The IRS's intensified audit attack.

• Author: Pilla, Daniel J.
• Position: Economics - National Research Program

IN THE SUMMER OF 2001, Internal Revenue Service Commissioner Charles Rossoti promised an immediate 28% increase in the number of tax audits. The institution of the National Research Program (NRP), as announced in January, 2002, is the first installment toward making good on that promise.

The NRP is the resurrected Taxpayer Compliance Measurement Program (TCMP) audit, the grueling line-by-line examination of randomly selected tax returns. The purpose of the TCMP audit was to compile statistical data that was then used to build the IRS's Discriminate Function System (DIF) database, a computer program that compares every line of your tax return with national and regional averages for a person in your same category and profession. If any line of your return is higher than the average, the is scored. The higher the DIF score. the more likely it is that the tax return item will be changed (reduced) through the process of a tax audit. Of course, all changes are intended to increase your tax debt. Consequently, the higher the DIF score, the more likely it is that you will be audited.

The IRS has not updated its DIF data in more than 10 years. As a result, the agency claims it is using vastly out-of-date data to select returns for audit. It admits that the use of such data leads to many taxpayers being audited unnecessarily while those who need to be questioned go unchallenged. In introducing this program in January, 2002, Rossotti proclaimed that "Honest taxpayers shouldn't have to shoulder the burden for those who don't pay what they owe."

Rossotti cast the National Research Program in such a light as to lead a casual observer to conclude that it will help the average citizen by equipping the IRS to target those who deliberately cheat. Not only does the IRS say that honest taxpayers have nothing to fear and will only benefit from this new wave of audits, but claims that the agency "will shift more of the burden onto itself--and away from taxpayers" in connection with these audits. This statement leads one to believe that the NRP is a welcome change to the way the IRS conducts its audit business, but closer examination is warranted.

The IRS's chief claim is that audits under NRP will be much less invasive than past research audits under TCMP. In fact, a TCMP audit came to be known as the "audit from hell" because of the time and effort required to navigate one. According to the IRS, TCMP audits took twice as much time to complete as a typical audit not associated with a research project.

Through the process of "shifting the burden" to the IRS, the agency claims the audit process will be "far less intrusive and burdensome than previous compliance studies." To achieve this alleged "shift in the burden," though, it intends to rely heavily upon pre-audit work. This consists of...