunds, are considered mandatory and may or
                may not be selected for audit solely because of the potential for a tax change.




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  and multiyear returns because of the difficulty of associating these audits
                                  8
  to 1 of the 3 years we analyzed.

  We analyzed returns received by IRS in 1992, 1993, and 1994. Because the
  criteria for selecting returns may change from year to year, we wanted to
  organize our data in a manner that would reflect the selection source. We
  discussed this with IRS officials and concluded that our analysis would be
  based on the year IRS received the return (filing year) rather than on the
  year the audit was closed (as presented in the AIMS files). Using the closed
  case data files for fiscal years 1992 through 1997, we collected data for
  audits of returns

• received in 1992 with audits closed during 1992 through 1995,
• received in 1993 with audits closed during 1993 through 1996, and
• received in 1994 with audits closed during 1994 through 1997.

  We used these years because they were the most recent filing years for
  which IRS had 4 years of audit closures. Tracking 4 years allowed us to
  account for almost all of the returns selected for audit. Even so, some
  audits of returns received in 1992, 1993, and 1994 remained opened at the
  end of our 4 year test period. Using the AIMS files, we determined that

• 4 percent of the audits for 1992 returns were open at the end of fiscal year
  1995,
• 5 percent of the audits for 1993 returns were open at the end of fiscal year
  1996, and
• 2 percent of the audits for 1994 returns were open at the end of fiscal year
  1997.

  To compare how much of the additional tax recommended was assessed
  and collected for DIF and non-DIF audits, we selected a sample of audits
  from the 1992 study population. We selected 1992 instead of 1993 or 1994
  to allow as much time as possible for collection activities. This sample was
  divided into 4 strata: (1) audits selected using the DIF scores and closed
  with the taxpayer agreeing to the additional tax recommended (agreed
  audits), (2) audits selected using the DIF scores and closed without the
  taxpayer agreeing to all of the additional tax recommended (unagreed
  audits), (3) agreed audits selected using non-DIF sources, and (4)
  unagreed audits selected using non-DIF sources. We used transcripts from
  IRS’ master file to compare the amount actually collected with the

  8
   See appendix I for a more complete description of the source codes eliminated and those used in the
  study population.




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                        B-279036




                        amounts recommended. A more complete explanation of our sample
                        selection strategy and sampling errors can be found in appendix III.

                        There are some limitations on our data analysis. We did not validate AIMS
                        data files on the closed audits. During our analysis of the master file
                        transcripts for a selected sample, however, we noted some data
                        inconsistencies between the master file and the AIMS files. We found
                        source codes on the AIMS files that differed from those on the master file.
                        According to IRS, the source code recorded on the AIMS files is correct,
                        and there is no mechanism to make these changes on the master file
                        accounts. We also found substitute for return (SFR) audits even though we
                                                                            9
                        had removed SFR source codes from our analysis. IRS officials indicated
                        that it was not possible to identify all SFRs by source code. We excluded
                        only those SFRs that could be identified using the AIMS coding. Moreover,
                        we did not adjust the dollar amounts for inflation, thus the dollars reported
                        may be conservative.

                        We performed our audit at IRS headquarters offices in Washington, D.C.;
                        the Western Region; the Northern California District Office; and IRS’
                        Fresno Service Center. Our work was done between January 1998 and
                        September 1998 in accordance with generally accepted government
                        auditing standards.

                        DIF-selected returns accounted for 59 percent of the books and records
Sources of IRS Audits   audits conducted at IRS’ district offices of returns received in 1992, 1993,
                                 10
                        and 1994. The remaining 41 percent of the audits were selected from the 5
                        non-DIF sources. Table 1 shows the number of books and records audits
                        conducted for each of the six sources for returns received by IRS between
                        1992 and 1994.




                        9
                         IRS files a substitute return for certain individuals who do not appear to have filed required tax
                        returns. These returns are prepared from information documents provided by third parties, such as
                        banks and employers. According to IRS officials, these SFRs may have been selected for other audit
                        purposes and thus were not coded as SFRs.
                        10
                           Audits of taxpayer books and records averaged less than one-half of 1 percent of the returns received
                        in 1992, 1993, and 1994. During this same period, staffing and other workload limited all district office
                        audits to only about 1 percent of returns received.




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Table 1: Number of Books and Records               a
Audits Conducted for Returns Received   Category                               1992              1993                 1994             Total
Between 1992 and 1994                   DIF                                  178,419           142,142              310,557          631,118
                                        Non-DIF-selected sources             135,564           128,993              174,490          439,047
                                         Projects                             41,173            40,804               50,797          132,774
                                         Referrals                            40,353            31,173               32,102          103,628
                                         Preparers                            26,578            25,799               37,561           89,938
                                         Regular classification               16,563            20,008               24,795           61,366
                                         Other sources                        10,897            11,209               29,235           51,341
                                        Total                                313,983           271,135              485,047        1,070,165
                                        a
                                         See appendix I for a summary of the specific source codes included in each of the categories.
                                        Source: Summarized from IRS’ closed case data files for fiscal years 1992 through 1997.


                                        Most returns are selected for audit using DIF because, according to IRS
                                        officials, it is IRS’ primary indicator of noncompliance and enables them to
                                        select returns that have the greatest probability of error on a nationwide
                                        basis. In addition, IRS officials also told us that districts might be unable to
                                        identify any additional returns with a higher audit potential through non-
                                        DIF sources than through those selected by DIF. Moreover, it may be
                                        easier to obtain large numbers of returns with potential noncompliance
                                        through DIF than through non-DIF sources. For DIF, districts simply
                                        request that service centers send them a certain number of returns. The
                                        service center selects the highest DIF-scored returns meeting the district’s
                                        geographic requirements. For non-DIF, selection is more complex. District
                                        office officials must identify specific returns that appear to have a greater
                                        potential for tax change than DIF-selected returns. These returns must
                                        then be ordered individually by taxpayer name and Social Security
                                        number.

                                        As part of our analysis of IRS’ audit selection sources, we separated the
                                        audits into returns filed by nonbusiness individuals with income under
                                        $50,000; nonbusiness individuals with income of $50,000 and above; and
                                        individual taxpayers whose primary source of income was from self-
                                                                            11
                                        employment (labeled as business). To look at how IRS distributed audits
                                        by sources and these types of individual taxpayers, we combined the 3
                                        years covered in this review.

                                        Figure 1 shows that IRS conducted a larger percentage of audits of
                                        nonbusiness individuals with income under $50,000 than of individuals
                                        with higher incomes or business income, regardless of the selection
                                        11
                                         Individuals report business income on the Schedule C of Form 1040. Business income cannot be
                                        broken out the same way nonbusiness income is because IRS does not organize the income data in the
                                        same manner. For example, business income is grouped in three categories as below $25,000, $25,000
                                        but less than $100,000, and over $100,000. Nonbusiness income is grouped into five categories that are
                                        not comparable.




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                                         source. For example, over half the audits with DIF as the source were of
                                         individuals with income under $50,000; 30 percent were of higher income
                                         individuals; and less than 20 percent were of individuals with business
                                         income. It is important to recognize, however, that over 75 percent of the
                                         returns received by IRS during 1992, 1993, and 1994 reported income under
                                         $50,000. Although a higher absolute number of audits are done on
                                         individuals with nonbusiness income under $50,000, IRS audits a greater
                                         percentage of individuals with business income and individuals with
                                         nonbusiness income over $50,000.

Figure 1: Percent of Audits by Type of
Taxpayer and Source of Audit




                                         Source: GAO analysis of IRS data for 1992, 1993, and 1994.




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                                         B-279036




                                         For audits of returns that were received in 1992, 1993, and 1994, the no-
Comparison of DIF                        change rates were generally lower and recommended tax amounts were
and Non-DIF Audits                       generally higher for the five non-DIF sources compared to the results from
                                         DIF sources. This is consistent with IRS’ policy to use non-DIF sources if
                                         the audit potential appears to be higher than for DIF sources. However, on
                                         the basis of a sample of audits of returns received in 1992, we found that
                                         IRS collected a greater proportion of the recommended tax amount from
                                         audits selected using DIF than from those using non-DIF sources.

                                         The no-change rate varied depending on the selection source and the type
                                         of taxpayer being audited. Overall, for the 3 years of audits covered in our
                                                                                       12
                                         analysis, the no-change rate was 22 percent. For the six sources we
                                         identified as being books and records audits, the overall no-change rate
                                         varied from about 15 percent for audits selected due to a questionable
                                         preparer to about 28 percent for audits selected using regular
                                         classification. Returns selected using DIF were closed with no change in
                                         about 26 percent of the audits. Detailed information on the no-change rate
                                         by source and year can be found in appendix IV. Table 2 shows the no-
                                         change rate by year and audit selection source.

Table 1: No-change Rate by Filing Year
and Selection Source                                                          Percent of audits closed with no change to tax
                                         Selection source                        1992                1993               1994            All years
                                         DIF                                       27                  27                 25                   26
                                         Projects                                  19                  19                 20                   19
                                         Referrals                                 14                  17                 17                   16
                                         Preparers                                 15                  17                 14                   15
                                         Regular classification                    24                  28                 30                   28
                                         Other sources                             22                  19                 12                   16
                                         Source: GAO analysis of IRS data for 1992, 1993, and 1994.

                                         For all sources, audits of nonbusiness individuals with income of over
                                                                                 13
                                         $50,000 had the highest no-change rate. Figure 2 summarizes these results
                                         for each source and type of taxpayer.




                                         12
                                            IRS reported no-change rates of 15 percent, 12 percent, and 8 percent for all district office audits of
                                         individual returns closed in fiscal years 1992, 1993, and 1994, respectively. IRS’ no-change rates are
                                         lower than ours because our calculation includes only audits of taxpayer books and records. IRS’ rates
                                         include other kinds of audits, such as claims and nonfilers, that often have very low no-change rates.
                                         13
                                            Regardless of source, the lowest no-change rate occurred in the group of taxpayers with the lowest
                                         income and the highest no-change rate occurred in audits of taxpayers with the highest income.
                                         Appendix IV describes these results in more detail.




                                         Page 10                                             GAO/GGD-99-30 IRS’ Return Selection Process
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Figure 2: No-change Rate by Type of
Taxpayer and Source of Audit




                                      Source: GAO analysis of IRS data for 1992, 1993, and 1994.




                                      The average amount of additional tax recommended per audit covered in
                                      our analysis declined from over $4,000 for closed audits of returns
                                      received in 1992 to about $3,300 for closed audits of returns received in
                                      1994 (a decrease of about 18 percent). By audit selection source, our
                                      analysis of 1992 compared to 1994 showed that the recommended
                                      additional tax increased only in audits of returns selected using DIF and
                                      preparer sources. The average additional tax recommended in DIF audits
                                      increased from about $2,500 in 1992 to almost $3,100 in 1994 (an increase
                                      of about 24 percent). The average additional tax recommended in audits
                                      selected due to a questionable preparer increased from about $1,950 in
                                      1992 to almost $2,100 in 1994 (an increase of about 7 percent).

                                      Our analysis by selection source also showed that the average amount of
                                      additional taxes recommended per audit over the 3 years varied. The


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                                     average amounts ranged from less than $2,000 for returns selected because
                                     of questionable tax preparers to over $10,000 for referrals. However, the
                                     average recommended additional tax for referrals was always at least
                                     double the averages for other selection sources. Table 3 shows the average
                                     additional tax recommended by selection source for each of the years in
                                     our analysis.

Table 2: Average Additional
Recommended Tax by Filing Year and                                           Average additional recommended tax
Selection Source                     Selection source                     1992            1993          1994                     Overall
                                     DIF                                 $2,487         $2,945        $3,082                     $2,883
                                     Projects                             4,286          3,771         3,357                      3,772
                                     Referrals                           12,542          8,804         8,329                     10,091
                                     Preparers                            1,949          1,912         2,094                      1,999
                                     Regular classification               3,358          2,507         2,969                      2,924
                                     Other sources                        3,974          3,373         2,218                      2,843
                                     Source: GAO analysis of IRS data for 1992, 1993, and 1994.


                                     As figure 3 shows, the average amount of additional tax recommended per
                                                                                 14
                                     audit varied by type of taxpayer and source. It shows lower average tax
                                     amounts in audits of nonbusiness individuals with income under $50,000
                                     compared to the remaining two groups for all sources. It also shows higher
                                     average amounts in audits of business individuals compared to audits of
                                     nonbusiness individuals—except for referrals and other sources.




                                     14
                                      Regardless of the source, the averages ranged from $2,100 for lower income taxpayers to almost
                                     $7,100 for individuals with business returns.




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Figure 3: Average Additional Tax
Recommended by Taxpayer Type and
Source of Audit




                                   Source: GAO analysis of IRS data for 1992, 1993, and 1994.




                                   IRS does not have a system that allows it to readily track taxes assessed
                                   and collected from audits by the source of the audit. IRS can track
                                   collections through its Enforcement Revenue Information System (ERIS).
                                   However, IRS has not analyzed the information in ERIS to determine the
                                   collection rate by audit source. Although an analysis by source is possible
                                   using information from ERIS, it would be difficult.

                                   To obtain information on the amount of recommended additional tax that
                                   is assessed and collected, we selected a sample of audits of returns
                                   received in 1992 that were included in our earlier analyses. Using
                                   information from these sampled audits and IRS’ master file, we estimated
                                   assessments and collections for audited returns in this population.




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                     We found no statistically significant difference in the proportion of
                     recommended tax assessed between audits selected using DIF and audits
                     selected using non-DIF sources. However, we found a statistically
                     significant difference in the proportion collected. We estimated that IRS
                     collected about 57 percent of the recommended tax for DIF returns and
                                                                             15
                     about 35 percent for non-DIF returns as of April 1998. It was not clear
                     from the data we had why collections were greater for DIF-selected
                     returns.

                     Our estimated 57 percent collection rate for DIF sources is high compared
                     to the collection rate for all individual taxpayer audits conducted at district
                     offices. In a June 1998 report to the House Ways and Means Committee, we
                     found that for all types of district office audits closed in 1992, IRS had
                                                                                   16
                     collected about 31 percent of the amounts recommended.

                     Caution is needed if one uses the three results we analyzed to compare the
Caution Is Needed    effectiveness of DIF and non-DIF sources. The no-change rate, the
When Comparing the   recommended additional tax amounts, and the collection rate on these
Results of DIF and   recommended amounts do not present a complete picture of audit
                     effectiveness. Nor is it easy to control for other factors that may influence
Non-DIF Audits       the three types of results we analyzed.

                     To evaluate the overall effectiveness of selection sources, these audit
                     results are not the only ones that could be used. As noted in our June 1998
                     report, the impacts of audits on voluntary compliance and taxpayer burden
                     are other results that could help IRS develop a more balanced picture of
                                                                             17
                     audit effectiveness, but IRS does not collect such data. That report
                     recognized that gathering such data was difficult because of limitations in
                     data sources and research methods. Beyond these possible results, we
                     concluded that IRS could do more to collect data on its direct and indirect
                     costs to do audits and then assess or collect any additional taxes. We
                     recommended that IRS begin to collect such data, and IRS agreed to do so.

                     In addition, IRS does not have data available that would allow it to control
                     for other factors that may affect the three audit results we analyzed. For
                     example, data on whether the results across the selection sources vary by

                     15
                        Because of the sample size and variability of the data, we were unable to make statistically valid
                     estimates of the assessments or collections for specific selection sources. Point estimates and
                     sampling errors can be found in appendix III.
                     16
                      Tax Administration: IRS Measures Could Provide a More Balanced Picture of Audit Results and Costs
                     (GAO/GGD 98-128, June 23, 1998).
                     17
                          GAO/GGD 98-128, June 23, 1998.




                     Page 14                                              GAO/GGD-99-30 IRS’ Return Selection Process
                  B-279036




                  the type of tax issue being audited are not available. Nor does IRS have
                  data on how the quality of the audit affects the results across the selection
                  sources.

                  Even with these cautions, comparing DIF and non-DIF audit sources by
                  the audit results we analyzed can be useful. For example, the comparisons
                  we did by source and selection year could provide a baseline that would
                  allow IRS to gauge some of the impacts of changes to the audit selection
                  process over time.

                  We requested comments on a draft of this report from the Commissioner
Agency Comments   of Internal Revenue. Officials representing the Assistant Commissioners
                  for the Examination and Research Divisions, as well as a representative
                  from the Commissioner’s Office of Legislative Affairs, provided IRS’
                  comments in a January 13, 1999, meeting. IRS also provided written
                  comments in a January 20, 1999, letter, which is reprinted in appendix V.

                  IRS was in overall agreement with the draft report and said it fairly
                  describes IRS’ return selection program. IRS also provided some additional
                  information to elaborate on issues we raised and technical comments;
                  where appropriate, we made changes to this report on the basis of these
                  technical comments.

                  We are sending copies of this report to the Committee’s Ranking Minority
                  Member, the Chairman and Ranking Minority Member of the Senate
                  Committee on Finance, various other congressional committees, the
                  Director of the Office of Management and Budget, the Secretary of the
                  Treasury, the Commissioner of Internal Revenue, and other interested
                  parties.

                  The major contributors to this report are listed in appendix VI. If you or
                  your staffs have any questions concerning this report, please contact me or
                  Thomas D. Short, Assistant Director, on (202) 512-9110.




                  James R. White
                  Director, Tax Policy and
                   Administration Issues




                  Page 15                               GAO/GGD-99-30 IRS’ Return Selection Process
Contents



Letter                                                                                                1


Appendix I                                                                                           20

Definition of Source
Codes for IRS Audits
Appendix II                                                                                          23

Flow Chart of IRS'
Audit Selection
Process
Appendix III                                                                                         24
                          Study Population                                                           24
Statistical               Sample Selection and Weighting                                             24
Methodology for           Sampling Errors and Confidence Intervals of Estimates                      25
                          Controlling for Nonsampling Errors                                         25
Analyzing Assessments
and Collections of
Recommended Tax
Appendix IV                                                                                          26

Tables of Audit Results
for Filing Years 1992,
1993, and 1994
Appendix V                                                                                           31

Comments From the
Internal Revenue
Service
Appendix VI                                                                                          34

Major Contributors to
This Report


                          Page 16                            GAO/GGD-99-30 IRS’ Return Selection Process
          Contents




Tables    Table 1: Number of Books and Records Audits                                    8
            Conducted for Returns Received Between 1992 and
            1994
          Table 1: No-change Rate by Filing Year and Selection                          10
            Source
          Table 2: Average Additional Recommended Tax by Filing                         12
            Year and Selection Source
          Table I.1: Number of Audits by Year the Return Was                            20
            Received
          Table I.2: Source Code Table—Inclusions and Exclusions                        21
          Table III.1: Distribution of Audits in the AIMS Database                      24
            by Sample Strata
          Table III.2: Confidence Interval for Estimate of difference                   25
            in Assessments and Collections for DIF-Selected and
            Non-DIF-Selected Audits
          Table IV.1: Number of Returns by Activity Code and                            26
            Source Group--Returns Received in 1992
          Table IV.2: Number of Returns by Activity Code and                            27
            Source Group—Returns Received in 1993
          Table IV.3: Number of Returns by Activity Code and                            27
            Source Group--Returns Received in 1994
          Table IV.4: No-change Rate by Source of Audit and                             28
            Activity Code--Returns Received in 1992
          Table IV.5 No-change Rate by Source of Audit and                              28
            Activity Code--Returns Received in 1993
          Table IV.6: No-change Rate by Source of Audit and                             29
            Activity Code--Returns Received in 1994
          Table IV.7 Average Audit Results by Source of Audit and                       29
            Activity Code--Returns Received in 1992
          Table IV.8: Average Audit Results by Source of Audit and                      30
            Activity Code--Returns Received in 1993
          Table IV.9: Average Audit Results by Source of Audit and                      30
            Activity Code--Returns Received in 1994


Figures   Figure 1: Percent of Audits by Type of Taxpayer and                            9
            Source of Audit
          Figure 2: No-change Rate by Type of Taxpayer and                              11
            Source of Audit
          Figure 3: Average Additional Tax Recommended by                               13
            Taxpayer Type and Source of Audit
          Figure II.1: Summary of IRS’ process for selecting                            23
            returns to audit.



          Page 17                               GAO/GGD-99-30 IRS’ Return Selection Process
Contents




Abbreviations

AIMS        Audit Information Management System
DCI         data collection instrument
DIF         discriminant function
IRM         Internal Revenue Manual
IRS         Internal Revenue Service
SFR         substitute for return




Page 18                             GAO/GGD-99-30 IRS’ Return Selection Process
Page 19   GAO/GGD-99-30 IRS’ Return Selection Process
Appendix I

Definition of Source Codes for IRS Audits


                                            This appendix shows the types of audits included in our study population.
                                            We included sources that appeared to be for audits of taxpayer books and
                                            records conducted at one of the Internal Revenue Service’s (IRS) district
                                            offices.

                                            We excluded audits for two reasons:

                                          • Reason 1: We excluded audits that did not deal with the taxpayers’ books
                                            and records or that were not conducted at an IRS’ district office. These
                                            audits included claims for refund, nonfilers, substitute for return, service
                                            center correspondence audits, and research studies.
                                          • Reason 2: We excluded related and multiyear audits because we were
                                            unable to relate them to specific returns in one of our target years. Also,
                                            some of these returns were selected on the basis of audits of partnership
                                            or corporation returns

                                            Table I.1 shows the total number of audits closed by IRS for the 3-year
                                            period of our analysis and the number included in the analysis. Table I.2
                                            shows the individual source codes and indicates which are included in the
                                            study population and which are not. This table also provides the reason a
                                            source was excluded or the source code group for those included.

Table I.1: Number of Audits by Year the                                                                                                a
Return Was Received                         Description                                      Year return was received by IRS
                                            Type of audit                                        1992            1993          1994
                                            Total recorded audits                             806,344        1,129,956     1,593,912
                                                                                Less (excluded audits)
                                            Service center auditsb                                246,602             305,711          688,441
                                            Nonfilers                                             115,108             434,238          296,527
                                            Multiple returns                                       70,826              61,467           60,144
                                            Related returns                                        47,046              41,148           50,600
                                            Claims                                                 10,309              11,529           10,175
                                            Other excluded returns                            2,470                     4,728           2,978
                                            Total audits excluded from analysis            492,361                    858,821       1,108,865
                                                                        Returns included in the analysis
                                            DIF-selected returns                           178,419                    142,142          310,557
                                            IRS projects                                     41,173                    40,804           50,797
                                            Referrals                                        40,353                    31,173           32,102
                                            Preparers                                        26,578                    25,799           37,561
                                            Regular classification                           16,563                    20,008           24,795
                                            All other selection reasons                      10,897                    11,209           29,235
                                            Total audits included in analysis              313,983                    271,135          485,047
                                            a
                                             Each of the years contains audit information from 4 years of IRS’ Audit Information Management
                                            System (AIMS) closed case database.
                                            b
                                             Service center audits are those with an organization code of 5000 or above on the AIMS database.
                                            Source: IRS’ AIMS database.




                                            Page 20                                          GAO/GGD-99-30 IRS’ Return Selection Process
                                Appendix I
                                Definition of Source Codes for IRS Audits




Table I.2: Source Code Table—
Inclusions and Exclusions       Source                                                                 Reason
                                code      Definition                                        Status     excluded/group
                                01        Tax shelters and automatics                       Included   Other
                                02        DIF source returns                                Included   DIF
                                03        Unallowable items                                 Included   Other
                                04        Multiple filers                                   Included   Other
                                05        DIF-related pickup                                Excluded   Reason 2
                                06        Correspondence examination                        Included   Other
                                07a       Claim—medium examination potential                Excluded   Reason 1
                                08        Self-employment examination                       Included   Other
                                09a       All other claims for refund                       Excluded   Reason 1
                                10        DIF multiyear                                     Excluded   Reason 2
                                11        Studies, tests, and research programs             Excluded   Reason 1
                                12        DIF related delinquent return                     Excluded   Reason 2
                                13a       Married taxpayers filing separately               Included   Other
                                14        Information Return Program—high underreporter     Included   Other
                                15a       Math/clerical error abatement                     Excluded   Reason 1
                                16a       Returns with an illegal narcotics issue           Included   Other
                                17        Tax shelter program                               Included   Other
                                20        Regular classification                            Included   Reg. Class.
                                23        IRA recovery                                      Included   Other
                                24        Nonfiler/refusal to file Tax Delinquency          Excluded   Reason 1
                                          Investigation
                                25b       Substitute for return                             Excluded   Reason 1
                                26        Alternative minimum tax program                   Included   Other
                                30        Claims for refund                                 Excluded   Reason 1
                                31b       Paid claims for refund                            Excluded   Reason 1
                                32        Carry-back refund                                 Excluded   Reason 1
                                35b       Administrative adjustment request (claim)         Excluded   Reason 1
                                37a       Stockholder returns                               Included   Other
                                39        Tax shelter—related pickup                        Excluded   Reason 2
                                40        Multiyear examination—non-DIF-related             Excluded   Reason 2
                                44        Delinquent return—non-DIF-related                 Excluded   Reason 1
                                45        Reference and research                            Excluded   Reason 1
                                46        IRS employee returns                              Included   preparer
                                48        Service center—unallowable related                Excluded   Reason 2
                                49        Return preparer program                           Included   Preparer
                                50        Related pickup—non-DIF                            Excluded   Reason 2
                                60        Information reports                               Included   Referral
                                62        Compliance projects—national office               Included   IRS projects
                                63a       Referrals from appeals                            Included   Referral
                                64        Pickup related to form 1065 (partnership), 1041   Excluded   Reason 2
                                          (estate), or 1120S (S-Corp).
                                65        Collection referral                               Included   Referral
                                66a       Referrals from criminal investigation             Included   Referral
                                67a       Compliance projects—regional office               Included   IRS projects
                                68a       Underreported income program—DIF                  Included   DIF
                                70        Referrals                                         Included   Referrals
                                71a       Referrals from Social Security                    Included   Referral
                                73        Taxpayer request and reconsideration              Excluded   Reason 2
                                75a       Referrals from Justice                            Included   Referral
                                76a       Referrals from other U.S. agencies                Included   Referral
                                77        Referrals from state tax agencies                 Included   Referral




                                Page 21                                     GAO/GGD-99-30 IRS’ Return Selection Process
Appendix I
Definition of Source Codes for IRS Audits




Source                                                                       Reason
code      Definition                                              Status     excluded/group
80        Taxpayer Compliance Measurement Program                 Included   Other
85        Information return program match                        Included   Referral
86a       All other information return program methods            Included   Referral
88        Special enforcement                                     Included   Referral
90        Fraud                                                   Included   Referral
91        TCMP related returns                                    Excluded   Reason 2
95a       IRS racketeer                                           Included   Referral
96a       Strike force                                            Included   Referral
97 a      Wagering                                                Included   Referral
98 a      Illegal income                                          Included   Referral
a
These codes used for returns received in 1992 and 1993 only.
b
These source codes effective for posting years 1994 and after only.
Source: IRS’ AIMS closed case data files and AIMS Coding Manual.




Page 22                                          GAO/GGD-99-30 IRS’ Return Selection Process
Appendix II

Flow Chart of IRS' Audit Selection Process


Figure II.1: Summary of IRS’ process for selecting returns to audit.




                                            Source: Review of IRS’ written procedures and discussions with IRS officials.




                                            Page 23                                           GAO/GGD-99-30 IRS’ Return Selection Process
Appendix III

Statistical Methodology for Analyzing
Assessments and Collections of
Recommended Tax
                                             This appendix describes the methodology we used to determine how much
                                             of the recommended additional tax the IRS actually assesses and collects.
                                             We used information from IRS’ master file and a sample of audits of
                                             returns received in 1992 that were audited during the period 1992 through
                                             1995. We used this sample to compare the amount of assessment and
                                             collection for audits selected using the DIF score and those where the DIF
                                             score was not the primary reason the return was selected for audit.

                                             IRS does not maintain information on the source for selecting a return for
Study Population                             audit, the additional tax recommended, and the amount assessed and
                                             collected in the same database. To determine what proportion of
                                             additional tax was assessed and collected, we looked at information on
                                             IRS’ individual master file for amount assessed and collected and the AIMS
                                             closed audit database for the selection source and the amount of
                                             additional tax recommended in the audit.

                                             As noted in our report, we limited our study population to audits of books
                                             and records done at IRS’ district offices. To compare how much of the
                                             additional tax recommended was assessed and collected for DIF and non-
                                             DIF audits, we selected a sample of audits from our 1992 study population.
                                             We selected 1992 instead of 1993 or 1994 to allow as much time as possible
                                             for collection activities. We also eliminated audits where the AIMS
                                             database indicated that a refund had been made or no additional tax had
                                             been recommended during the audit. This sample population contained
                                             records of 229,550 audits.

                                             To obtain the sample of books and records audits, we selected a stratified
Sample Selection and                         probability sample of 1,083 audits of taxpayer books and records. The
Weighting                                    sample was stratified by whether or not the taxpayer agreed or disagreed
                                             with the adjustments to tax that IRS recommended and whether or not the
                                             audit was selected because of its DIF score or for some non-DIF reason.
                                             The number of audits sampled in each stratum was based on the number
                                             of returns in the population and the total additional taxes recommended in
                                             the audits. The division of the population and sample of audits between
                                             different strata is shown in table III.1.

Table III.1: Distribution of Audits in the
AIMS Database by Sample Strata                                                 Audits in            Results of
                                             Strata                           population          examination       Audits in sample
                                             Agreed DIF-selected                112,512          $330,957,253                     332
                                             Agreed non-DIF-selected            100,254            586,909,138                    250
                                             Unagreed DIF-selected                 9,583           128,733,806                    251
                                             Unagreed non-DIF-selected             7,201           258,077,075                    250
                                             Total                              229,550         $1,304,677,272                  1,083
                                             Source: IRS AIMS database and GAO sampling data.




                                             Page 24                                      GAO/GGD-99-30 IRS’ Return Selection Process
                                        Appendix III
                                        Statistical Methodology for Analyzing Assessments
                                        and Collections of Recommended Tax




                                        We obtained copies of the master file transcript for 1,082 of the audits we
                                        selected. IRS could find no record for one of the taxpayers. For each of the
                                        sample audits, we obtained information on the amount of additional tax
                                        recommended (from the AIMS database) and the amount assessed and the
                                        amount collected (from the master file transcript).

                                        The results of how much of recommended taxes was assessed and
Sampling Errors and                     collected shown in this report are estimates because they are based on the
Confidence Intervals of                 sample of audits drawn from the total population of all eligible audits of
Estimates                               returns received in 1992. The accuracy of these estimates is quantified by
                                        their sampling errors, expressed as 95 percent confidence intervals. In
                                        table III.2 for example, we estimate that the difference between DIF and
                                        non-DIF collections is 22 percent. This estimate is surrounded by a
                                        confidence interval of + 13 percentage points, indicating that we are 95-
                                        percent confident that the actual percentage difference in the population
                                        of all audits of returns received in 1992 lies between 8 percent and 36
                                        percent.

Table III.2: Confidence Interval for
Estimate of difference in Assessments                                                          Percent of audit     Percent of audit
and Collections for DIF-Selected and    Description                                           results assessed     results collected
Non-DIF-Selected Audits                 Point estimate DIF-selected returns                                76%                   57%
                                        Confidence interval DIF-selected returns                          + 8%                  + 9%
                                        Point estimate non-DIF-selected returns                            83%                   35%
                                        Confidence interval non-DIF-selected returns                      + 7%                  + 9%
                                        Percentage difference                                               7%                   22%
                                        Confidence interval at the 95 percent                            + 11%                + 13%
                                        confidence level for the percentage difference
                                        Source: GAO analysis of sampled data for 1992.


                                        In addition to the reported sampling errors, various obstacles can occur
Controlling for                         when conducting this type of review and may cause other types of errors,
Nonsampling Errors                      commonly referred to as nonsampling errors. For example, differences in
                                        how questions are interpreted and errors in entering data could affect the
                                        results. We included steps in both the data collection and data analysis
                                        stages for the purpose of minimizing such nonsampling errors. These steps
                                        involved the 100-percent review of completed data collection instruments
                                        (DCI) and data entry of those DCIs. We also had a second analyst check all
                                        computer analyses and programming.




                                        Page 25                                          GAO/GGD-99-30 IRS’ Return Selection Process
Appendix IV

Tables of Audit Results for Filing Years 1992,
1993, and 1994

                                          We grouped the audit results of our analyses by IRS’ activity codes. These
                                          are codes IRS uses to categorize individual tax returns relative to the
                                          various tax forms filed and the taxpayer’s income level. The following are
                                          definitions of the activity codes:

                                      • 530 - Form 1040A with total positive income less than $25,000;
                                      • 531 - Non-1040A with total positive income less than $25,000;
                                      • 532 - Total positive income of $25,000 or more but less than $50,000;
                                      • 533 - Total positive income of $50,000 or more but less than $100,000;
                                      • 534 - Total positive income of $100,000 or more;
                                      • 535 - Form 1040C with total gross receipts under $25,000;
                                      • 536 - Form 1040C with total gross receipts of $25,000 or more but less than
                                        $100,000;
                                      • 537 - Form 1040C with total gross receipts of $100,000 or more;
                                      • 538 - Form 1040F with total gross receipts under $100,000; and
                                      • 539 - Form 1040F with total gross receipts of $100,000 or more.

                                          For the grouping of IRS audits included in our analyses, the following sets
                                          of tables present the results of these audits by source of audit and activity
                                          codes for each of the 3 years reviewed—1992, 1993, and 1994. The first set
                                          of tables shows the total number of audits, the second set shows the no-
                                          change rate, and the third set shows the average audit results. Each of the
                                          tables summarizes information from IRS’ AIMS closed case data files for
                                          fiscal years 1992 through 1997. Also, a description of the source codes
                                          included in each of the source categories we used can be found in table I.2.


Table IV.1: Number of Returns by Activity Code and Source Group—Returns Received in 1992
                                                                                a
                                                      Number of Audits by Source
                                       Regular                  Compliance
Activity code            DIF     classification     Preparers      projects       Referrals       All other          Total
530                   27,712              6,413        10,950        16,191         11,955              482         73,703
531                   23,800              1,151         3,940          6,196         5,584            1,629         42,300
532                   37,987              2,067         5,456          6,094         6,459            2,294         60,357
533                   36,298              1,921         2,470          3,380         3,171            2,385         49,625
534                   20,557              1,441           290          1,694         2,652            1,592         28,226
535                    8,414                502         1,078          1,972         3,349              506         15,821
536                    9,845              1,394         1,656          2,880         3,614            1,177         20,566
537                   10,757              1,388           644          2,347         3,124              715         18,975
538                    2,177                101            59            161           249               77          2,824
539                      872                185            35            258           196               40          1,586
Total               178,419              16,563        26,578        41,173         40,353          10,897         313,983




                                          Page 26                                GAO/GGD-99-30 IRS’ Return Selection Process
                                         Appendix IV
                                         Tables of Audit Results for Filing Years 1992, 1993,
                                         and 1994




Table IV.2: Number of Returns by Activity Code and Source Group—Returns Received in 1993
                                                                                 a
                                                      Number of audits by source
                                   Regular                      Compliance
Activity code           DIF   classification        Preparers      projects        Referrals            All other          Total
530                 20,871             6,789           11,523        18,143          12,292                 2,658         72,276
531                 18,107             1,273            3,425          5,195          3,287                 1,228         32,515
532                 38,913             3,224            5,200          5,370          4,315                 1,542         58,564
533                 25,533             2,780            2,418          3,125          2,184                 1,860         37,900
534                 13,643             1,894              274          2,002          2,062                 1,083         20,958
535                   6,610              445            1,340          1,294          1,638                   770         12,097
536                   8,501            1,362            1,106          2,138          2,380                 1,248         16,735
537                   7,752            1,775              434          2,847          2,492                   645         15,945
538                   1,548              111               59            209            208                    94          2,229
539                     664              355               20            481            315                    81          1,916
Total              142,142            20,008           25,799        40,804          31,173               11,209         271,135




Table IV.3: Number of Returns by Activity Code and Source Group—Returns Received in 1994
                                                                                 a
                                                       Number of audits by source
                                       Regular                  Compliance
Activity code               DIF classification      Preparers      projects        Referrals            All other          Total
530                     39,557            7,688        16,136        19,928          12,061                 2,077         97,447
531                     37,258            1,758         4,981          5,100          3,298                 9,817         62,212
532                     84,521            3,453         8,167          6,027          4,689                 4,857        111,714
533                     62,866            3,686         4,290          5,000          2,733                 2,822         81,397
534                     30,526            2,967           413         3,755           2,078                 1,346         41,085
535                     14,264              714         1,578         1,571           1,682                 3,383         23,192
536                     19,358            1,812         1,329          3,390          2,208                 3,095         31,192
537                     19,488            2,467           538         4,694           2,950                 1,311         31,448
538                       1,497              94            97            363            179                   443          2,673
539                       1,222             156            32            969            224                    84          2,687
Total                  310,557           24,795        37,561        50,797          32,102               29,235         485,047




                                         Page 27                                       GAO/GGD-99-30 IRS’ Return Selection Process
                                          Appendix IV
                                          Tables of Audit Results for Filing Years 1992, 1993,
                                          and 1994




Table IV.4: No-change Rate by Source of Audit and Activity Code—Returns Received in 1992
                                                                                   a
                                                         Percent by source of audit
                                      Regular                     Compliance
Activity code              DIF classification       Preparers        projects        Referrals           All other           Total
530                         17             17               16             15              10                   14             15
531                         27             30               12             18              12                   18             22
532                         24             22               12             22              14                   22             21
533                         31             22               15             26              20                   20             28
534                         37             32               31             27              23                   29             35
535                         27             30               14             12                9                  15             20
536                         20             29               15             14              14                   20             18
537                         26             32               14             23              20                   22             24
538                         39             32               23             28              37                   32             38
539                         38             29               14             27              34                   25             34
Total                       27             23               15             18               14                  21             22




Table IV.5 No-change Rate by Source of Audit and Activity Code—Returns Received in 1993
                                                                                   a
                                                         Percent by source of audit
                                      Regular                     Compliance
Activity code              DIF classification      Preparers         projects        Referrals           All other           Total
530                         16             17               20             12              11                   26             15
531                         27             31               13             20              18                   15             23
532                         26             33               13             23              17                   14             24
533                         27             35               17             27              24                   11             26
534                         43             40               31             29              26                   18             38
535                         26             25               12             13              14                   16             21
536                         21             24               13             22              17                   18             20
537                         31             34               16             27              21                   21             28
538                         41             36               20             32              38                   38             39
539                         36             31               25             22              38                   25             31
Total                       27             28               16             18              16                   18             23




                                          Page 28                                       GAO/GGD-99-30 IRS’ Return Selection Process
                                          Appendix IV
                                          Tables of Audit Results for Filing Years 1992, 1993,
                                          and 1994




Table IV.6: No-change Rate by Source of Audit and Activity Code—Returns Received in 1994
                                                                                   a
Activity code                                            Percent by source of audit
                                      Regular                     Compliance
                           DIF classification       Preparers        projects        Referrals           All other           Total
530                         16             20               18             12              11                   16             15
531                         25             34               10             17              20                    5             20
532                         23             28               10             21              15                   13             21
533                         25             36               12             27              21                   15             25
534                         43             42               24             37              28                   24             41
535                         23             27               14             23              17                    9             20
536                         16             29               10             22              17                   15             17
537                         27             32               17             28              19                   19             26
538                         38             38               15             23              30                   37             35
539                         35             30                9             18              29                   41             28
Total                       25             29               14             20               16                  12             22




Table IV.7 Average Audit Results by Source of Audit and Activity Code—Returns Received in 1992
                                                                                          a
                                                 Average audit results by source of audit
                                 Regular                            Compliance                                      Average audit
Activity code        DIF   classification          Preparers           projects     Referrals  All other         result—all audits
530              $1,269            $1,976             $1,278             $2,637        $7,409    $5,717                     $2,657
531                1,079            2,280               1,504             2,663         8,122      1,719                     2,338
532                1,511            2,341               1,878             2,826         8,160      2,116                     2,440
533                2,176            2,806               2,444             4,882        11,921      3,298                     3,075
534                4,252            8,100             (1,900)            15,839        39,384      7,001                     8,537
535                1,705            2,421               2,193             3,599         6,491      2,531                     3,037
536                3,300            4,246               4,410             6,382        11,958      3,698                     5,429
537                9,823            7,522               9,347            12,180        34,479      8,225                    13,929
538                  917            6,538               2,226             5,664         6,700      2,094                     1,958
539                5,197            1,009               9,282             6,770        14,701      5,214                     7,490
Total            $2,487            $3,358             $1,949             $4,286       $12,542    $3,974                     $4,067




                                          Page 29                                       GAO/GGD-99-30 IRS’ Return Selection Process
                                          Appendix IV
                                          Tables of Audit Results for Filing Years 1992, 1993,
                                          and 1994




Table IV.8: Average Audit Results by Source of Audit and Activity Code—Returns Received in 1993
                                                                                         a
                                                Average audit results by source of audit
                                                                                                                     Average audit
Activity                            Regular                         Compliance                                         results—all
code                    DIF    classification       Preparers         projects           Referrals      All other           audits
530                  $1,430            $2,280          $1,319           $2,157             $5,754         $1,697            $2,420
531                   1,143             1,679           1,569            2,755              7,941           1,851            2,181
532                   1,515             1,505           1,892            3,008              6,439           2,710            2,079
533                   2,236             2,268           2,397            3,287             12,355           4,364            3,023
534                   5,773             3,090           4,718           10,011             20,144           6,984            7,398
535                   1,757             2,892           2,256            5,528              5,483           1,976            2,776
536                   4,235             3,626           4,523            6,817              8,394           3,325            5,058
537                  15,269             4,439           8,229           10,628             19,726           7,113           13,410
538                   1,116             2,129           2,749            3,363              2,542           4,815            1,709
539                   8,297             3,383           2,980            2,596              8,498           5,559            5,817
Total                 2,945             2,507           1,912            3,771              8,804           3,373            3,630




Table IV.9: Average Audit Results by Source of Audit and Activity Code—Returns Received in 1994
                                                                                         a
                                                 Average audit results by source of audit
                                                                                                                     Average audit
                                    Regular                        Compliance                                          results—all
Activity code            DIF   classification       Preparers        projects            Referrals       All other          audits
530                   $1,422           $1,810          $1,466          $1,810              $4,343          $2,085           $1,915
531                    1,155            1,885           1,615           3,182               6,412            1,189           1,663
532                    1,616            1,678           1,938           2,458               5,067            1,346           1,820
533                    2,058            2,146           2,840           3,223               8,398            2,612           2,407
534                    6,144            5,851           6,509           8,134              23,286            9,236           7,277
535                    2,157            3,254           2,108           3,015               5,815            1,271           2,382
536                    5,077            3,424           4,840           4,172               9,156            2,546           4,910
537                   13,077            6,323          11,375           7,344              21,767            7,458          12,243
538                    1,599            2,141           2,477           1,402               7,984              835           1,924
539                   14,738            6,406           4,021           3,003              13,851            2,168           9,428
Total                  3,082            2,969           2,094           3,357               8,329            2,218           3,324




                                          Page 30                                       GAO/GGD-99-30 IRS’ Return Selection Process
Appendix V

Comments From the Internal Revenue Service




              Page 31       GAO/GGD-99-30 IRS’ Return Selection Process
Appendix V
Comments From the Internal Revenue Service




Page 32                                  GAO/GGD-99-30 IRS’ Return Selection Process
Appendix V
Comments From the Internal Revenue Service




Page 33                                  GAO/GGD-99-30 IRS’ Return Selection Process
Appendix VI

Major Contributors to This Report


                        Thomas D. Short, Assistant Director, Tax Policy and Administration Issues
General Government      Tim Outlaw, Senior Evaluator
Division, Washington,
D.C.
                        Louis G. Roberts, Evaluator-in-Charge
San Francisco Field     Kathleen E. Seymour, Senior Evaluator
Office                  Samuel H. Scrutchins, Senior Data Analyst
                        Tre M. Forlano, Evaluator




                        Page 34                             GAO/GGD-99-30 IRS’ Return Selection Process
Page 35   GAO/GGD-99-30 IRS’ Return Selection Process
Page 36   GAO/GGD-99-30 IRS’ Return Selection Process
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