New IRS guidance boosts statistical sampling.

• Author: Batcher, Mary

At the end of August, the Internal Revenue Service issued Revenue Procedure 2011-42, which provides guidance to taxpayers using statistical sampling to support a tax return position. (1) The guidance in the revenue procedure is not substantially different from guidance provided in earlier field directives. (2) The most important difference is that the revenue procedure provides a safe harbor for companies who wish to use statistical sampling as part of their tax filings.

With the issuance of the revenue procedure, companies do not have to wonder or ask their IRS Examination team whether statistical sampling will be accepted in a situation that is not explicitly covered in other guidance. As long as the statistical sample is in accordance with the revenue procedure, it will be acceptable to the IRS. This means taxpayers can claim deductions or credits that they may not have had the resources to pursue if they did not use sampling.

History of Tax Sampling Guidance

Before the release of the 2002 Field Directive on the Use of Estimates from Probability Samples, the IRS only sanctioned the use of statistical sampling in specific areas. Revolving credit, trading stamps, basis studies, and LIFO were among the few areas that were addressed in IRS guidance. Taxpayers were using statistical sampling for other purposes without the IRS's explicit approval or after approaching their IRS exam team to seek ad hoc approval for their proposed sampling. Recognizing the value to the IRS while limiting the burden to taxpayers, the 2002 field directive was released. A benefit to the IRS is that a properly designed statistical sample narrows the scope of what the IRS needs to examine. After 2000, a series of revenue procedures or guidance were released relating to statistical sampling for Qualified Intermediaries, U.S. Withholding, Meals and Entertainment, Basis Studies, Section 199, and Utility Repairs.

Coordination with Field Guidance

The IRS has taken the additional step of revising its internal sampling guidance in the Internal Revenue Manual (IRM) so audits will be consistent with the guidance provided to taxpayers. That means companies can expect the IRS to generally follow the procedures outlined in Revenue Procedure 2011-42.

The practical consequence of this synchronization of the IRM with the Sampling Revenue Procedure is that, if the taxpayer sample is consistent with the revenue procedure, the IRS will generally use it in its audit of the taxpayer. That limits the scope of the...