IRS plans to check 50,000 returns randomly

WASHINGTON -- Aiming to target its audits better, the IRS intends a special random check this year of about 50,000 individual tax returns but will subject fewer people to the intense, face-to-face questioning that drew heavy criticism in the past.

IRS Commissioner Charles Rossotti said Wednesday the goal is to collect an up-to-date snapshot of the taxpaying public so that audits get better results. Almost a quarter of Internal Revenue Service audits now done turn out to have been unnecessary; the new information could reduce the number of no-change audits by 15,000 a year.

"We don't want to audit somebody who doesn't need to be audited," Rossotti told reporters. "We have an opportunity to reduce the burden on the honest taxpayer."

The project, officially called the National Research Program, was last done in 1988. When IRS officials tried a repeat in 1994, it was withdrawn in a hail of criticism from Congress and elsewhere as far too burdensome on taxpayers.

Those past efforts required each selected taxpayer -- in 1988, it was 54,000 -- to undergo a rigid, time-consuming, line-by-line audit of the tax return, even down to bringing birth certificates to prove the identities of their children. A taxpayer's accountant or lawyer wasn't allowed to participate.

Changing policy

This time, officials promise it will be different. Rossotti said about 2,000 taxpayers will face line-by-line examinations that will be less detailed than in the past. The biggest group, about 30,000 taxpayers, will undergo a more limited in-person audit, but those will be less intrusive than in the past and can be attended by a professional tax preparer.

An additional 9,000 taxpayers can expect a correspondence audit through the mail, with the remaining 8,000 likely to have no contact at all from the IRS. The study is intended to reflect the taxpaying population as a whole, with a more detailed look at taxpayers earning above $100,000 a year compared with previous years.

The audits are expected to begin in the fall on individual returns from the 2001 tax year, for which returns are due April 15. Rossotti said the program will not increase the overall number of IRS audits and will not require an increase in the agency's budget.

Taxpayers audited under the project will be told why they were chosen.

In 2000, the IRS conducted 618,000 audits of individual returns, representing less than one-half of 1 percent of the total tax returns filed and less than half the number of the year before.

'People cheat'

A projected 132 million individual tax returns will be filed this year, and IRS officials say reversal of the enforcement slide is essential to ensure compliance with the law.

"There are, unfortunately, people who cheat on their taxes," Rossotti said.

Treasury Secretary Paul O'Neill, who approved the program, said information gleaned will "put us back on the right track" in targeting who is complying and who isn't. The IRS estimated the "tax gap" -- the difference between all federal taxes owed and those paid -- at $278 billion for the 1998 tax year.

"While we have a general sense of the tax gap, and we know that compliance is uneven, we don't have the necessary information to know how big the problem is or how to fix it," O'Neill said in a statement.

In addition, the project enables the IRS to find areas in the tax law that consistently give people trouble. Forms and instructions can be improved, and sometimes Congress will change tax law to eliminate problems.

This year's project will involve only individual Form 1040 tax returns. Future projects will focus on other taxes, such as those paid by corporations, small businesses and the self-employed.