Tax Administration: Audit Trends and Results for Individual Taxpayers
(Letter Report, 04/26/96, GAO/GGD-96-91).

Pursuant to a congressional request, GAO reviewed the Internal Revenue
Service's (IRS) audits of individual taxpayers, focusing on: (1) IRS
audit rates for individual returns; and (2) the overall results of IRS
most recent audits of individual returns.

GAO found that: (1) while the audit rate for individuals decreased
between fiscal years (FY) 1988 and 1993 from 1.57 percent to .92
percent, it increased to 1.67 percent by FY 1995; (2) between FY 1992
and FY 1994, the number of audited computer-selected returns and returns
with potential tax shelters declined by half, while the number of
audited returns with potential nonfilers and returns with unallowable
items tripled; (3) audit rates varied by region and district office; (4)
between FY 1988 and FY 1995, audit rates were highest in the western
region of the country and lowest in the central United States; (5)
between FY 1988 and FY 1995, audit rates increased among those in the
lowest-income group and decreased among those in the highest-income
group; (6) audits of the highest-income group yielded the most
recommended additional tax per return; and (7) between FY 1992 and 1994,
additional taxes recommended for each direct audit hour increased for
business individuals in the lowest and highest-income groups and
nonbusiness individuals in the lowest-income group, and decreased for
nonbusiness individuals in the highest-income group.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-96-91
     TITLE:  Tax Administration: Audit Trends and Results for Individual 
             Taxpayers
      DATE:  04/26/96
   SUBJECT:  Taxpayers
             Voluntary compliance
             Noncompliance
             Auditing standards
             Tax nonpayment
             Tax violations
             Tax returns
             Tax return audits
             Tax administration
             Tax credit
IDENTIFIER:  Earned Income Tax Credit
             IRS Taxpayer Compliance Measurement Program
             IRS Coordinated Examination Program
             IRS Audit Information Management System
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to the Chairman
Subcommittee on Oversight
Committee on Ways and Means
House of Representatives

April 1996

TAX ADMINISTRATION - AUDIT TRENDS
AND RESULTS FOR INDIVIDUAL
TAXPAYERS

GAO/GGD-96-91

Audit Trends and Results

(268694)


Abbreviations
=============================================================== ABBREV

  AIMS - Audit Information Management System
  DIF - Discriminant Function
  EIC - Earned Income Credit
  IRS - Internal Revenue Service
  TCMP - Taxpayer Compliance Measurement Program
  TGR - Total Gross Receipts
  TPI - Total Positive Income

Letter
=============================================================== LETTER


B-261743

April 26, 1996

The Honorable Nancy L.  Johnson
Chairman, Subcommittee on Oversight
Committee on Ways and Means
House of Representatives

Dear Chairman Johnson: 

IRS annually audits a number of tax returns to determine whether
individual taxpayers have voluntarily complied with the tax laws and
paid the proper amount of taxes.  Section 7602 of the Internal
Revenue Code defines an audit as an examination of a taxpayer's books
and records for the purpose of determining the correct tax liability. 
To better use audit resources, IRS attempts to identify and audit
returns with the greatest likelihood of noncompliance, while seeking
a minimum degree of audit coverage for each type of taxpayer to
advance voluntary compliance. 

Compared to the 1960s and 1970s, the audit rate--the annual
percentage of individual tax returns that IRS has audited of the
total number of individual tax returns filed--has dropped, falling
below 1 percent in fiscal year 1993.  Although IRS believes that its
audits induce voluntary taxpayer compliance, no one knows the actual
impact, particularly given a decreasing audit rate.  Data are
available, however, to analyze both the trends in audit rates across
the country and the results of these audits, such as the type of tax
returns being audited and the productivity of the audits, measured by
additional taxes recommended per return and per direct audit hour. 

This report responds to your request that we provide information on
(1) the trend in IRS' audit rates for individual returns and (2) the
overall results of IRS' most recent audits of individual returns.  We
analyzed the most recent years of available IRS data, including
fiscal years 1988 through 1995 for the trend in audit rates, and
fiscal years 1992 through 1994 for the overall audit results.  We did
not attempt an in-depth analysis to identify the reasons for the
audit trends and results; however, we obtained the views of IRS
Examination Division officials concerning these trends and results. 


   BACKGROUND
------------------------------------------------------------ Letter :1

IRS believes that taxpayers are more likely to voluntarily comply
with the tax laws if they believe that their return may be audited
and unpaid taxes identified.  In concert with audits, IRS uses other
enforcement and nonenforcement methods.  For example, IRS uses
computers to match information returns filed by banks and other third
parties with individual tax returns so it can identify unreported
income.  In recent years, IRS has also emphasized taxpayer education
and assistance to encourage voluntary compliance. 

As part of its audit approach, IRS has established 10 audit classes
for individual returns based on taxpayer income--5 involving returns
without business income, and 5 involving returns with business income
from self-employment.  IRS tracks audit results by these audit
classes and also by various audit sources--programs and techniques
used to select potentially noncompliant returns for audit.  Audit
sources include, among others, suspected tax shelters, IRS and
non-IRS referrals, compliance projects, and computer matches of third
party information.  One of the major audit sources--discriminant
function (DIF)-- involves returns selected solely because of a
computer score\1 designed to predict individual tax returns most
likely to result in additional taxes if audited.  This scoring
provides an objective way to select returns and has helped IRS avoid
burdening potentially compliant taxpayers with an audit. 

Traditionally, IRS has done two types of face-to-face audits from its
district offices to review taxpayers' books and records in support of
a filed return:  (1) field audits, in which an IRS revenue agent
visits an individual taxpayer who has business income or a very
complex return and (2) office audits, in which a tax auditor at an
IRS office is visited by an individual taxpayer who has a less
complex return.  Tax examiners at IRS service centers also review
returns and third-party information, and contact taxpayers concerning
potential discrepancies on their returns.  These discrepancies
include such items as unreported income, as well as unallowable
credits, such as the Earned Income Credit (EIC). 

Starting in fiscal year 1994, IRS decided to include all service
center contacts by tax examiners as audits.  IRS attributed this
change to the fact that such contacts are part of its overall efforts
to correct inaccurate returns.  Unlike traditional field or office
audits, these contacts usually involve a single tax issue on the
return and do not involve a face-to-face audit.  IRS is also counting
other nontraditional types of work as audits, such as recent reviews
of nonfilers\2 done by district office auditors. 

After reviewing a taxpayer's support for the return, IRS auditors
decide whether to recommend changes to tax liability.  If a tax
change is recommended, the taxpayer has the right to either agree
with the recommended tax change or to appeal it through IRS' Office
of Appeals or the courts.  Depending on the outcome of such appeals,
additional recommended tax revenue may or may not ultimately be
assessed and collected. 


--------------------
\1 To compute this score, IRS uses a statistical analysis technique
known as DIF.  This analysis relies on statistically valid data
collected during IRS' periodic Taxpayer Compliance Measurement
Program (TCMP), which involves detailed audits of a random sample of
tax returns.  The most recent TCMP for individuals covered tax year
1988. 

\2 IRS began a 2-year initiative in fiscal year 1993, using up to
2,000 auditor staff years annually, to pursue potential nonfiler
cases that IRS' Collection Division had not previously pursued. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Between fiscal years 1988 and 1993, IRS' annual audit rates for
individuals declined from 1.57 percent to a low of 0.92 percent. 
According to IRS officials, in fiscal years 1994 and 1995 these rates
rebounded mainly because of IRS' nonfiler initiative and a recent
emphasis on reviews of EIC claims.  Coupled with the recent IRS
decision to include all service center contacts in the annual audit
rate, these actions contributed to an audit rate of 1.67 percent in
fiscal year 1995. 

Although generally higher for higher-income individuals, audit rates
have generally decreased since fiscal year 1988 for the
highest-income individuals, while increasing in the past 2 years for
the lowest-income individuals.  According to IRS officials, this is a
direct result of the recent emphasis on nonfilers and EIC claims. 

IRS' audit rates varied significantly in different parts of the
country.  For example, audit rates tended to be higher in IRS'
Western and Southwestern Regions and lower in its Central and Midwest
Regions.  According to IRS officials, the variance among regions was
consistent with IRS' Taxpayer Compliance Program (TCMP) data (which
IRS periodically collects from detailed audits of a random sample of
tax returns) that showed higher taxpayer noncompliance in the Western
and Southwestern Regions compared to the Central and Midwest Regions. 

In general, audits of the highest-income individuals resulted in more
additional tax recommended per return than did audits of the
lowest-income individuals--as much as 4 to 5 times more.  However,
the amount of additional tax recommended per direct audit hour for
the highest-income individuals was less than twice the additional tax
recommended for the lowest-income individuals.  IRS Examination
officials told us that although audits of the highest-income
individuals usually result in substantially greater additional tax
recommended per audit, they tend to be more complex and time
consuming than do audits of the lowest-income individuals, which tend
to focus on single issues and take very little time to complete. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

Our objectives were to provide information on the overall trend in
IRS' individual audit rates and on the overall results of IRS' most
recent individual audits.  We did the audit rate analysis for fiscal
years 1988 through 1995 because published data were readily available
for this period.  We did the audit results analysis for fiscal years
1992 through 1994 because this was the most recent readily available
data. 

To determine the trend in IRS' audit rates, we reviewed IRS' annual
reports for fiscal years 1987 through 1994 as well as unpublished
data for fiscal year 1995.  We collected information on the overall
annual audit rates by type of taxpayer.  We also collected
information on the number of returns filed and the number of returns
audited each year by IRS' regions and by the district offices within
those regions.  We reviewed this information to identify IRS' overall
published audit rates for fiscal years 1988 through 1995, which
included a combination of district office audits and service center
contacts.  To show what the overall rates would have been based
solely on traditional district office audits, we recalculated these
rates excluding service center contacts.  We also used this
information to calculate regional audit rates, both including and
excluding service center contacts, as well as audit rates for each
district office. 

To determine the specific results of IRS' audit efforts for fiscal
years 1992 through 1994, we analyzed IRS Audit Information Management
System (AIMS) data.  IRS uses AIMS to track its audits of tax
returns, including the resources used and any additional taxes
recommended.  We obtained copies of AIMS tapes for each year from
fiscal year 1992 through 1994 and did various analyses to generate
overall results for each year by (1) 10 individual audit classes, (2)
15\3 major audit sources, (3) 3 types of audit staff, and (4) 4 broad
categories of audit closures.\4 For each of these analyses, we
determined the number and percentage of audited returns as well as
the total direct hours and the total additional tax recommended for
each year.  From this information, we computed the direct hours per
return, the taxes recommended per return, and the taxes recommended
per direct hour for each year. 

Other than reconciling totals from the AIMS database to IRS' annual
reports, we did not verify the accuracy of the AIMS data.  Nor did we
attempt an in-depth analysis to identify the reasons for the audit
rate trends and audit results.  Rather, we asked IRS Examination
officials at the National Office to review our analysis of the audit
rate trends and the audit results and provide explanations.  We
requested comments on a draft of this report from the Commissioner of
Internal Revenue.  On March 26, 1996, several IRS Examination
Division officials, including the Acting Assistant Commissioner
(Examination); Director, Management and Analysis; and, Team Leader,
Management and Analysis, as well as a representative from IRS' Office
of Legislative Affairs, provided us with both oral and written
comments.  Their comments are summarized on page 14 and have been
incorporated in this report where appropriate. 

We performed our audit work in Washington, D.C., between August 1995
and February 1996 in accordance with generally accepted government
auditing standards. 


--------------------
\3 IRS has established over 40 varying audit sources; we selected the
largest 14 sources from fiscal years 1992 through 1994 and combined
the rest into an "other" category. 

\4 An audit closure occurs when an audit is completed, after which a
taxpayer can either agree or appeal if there is a proposed tax
change; if there is no proposed tax change, the audit may be closed
either with or without an adjustment to the return. 


   TRENDS IN IRS' AUDIT RATES
------------------------------------------------------------ Letter :4

Between fiscal years 1988 and 1993, IRS' audit rate for individuals
decreased from 1.57 percent to 0.92 percent.  IRS Examination
Division officials told us that they attributed the decrease to more
returns being filed by taxpayers; more time spent auditing complex
returns by IRS auditors; and, an overall reduction in examination
staffing.  During fiscal years 1994 and 1995, the audit rate
increased, reaching 1.67 percent by 1995.  IRS officials told us they
attributed this increase to the involvement of district office
auditors in pursuing nonfiler cases and the increasing number of EIC
claims reviewed by service center examination staff. 

Starting in fiscal year 1994, IRS decided to include all service
center contacts by tax examiners in its audit rates.  As a result,
when the annual statistics for fiscal years 1993 and 1994 were
published, IRS also recomputed its audit rates for fiscal years 1988
through 1992 to include all service center contacts.  Counting such
work as part of the audit rate, coupled with IRS recent nonfiler and
EIC emphasis, tended to produce higher audit rates, as most of this
work takes less time to do than traditional face-to-face audits. 
Figure 1 shows the trend in individual audit rates from fiscal years
1988 through 1995, based on rates that both include and exclude
service center results. 

   Figure 1:  IRS' National Audit
   Rates, Including and Excluding
   Service Center Results, FYs
   1988 through 1995

   (See figure in printed
   edition.)

Source:  GAO analysis of IRS data. 


   MAJOR AUDIT SOURCES REFLECT THE
   IMPACT OF RECENT IRS
   INITIATIVES
------------------------------------------------------------ Letter :5

In analyzing the audit results from fiscal year 1992 through 1994, we
did an in-depth review of various sources of IRS' audits.  Our
analysis of these sources illustrated the shift from traditional
audits to other types of work.  Over these 3 years, four sources
accounted for over half of IRS' audits.  As shown in figure 2, two of
these--returns selected because of DIF or potential tax
shelters--declined by at least half, while the other two--returns
involving potential nonfilers or unallowable items--at least tripled. 
The first two sources reflect traditional audits and the latter two
sources reflect nontraditional work, such as the nonfiler initiative
and EIC claims, respectively. 

   Figure 2:  Number of Returns
   Audited for Selected IRS Audit
   Sources, FYs 1992 to 1994

   (See figure in printed
   edition.)

\a Computer identified DIF-scored returns. 

\b Related returns of partners, grantors, beneficiaries, and
shareholders identified during audits of either partnerships,
fiduciaries, or Subchapter S corporations involving potential tax
shelter issues. 

\c Returns involving refundable credits and dependency exemptions,
e.g., the EIC, initiated by service center examination staff. 

\d Returns involving known taxpayers who appeared to not file as
required. 

Source:  GAO analysis of IRS data. 


   AUDIT RATES VARIED BY
   GEOGRAPHIC LOCATION
------------------------------------------------------------ Letter :6

IRS' individual audit rates varied widely by geographic location,
regardless of whether service center contacts and other
nontraditional audits were included.  As figure 3 shows, for fiscal
year 1995 the rates tended to be highest in the western regions of
the country and lowest in the middle regions.  IRS Examination
Division officials told us that these trends were consistent with
TCMP data, which showed higher taxpayer noncompliance in IRS' Western
and Southwest Regions and lower taxpayer noncompliance in its Central
and Midwest Regions.  With few exceptions, these regional patterns
largely held true from fiscal years 1988 through 1995.  (See table
I.1 for our analysis of regional audit rates.) Throughout this
period, audit rates also varied widely by district office.  (See
table I.2 for our analysis of district office audit rates.)

   Figure 3:  IRS' FY 1995
   Regional Audit Rates, Including
   and Excluding Service Center
   Results

   (See figure in printed
   edition.)

Note 1:  District rates include only district office results; service
center rates include only service center results; overall rate
includes district office and service center results. 

Note 2:  Regional audit rate is the annual percentage of individual
returns audited of the total individual returns filed in the region. 

Source:  GAO analysis of IRS data. 


   AUDIT RATES VARIED AMONG INCOME
   GROUPS
------------------------------------------------------------ Letter :7

Our analysis of the audit rates and audit results also identified
patterns related to income reported by taxpayers.  Our analysis
focused on individuals who reported significant amounts of business
income and individuals who did not report such income, (i.e.,
nonbusiness), particularly those that were in the lowest- and
highest-income groups.  Figure 4 shows that the IRS reported audit
rates from fiscal years 1988 to 1995 (1) increased in the last 2
fiscal years among those in the lowest-income group (less than
$25,000), particularly for business individuals, for whom the rate
more than doubled, and (2) decreased among those in the
highest-income group ($100,000 or more), particularly for nonbusiness
individuals, for whom the fiscal year 1995 rate dropped to about
one-fourth of what it had been in fiscal year 1988.  IRS Examination
Division officials said they attributed the increase in audit rates
for the lowest-income groups, which generally occurred in fiscal
years 1994 and 1995, to the nonfiler initiative and the recent
emphasis on EIC.  They said the decrease in audit rates for the
highest-income nonbusiness individuals was due to an overall
reduction in examination staffing coupled with an increase in the
number of returns filed for this income group.  (See table I.4 for
our analysis of the audit rate trends for all income groups.)

   Figure 4:  Trend in Audit Rates
   for Business and NonBusiness
   Individual Taxpayers, FYs 1988
   through 1995

   (See figure in printed
   edition.)

Source:  GAO analysis of IRS data. 


   AUDIT PRODUCTIVITY ALSO VARIED
   AMONG INCOME GROUPS
------------------------------------------------------------ Letter :8

Concerning audit productivity measured by income groups, differing
patterns emerged.  In general, audits of the highest-income groups
resulted in as much as 4 to 5 times more additional tax recommended
per return--for both nonbusiness and business individuals--than did
audits of the lowest-income groups.  As figure 5 shows, from fiscal
year 1992 to fiscal year 1994, additional taxes recommended per
return (1) decreased among business individuals for the lowest-income
group and increased for the highest-income group and (2) increased
among nonbusiness individuals for the lowest-income group and
decreased for the highest-income group.  IRS Examination officials
said the increases or decreases in additional taxes recommended from
fiscal years 1992 to 1994 for both the highest-income business and
nonbusiness individuals were affected by the small number of
individual tax returns that IRS audited as part of its Coordinated
Examination Program.  This program is designed to audit the largest
corporations; individual taxpayers audited under this program are
usually corporate officers or shareholders. 

   Figure 5:  Additional Taxes
   Recommended Per Return for
   Selected Audit Classes, FYs
   1992 to 1994

   (See figure in printed
   edition.)

Source:  GAO analysis of IRS data. 

Another measure of audit productivity is the amount of additional
taxes recommended for each direct audit hour used to complete the
audit.  Whereas from fiscal years 1992 to 1994, the amount of
additional taxes recommended per direct hour was similar to the
amount of additional taxes recommended per return for nonbusiness
individuals; however, these amounts differed for business
individuals.  As figure 6 shows, from fiscal years 1992 to 1994,
taxes recommended per direct hour (1) among business individuals
increased for both the lowest- and highest-income groups and (2)
increased among nonbusiness individuals for the lowest-income group
and decreased for the highest-income group.  (See tables II.1 through
II.3 for an overall analysis of the results of audits by income
classes.)

   Figure 6:  Additional Taxes
   Recommended Per Audit Hour for
   Selected Audit Classes, FYs
   1992 to 1994

   (See figure in printed
   edition.)

Source:  GAO analysis of IRS data. 

We provide more detailed information from our analyses of various
other elements of both the audit rates and the audit results in
appendixes I and II.  Such elements include audit rates by IRS
district offices (tables I.2 and I.3), audit results on whether or
not the IRS auditor recommended additional taxes, and if so, whether
the taxpayer appealed the additional taxes recommended (tables II.10
through II.12), and the no-change rate for selected audit sources
(table II.13). 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :9

We requested comments on a draft of this report from the Commissioner
of Internal Revenue or her designated representative.  Responsible
IRS Examination Division officials, including the Acting Assistant
Commissioner (Examination); Director, Management and Analysis; and,
Team Leader, Management and Analysis, as well as a representative
from IRS' Office of Legislative Affairs provided IRS' comments in a
March 26, 1996, meeting.  They basically agreed with the information
presented in the report and provided additional explanations for some
of the audit trends and results, such as (1) the downward trend in
overall audit rates, as well as the rate for the highest-income
nonbusiness individuals, from fiscal years 1988 to 1993; (2) the
increases or decreases in additional taxes recommended for the
highest-income business and nonbusiness individuals from fiscal years
1992 to 1994; (3) the decrease in additional taxes recommended for
the lowest-income business individuals from fiscal years 1992 to
1994; and (4) the amount of additional tax recommended per direct
hour for the highest-income individuals compared to that for the
lowest-income individuals.  In response to their comments, we have
incorporated the additional explanations in the report where
appropriate. 


---------------------------------------------------------- Letter :9.1

As agreed with you, unless you announce the contents of this report
earlier, we plan no further distribution of this report until 30 days
from the date of this letter.  At that time, we will send copies of
this report to various congressional committees, the Commissioner of
Internal Revenue, and other interested parties.  We also will make
copies available to others upon request. 

The major contributors to this report are listed in Appendix III.  If
you have any questions concerning this report, please contact me at
(202) 512-9044. 

Sincerely yours,

Natwar M.  Gandhi
Associate Director, Tax Policy
 and Administration Issues


THE TREND IN IRS INDIVIDUAL AUDIT
RATES FOR FISCAL YEARS 1988
THROUGH 1995
=========================================================== Appendix I

This appendix presents our analysis of the trend in IRS' individual
audit rates from fiscal year 1988 through fiscal year 1995.  The
audit rate is the percentage of individual tax returns that IRS has
audited of the total number of individual tax returns filed.  The
appendix includes a comparison of IRS' published annual audit rates,
which include both district office and service center results, with
recomputed audit rates that we derived by excluding service center
results.  It also presents trends in individual audit rates by
geographic location as well as by various income groups. 



                                    Table I.1
                     
                        Comparison of IRS Individual Audit
                      Rates, Including and Excluding Service
                      Center Results, FYs 1988 Through 1995


Location            1988    1989    1990    1991    1992    1993    1994    1995
----------------  ------  ------  ------  ------  ------  ------  ------  ------
================================================================================
United States      1.57%   1.29%   1.04%   1.17%   1.06%   0.92%   1.07%   1.67%
United States       0.85    0.73    0.65    0.62    0.66    0.66    0.72    0.70


--------------------------------------------------------------------------------
================================================================================
North Atlantic      1.83    1.27    1.07    1.15    1.06    0.91    1.03    1.82
North Atlantic      0.73    0.64    0.55    0.53    0.54    0.50    0.59    0.64


--------------------------------------------------------------------------------
================================================================================
Mid-Atlantic        0.99    0.85    0.70    0.65    0.62    0.53    0.70    1.23
Mid-Atlantic        0.64    0.57    0.46    0.41    0.41    0.41    0.47    0.42


--------------------------------------------------------------------------------
================================================================================
Southeast           1.40    1.38    1.14    1.17    1.16    0.98    0.99    1.25
Southeast           0.77    0.73    0.71    0.75    0.76    0.75    0.79    0.74


--------------------------------------------------------------------------------
================================================================================
Central             1.23    1.03    0.85    0.79    0.80    0.66    0.71    0.84
Central             0.66    0.64    0.53    0.47    0.49    0.43    0.47    0.43


--------------------------------------------------------------------------------
================================================================================
Midwest             1.31    1.05    0.79    0.71    0.71    0.64    0.85    1.07
Midwest             0.81    0.66    0.52    0.47    0.43    0.45    0.67    0.54


--------------------------------------------------------------------------------
================================================================================
Southwest           2.45    2.05    1.48    1.37    1.27    1.28    1.37    2.13
Southwest           1.16    0.88    0.82    0.77    0.75    0.79    0.83    0.81


--------------------------------------------------------------------------------
================================================================================
Western             1.82    1.44    1.19    2.13    1.62    1.33    1.75    3.19
Western             1.18    0.96    0.89    0.86    1.05    1.10    1.09    1.16
--------------------------------------------------------------------------------
Note:  IRS audit rates, which include both service center and
district office results, are in bold.  All others are GAO's
recomputed audit rates, which include only district office results. 

Source:  GAO analysis of IRS data. 



                                    Table I.2
                     
                      IRS Individual Audit Rates by District
                          Office, FYs 1988 Through 1995


Region/District     1988    1989    1990    1991    1992    1993    1994    1995
----------------  ------  ------  ------  ------  ------  ------  ------  ------
North Atlantic
Brooklyn           0.69%   0.52%   0.43%   0.41%   0.48%   0.42%   0.47%   0.59%
Boston              0.57    0.50    0.41    0.41    0.43    0.36    0.51    0.48
Buffalo             0.66    0.59    0.52    0.41    0.44    0.48    0.52    0.47
Manhattan           1.39    1.23    0.98    0.79    0.78    0.62    0.77    1.07
Hartford            0.63    0.61    0.61    0.52    0.64    0.64    0.79    0.79
Albany              0.52    0.52    0.45    0.47    0.44    0.41    0.41    0.35
Augusta             0.56    0.45    0.38    0.42    0.43    0.59    0.74    0.66
Portsmouth          0.56    0.69    0.54    0.60    0.75    0.73    0.67    0.65
Providence          0.82    0.82    0.74    0.71    0.87    0.84    0.94    0.96
Burlington          0.82    0.65    0.58    2.22    0.66    0.61    0.73    0.64
Mid-Atlantic
Newark              0.57    0.50    0.36    0.35    0.39    0.42    0.39    0.39
Philadelphia        0.64    0.50    0.37    0.29    0.31    0.33    0.43    0.42
Richmond            0.60    0.59    0.51    0.49    0.48    0.48    0.62    0.45
Baltimore           0.78    0.69    0.50    0.47    0.45    0.39    0.46    0.45
Pittsburgh          0.64    0.62    0.69    0.52    0.46    0.43    0.45    0.36
Wilmington          0.82    1.00    0.83    0.62    0.66    0.62    0.80    0.59
Southeast
Jacksonville        0.70    0.62    0.65    0.67    0.69    0.67    0.70    0.57
Greensboro          0.54    0.50    0.41    0.44    0.46    0.48    0.50    0.57
Atlanta             1.07    0.90    0.86    0.90    0.92    1.07    1.11    1.14
Ft. Lauderdale      0.76    0.93    0.95    0.87    0.84    0.82    0.88    0.68
Nashville           0.77    0.73    0.66    0.71    0.77    0.62    0.62    0.54
New Orleans         0.89    1.00    1.00    1.19    1.07    0.91    1.02    0.90
Birmingham          0.85    0.63    0.64    0.59    0.65    0.61    0.64    0.74
Columbia            0.54    0.56    0.49    0.60    0.56    0.63    0.64    0.54
Jackson             0.94    0.83    0.72    0.86    0.95    0.92    1.12    1.15
Little Rock         0.69    0.70    0.82    0.92    1.01    0.96    0.92    0.92
Central
Detroit             0.62    0.58    0.46    0.42    0.45    0.40    0.53    0.47
Cleveland           0.59    0.70    0.58    0.52    0.52    0.40    0.33    0.33
Indianapolis        0.78    0.75    0.57    0.50    0.53    0.51    0.63    0.60
Cincinnati          0.73    0.52    0.50    0.43    0.44    0.36    0.35    0.33
Louisville          0.61    0.71    0.63    0.50    0.54    0.53    0.43    0.32
Parkersburg         0.65    0.60    0.52    0.54    0.54    0.46    0.49    0.47
Midwest
Chicago             0.90    0.73    0.50    0.34    0.38    0.39    0.78    0.56
St. Louis           0.75    0.60    0.52    0.46    0.44    0.61    0.79    0.55
Milwaukee           0.55    0.45    0.34    0.31    0.24    0.25    0.32    0.47
St. Paul            0.88    0.69    0.62    0.54    0.50    0.53    0.82    0.58
Springfield         0.86    0.64    0.49    0.49    0.43    0.39    0.40    0.39
Des Moines          0.74    0.61    0.54    0.49    0.47    0.39    0.74    0.52
Omaha               0.85    0.68    0.55    0.57    0.45    0.57    0.55    0.54
Helena              1.06    1.11    0.95    0.81    0.82    0.79    0.85    0.68
Aberdeen            0.70    0.75    0.59    0.62    0.57    0.67    0.81    0.61
Fargo               1.17    0.96    0.93    1.86    1.11    0.78    0.90    0.90
Southwest
Dallas              1.19    0.83    0.83    0.81    0.80    0.82    0.90    1.04
Austin              1.15    0.91    0.83    0.72    0.67    0.71    0.72    0.73
Houston             1.53    1.14    1.09    0.85    0.75    0.81    0.86    0.79
Denver              1.11    0.93    0.79    0.93    0.87    0.81    0.93    0.88
Phoenix             0.96    0.80    0.75    0.71    0.80    0.78    0.81    0.70
Oklahoma City       1.33    0.86    0.80    0.89    0.92    0.97    1.08    0.81
Wichita             0.83    0.63    0.65    0.61    0.51    0.89    0.73    0.55
Salt Lake City      1.09    0.78    0.61    0.51    0.48    0.58    0.58    0.72
Albuquerque         0.81    0.83    0.59    0.54    0.63    0.63    0.48    0.63
Cheyenne            1.46    1.13    1.16    0.93    0.90    0.76    0.86    0.92
Western
Laguna Niguel       1.31    1.12    0.91    0.91    1.10    1.28    1.14    1.57
Los Angeles         1.24    1.01    1.06    1.13    1.37    1.39    1.32    1.34
San Jose            1.22    0.97    0.72    0.85    0.93    0.86    0.74    0.92
Seattle             0.92    0.63    0.65    0.63    0.79    0.75    0.76    0.65
Sacramento          0.98    1.00    0.81    0.57    0.88    0.89    0.89    1.06
San Francisco       1.46    1.08    1.20    0.99    1.30    1.60    1.57    1.36
Portland            0.72    0.55    0.57    0.49    0.52    0.58    0.64    0.66
Honolulu            0.72    0.46    0.45    0.37    0.41    0.47    0.46    0.66
Las Vegas           2.06    1.79    1.84    1.57    1.95    2.02    3.08    2.02
Boise               1.15    0.92    0.89    0.71    0.93    1.13    1.15    1.12
Anchorage           2.08    1.15    1.49    1.87    1.36    1.15    1.30    1.07
International       1.06    0.92    0.88    0.52    0.52    0.29    0.19    0.19
--------------------------------------------------------------------------------
Source:  GAO analysis of IRS data. 



                                    Table I.3
                     
                        IRS Districts With the Highest and
                     Lowest Individual Audit Rates, FYs 1988
                                   Through 1995


Districts           1988    1989    1990    1991    1992    1993    1994    1995
----------------  ------  ------  ------  ------  ------  ------  ------  ------
Highest rates
Anchorage          2.08%   1.15%   1.49%   1.87%   1.36%   1.15%   1.30%   1.07%
Las Vegas           2.06    1.79    1.84    1.57    1.95    2.02    3.08    2.02
Cheyenne            1.46    1.13    1.16    0.93    0.90    0.76    0.86    0.92
San Francisco       1.46    1.08    1.20    0.99    1.30    1.60    1.57    1.36
Laguna Niguel       1.31    1.12    0.91    0.91    1.10    1.28    1.14    1.57
Los Angeles         1.24    1.01    1.06    1.13    1.37    1.39    1.32    1.34
Boise               1.15    0.92    0.89    0.71    0.93    1.13    1.15    1.12
Atlanta             1.07    0.90    0.86    0.90    0.92    1.07    1.11    1.14
Lowest rates
Albany              0.52    0.52    0.45    0.47    0.44    0.41    0.41    0.35
Milwaukee           0.55    0.45    0.34    0.31    0.24    0.25    0.32    0.47
Boston              0.57    0.50    0.41    0.41    0.43    0.36    0.51    0.48
Newark              0.57    0.50    0.36    0.35    0.39    0.42    0.39    0.39
Detroit             0.62    0.58    0.46    0.42    0.45    0.40    0.53    0.47
Philadelphia        0.64    0.50    0.37    0.29    0.31    0.33    0.43    0.42
Cincinnati          0.73    0.52    0.50    0.43    0.44    0.36    0.35    0.33
Baltimore           0.78    0.69    0.50    0.47    0.45    0.39    0.46    0.45
--------------------------------------------------------------------------------
Note:  Districts with the 15 highest or lowest audit rates for at
least 6 of 8 years during fiscal years 1988 through 1995. 

Source:  GAO analysis of IRS data. 



                                    Table I.4
                     
                       IRS Audit Rates by Individual Audit
                     Class: Nonbusiness and Business Returns,
                              FYs 1988 Through 1995


Audit class         1988    1989    1990    1991    1992    1993    1994    1995
----------------  ------  ------  ------  ------  ------  ------  ------  ------
Nonbusiness returns
--------------------------------------------------------------------------------
1040A, TPI <       1.03%   1.03%   0.55%   0.94%   0.78%   0.74%   1.04%   1.96%
 $25,000\
Non-1040A, TPI <    1.04    0.82    0.91    1.03    0.92    0.66    0.88    1.30
 $25,000
TPI $25,000 <       1.72    1.31    0.97    0.77    0.70    0.58    0.53    0.90
 $50,000
TPI $50,000 <       1.53    1.46    1.38    1.24    1.10    0.88    0.72    1.05
 $100,000
TPI $100,00 and    11.41    6.45    5.55    5.64    5.28    4.03    2.94    2.79
 over
Business returns
C-TGR < $25,000\    2.38    1.94    1.84    1.91    1.89    2.24    4.39    5.85
C-TGR $25,000 <     3.09    2.50    2.35    2.22    2.28    2.41    3.01    3.08
 $100,000
C-TGR $100,000      5.38    4.35    3.84    3.92    4.17    3.91    3.57    3.47
 and over
F-TGR <             1.59    1.38    1.67    1.53    1.28    1.06    1.16    1.23
 $100,000\
F-TGR $100,000      4.35    2.49    3.09    3.98    2.40    2.06    1.74    2.51
 and over
--------------------------------------------------------------------------------
Legend

1040A = nonbusiness returns filed by individuals
TPI = total positive income (Income from positive sources only)
C-TGR = Form 1040 Schedule C (Profit or Loss from Business) total
gross receipts
F-TGR = Form 1040 Schedule F (Profit or Loss from Farming) total
gross receipts

Source:  GAO analysis of IRS data. 


THE RESULTS OF IRS INDIVIDUAL
AUDITS FOR FISCAL YEARS 1992 TO
1994
========================================================== Appendix II

This appendix presents our analysis of the results of IRS' individual
audits from fiscal year 1992 through fiscal year 1994.  It includes
information on the number of individual returns audited; the amount
of direct hours and additional taxes recommended resulting from these
audits; and a computation of the direct hours per return, as well as
the additional taxes recommended per return and per direct hour, for
the following four categories:  (1) taxpayer income groups, (2) audit
sources, (3) types of audit staff, and (4) types of audit closures. 



                                    Table II.1
                     
                     Number of Individual Returns Audited by
                        Audit Class, FYs 1992 through 1994



Audit class             Number   Percent    Number   Percent    Number   Percent
--------------------  --------  --------  --------  --------  --------  --------
1040A, TPI <           338,683       28%   315,469       30%   470,723       38%
 $25,000\
Non 1040A, TPI <       172,557        14   125,697        12   129,132        11
 $25,000
TPI $25,000 <          191,166        16   159,070        15   143,243        12
 $50,000
TPI $50,000 <          150,905        13   127,484        12   110,193         9
 $100,000
TPI $100,000 and       167,394        14   136,908        13   110,004         9
 over
C-TGR < $25,000         41,293         3    51,934         5   106,169         9
C-TGR $25,000 <         64,070         5    69,253         7    87,561         7
 $100,000
C-TGR $100,000 and      65,939         5    61,768         6    57,766         5
 over
F-TGR < $100,000         7,333         1     5,980         1     6,203         1
F-TGR $100,000 and       6,679         1     5,403         1     4,713        0\
 over
================================================================================
Total                 1,206,01      100%  1,058,96      102%  1,225,70      101%
                             9                   6                   7
--------------------------------------------------------------------------------
Legend

1040A = nonbusiness returns filed by individuals
TPI = total positive income (income from positive sources only)
C-TGR = Form 1040 Schedule C (Profit or Loss from Business) total
gross receipts
F-TGR = Form 1040 Schedule F (Profit or Loss from Farming) total
gross receipts

Note:  Percentages are the percent of total individual audits for the
year and have been rounded to the nearest whole percent. 

Source:  GAO analysis of IRS data. 



                                    Table II.2
                     
                        Direct Audit Hours and Additional
                     Recommended Tax by Audit Class, FYs 1992
                                   Through 1994

                      (Dollars rounded to nearest thousand)


Audit class     1992        1993        1994        1992        1993        1994
------------  ------  ----------  ----------  ----------  ----------  ----------
1040A, TPI <  682,09     779,762   1,327,898   $ 851,498   $ 923,444           $
 $25,000           9                                                   1,458,449
Non-1040A,    669,34     560,972     569,194     365,082     332,917     406,007
 TPI <             6
 $25,000
TPI $25,000   1,036,     879,258     756,338     523,852     494,225     392,401
 < $50,000       641
TPI $50,000   1,049,     845,911     692,853     497,592     469,763     422,755
 < $100,000      245
TPI $100,00   1,469,   1,219,437     948,220   2,439,614   1,725,394   1,516,202
 and over        274
C-TGR <       321,61     344,307     590,905     134,133     159,564     315,412
 $25,000           5
C-TGR         825,27     725,075     765,024     404,824     455,335     570,837
 $25,000 <         7
 $100,000
C-TGR         1,586,   1,378,512   1,142,811     966,855     972,900     929,553
 $100,000        402
 and over
F-TGR <       66,266      47,541      43,316      16,597      12,295      15,676
 $100,000
F-TGR         129,36      87,292      67,053     108,378     107,257     139,734
 $100,000          6
 and over
--------------------------------------------------------------------------------
Legend

1040A = nonbusiness returns filed by individuals
TPI = total positive income (Income from positive sources only)
C-TGR = Form 1040 Schedule C (Profit or Loss from Business) total
gross receipts
F-TGR = Form 1040 Schedule F (Profit or Loss from Farming) total
gross receipts

Source:  GAO analysis of IRS data. 



                                    Table II.3
                     
                      Audit Productivity by Audit Class, FYs
                                1992 Through 1994


Audit
class       1992    1993    1994    1992    1993    1994    1992    1993    1994
--------  ------  ------  ------  ------  ------  ------  ------  ------  ------
1040A,      2.01    2.47    2.82       $       $       $  $1,248  $1,184  $1,098
 TPI <                             2,514   2,927   3,098
 $25,000
Non-        3.88    4.46    4.41   2,116   2,649   3,144     545     593     713
 1040A,
 TPI <
 $25,000
TPI         5.42    5.53    5.28   2,740   3,107   2,739     505     562     519
 $25,000
 <
 $50,000
TPI         6.95    6.64    6.29   3,297   3,685   3,837     474     555     610
 $50,000
 <
 $100,00
 0
TPI         8.78    8.91    8.62  14,574  12,603  13,783   1,660   1,415   1,599
 $100,00
 and
 over
C-TGR <     7.79    6.63    5.57   3,248   3,072   2,971     417     463     534
 $25,000
C-TGR      12.88   10.47    8.74   6,318   6,575   6,519     491     628     746
 $25,000
 <
 $100,00
 0
C-TGR      24.06   22.32   19.78  14,663  15,751  16,092     609     706     813
 $100,000
 and
 over
F-TGR <     9.04    7.95    6.98   2,263   2,056   2,527     250     259     362
 $100,000
F-TGR      19.37   16.16   14.23  16,227  19,851  29,649     838   1,229   2,084
 $100,000
 and
 over
--------------------------------------------------------------------------------
Legend

1040A = nonbusiness returns filed by individuals
TPI = total positive income (Income from positive sources only)
C-TGR = Form 1040 Schedule C (Profit or Loss from Business) total
gross receipts
F-TGR = Form 1040 Schedule F (Profit or Loss from Farming) total
gross receipts

Note:  Dollars rounded to the nearest whole dollar. 

Source:  GAO analysis of IRS data. 



                                    Table II.4
                     
                     Number of Individual Returns Audited By
                      Examination Position, FYs 1992 Through
                                       1994



                                Percen               Percen               Percen
Examination position    Number       t       Number       t       Number       t
----------------------  ------  ------  -----------  ------  -----------  ------
Revenue agents          210,16     17%      250,712     24%      364,016     30%
                             6
Tax auditors            536,64      45      505,539      48      456,216      37
                             0
Tax examiners           459,21      38      302,715      29      405,475      33
                             3
================================================================================
Total                   1,206,    100%    1,058,966    101%    1,225,707    100%
                           019
--------------------------------------------------------------------------------
Note:  Percentages are the percent of total individual audits for the
year and have been rounded to the nearest whole percent. 

Source:  GAO analysis of IRS data. 



                                    Table II.5
                     
                      Direct Audit Hours and Additional Tax
                     Recommended by Examination Position, FYs
                                1992 Through 1994

                      (Dollars rounded to nearest thousand)


Examinat
ion
position        1992        1993        1994        1992        1993        1994
--------  ----------  ----------  ----------  ----------  ----------  ----------
Revenue    4,941,483   4,306,076   4,484,756  $3,919,209  $3,425,739  $3,950,704
 agents
Tax        2,334,506   2,140,219   1,963,335   1,223,307   1,327,048   1,420,275
 auditors
Tax          559,541     421,770     455,521   1,165,908     900,307     796,047
 examine
 rs
--------------------------------------------------------------------------------
Source:  GAO analysis of IRS data. 



                                    Table II.6
                     
                        Audit Productivity by Examination
                         Position, FYs 1992 Through 1994


Examinat
ion
position    1992    1993    1994    1992    1993    1994    1992    1993    1994
--------  ------  ------  ------  ------  ------  ------  ------  ------  ------
Revenue    23.51   17.18   12.32  $18,64  $13,66  $10,85    $793    $796    $881
 agents                                8       4       3
Tax         4.35    4.23    4.30   2,280   2,625   3,113     524     620     723
 auditors
Tax         1.22    1.39    1.12   2,539   2,974   1,963   2,084   2,135   1,748
 examine
 rs
--------------------------------------------------------------------------------
Note:  Dollars have been rounded to the nearest whole dollar. 

Source:  GAO analysis of IRS data. 



                                    Table II.7
                     
                     Number of Individual Returns Audited by
                       Audit Sources, FYs 1992 Through 1994


                                  Percen              Percen              Percen
Audit sources             Number       t      Number       t      Number       t
------------------------  ------  ------  ----------  ------  ----------  ------
DIF                       358,80     30%     287,807     27%     178,823     15%
                               4
Nonfilers                 119,86      10     190,809      18     402,435      33
                               5
Tax shelter related       101,45       8      48,070       5      29,687       2
                               3
Self-employment tax       71,126       6      46,310       4      43,032       4
DIF multiyear             61,551       5      51,617       5      38,180       3
Regular classification    52,528       4      50,709       5      47,170       4
State information         48,418       4       3,564      0\       4,573      0\
Service center studies    43,333       4      20,059       2      22,825       2
 and tests
Compliance projects       40,403       3      44,267       4      41,959       3
Claims for refund         33,163       3      37,203       4      26,412       2
DIF related               32,090       3      32,692       3      22,554       2
Return preparers          27,706       2      28,231       3      27,708       2
Non-DIF multiyear         26,866       2      29,373       3      26,742       2
Unallowable items         13,117       1      12,099       1     134,007      11
Other sources             175,59      15     176,156      16     179,600      15
                               6
================================================================================
Total                     1,206,    100%   1,058,966    100%   1,225,707    100%
                             019
--------------------------------------------------------------------------------
Note 1:  See glossary for definition of terms used in this table. 

Note 2:  Percentages are the percent of total audits for the year and
have been rounded to the nearest whole percent. 

Source:  GAO analysis of IRS data. 



                                    Table II.8
                     
                        Direct Audit Hours and Additional
                       Recommended Tax By Audit Source, FYs
                                1992 Through 1994

                      (Dollars rounded to nearest thousand)


Audit
source          1992        1993        1994        1992        1993        1994
--------  ----------  ----------  ----------  ----------  ----------  ----------
DIF        3,272,708   2,401,818   1,529,068    $985,975    $884,954    $776,252
Nonfiler     120,009     609,587   2,097,658     540,828     859,618   2,143,788
 s
Tax          275,870     153,785      88,541     467,443     455,858     170,780
 shelter
 related
Self-         84,659      74,168      82,373      83,301      61,717      63,861
 employm
 ent tax
DIF          673,995     535,756     368,151     356,591     368,611     285,089
 multiye
 ar
Regular      255,628     209,782     187,845     127,149     127,892     127,993
 classif
 ication
State         31,895      19,424      17,865      46,898      27,029      22,110
 informa
 tion
Service       42,892      32,377      70,024      36,727      55,721      48,512
 center
 studies
 and
 tests
Complian     303,224     311,120     275,226     220,111     207,895     203,778
 ce
 project
 s
Claims        84,822      92,807      85,048      63,305      47,506      31,232
 for
 refund
DIF          411,627     398,175     299,706     426,792     293,627     276,142
 related
Return       169,005     148,753     125,572      58,544      58,508      63,758
 prepare
 rs
Non-DIF      374,002     323,690     300,065     521,406     287,462     408,369
 multiye
 ar
Unallowa      20,505      21,030      59,474      12,078      14,537     126,118
 ble
 items
Other      1,714,692   1,535,793   1,316,995   2,361,274   1,902,160   1,419,244
 sources
================================================================================
Total      7,835,530   6,868,066   6,903,611  $6,308,424  $5,653,094  $6,167,026
--------------------------------------------------------------------------------
Note:  See glossary for definition of terms used in this table. 

Source:  GAO analysis of IRS data. 



                                    Table II.9
                     
                     Audit Productivity by Audit Source, FYs
                                1992 Through 1994


Audit
source      1992    1993    1994    1992    1993    1994    1992    1993    1994
--------  ------  ------  ------  ------  ------  ------  ------  ------  ------
DIF         9.12    8.35    8.55  $2,748  $3,075  $4,341    $301    $368    $508
Tax         2.72    3.20    2.98   4,607   9,483   5,753   1,694   2,964   1,929
 shelter
 related
State       0.66    5.45    3.91     969   7,584   4,835   1,470   1,392   1,238
 informa
 tion
Self-       1.19    1.60    1.91   1,171   1,333   1,484     984     832     775
 employm
 ent tax
DIF        10.95   10.38    9.64   5,793   7,141   7,467     529     688     774
 multiye
 ar
Service     0.99    1.61    3.07     848   2,778   2,125     856   1,721     693
 center
 studies
 and
 tests
Claims      2.56    2.49    3.22   1,909   1,277   1,182     746     512     367
 for
 refund
DIF        12.83   12.18   13.29  13,300   8,982  12,244   1,037     737     921
 related
Regular     4.87    4.14    3.98   2,421   2,522   2,713     497     610     681
 classif
 ication
Non-DIF    13.92   11.02   11.22  19,408   9,787  15,271   1,394     888   1,361
 multiye
 ar
Nonfiler    1.00    3.19    5.21   4,512   4,505   5,327   4,507   1,410   1,022
 s
Unallowa    1.56    1.74     .44     921   1,202     941     589     691   2,121
 ble
 items
Complian    7.51    7.03    6.56   5,448   4,696   4,857     726     668     740
 ce
 project
 s
Return      6.10    5.27    4.53   2,113   2,072   2,301     346     393     508
 prepare
 rs
Other       9.77    8.72    7.33  13,447  10,798   7,902   1,377   1,239   1,078
 sources
================================================================================
Total       6.50    6.49    5.63   5,231   5,338   5,031     805     823     893
--------------------------------------------------------------------------------
Note 1:  See glossary for definition of terms used in this table. 

Note 2:  Dollars rounded to the nearest whole dollar. 

Source:  GAO analysis of IRS data. 



                                   Table II.10
                     
                       Number of Returns Audited by Type of
                          Closure, FYs 1992 Through 1994



                                  Percen              Percen              Percen
Type of closure           Number       t      Number       t      Number       t
--------------------  ----------  ------  ----------  ------  ----------  ------
Agreed                   895,905     74%     744,442     70%     844,848     69%
Appealed                  64,239       5      57,010       5      49,778       4
No change with            62,386       5     112,186      11     168,231      14
 adjustments
No change without        183,489      15     145,328      14     162,850      13
 adjustments
================================================================================
Total                  1,206,019    100%   1,058,966    100%   1,225,707    100%
--------------------------------------------------------------------------------
Note:  Percentages are the percent of total individual audits for the
year and have been rounded to the nearest whole percent. 

Source:  GAO analysis of IRS data. 



                                   Table II.11
                     
                      Direct Audit Hours and Additional Tax
                     Recommended by Type of Closure, FYs 1992
                                   Through 1994

                      (Dollars rounded to nearest thousand)


Type of
closure         1992        1993        1994        1992        1993        1994
--------  ----------  ----------  ----------  ----------  ----------  ----------
Agreed     5,236,378   4,452,221   4,454,030  $3,560,822  $3,427,851  $3,992,453
Appealed   1,326,168   1,116,546     920,893   2,705,925   1,982,679   1,715,805
No           430,643     613,840     963,405      41,678     242,564     458,768
 change
 with
 adjustm
 ents
No           842,342     685,459     565,284           0           0           0
 change
 without
 adjustm
 ents
--------------------------------------------------------------------------------
Source:  GAO analysis of IRS data. 



                                   Table II.12
                     
                      Audit Productivity by Type of Closure,
                              FYs 1992 Through 1994


Type of
closure     1992    1993    1994    1992    1993    1994    1992    1993    1994
--------  ------  ------  ------  ------  ------  ------  ------  ------  ------
Agreed      5.84    5.98    5.27  $3,975  $4,605  $4,726    $680    $770    $896
Appealed   20.64   19.59   18.50  42,123  34,778  34,469   2,040   1,776   1,863
No          6.90    5.47    5.73     668   2,162   2,727      97     395     476
 change
 with
 adjustm
 ents
No          4.59    4.72    3.47       0       0       0       0       0       0
 change
 without
 adjustm
 ents
--------------------------------------------------------------------------------
Note:  Dollars rounded to the nearest whole dollar. 

Source:  GAO analysis of IRS data. 



                                   Table II.13
                     
                     Number of Audits Resulting in No Change
                       Without Adjustment, FYs 1992 Through
                                       1994


Au
di
t
so  Ret
ur  urn           Percen                      Percen                      Percen
ce   s    Number       t    Returns   Number       t    Returns   Number       t
--  ---  -------  ------  ---------  -------  ------  ---------  -------  ------
DI  358   71,641     20%    287,807   55,384     19%    178,823   34,956     20%
 F  ,80
     4
No  119    4,199       4    190,809    5,832       3    402,435    5,320       1
 n  ,86
 f   5
 i
 l
 e
 r
 s
Ta  101   26,639      26     48,070   13,171      27     29,687   10,177      34
 x  ,45
 s   3
 h
 e
 l
 t
 e
 r
 r
 e
 l
 a
 t
 e
 d
Se  71,    6,899      10     46,310    8,998      19     43,032    7,939      18
 l  126
 f
 -
 e
 m
 p
 l
 o
 y
 m
 e
 n
 t
 t
 a
 x
DI  61,    3,745       6     51,617    3,095       6     38,180    2,172       6
 F  551
 m
 u
 l
 t
 i
 y
 e
 a
 r
Re  52,    8,273      16     50,709    8,026      16     47,170    8,414      18
 g  528
 u
 l
 a
 r
 c
 l
 a
 s
 s
 i
 f
 i
 c
 a
 t
 i
 o
 n
St  48,   11,743      24      3,564      295       8      4,573      261       6
 a  418
 t
 e
 i
 n
 f
 o
 r
 m
 a
 t
 i
 o
 n
Se  43,    6,814      16     20,059    3,896      19     22,825    7,055      31
 r  333
 v
 i
 c
 e
 c
 e
 n
 t
 e
 r
 s
 t
 u
 d
 i
 e
 s
 a
 n
 d
 t
 e
 s
 t
 s
Co  40,    6,389      16     44,267    8,114      18     41,959    6,746      16
 m  403
 p
 l
 i
 a
 n
 c
 e
 p
 r
 o
 j
 e
 c
 t
 s
Cl  33,      462       1     37,203      135       0     26,412        0       0
 a  163
 i
 m
 s
 f
 o
 r
 r
 e
 f
 u
 n
 d
DI  32,    2,089       7     32,692    2,113       6     22,554    1,581       7
 F  090
 r
 e
 l
 a
 t
 e
 d
Re  27,    3,069      11     28,231    2,838      10     27,708    2,778      10
 t  706
 u
 r
 n
 p
 r
 e
 p
 a
 r
 e
 r
 s
No  26,    1,667       6     29,373    1,624       6     26,742    1,689       6
 n- 866
 D
 I
 F
 m
 u
 l
 t
 i
 y
 e
 a
 r
Un  13,    2,290      17     12,099    2,525      21    134,007   39,622      30
 a  117
 l
 l
 o
 w
 a
 b
 l
 e
 i
 t
 e
 m
 s
Ot  175   27,570      16    176,156   29,282      16    179,600   34,140      19
 h  ,59
 e   6
 r
 s
 o
 u
 r
 c
 e
 s
================================================================================
To  1,2  183,489     15%  1,058,966  145,328     14%  1,225,707  162,850     13%
 t  06,
 a  019
 l
--------------------------------------------------------------------------------
Note 1:  See glossary for definition of terms. 

Note 2:  Percentages are the percent of individual audits resulting
in No Change Without Adjustments by the specific audit source for the
year, rounded to the nearest whole percent. 

Source:  GAO analysis of IRS data. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Thomas Short, Assistant Director
Bob McKay, Evaluator-in-Charge
Elwood White, Evaluator
Pat McGuire, Senior Computer Specialist
Susan Baker, Computer Specialist
Katherine Wheeler, Publishing Advisor
Hazel Bailey, Writer-Editor


GLOSSARY
=========================================================== Appendix 0


      CLAIMS FOR REFUND
------------------------------------------------------- Appendix 0:0.1

Returns involving an audit of an amended return in which the taxpayer
has claimed a refund. 


      COMPLIANCE PROJECTS
------------------------------------------------------- Appendix 0:0.2

Returns identified through IRS' information gathering projects. 


      DIF
------------------------------------------------------- Appendix 0:0.3

Returns selected on the basis of a computer generated score (the
scoring is based on an analysis technique known as discriminate
function). 


      DIF MULTIYEAR
------------------------------------------------------- Appendix 0:0.4

Related returns from prior or subsequent years for the same taxpayer
identified during the audit of a DIF-source return. 


      DIF RELATED
------------------------------------------------------- Appendix 0:0.5

Related returns identified during an audit of a DIF-source return,
other than returns from prior or subsequent years. 


      NON-DIF MULTIYEAR
------------------------------------------------------- Appendix 0:0.6

Related returns from prior or subsequent years for the same taxpayer,
when the initial source was other than a DIF-source return. 


      NONFILERS
------------------------------------------------------- Appendix 0:0.7

Audits initiated against known taxpayers who did not file a return
with IRS. 


      OTHER SOURCES
------------------------------------------------------- Appendix 0:0.8

Over 25 other audit sources, such as referrals from other IRS
Divisions, which were not one of the 10 largest sources during the
period of our review. 


      REGULAR CLASSIFICATION
------------------------------------------------------- Appendix 0:0.9

Manually selected returns for audit that do not result from other
specified audit sources. 


      RETURN PREPARERS
------------------------------------------------------ Appendix 0:0.10

Returns identified for audit due to questionable tax practitioners. 


      SELF-EMPLOYMENT TAX
------------------------------------------------------ Appendix 0:0.11

Returns involving self-employment tax issues initiated by IRS service
center examination staff. 


      SERVICE CENTER STUDIES AND
      TESTS
------------------------------------------------------ Appendix 0:0.12

Returns identified through service center projects initiated by the
IRS National Office. 


      STATE INFORMATION
------------------------------------------------------ Appendix 0:0.13

Returns identified from various state sources, generally under
exchange agreements between the IRS and the states. 


      TAX SHELTER RELATED
------------------------------------------------------ Appendix 0:0.14

Related returns of partners, grantors, beneficiaries, and
shareholders identified during audits of either partnerships,
fiduciaries, or Subchapter S corporations involving potential tax
shelter issues. 


      TOTAL PERSONAL INCOME
------------------------------------------------------ Appendix 0:0.15

Total income, such as wages and interest, reported on a tax return
prior to any deductions or adjustments. 


      UNALLOWABLE ITEMS
------------------------------------------------------ Appendix 0:0.16

Returns involving refundable credits and dependency exemptions, such
as the Earned Income Credit, initiated by service center examination
staff. 


*** End of document. ***