New Development in IRS Audits

Good news: The IRS says that more and more of its individual taxpayer audits are resulting in "no changes" to filers' tax returns. Better news: The IRS has a new plan that will subject fewer compliant taxpayers to IRS audits. Bad news: The new plan will involve a comprehensive research project which will measure payment, filing, and reporting compliance — and the IRS will need the help of about 50,000 taxpayers to complete its research.

This project, called the National Research Program (NRP), is scheduled to start in September 2002. The last time the IRS conducted comprehensive taxpayer research, 54,000 taxpayers were required to meet IRS auditors face-to-face under the Taxpayer Compliance Measurement Program (TCMP).

The old-style TCMP audits were highly burdensome because they required the taxpayers under audit to substantiate each piece of information on their tax returns. The IRS promises that the new NRP audits will not burden taxpayers as much as the TCMP audits did.

The Plan

First, the IRS plans to determine overall compliance with tax-return filing requirements using population data from the U.S. Census Bureau. The IRS will evaluate the portion of the population that has taxable income but fails to file income-tax returns so that strategies can be developed to address this problem.

Second, the IRS plans to use information it already has to analyze payment compliance. This information will help the IRS understand why individuals who should pay taxes do not do so. Would such individuals pay if they could? Do they have other reasons for not paying?

Auditing Sample Returns

Third, the IRS plans to analyze taxpayer compliance by reviewing a sample of tax returns. The IRS will check information on about 8,000 returns by comparing it to information that third parties have provided to the IRS. These taxpayers will not need to be contacted.

Another 9,000 tax return reviews will involve correspondence with taxpayers but will not require face-to-face meetings. The IRS would have contacted some of these taxpayers anyway as part of its ongoing information matching program.

The IRS will conduct partial audits of 30,000 returns. These audits will be designed to be less time-consuming and intrusive for taxpayers than the old-style line-by-line audits.

In addition, the IRS will conduct audits that will check each line of about 2,000 tax returns. However, these audits will not require strict line-by-line substantiation.

Taxpayers who are selected for the NRP sample return audits may send representatives to meetings with IRS auditors instead of attending the meetings in person. We can help you if you are contacted as part of an NRP audit — or any other state or federal tax return audit.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.