Taxpayer use of statistical sampling.

• Author: Smith, Annette B.

Even though the IRS has acted to clarify a taxpayer's ability to use statistical sampling in making a broad range of determinations needed to establish tax liabilities, some questions still remain in light of recently released Field Service Advice (FSA) 200209028.

Director's Memorandum

In March, the Large and Mid-Size Business Division issued its long-awaited "Director's Memorandum" to examiners on taxpayer use of statistical sampling techniques. While in the past the Service has allowed taxpayers to use statistical sampling in certain circumstances, the new memorandum marks the first instance in which it has acknowledged implicitly and approved taxpayer use of the methodology broadly, without regard to a specific underlying issue of income, deduction or credit. The memorandum's stated purpose--to establish guidelines in "evaluating samples and sampling estimates by taxpayers"--may be interpreted to encompass taxpayer positions taken on returns, amended returns and refund claims.

The memorandum directs examiners to determine first whether a taxpayer "has appropriately used a probability sample to support or be the primary evidence of tax amounts" Rather than describing the circumstances for which a probability sample would be appropriate, the memorandum states that the determination will be based on the taxpayer's facts and circumstances and the situation.

Some of the factors used in determining whether sampling is appropriate include the time required to analyze large volumes of data, the cost of analyzing data and other books and records that may exist independently or have greater probative value. Further, sampling "generally should be considered appropriate if there is a compelling reason" for its use "and taxpayers cannot reasonably obtain more accurate information." However, sampling "generally should not be considered appropriate if evidence is readily available from another source that can be demonstrated to be a more accurate answer, or if the use of sampling does not conform to Generally Accepted Accounting Principles."

If the taxpayer's sampling technique is found to be appropriate, the memorandum provides statistical guidelines for testing the validity of the sampling in the specific situation. These guidelines generally parallel those set forth in Internal Revenue Manual 42(18)1, which IRS computer audit specialists use for their own statistical sampling audits. Generally, a taxpayer is expected to have a written sampling plan...