Expect renewed IRS compliance efforts.

• Author: Ely, Mark H.

The tax administration pendulum appears to be swinging back to the middle toward enforcement, resulting in an increase in IRS examinations and collections.

With the enactment of the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA), the Service found its resources consumed by the dual demands of restructuring and reform. Conversion from its traditional geographical and functional structure to the four new business divisions consumed huge amounts of attention and resources. In addition, its renewed emphasis on improved customer service and efforts to implement the many requirements imposed by the IRSRRA necessitated a wholesale reassignment of staff from traditional field enforcement work (i.e., audits and collections) to customer service and IRSRRA initiatives. Most field personnel also participated in myriad mandatory IRSRRA-related training, which consumed additional work hours that would have ordinarily been devoted to traditional daily tasks.

Not surprisingly, the cumulative diversion of resources resulted in a significant reduction in audit and collection. However, because its four new business divisions are now operational, the IRS can reallocate its resources to deal with taxpayer compliance. In addition, with the recent Congressional hearings urging the Service to reinvigorate its enforcement activities, tax practitioners should expect an increase in enforcement initiatives.

Audit Coverage

The manner in which the IRS conducts its taxpayer audits is frequently focused on by the press and Congressional oversight. For example, periodically, Congress, the press and the Service evaluate the rate at which the IRS "audits" taxpayers in various economic strata, drawing conclusions about whether audit coverage has increased or decreased from one year to another. In recent years, the press has enjoyed reporting that the Service's audit rate for the wealthiest Americans has fallen, while the rate has risen for low-wage-earning taxpayers. Often overlooked in that "analysis" however, is the fact that Congress has mandated the IRS to aggressively pursue audits of earned income tax credit (EITC) claims, which increases the audit rate for taxpayers entitled to the EITC.

In absolute terms, the audit-cover age rate has been decreasing since the mid-1990s. For example, the total individual field audit rate (i.e., audits done by revenue agents) has fallen from 0.66% in 1996 to 0.16% in 2001. During that same period, individual...