Tax Administration: IRS' Audit and Criminal Enforcement Rates for
Individual Taxpayers Across the Country (Letter Report, 12/23/98,
GAO/GGD-99-19).

Some observers have raised questions about whether the Internal Revenue
Service (IRS) disproportionately audits or pursues criminal
investigations of taxpayers in some parts of the country. For example,
an April 1997 study concluded that IRS enforced the tax laws at higher
rates in the South compared to the rest of the country. IRS officials
identified several factors to explain variations across the country in
audit, criminal investigation initiation, and prosecution referral rates
for individual taxpayers. The main factor was that the rates for civil
and criminal tax noncompliance vary geographically. IRS officials also
cited other factors that might affect geographic variations, such as the
location of available audit and criminal investigation staff. Because
various factors can affect the geographic variations in IRS' audit,
criminal investigation initiation, and prosecution referral rates,
comparisons of these rates must be interpreted with caution. For the
years 1992 through 1997 combined, the unadjusted audit rate for the
Tennessee-Kentucky district was below the national average rate, and the
South's rate was about at the national average. The six-year combined
criminal investigation initiation and prosecution referral rates for the
Tennessee-Kentucky district were below the national averages, and the
South's rates were about at the national averages. IRS has established
controls for its audits, criminal investigations, and prosecution
referrals. These controls generally consist of standards to guide audit
and investigation behavior, such as how auditors are to gather and
document evidence and how criminal investigators are to conduct
investigations of alleged criminal tax and nontax violations. GAO could
not determine the extent to which IRS has used most of its controls over
audits, criminal investigations, and prosecution referrals.

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

 REPORTNUM:  GGD-99-19
     TITLE:  Tax Administration: IRS' Audit and Criminal Enforcement 
             Rates for Individual Taxpayers Across the Country
      DATE:  12/23/98
   SUBJECT:  Tax return audits
             Tax administration
             Taxpayers
             Tax violations
             Internal controls
             Comparative analysis
             Statistical methods
IDENTIFIER:  IRS Audit Information Management System
             IRS Criminal Investigation Management Information System
             Tennessee
             Kentucky
             
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Microsoft Word - z6z01!.PBF TAX ADMINISTRATION

IRS' Audit and Criminal Enforcement Rates for Individual Taxpayers
Across the Country

United States General Accounting Office

GAO Report to the Honorable Harold E. Ford, Jr. and the Honorable
Henry A. Waxman,

House of Representatives


December 1998 

GAO/GGD-99-19

December 1998   GAO/GGD-99-19

United States General Accounting Office Washington, D. C. 20548

General Government Division

B-280369

Page 1 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

GAO December 23, 1998 The Honorable Harold E. Ford, Jr. House of
Representatives

The Honorable Henry A. Waxman House of Representatives

Recently, some observers have raised questions about whether the
Internal Revenue Service (IRS) disproportionately audits or
pursues criminal investigations of taxpayers in some locations
compared to other locations. An April 1997 study 1 concluded that
enforcement of the tax laws occurred at higher rates among
taxpayers living in the South compared to enforcement in the rest
of the country. Moreover, congressional hearings in 1998 pointed
to concerns about whether IRS' audits and criminal investigations
were always justified.

Given concerns about alleged disproportionate treatment, at your
request this report provides information about (1) factors that
might explain why IRS' audit, criminal investigation initiation,
and prosecution referral rates for individual taxpayers differ
across the country; (2) rates at which individual taxpayers were
audited in IRS' Tennessee- Kentucky district and the South 2
during fiscal years 1992 through 1997 compared to the national
average rates; (3) rates at which individual taxpayers were
investigated for alleged criminal tax and nontax violations and
referred for prosecution in IRS' Tennessee- Kentucky district and
the South during fiscal years 1992 through 1997 compared to the
national average rates; and (4) controls that IRS has established
for its audits, criminal investigations, and prosecution referrals
for individual taxpayers and whether these controls were used. 3

IRS' 33 districts and 10 service centers audit tax returns to
determine whether taxpayers have complied with tax laws and paid
the correct taxes. The Criminal Investigation Division (CID)
through district and regional

1 The Transactional Records Access Clearinghouse (TRAC) a data-
gathering and research organization associated with Syracuse
University did the study. The study focused on criminal
prosecutions, convictions, and sentencings. It did not draw the
same conclusions about IRS data on its audits, criminal
investigations, or prosecution referrals.

2 IRS' Southeast Region includes the districts for Tennessee,
Kentucky, Alabama, Florida, Georgia, Louisiana, Mississippi, North
Carolina, South Carolina, Virginia, West Virginia, Indiana,
Maryland, and Delaware. We included all but three of these
districts in our analyses of the South. We excluded Indiana,
Maryland and Delaware because they are generally not considered
part of the South.

3 As agreed with your offices, we did not test the effectiveness
of IRS' controls over audits, criminal investigations, and
prosecution referrals.

B-280369 Page 2 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

offices investigates alleged criminal tax violations and makes
referrals to U. S. Attorneys for prosecution. IRS has four
regional offices to oversee these and other activities in the
field.

IRS officials identified several factors to explain variation
across the country in audit, criminal investigation initiation,
and prosecution referral rates for individual taxpayers. The main
factor was that the rates for civil and criminal tax noncompliance
vary geographically. That is, neither the types of taxpayers nor
their tax behaviors are homogeneous across districts. IRS
officials also identified other factors that might affect
geographic variation, such as the location of available audit and
criminal investigation staff.

Because a variety of factors can affect the geographic variations
in IRS audit, criminal investigation initiation, and prosecution
referral rates, comparisons of these rates must be interpreted
with caution. Some factors fall outside IRS' direct control, such
as the location of taxpayers' noncompliant behaviors. Other
factors are more subject to IRS' control, such as how many
auditors and criminal investigators it assigns to a location. We
were not able to adjust for all such factors in comparing audit,
criminal investigation initiation, and prosecution referral rates
across locations. Had we been able to make these adjustments, the
results of our comparisons of rates across locations could have
been different.

For the years 1992 through 1997 combined, the unadjusted audit
rate for the Tennessee- Kentucky district was below the national
average rate, and the South's rate was approximately at the
national average. The annual rates for the Tennessee- Kentucky
district were approximately at or below the national average, and
the South's annual rate was approximately at the national average.

The 6- year combined criminal investigation initiation and
prosecution referral rates for the Tennessee- Kentucky district
were below the national averages, and the South's rates were
approximately at the national averages. Although not every annual
rate for the Tennessee- Kentucky district or the South was at or
below the national average, the rates generally were.

IRS has established controls for its audits, criminal
investigations, and prosecution referrals. These controls
generally consist of standards to guide audit and investigation
behavior, such as how auditors are to gather and document evidence
and how criminal investigators are to conduct Results in Brief

B-280369 Page 3 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

investigations of alleged criminal tax and nontax violations. The
controls also include a series of reviews to check adherence to
the standards.

We could not determine the extent to which IRS has used most of
its controls over audits, criminal investigations, and prosecution
referrals. Statistics on how often the controls were used are not
maintained in any database except for the reviews done at the
close of audits to measure adherence to the audit standards.
However, both Examination and CID officials said that they believe
that the controls to initiate audits and criminal investigations
are always used.

IRS believes that taxpayers are more likely to voluntarily comply
with the tax laws if they believe that their returns may be
audited and unpaid taxes identified. IRS audits 1 to 2 percent of
the more than 100 million income tax returns filed annually by
individuals to check for voluntary compliance in reporting income,
deductions, and other tax issues as well as in paying the correct
tax liability. IRS relies on the taxpayer to provide documentation
about the issues being audited. In turn, IRS auditors are to
examine the documentation to determine the correct tax liability.

IRS does two types of face- to- face audits in its district
offices to examine individual taxpayers' documentation: (1) field
audits in which an IRS revenue agent visits an individual who has
business income or a very complex return and (2) office audits in
which an individual who has a less complex return visits a tax
auditor at an IRS office. At IRS' service centers, IRS uses
correspondence audits in which tax examiners correspond with
taxpayers about potential discrepancies on their returns. Unlike
the district audits, these audits usually involve only one tax
issue, such as dependent exemptions.

Regardless of the type of audit, IRS auditors must decide, when
closing it, whether to recommend changes to the audited tax issues
and to the reported tax. If an auditor recommends a tax change,
the taxpayer has the right to agree with or appeal this tax
change. Depending on the outcome of any taxpayer appeal, the
recommended additional taxes may or may not be assessed and
collected.

CID carries out IRS' criminal law enforcement responsibilities
under three principal statutes. Under title 26 U. S. Code, IRS has
the authority to investigate alleged criminal tax violations, such
as tax evasion and filing a false tax return. Under title 18 U. S.
Code, IRS has the authority to investigate a broad range of
fraudulent activities, such as false claims against the government
and money laundering. Under title 31 U. S. Code, Background

B-280369 Page 4 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

IRS is responsible for enforcing certain recordkeeping and
reporting requirements of large currency transactions, such as
cash bank deposits of more than $10,000. In fulfilling these
responsibilities, CID coordinates as necessary with IRS' District
Counsel, the Criminal Tax Division in DOJ, and the U. S. Attorney
to prosecute violators of the statutes.

CID special agents 4 are responsible for conducting investigations
to determine if criminal tax fraud or nontax financial crimes
might have occurred. Investigations usually start on the basis of
information provided by (1) IRS' Examination or Collection
Divisions, (2) CID projects, (3) the public and other government
agencies, or (4) reports of currency transactions. Investigators
are to gather the evidence to determine if a criminal violation
has occurred. In fiscal year 1997, CID initiated 5,335
investigations and referred 3, 817 investigations for prosecution.
5

To identify factors that might explain differences in the audit,
criminal investigation initiation, and prosecution referral rates
for individuals across the country, we interviewed Examination
Division and CID officials in IRS' National Office to obtain
explanations of the differences. We were not able to adjust for
all of the factors IRS identified when we analyzed the extent to
which rates differed across locations.

To compare IRS' unadjusted audit, criminal investigation
initiation, and prosecution referral rates across locations during
fiscal years 1992 through 1997, we first defined the South as
those states included in IRS' Southeast region, except for three
states Indiana, Maryland, and Delaware. We excluded these states
on the basis of discussions with your offices and because these
states generally are not considered to be part of the South. As a
result, this report defines the South as 7 IRS districts that
cover 11 states Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina, Tennessee, Virginia,
and West Virginia. We shifted IRS' Indiana district to the
Midstates region and the MarylandDelaware district to the
Northeast region. We made no other changes to IRS' regional
boundaries. 6

4 CID special agents are federal criminal investigators whose
specialty is financial investigations. Their training includes
accounting and federal law enforcement procedures. 5 Due to their
lengths, investigations usually start in one year and end with any
referrals in another year.

6 If we had not shifted the three states from the Southeast
region, our analyses would have resulted in slightly lower audit,
investigation, and referral rates between 1 percent and 5 percent
lower than we report for the South. Scope and

Methodology

B-280369 Page 5 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

We collected and analyzed data on IRS audit rates the percentage
of individual tax returns that IRS audited compared to the number
of filers of individual tax returns. We computed audit rates for
districts, service centers, and regions for each of the 6 years as
well as an average rate for all 6 years. We then ranked (from
highest to lowest) the rates for all 6 years and for all
locations. We also compared the annual audit rates in the
Tennessee- Kentucky district and the districts for the South with
the national average. Appendix I shows these annual audit rates by
district, service center, and region.

We also collected and analyzed IRS data on criminal investigation
initiation and prosecution referral rates. We computed these rates
by dividing the number of initiations and referrals by the number
of filers. For ease of comparison, we computed the rates for every
100,000 filers in a location. As with audit rates, we analyzed
criminal investigation initiation and referral rates across
locations through (1) rankings of the average rates for all 6
years and (2) comparisons of the rate at a specific location in
each of the 6 years with the national average rate. Appendix II
shows the investigation and referral rates by district and region.

We also analyzed the number of audits, criminal investigation
initiations, and prosecution referrals by geographic location.
Appendix III presents this analysis and its results, which were
similar to those for our analysis of rates.

The audit data used in our analyses came from IRS' Audit
Information Management System (AIMS) and our prior work on audit
rates for some fiscal years. 7 We used data from the Criminal
Investigation Management Information System (CIMIS) on criminal
investigations and prosecution referrals for both tax and nontax
issues. We did not test the reliability of the AIMS and CIMIS
data, but we did talk to Examination and CID officials about their
data and concluded that we could use the data for our analyses.

Because of TRAC's study on alleged data discrepancies between CID
and other agencies, 8 we collected information and interviewed
officials at these agencies about the reasons for any
discrepancies. We interviewed TRAC officials about the same issue.
Rather than reconciling the data, our goal

7 Tax Administration: Audit Trends and Results for Individual
Taxpayers (GAO/GGD-96-91, April 26, 1996). 8 These other agencies
include DOJ's Criminal Tax Division, the Executive Office for U.
S. Attorneys (EOUSA), and the Administrative Office of the U. S.
Courts (AOUSC).

B-280369 Page 6 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

was to determine whether we could use CID data on criminal
investigations and prosecution referrals. We concluded that we
could use the data because TRAC's reported discrepancies did not
focus on the initiation of criminal investigations and referrals
for prosecution.

To identify IRS' controls over audits, criminal investigations,
and prosecution referrals, we interviewed Examination and CID
officials in the National Office. We collected and reviewed
relevant IRS documents on audit standards as well as criminal
investigation and prosecution standards and policies. To determine
whether IRS used the controls, we sought available documentation.
We interviewed responsible IRS officials on the use of the
controls, and we reported data from our work 9 on the use of
certain audit controls.

We did our work at IRS' National Office, DOJ's Criminal Tax
Division, EOUSA, and AOUSC in Washington, D. C., between May and
September 1998 in accordance with generally accepted government
auditing standards. We requested comments from the Commissioner of
Internal Revenue on a draft of this report, and these comments are
discussed at the end of the report.

IRS officials said that variation across the country in the audit,
criminal investigation initiation, and prosecution referral rates
for individual taxpayers should be expected due to several
factors. The main factor is that the rates for civil and criminal
tax noncompliance vary geographically. Because the types of
taxpayers are not homogeneous from district to district, the
noncompliant behaviors of some are not uniformly distributed in
each district.

In linking this geographic variation in noncompliance with audit
rates, Examination officials also pointed out that audit rates
vary with how many auditors are allocated to specific locations.
The officials stated that allocation of auditors is based
primarily on statistically valid research data, which shows that
some locations have more filed returns with a higher potential for
noncompliance than other locations. IRS said it considers this
fact when determining how many auditors to assign to a location.

Beyond the number of auditors, IRS Examination officials said that
the audit rates can vary across locations on the basis of how the
auditors are

9 Tax Administration: More Criteria Needed on IRS' Use of
Financial Status Audit Techniques (GAO/GGD-98-38, Dec. 30, 1997);
Tax Administration: IRS' Use of Information Gathering Projects
(GAO/GGD-98-39, Feb. 5, 1998); and IRS Audits: Workpapers Lack
Documentation of Supervisory Review (GAO/GGD-98-98, Apr. 15,
1998). IRS Expects

Variations in Enforcement Rates Across the Country

B-280369 Page 7 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

used. For example, more auditors might be available to do audits
when an IRS location uses fewer auditors for nonaudit efforts,
such as taxpayer education and outreach to improve compliance.
These officials explained that because the need for such services
can vary across IRS locations, the assignment of some auditors to
nonaudit efforts also will vary.

IRS Examination officials also identified several other factors
that might affect geographic variations in audit rates. According
to the officials, variability in the audit rates can be attributed
to the use of projects that focus on known compliance issues in
specific locations. 10 The officials said that audit rates might
be higher if a location has more tax returns from certain types of
taxpayers who have proven to be more noncompliant, such as certain
self- employed taxpayers operating cash businesses. Further, some
variation from year to year could be expected depending on the
changing number of returns that are filed by taxpayers at specific
locations.

CID officials also pointed to these factors. In addition, they
attributed variability in the criminal investigation and
prosecution referral rates to a recent shift towards investigating
certain types of tax fraud and narcotic crimes and identifying
major types of new tax fraud issues. Moreover, they said that
investigations are resource intensive. If many investigations
happen to take more time than usual, the start of new
investigations would be delayed. If investigations take longer in
certain locations compared to others, differences in the
investigation rates would arise, which also could affect future
referral rates.

Finally, CID officials said some variability in rates might be due
to difficultto- quantify factors, such as differences in the
experience and skill of the investigators. More skilled
investigators may be assigned more complex and time- intensive
investigations. On the other hand, their skills might allow them
to do investigations more quickly. Further, the officials stated
that some variation could be expected depending on the number and
location of assistant U. S. Attorneys and judges in the judicial
system.

Because many factors affect geographic variations in the audit,
criminal investigation initiation, and prosecution referral rates,
comparisons of these rates must be interpreted with caution. Some
factors fall outside IRS' direct control. For example, IRS does
not control whether taxpayers

10 IRS staff can propose audit projects on the basis of past
audits or studies that have shown noncompliance for selected
taxpayer populations, such as those in a particular occupation,
industry, geographic area, or economic activity.

B-280369 Page 8 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

engage in civil and criminal tax noncompliance at higher rates in
some locations than in others. Nor does IRS control the actions of
outside parties that influence the initiation of many
investigations, such as those involving grand juries. 11 Other
factors are more subject to IRS' control, such as how many
auditors or investigators it assigns to a location.

We were not able to adjust for all such factors in comparing
audit, criminal investigation initiation, and prosecution referral
rates across locations. Had we been able to make these
adjustments, the results of our rate comparisons could have been
different.

Without adjusting for external factors that can affect the
geographic variation of IRS audit rates, we found that IRS did not
appear to have audited individual taxpayers at a higher rate in
the Tennessee- Kentucky district and the South compared to the
national average during fiscal years 1992 through 1997.

For all 6 years, the Tennessee- Kentucky district's audit rate
averaged 0.52 percent, which was below the national average, and
ranked 21st of 33 districts. The Memphis Service Center ranked 9th
in the audit rate among 10 service centers. The South's audit rate
averaged 0.65 percent, placing it close to the national average of
0.67 percent and second among the four regions. However, the
average rate for the South was similar to the rates ranked third
and fourth, which averaged 0.63 and 0.46 percent, respectively.

On an annual basis, audit rates in the Tennessee- Kentucky
district and the South were generally at or below the national
average. The TennesseeKentucky district rates almost always fell
below the national averages each fiscal year, 1992 through 1997.
Annual audit rates in the South were more likely to be below than
above the national averages. Figure 1 shows the trends in these
rates for the Tennessee- Kentucky district, the South, and the
national average over the 1992 through 1997 period. Appendix I
presents detailed information on audit rates by location for 1992
through 1997.

11 CID officials stated that grand jury investigations account for
66 percent of the criminal cases initiated by CID. Unadjusted
Audit

Rates in the TennesseeKentucky District and the South Were
Generally at or Below the National Averages

B-280369 Page 9 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Source: GAO analysis of IRS data.

Without adjusting for the external factors that can affect the
geographic variation of IRS' rates, we found that IRS did not
appear to have investigated or referred for prosecution individual
taxpayers in TennesseeKentucky and the South at a higher rate
compared to the rest of the country during fiscal years 1992
through 1997.

Over all 6 years, the Tennessee- Kentucky district initiated an
average of 4.22 investigations per 100,000 individual filers,
ranking 20th of 33 districts and below the national average. The
South ranked third with a 4. 87 average rate over all 6 years for
initiating investigations. However, the range among the 4 regions
was small from 4.86 to 4.96 investigations initiated per 100,000
filers.

As shown in figure 2, for each of the 6 years, the Tennessee-
Kentucky district's rates for initiations generally were below the
national averages. The South's initiation rates were slightly
below the national average in 4 years and slightly above it in 2
other years. Appendix II presents detailed

Figure 1: Individual Audit Rates

Unadjusted Criminal Investigation Initiation and Referral Rates in
the TennesseeKentucky District and the South Were Approximately at
or Below the National Averages

B-280369 Page 10 GAO/GGD-99-19 Audit and Criminal Enforcement
Rates

information on the investigations initiated and prosecutions
referred per 100,000 individual filers by location for 1992
through 1997.

Source: GAO analysis of IRS data.

In terms of prosecution referral rates, the Tennessee- Kentucky
district ranked 16th and below the national average with an
average of 3.15 referrals per 100,000 individual filers for all 6
years. The South ranked first in these rates. However, the
differences among the four regions were small over the period. The
South's 6- year average rate was 3.48 per 100,000 individual
filers compared to 3.46, 3.40, and 3.19 in the other 3 regions.

Figure 3 shows that except for 1992 and 1995, the Tennessee-
Kentucky district fell below the annual national averages in
referrals per 100,000 individual filers. The South's referral
rates were below the national average in 3 years and above it in 3
other years.

Figure 2: Criminal Investigation Initiation Rates per 100,000
Individual Filers

B-280369 Page 11 GAO/GGD-99-19 Audit and Criminal Enforcement
Rates

Source: GAO analysis of IRS data.

IRS has established various controls over its audits, criminal
investigations, and prosecution referrals. These controls
generally consist of a series of standards to guide audit and
investigation behavior and a series of reviews to check adherence
to the standards. Appendixes IV and V provide detailed information
on these controls and standards.

IRS has standards for the selection of returns to audit and for
audit quality. To check auditors' adherence to these standards,
IRS has developed various types of reviews. These reviews are to
occur at the start of all audits as well as during and after
selected audits.

The basic audit selection standard is to select tax returns that
appear to have a high likelihood of tax noncompliance. To help
meet this standard, IRS has selected most returns for audits
through computerized criteria

Figure 3: Referral Rates per 100, 000 Individual Filers

IRS Has Established Controls Over Audits, Criminal Investigations,
and Prosecution Referrals

IRS Audit Standards and Controls

B-280369 Page 12 GAO/GGD-99-19 Audit and Criminal Enforcement
Rates

designed to identify potential noncompliance. IRS also has
selected returns for audit through many other sources, such as
through projects that focus on known compliance issues within a
specific location or a select group of taxpayers. Regardless of
how the returns are selected, IRS generally requires various
levels of IRS managers and staff to check, among other things, for
adherence to the audit selection standard. For the audit projects,
IRS districts also require authorization by a district director or
higher level management official before audits can begin.

To guide auditors' behaviors during audits, IRS has established
quality standards in such areas as developing evidence,
considering the potential for fraud, and documenting audit
results. IRS audit supervisors are to periodically review audits
to determine conformity with the standards. IRS supervisors also
are to separately review whether auditors are handling taxpayer
inquiries and issues responsively.

After an audit, IRS district office employees and service center
employees are to review a sample of audits closed in their
offices. IRS Examination officials said that they believe the
sample is statistically valid. IRS employees conduct these post-
audit reviews to measure the quality of the audits against the
standards. 12

IRS did not have statistics available in a database on how often
it uses audit controls through managerial and supervisory reviews
at the start of audits and during audits. In prior reports, 13 we
found evidence that supervisors reviewed about 6 percent of the
workpapers during certain types of audits that closed during
fiscal years 1995 and 1996. In noting that IRS did not require
supervisors to document these reviews during audits, we
recommended that IRS establish such a requirement, which IRS
agreed to do.

IRS did have automated statistics on its use of post- audit
reviews. These statistics showed that Examination staff in the
districts reviewed adherence to quality standards in 12,170 of
about 800,000 audits closed by district auditors during fiscal
year 1996. 14 Our analysis did not evaluate

12 The audit quality measure is also to become part of the quality
measurement across IRS. According to IRS officials, implementation
of IRS' new measures on customer satisfaction, employee
satisfaction, quantity, and quality for various IRS activities is
scheduled for January 1999.

13 GAO/GGD-98-38 and GAO/GGD-98-98. 14 In December 1998, IRS
Examination officials said that the fiscal year 1998 sample size
for post- audit reviews in the district offices was approximately
11, 900. These officials said that in fiscal year 1999, this
sample size will be increased to about 46, 900 in order to provide
greater statistical validity and accountability at the managerial
level in the district offices.

B-280369 Page 13 GAO/GGD-99-19 Audit and Criminal Enforcement
Rates

IRS' sample selection or quality review processes, or whether IRS
used the results of the reviews to improve quality.

Apart from these post- audit reviews, IRS Examination officials
said that they do periodic operational and peer reviews. According
to the officials, the reviews are intended to oversee the use of
the controls as well as the entire audit process.

We are currently studying some of these audit selection controls
at district offices and audit quality controls at service centers,
and we expect to report results in 1999.

IRS has established standards governing the criminal investigation
and prosecution referral processes. CID also relies on multiple
levels of review and approval to check adherence to the standards.
If IRS refers a case for prosecution, outside offices are to
review, in succession, whether prosecution was justified.

A major standard for initiating a criminal tax investigation
involves prosecution potential. As a control for this standard,
IRS requires the CID chief to approve investigations. During an
investigation, the CID special agent is to gather evidence on
whether a criminal violation of tax or nontax issues occurred and,
if so, whether prosecution is justified. To check adherence to
this and other evidence standards, CID managers are to
periodically review the agent's work and evidence. The
investigation is to continue until (1) during the course of
gathering information the investigator determines a criminal case
is not warranted; (2) sufficient evidence has been collected to
justify a referral for successful prosecution; or (3) limited
resources, cases with higher potential, or other circumstances
warrant discontinuation.

If a special agent determines that the evidence pointed to
criminal violations, the agent is to write a detailed report on
violations that merit prosecution. The report is to be reviewed by
the group manager, branch chief, and division chief to check the
adequacy of the investigation, sufficiency of evidence, and
conformance to legal requirements for prosecution.

If the division chief approves, the prosecution referral is to
move to the next levels of review IRS District Counsel, DOJ's
Criminal Tax Division, and the U. S. Attorney. The ultimate
responsibility for criminal prosecutions lies with the U. S.
Attorney. The U. S. Attorney is to consider two standards in
deciding whether to prosecute: CID Standards and Controls

for the Criminal Investigation and Referral Processes

B-280369 Page 14 GAO/GGD-99-19 Audit and Criminal Enforcement
Rates

(1) sufficient evidence to establish guilt beyond a reasonable
doubt, and (2) reasonable probability of conviction.

CID did not have automated statistics on how often it used its
controls over the investigation and referral processes. However,
CID officials said that they believe that the controls to initiate
and refer criminal investigations are always used. For example,
CID officials stated that during fiscal years 1992 through 1997,
66 percent of the investigations initiated were grand jury
investigations, which are opened only with the approval and
control of DOJ. Further, the officials said that DOJ and the U. S.
Attorney accept most of the referrals for prosecution, which
cannot be done without the Chief of CID and the District Counsel's
approval of the referral.

In addition, CID officials said that they do quarterly and
biannual reviews as well as peer reviews of their operations. The
officials said that these reviews are intended to address such
things as workload, documentation, and the selection and
management of investigations.

We requested comments on a draft of this report from the
Commissioner of Internal Revenue. Officials representing the
Assistant Commissioners for the Examination Division and Criminal
Investigation Division, as well as a representative from the
Commissioner's Office of Legislative Affairs, provided IRS'
comments in a December 3, 1998, meeting. IRS also provided written
comments, which are reprinted in appendix VI.

IRS' comments were technical in nature to clarify specific
sections of the draft report that described (1) frequency of the
use of controls over audits, criminal investigations, and
referrals; (2) peer review and other periodic operational reviews;
and (3) differences between the Examination and Criminal
Investigation Divisions, including those factors that are somewhat
outside their control but can affect audit, investigation
initiation, and referral rates. We have incorporated these
comments into the report where appropriate.

Copies of this report are being sent to the Chairman and the
Ranking Minority Member, Senate Committee on Finance; the Chairman
and the Ranking Minority Member, Senate Committee on Governmental
Affairs; and the Chairman and the Ranking Minority member, House
Committee on Ways and Means. We will also send copies to the
Director of the Office of Management and Budget; the Secretary of
the Treasury; the Commissioner of the Internal Revenue Service;
and officials at the Department of Justice, Agency Comments and

Our Evaluation

B-280369 Page 15 GAO/GGD-99-19 Audit and Criminal Enforcement
Rates

Executive Office for U. S. Attorneys, and Administrative Office of
the U. S. Courts. We will also make copies available to others
upon request.

Major contributors to this report are listed in appendix VII.
Please contact me on (202) 512- 9110 if you or your staff have any
questions about this report.

James R. White Director, Tax Policy and

Administration Issues

Page 16

Contents 1 Letter 20 Appendix I IRS' Individual Audit Rates for
Districts, Regions, and Service Centers, Fiscal Years 1992 Through
1997

22 Appendix II IRS' Criminal Investigation Initiation and
Prosecution Referral Rates for Districts and Regions, Fiscal Years
1992 Through 1997

25 Appendix III Total Number of IRS Audits, Criminal Investigation
Initiations, and Prosecution Referrals for Fiscal Years 1992- 1997

30 Appendix IV Audit, Criminal Investigation, and Prosecution
Standards

Audit Standards 30

Contents Page 17

Criminal Investigation and Prosecution Standards 30 32 Controls
Over the Audit Process 32 Controls Over the Criminal Investigation
and Referral

Processes 33 Appendix V

IRS' Controls for Audit, Criminal Investigation, and Prosecution
Referral Processes

36 Appendix VI Comments From the Internal Revenue Service

38 Appendix VII Major Contributors to This Report

Table I. 1: Individual Audit Rates by District and Ranked, FYs
1992 Through 1997

20 Table I. 2: Individual Audit Rates by Region and Ranked,

FYs 1992 Through 1997 21

Table I. 3: Individual Audit Rates by Service Center and Ranked,
FYs 1992 Through 1997

21 Table II. 1: Criminal Investigation Initiation Rates per

100,000 Individual Filers by District and Ranked, FYs 1992 Through
1997

22 Table II. 2: Criminal Investigation Initiation Rates per

100,000 Individual Filers by Region and Ranked, FYs 1992 Through
1997

23 Table II. 3: Criminal Investigation Prosecution Referral

Rates per 100,000 Individual Filers by District and Ranked, FYs
1992 Through 1997

23 Table II. 4: Criminal Investigation Prosecution Referral

Rates per 100,000 Individual Filers by Region and Ranked, FYs 1992
Through 1997

24 Tables

Table III. 1: Total Number of Audits by District and Ranked, FYs
1992 Through 1997

25

Contents Page 18

Table III. 2: Total Number of Audits by Region and Ranked, FYs
1992 Through 1997

26 Table III. 3: Total Number of Audits by Service Center

and Ranked, FYs 1992 Through 1997 26

Table III. 4: Total Number of Criminal Investigations Initiated by
District and Ranked, FYs 1992 Through 1997

27 Table III. 5: Total Number of Criminal Investigations

Initiated by Region and Ranked, FYs 1992 Through 1997

28 Table III. 6: Total Number of Criminal Investigations

Referred for Prosecution by District and Ranked, FYs 1992 Through
1997

28 Table III. 7: Total Number of Criminal Investigations

Referred for Prosecution by Region and Ranked, FYs 1992 Through
1997

29 Table IV. 1: Description of IRS' Audit Standards 30 Table IV.
2: Criminal Investigation Standards for Fraud

Cases 31

Figure 1: Individual Audit Rates 9 Figure 2: Criminal
Investigation Initiation Rates per

100,000 Individual Filers 10

Figure 3: Referral Rates per 100,000 Individual Filers 11 Figures

Contents Page 19 Abbreviations

AIMS Audit Information Management System AOUSC Administrative
Office of the United States Courts CIMIS Criminal Investigation
Management Information System DOJ Department of Justice EOUSA
Executive Office for United States Attorneys IRS Internal Revenue
Service TRAC Transactional Records Access Clearinghouse

Appendix I IRS' Individual Audit Rates for Districts, Regions, and
Service Centers, Fiscal Years 1992 Through 1997

Page 20 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Audit rates District 1992 1993 1994 1995 1996 1997 FYs 92- 97

Average Rank

Los Angeles 1.37 1.39 1.32 1.34 1.59 1.54 1.43 1 Southern
California 1.10 1.28 1.15 1.57 1.62 1.34 1.34 2 Northern
California 1. 04 1. 16 1. 15 1. 17 1. 24 1. 34 1. 18 3 Southwest
1. 00 1. 01 1. 23 0. 98 0. 80 0. 81 0. 97 4 Georgia 0. 92 1. 07 1.
11 1. 13 0. 78 0. 64 0. 94 5 Central California 0. 93 0. 86 0. 74
0. 92 1. 17 0. 91 0. 92 6 North Texas 0. 80 0. 82 0. 90 1. 03 0.
96 0. 82 0. 89 7 Arkansas- Oklahoma 0.95 0.96 1.01 0.85 0.72 0.63
0.85 8 Gulf Coast 0. 88 0. 80 0. 90 0. 89 0. 83 0. 74 0. 84 9
Manhattan 0. 78 0. 62 0. 77 1. 07 0. 75 0. 77 0. 79 10 Rocky
Mountain 0. 79 0. 80 0. 87 0. 86 0. 73 0. 67 0. 78 11 South
Florida 0. 84 0. 83 0. 87 0. 68 0. 71 0. 68 0. 77 12 Houston 0. 75
0. 81 0. 86 0. 79 0. 76 0. 64 0. 76 13 Connecticut- Rhode Island
0.69 0.69 0.82 0.83 0.60 0.45 0.68 14 North Central 0. 58 0. 58 0.
83 0. 61 0. 68 0. 76 0. 67 15

National average 0. 66 0. 66 0. 72 0. 70 0. 66 0. 61 0. 67

Pacific- Northwest 0. 71 0. 69 0. 73 0. 68 0. 63 0. 51 0. 66 16
South Texas 0. 67 0. 71 0. 72 0. 73 0. 55 0. 50 0. 64 17 North
Florida 0. 69 0. 67 0. 70 0. 57 0. 52 0. 45 0. 60 18 Kansas-
Missouri 0. 46 0. 71 0. 77 0. 55 0. 51 0. 45 0. 57 19 Indiana 0.
53 0. 51 0. 63 0. 61 0. 51 0. 43 0. 54 20

Tennessee- Kentucky 0.67 0.58 0.54 0.45 0.40 0.48 0.52 21

Brooklyn 0. 48 0. 42 0. 47 0. 59 0. 58 0. 56 0. 52 22 Illinois 0.
39 0. 39 0. 69 0. 51 0. 47 0. 53 0. 50 23 North- South Carolina 0.
50 0. 53 0. 55 0. 56 0. 48 0. 34 0. 49 24 Delaware- Maryland 0. 47
0. 42 0. 50 0. 47 0. 53 0. 53 0. 49 25 New England 0. 48 0. 46 0.
57 0. 53 0. 46 0. 37 0. 48 26 Virginia- West Virginia 0.49 0.47
0.60 0.46 0.39 0.39 0.46 27 Midwest 0. 34 0. 35 0. 48 0. 49 0. 53
0. 52 0. 45 28 Michigan 0.45 0.40 0.54 0.47 0.44 0.36 0.44 29
Upstate New York 0.44 0.46 0.48 0.43 0.36 0.37 0.42 30 New Jersey
0.39 0.42 0.39 0.39 0.42 0.39 0.40 31 Pennsylvania 0. 36 0. 37 0.
44 0. 40 0. 36 0. 41 0. 39 32 Ohio 0.49 0.38 0.34 0.33 0.34 0.32
0.37 33

Source: GAO analysis of IRS data.

Table I. 1: Individual Audit Rates by District and Ranked, FYs
1992 Through 1997

Appendix I IRS' Individual Audit Rates for Districts, Regions, and
Service Centers, Fiscal Years 1992 Through 1997

Page 21 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Audit rates Region 1992 1993 1994 1995 1996 1997 FYs 92- 97

Average Rank

Western 0. 99 1. 02 1. 02 1. 07 1. 09 0. 99 1. 03 1

National average 0. 66 0. 66 0. 72 0. 70 0. 66 0. 61 0. 67 South
0. 70 0. 69 0. 74 0. 67 0. 58 0. 52 0. 65 2

Midstates 0. 56 0. 60 0. 74 0. 66 0. 61 0. 58 0. 63 3 Northeast
0.48 0.44 0.50 0.50 0.45 0.42 0.46 4

Source: GAO analysis of IRS data.

Audit rates Service center 1992 1993 1994 1995 1996 1997 FY 92- 97

Average Rank

Fresno 0.92 0.36 1.08 3.48 3.15 2.01 1.81 1 Brookhaven 0. 47 0. 39
0. 40 1. 34 1. 18 1. 04 0. 80 2 Austin 0.31 0.44 0.46 0.88 1.25
0.45 0.64 3

National average 0. 40 0. 26 0. 37 0. 98 1. 02 0. 68 0. 62

Ogden 0.33 0.20 0.25 0.78 0.86 0.74 0.53 4 Philadelphia 0. 26 0.
15 0. 28 1. 01 0. 83 0. 45 0. 49 5 Atlanta 0. 48 0. 24 0. 33 0. 61
0. 80 0. 41 0. 48 6 Andover 0.33 0.26 0.29 0.55 0.58 0.63 0.44 7
Kansas City 0.32 0.21 0.20 0.61 0.68 0.41 0.40 8

Memphis 0.32 0.22 0.17 0.41 0.60 0.47 0.37 9

Cincinnati 0. 31 0. 23 0. 24 0. 42 0. 42 0. 43 0. 34 10 Source:
GAO analysis of IRS data.

Table I. 2: Individual Audit Rates by Region and Ranked, FYs 1992
Through 1997 Table I. 3: Individual Audit Rates by Service Center
and Ranked, FYs 1992 Through 1997

Appendix II IRS' Criminal Investigation Initiation and Prosecution
Referral Rates for Districts and Regions, Fiscal Years 1992
Through 1997

Page 22 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Initiation rates per 100,000 Individual filers District 1992 1993
1994 1995 1996 1997 FYs 92- 97

Average Rank

Manhattan 12.22 17.44 17.12 11.23 12.75 9.89 13.44 1 South Texas
10.47 8.43 10.26 5.40 8.04 9.02 8.57 2 South Florida 7. 32 7. 75
8. 39 7. 34 8. 54 7. 76 7. 86 3 North Texas 11.10 6.98 6.68 5.65
5.64 5.97 6.98 4 Arkansas- Oklahoma 7.44 8.23 6.73 5.12 7.51 6.45
6.91 5 Brooklyn 7. 45 7. 72 5. 92 5. 67 6. 42 6. 66 6. 64 6
Houston 7. 60 7. 29 5. 38 6. 39 6. 50 6. 11 6. 53 7 Southwest 6.
73 6. 72 5. 31 4. 98 6. 05 6. 97 6. 13 8 Rocky Mountain 8. 00 5.
98 5. 82 5. 61 6. 18 5. 13 6. 09 9 Virginia- West Virginia 7.35
5.75 5.93 4.07 4.26 7.15 5.75 10 Delaware- Maryland 6. 09 6. 10 4.
35 5. 36 4. 61 6. 61 5. 52 11 Georgia 6. 80 5. 54 5. 54 4. 86 3.
87 3. 96 5. 06 12 Northern California 5. 64 4. 66 4. 66 3. 72 6.
49 4. 44 4. 94 13 New Jersey 4.81 5.15 5.66 5.37 3.81 4.66 4.91 14

National average 5. 78 5. 39 4. 73 4. 39 4. 61 4. 53 4. 90

North Florida 6. 48 6. 16 3. 52 3. 79 4. 17 4. 78 4. 81 15
Pacific- Northwest 5. 19 5. 46 4. 60 5. 47 4. 59 3. 46 4. 78 16
Connecticut- Rhode Island 5.48 5.00 5.17 2.90 5.15 4.56 4.72 17
Los Angeles 6.84 4.44 4.70 4.43 3.63 3.22 4.58 18 Pennsylvania 4.
86 5. 10 4. 48 5. 19 3. 51 3. 63 4. 46 19

Tennessee- Kentucky 5.36 4.67 3.54 4.34 3.65 3.76 4.22 20

Illinois 5. 43 4. 29 2. 97 3. 73 4. 35 4. 49 4. 21 21 Michigan
5.71 5.10 4.59 2.41 4.08 2.57 4.08 22 Indiana 4. 13 6. 67 3. 85 3.
37 3. 19 3. 24 4. 06 23 Kansas- Missouri 3. 81 4. 55 4. 43 4. 07
3. 20 4. 04 4. 02 24 Southern California 3.64 4.74 3.21 4.73 3.63
4.13 4.01 25 Ohio 5.80 4.62 3.61 3.35 3.12 2.97 3.91 26 Gulf Coast
5. 47 4. 03 2. 65 3. 56 4. 27 3. 35 3. 89 27 North- South Carolina
4. 61 4. 41 3. 49 3. 29 3. 54 3. 48 3. 79 28 Upstate New York 3.54
3.27 3.77 3.23 3.60 3.12 3.42 29 Central California 4. 01 3. 62 3.
25 2, 26 3. 07 4. 19 3. 40 30 North Central 3. 16 3. 08 3. 49 3.
19 3. 72 3. 42 3. 34 31 New England 3. 25 4. 21 2. 94 2. 66 3. 83
3. 06 3. 33 32 Midwest 3. 43 2. 44 2. 53 3. 36 2. 64 2. 34 2. 79
33

Source: GAO analysis of IRS data.

Table II. 1: Criminal Investigation Initiation Rates per 100,000
Individual Filers by District and Ranked, FYs 1992 Through 1997

Appendix II IRS' Criminal Investigation Initiation and Prosecution
Referral Rates for Districts and Regions, Fiscal Years 1992
Through 1997

Page 23 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Initiation rates Region 1992 1993 1994 1995 1996 1997 FYs 92- 97

Average Rank

Midstates 5. 97 5. 33 4. 75 4. 30 4. 67 4. 75 4. 96 1 Northeast
5.53 5.72 5.06 4.39 4.50 4.28 4.91 2

National average 5. 78 5. 39 4. 73 4. 39 4. 61 4. 53 4. 90 South
6. 05 5. 30 4. 47 4. 29 4. 45 4. 70 4. 87 3

Western 5. 66 5. 10 4. 51 4. 59 4. 86 4. 46 4. 86 4 Source: GAO
analysis of IRS data.

Referral rates per 100,000 Individual filers District 1992 1993
1994 1995 1996 1997 FYs 92- 97

Average Rank

Manhattan 7. 72 10.01 9.63 11.94 10.36 8.92 9.75 1 South Texas 7.
95 5. 57 6. 62 3. 85 4. 29 5. 82 5. 65 2 North Texas 9. 38 5. 41
5. 01 3. 89 3. 44 4. 73 5. 28 3 South Florida 5. 65 3. 71 6. 20 5.
69 5. 38 5. 01 5. 27 4 Brooklyn 4. 29 6. 45 4. 58 4. 09 5. 35 4.
67 4. 91 5 Houston 5. 05 5. 69 3. 36 3. 73 3. 66 3. 99 4. 24 6
Southwest 4. 57 3. 60 5. 18 3. 01 3. 93 4. 33 4. 10 7 Virginia-
West Virginia 3.37 5.14 5.10 3.36 2.33 5.17 4.08 8 Arkansas-
Oklahoma 4.53 4.11 2.56 3.49 4.96 4.59 4.05 9 Rocky Mountain 5. 12
3. 97 3. 63 3. 32 3. 52 3. 10 3. 75 10 Georgia 4. 54 3. 18 4. 01
3. 24 3. 77 2. 84 3. 58 11 Delaware- Maryland 3. 21 4. 00 3. 63 2.
60 2. 78 5. 23 3. 58 12 New Jersey 2.82 3.81 4.22 3.70 3.05 3.58
3.53 13

National average 3. 76 3. 75 3. 31 3. 17 3. 12 3. 24 3. 39

Pennsylvania 3. 19 4. 06 3. 26 3. 32 3. 52 3. 10 3. 38 14 North
Florida 2. 81 3. 78 2. 84 2. 47 2. 97 4. 14 3. 18 15

Tennessee- Kentucky 4.54 3.30 2.76 3.52 2.26 2.61 3.15 16

Pacific- Northwest 3. 34 3. 63 2. 78 3. 34 3. 33 2. 34 3. 12 17
Connecticut- Rhode Island 3.64 3.54 2.68 2.15 3.20 3.22 3.08 18
Kansas- Missouri 3. 70 3. 20 2. 53 2. 95 3. 14 3. 08 3. 07 19
Southern California 2.45 3.88 2.68 3.85 2.62 2.78 3.05 20 Northern
California 3. 04 2. 94 3. 19 2. 53 3. 56 2. 44 2. 95 21 North-
South Carolina 3. 54 3. 26 3. 28 1. 98 2. 57 3. 00 2. 93 22
Illinois 3. 49 3. 86 2. 25 2. 79 2. 52 2. 39 2. 89 23 Indiana 3.
14 4. 14 3. 34 2. 50 1. 81 2. 33 2. 87 24 Gulf Coast 3. 37 2. 82
1. 97 2. 81 3. 23 2. 90 2. 85 25 Los Angeles 3.13 3.55 2.68 2.42
3.44 1.74 2.84 26 Ohio 3.49 3.72 2.50 2.92 1.97 2.32 2.82 27
Michigan 3.74 3.32 3.32 2.41 1.90 2.09 2.79 28 Central California
3. 19 3. 00 2. 09 2. 30 2. 32 2. 04 2. 49 29

Table II. 2: Criminal Investigation Initiation Rates per 100,000
Individual Filers by Region and Ranked, FYs 1992 Through 1997
Table II. 3: Criminal Investigation Prosecution Referral Rates per
100,000 Individual Filers by District and Ranked, FYs 1992 Through
1997

Appendix II IRS' Criminal Investigation Initiation and Prosecution
Referral Rates for Districts and Regions, Fiscal Years 1992
Through 1997

Page 24 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Referral rates per 100,000 Individual filers District 1992 1993
1994 1995 1996 1997 FYs 92- 97

Average Rank

Upstate New York 2.30 1.86 2.26 2.17 3.14 2.30 2.34 30 New England
1. 91 2. 01 1. 63 2. 23 2. 27 2. 59 2. 11 31 Midwest 2. 21 2. 19
1. 69 2. 77 1. 63 1. 64 2. 02 32 North Central 1. 92 2. 20 2. 01
1. 65 1. 62 2. 60 2. 00 33

Source: GAO analysis of IRS data.

Referral Rates per 100,000 Individual filers Region 1992 1993 1994
1995 1996 1997 FYs 92- 97

Average Rank South 3. 88 3. 57 3. 58 3. 16 3. 11 3. 57 3. 48 1

Northeast 3.39 3.95 3.42 3.40 3.26 3.37 3.46 2 Midstates 4. 38 3.
84 3. 07 3. 02 2. 85 3. 25 3. 40 3

National average 3. 76 3. 75 3. 31 3. 17 3. 12 3. 24 3. 39

Western 3. 48 3. 53 3.15 3.03 3.26 2.69 3.19 4 Source: GAO
analysis of IRS data.

Table II. 4: Criminal Investigation Prosecution Referral Rates per
100,000 Individual Filers by Region and Ranked, FYs 1992 Through
1997

Appendix III Total Number of IRS Audits, Criminal Investigation
Initiations, and Prosecution Referrals for Fiscal Years 1992- 1997

Page 25 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Tables III. 1 to III. 3 show how the Tennessee- Kentucky district,
Memphis Service Center, and the South ranked in total number of
audits closed during fiscal years 1992 through 1997. During this
period, IRS' TennesseeKentucky District audited 118,545 individual
returns. The district ranked 18th of 33 districts and averaged
about 20,000 audits annually. The Memphis Service Center ranked
10th among the 10 service centers, averaging about 40,000 audits
annually over the 6 years. The South ranked 3rd among 4 regions,
averaging about 168,000 audits annually over the 6 years.

Returns audited District 1992 1993 1994 1995 1996 1997 Total Rank

Southern California 44,432 52,306 45,755 62,034 63,962 53,991
322,480 1 Los Angeles 46,970 47,069 43,439 42,551 49,590 48,877
278,496 2 Northern California 37,241 41,670 40,586 41,152 43,880
48,363 252,892 3 Gulf Coast 38,511 35,557 39,943 40,386 37,961
34,547 226,905 4 Pacific- Northwest 31,543 31,806 33,738 31,899
29,693 24,500 183,179 5 Southwest 28,773 29,728 36,549 30,261
25,773 26,888 177,972 6 North Texas 25,072 26,113 28,510 33,437
31,397 27,625 172,154 7 Georgia 26,253 31,156 32,773 34,230 24,328
20,575 169,315 8 Rocky Mountain 25,537 26,523 29,529 29,915 26,386
24,717 162,907 9 Illinois 20,952 20,807 36,385 27,314 25,345
28,719 159,522 10 Central California 23,961 22,224 19,130 23,659
29,706 23,649 142,329 11 North- South Carolina 22,737 24,621
25,423 26,346 23,097 17,039 139,263 12

National average 22,463 22,825 24,795 24,106 23,036 21,638 138,863

South Florida 23,208 23,197 24,364 19,382 20,327 20,047 130,525 13
Pennsylvania 20,100 20,134 23,718 21,378 19,685 22,298 127,313 14
North Florida 23,069 22,984 23,559 19,533 18,304 16,052 123,501 15
New England 20,483 19,013 23,638 22,109 19,252 15,631 120,126 16
Arkansas- Oklahoma 21,640 22,246 23,271 19,839 16,943 15,237
119,176 17

Tennessee- Kentucky 24,731 21,721 20,211 17,148 15,637 19,097
118,545 18

Midwest 14,657 15,053 20,686 21,025 23,171 22,903 117,495 19
Kansas- Missouri 15,544 23,774 26,022 18,627 17,693 15,813 117,473
20 Ohio 24,678 19,631 17,171 16,723 17,774 16,866 112,843 21
Michigan 18,769 16,740 21,943 19,319 18,605 15,607 110,983 22
North Central 14,984 15,179 21,741 16,352 18,585 21,147 107,988 23
Virginia - West Virginia 17,397 17,061 21,418 16,585 15,452 14,433
102,346 24 South Texas 15,564 17,118 17,565 18,343 14,176 13,346
96,112 25 Brooklyn 14,957 12,884 14,136 17,515 17,322 16,885
93,699 26 New Jersey 15,029 16,017 14,587 14,677 15,813 14,639
90,762 27 Houston 14,109 15,587 16,584 15,414 14,875 12,910 89,479
28 Manhattan 14,684 11,605 14,139 19,481 13,734 14,287 87,930 29
Delaware- Maryland 13,863 12,379 14,643 13,735 15,735 15,726
86,081 30 Connecticut- Rhode Island 14,687 14,137 16,512 16,629
11,930 8, 994 82,889 31 Indiana 13,285 12,873 15,931 15,402 13,284
11,449 82,224 32 Upstate New York 13,849 14,299 14,625 13,108
10,782 11,198 77,861 33

Source: GAO analysis of IRS data.

Table III. 1: Total Number of Audits by District and Ranked, FYs
1992 Through 1997

Appendix III Total Number of IRS Audits, Criminal Investigation
Initiations, and Prosecution Referrals for Fiscal Years 1992- 1997

Page 26 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Returns audited Region 1992 1993 1994 1995 1996 1997 Total Rank

Western 238,457 251,326 248,726 261,471 268,990 250,985 1, 519,955
1

National average 185,317 188,303 204,556 198,877 190,049 178,514
1, 145,616

Midstates 155,807 168,750 206,695 185,753 175,469 169,149 1,
061,623 2

South 175,906 176,297 187,691 173,610 155,106 141,790 1, 010,400 3

Northeast 171,099 156,839 175,112 174,674 160,632 152,131 990,487
4 Source: GAO analysis of IRS data.

Returns audited Service Center 1992 1993 1994 1995 1996 1997 Total
Rank

Fresno 109,296 43,658 127,146 385,278 361,378 234,514 1, 261,270 1
Ogden 42,451 25,976 32,602 105,074 119,695 105,097 430,895 2

National average 45,921 30,272 41,548 112,195 117,970 80,363
428,268

Austin 32,689 46,808 48,496 95,977 137,371 50,804 412,145 3
Brookhaven 41,371 34,037 34,170 115,044 101,246 79,837 405,705 4
Philadelphia 31,048 17,835 33,073 121,002 99,000 54,980 356,938 5
Kansas City 41,569 27,858 25,967 80,048 91,168 55,507 322,117 6
Atlanta 50,280 25,997 35,011 66,379 88,949 47,022 313,638 7
Cincinnati 42,570 32,556 33,358 58,674 60,724 63,404 291,286 8
Andover 33,871 24,504 27,007 50,020 53,407 58,652 247,461 9

Memphis 34,068 23,486 18,645 44,456 66,758 53,811 241,224 10

Source: GAO analysis of IRS data.

Tables III. 4 to III. 7 show how the Tennessee- Kentucky district
and the South ranked in total number of criminal investigations
and prosecution referrals during fiscal years 1992 through 1997,
compared to the rest of the country.

During this period, the Tennessee- Kentucky district initiated 960
investigations, ranking 22nd among 33 districts. Also, the South
initiated 7,588 investigations, ranking 3rd of 4 regions. As for
prosecution referrals during this period, the Tennessee- Kentucky
district made 719 referrals, ranking 17th of 33 districts and
averaging 120 referrals for all 6 years. The district ranked
higher in 2 years sixth in 1992 and ninth in 1995. The average
number of prosecution referrals in the South for all 6 years
ranked third of four regions.

Table III. 2: Total Number of Audits by Region and Ranked, FYs
1992 Through 1997 Table III. 3: Total Number of Audits by Service
Center and Ranked, FYs 1992 Through 1997

Appendix III Total Number of IRS Audits, Criminal Investigation
Initiations, and Prosecution Referrals for Fiscal Years 1992- 1997

Page 27 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Investigations initiated District 1992 1993 1994 1995 1996 1997
Total Rank

Manhattan 231 326 313 205 234 184 1,493 1 Pennsylvania 268 280 242
279 190 198 1,457 2 North Texas 349 222 212 183 185 201 1,352 3
Illinois 289 230 157 198 233 244 1,351 4 South Florida 202 217 234
209 246 229 1,337 5 Pacific- Northwest 231 250 212 255 218 167
1,333 6 South Texas 245 203 251 136 208 240 1,283 7 Rocky Mountain
258 199 197 196 223 190 1,263 8 Virginia- West Virginia 262 207
213 148 157 267 1,254 9 Brooklyn 231 237 177 169 192 201 1,207 10
Ohio 294 236 183 171 162 157 1,203 11 Southwest 193 198 158 154
194 232 1,129 12 New Jersey 184 196 212 202 144 177 1,115 13
North- South Carolina 211 204 162 156 171 173 1,077 14 Northern
California 202 168 165 131 230 160 1,056 15 Gulf Coast 240 180 118
161 196 157 1,052 16

National average 198 186 162 152 161 162 1,021

Michigan 237 212 188 100 172 111 1,020 17 North Florida 217 210
119 130 146 172 994 18 Delaware- Maryland 180 180 127 157 136 197
977 19 Arkansas- Oklahoma 169 190 155 119 177 156 966 20 Southern
California 147 194 128 187 143 166 965 21

Tennessee- Kentucky 197 174 132 165 142 150 960 22

Georgia 195 162 163 147 120 127 914 23 Los Angeles 234 150 154 141
113 102 894 24 New England 138 176 121 110 160 130 835 25 Kansas-
Missouri 129 152 149 138 110 142 820 26 Houston 143 141 104 125
128 124 765 27 Midwest 146 105 108 144 115 104 722 28 Upstate New
York 111 102 115 98 109 95 630 29 Indiana 104 169 97 85 83 86 624
30 Connecticut- Rhode Island 116 103 104 58 103 92 576 31 North
Central 82 81 92 85 101 95 536 32 Central California 103 94 84 58
78 109 526 33

Source: GAO analysis of IRS data.

Table III. 4: Total Number of Criminal Investigations Initiated by
District and Ranked, FYs 1992 Through 1997

Appendix III Total Number of IRS Audits, Criminal Investigation
Initiations, and Prosecution Referrals for Fiscal Years 1992- 1997

Page 28 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Investigations initiated Region 1992 1993 1994 1995 1996 1997
Total Rank

Northeast 1,990 2,048 1,782 1,549 1,602 1,542 10,513 1

National average 1, 635 1,537 1,337 1,250 1,330 1,334 8,422

Midstates 1, 656 1,493 1,325 1.213 1,340 1,392 8,419 2

South 1, 524 1,354 1,141 1,116 1,178 1,275 7,588 3

Western 1, 368 1,253 1,098 1,122 1,199 1,126 7,166 4 Source: GAO
analysis of IRS data.

Prosecution referrals District 1992 1993 1994 1995 1996 1997 Total
Rank

Pennsylvania 176 223 176 195 175 159 1,104 1 Manhattan 146 187 176
218 190 166 1,083 2 North Texas 295 172 159 126 113 159 1,024 3
Illinois 186 207 119 148 135 130 925 4 South Florida 156 104 173
162 155 148 898 5 Brooklyn 133 198 137 122 160 141 891 6 Virginia-
West Virginia 120 185 183 122 86 193 889 7 Pacific- Northwest 149
166 128 156 158 113 870 8 Ohio 177 190 127 149 102 123 868 9 South
Texas 186 134 162 97 111 155 845 10 North- South Carolina 162 151
152 94 124 149 832 11 New Jersey 108 145 158 139 115 136 801 12
Rocky Mountain 165 132 123 116 127 115 778 13 Gulf Coast 148 126
88 127 148 136 773 14 Southwest 131 106 154 93 126 144 754 15
Southern California 99 159 107 152 103 112 732 16

Tennessee- Kentucky 167 123 103 134 88 104 719 17 National average
129 129 113 110 109 116 706

Michigan 155 138 136 100 80 90 699 18 North Florida 94 129 96 85
104 149 657 19 Georgia 130 93 118 98 117 91 647 20 Delaware-
Maryland 95 118 106 76 82 156 633 21 Northern California 109 106
113 89 126 88 631 22 Kansas- Missouri 125 101 85 100 108 108 627
23 Arkansas- Oklahoma 103 95 59 81 117 111 566 24 Los Angeles 107
120 88 77 107 55 554 25 New England 81 84 67 92 95 110 529 26
Midwest 94 94 72 119 71 73 523 27 Houston 95 110 65 73 72 81 496
28 Indiana 79 105 84 63 47 62 440 29 Upstate New York 72 58 69 66
95 70 430 30 Central California 82 78 54 59 59 53 385 31
Connecticut- Rhode Island 77 73 54 43 64 65 376 32 North Central
50 58 53 44 44 72 321 33

Source: GAO analysis of IRS data.

Table III. 5: Total Number of Criminal Investigations Initiated by
Region and Ranked, FYs 1992 Through 1997 Table III. 6: Total
Number of Criminal Investigations Referred for Prosecution by
District and Ranked, FYs 1992 Through 1997

Appendix III Total Number of IRS Audits, Criminal Investigation
Initiations, and Prosecution Referrals for Fiscal Years 1992- 1997

Page 29 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Prosecution referrals Region 1992 1993 1994 1995 1996 1997 Total
Rank

Northeast 1,220 1,414 1,206 1,200 1,158 1,216 7,414 1

National average 1, 063 1,067 936 904 901 954 5,825

Midstates 1, 213 1,076 858 851 818 951 5,767 2

South 977 911 913 822 822 970 5,415 3

Western 842 867 767 742 806 680 4,704 4 Source: GAO analysis of
IRS data.

Table III. 7: Total Number of Criminal Investigations Referred for
Prosecution by Region and Ranked, FYs 1992 Through 1997

Appendix IV Audit, Criminal Investigation, and Prosecution
Standards

Page 30 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

As table IV. 1 shows, IRS has developed audit quality standards
that IRS auditors are to follow. IRS also uses the standards to
measure the accuracy and effectiveness of the audit process.

Audit standard Purpose

Adequate consideration of significant items Requires consideration
be given to the large, unusual, or questionable items (i. e.,
absolute/ relative dollar value, multiyear comparisons, intent to
mislead, industry/ business practices, compliance impact) in both
the initial contact stage and during the course of the audit.
Probes for unreported income Requires that steps be taken to
verify that the proper amount of income was

reported. Required filing checks Requires that consideration be
given to the filing and audit potential of all

returns required by the taxpayer, including those entities in
taxpayer's sphere of influence/ responsibility. Examination depth
and conclusions reached Requires that audited issues be complete
to the extent necessary to provide

sufficient information to determine substantially correct tax.
Findings supported by law Requires that the conclusions reached be
based on a correct application of

tax law. Penalties properly considered Requires that the
applicable penalties be considered and applied correctly.
Workpapers support conclusions Requires that the audit techniques
and audit trail be fully disclosed and

documented. Report writing procedures followed Requires that audit
findings be presented in the proper content and format and

that they are accurate. Time span or time charged Requires that
the complete audit process is timely.

Note: These standards apply to IRS revenue agents and tax auditors
who do audits in district offices. Similar standards apply to
correspondence audits done by tax examiners in the service
centers, except for the probes for unreported income and the
required filing checks.

Source: GAO summary of IRS data.

A criminal case has two stages: (1) the investigation and review
stage and (2) prosecution in court. The investigator assigned to
the criminal case must follow specific CID standards in conducting
the investigation.

Table IV. 2 describes some of the standards that must be followed
in the criminal investigation. Audit Standards

Table IV. 1: Description of IRS' Audit Standards

Criminal Investigation and Prosecution Standards

Appendix IV Audit, Criminal Investigation, and Prosecution
Standards

Page 31 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Standard Purpose

Documentation of taxpayer's statements Requires agents to document
the statements made by a taxpayer for use in the criminal case.
Determination of the types of available records Requires agents to
determine whether taxpayer records and supporting

documents are available and whether they can be reconciled with
tax returns. Discovery of third- party witness records Requires
agents to use any third- party records that are available to prove
the

taxpayer's net worth and expenditures. Use of internal records
Requires agents to gather all records maintained by IRS that may
be relevant

or may provide investigative leads. Determination of documentary
sources of information Requires agents to show that all sources of
information were considered in

gathering evidence of the tax violation, such as confidential
sources; other government agencies; business records (i. e.,
private business records and bank, stock, credit bureau, and
insurance records). Source: GAO summary of IRS data.

Further, CID must apply criminal prosecution standards when
investigating potential criminal violations and referring
violations for prosecution. These standards include: (1)
sufficient evidence must be gathered to establish guilt beyond a
reasonable doubt, and (2) only cases having a reasonable
probability of conviction should be considered for prosecution.

Other standards that must be considered when determining if a case
warrants prosecution are:

 the potential for national or local press coverage that will
generate awareness of criminal enforcement and thus foster
voluntary compliance;

 localized areas of substantial noncompliance, including actions
that appear to represent a trend or common attitude within the
community, trade, industry;

 evidence of willful, flagrant, or repetitious violations;

 a pattern of noncompliance, usually over multiple years;

 nonvoluntary disclosure of the tax violation and deficiency;

 the health, age, and mental condition of a taxpayer; and

 whether the same acts or transactions have already been
prosecuted.

Table IV. 2: Criminal Investigation Standards for Fraud Cases

Appendix V IRS' Controls for Audit, Criminal Investigation, and
Prosecution Referral Processes

Page 32 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

For years IRS has had various controls and procedures for
conducting audits, criminal investigations, and prosecution
referrals. These controls and procedures are designed to guard
against any improprieties and misuse of audits and criminal
investigations, as well as to better ensure productive use of
resources. The following describes what these controls have
included.

The controls over the audit process occur at three major stages of
the audit: (1) selection of the return to audit, (2) supervisory
review during the audit, and (3) quality review and measurement
upon completion of the audit.

The selection of most audited returns relies on IRS' audit
sources. IRS has about 40 audit sources (i. e., programs and
techniques used to select potentially noncompliant returns for
audit) for identifying returns that need to be audited on the
basis of known or suspected noncompliance. The major source for
identifying returns for audit is DIF-- a computergenerated score
designed to predict returns that, if audited, would be most likely
to result in changes to the reported tax. 1

Regardless of the selection method, IRS generally requires various
levels of IRS managers and staff to check, among other things, for
adherence to the audit selection standard. For the audit projects,
IRS district offices also require authorization by a district
director or higher level management official before audits can
begin. Prior to that authorization, returns should also undergo
review at multiple managerial and staff office levels in the
district to help ensure an appropriate basis for selecting the
return for audit. After selecting returns for audit, IRS requires
manual review or classification of the returns. The purpose of
classification is to decide whether to accept the return as filed
by the taxpayer or to identify all tax issues on the return that
should be audited.

During an audit, IRS auditors have a responsibility to do quality
audits on a timely basis. IRS has established audit standards to
guide auditors' behavior in such areas as probing for unreported
income, checking taxpayer claims, developing evidence, considering
the potential for fraud, and documenting the audit results. IRS
audit supervisors are required to periodically review the audit
workload to determine conformity with audit standards as well as
the technical accuracy of the audits. In addition, IRS

1 Besides DIF, the other sources prompt audits for a variety of
reasons. These reasons include taxpayer actions (such as a claim
for refund), referrals from either outside or inside IRS,
information provided by a third party, indications of fraud or
noncompliance through another audits, and special compliance
problems identified through projects. Controls Over the

Audit Process

Appendix V IRS' Controls for Audit, Criminal Investigation, and
Prosecution Referral Processes

Page 33 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

supervisors also are to do reviews to determine whether auditors
are responsive to taxpayers in dealing with taxpayer inquiries and
issues. These reviews cover such aspects as professionalism,
timeliness, language used, and adequacy of IRS' responses.

During the audit, auditors may ask to expand the audit to include
other tax years and related returns of the same taxpayer if, in
their professional judgement, either the same or a related
compliance problem exists. An auditor is not authorized to audit
any tax return that does not meet this criterion. These requests
to audit the other returns should be approved by the auditor's
supervisor.

After an audit, IRS attempts to measure the quality of the audits
against the audit standards. 2 IRS staff across the country review
a sample of audits closed through the district offices. This
sample usually totals less than 15,000 returns. Similar to the
practice at district offices, service center staff are to review a
small sample of all closed audits.

Controls over the criminal investigation and referral processes
consist mainly of multiple levels of review within the Criminal
Investigation Division, as well as successive levels of review and
approval by the IRS District Counsel, DOJ, and U. S. Attorney. The
controls have been put in place to ensure that investigators
adhere to the criminal prosecution standards and policies.

In addition, CID officials conduct quarterly reviews, biannual
reviews, and peer reviews of their operations. These reviews are
intended to address such things as workload, documentation, and
the selection and management of criminal investigations.

A criminal tax investigation begins after an investigator
determines that a case has prosecution potential. If a case lacks
potential, an investigation should not be started. However, if
started, the investigation is done to gather evidence that would
prove a criminal tax violation. Once the investigation has
started, investigators are to continue until (1) during the course
of gathering information the investigator determines a criminal
case is not warranted; (2) sufficient evidence has been collected
to justify a referral for a successful prosecution; or (3) limited
resources, cases with higher potential, or other circumstances
warrant discontinuation.

2 The audit quality measure will also become part of the quality
measurement across IRS. Controls Over the

Criminal Investigation and Referral Processes

Appendix V IRS' Controls for Audit, Criminal Investigation, and
Prosecution Referral Processes

Page 34 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

The CID chief is to approve the opening of an investigation. Once
an investigation is opened, investigators (CID special agents) are
to begin efforts to gather and analyze financial data, conduct
interviews, and search public records. The primary function is to
gather evidence that documents the movement of money for use in
the criminal prosecution. CID managers review all ongoing
investigations quarterly to insure that the evidence gathered
meets established standards. Referrals for prosecution require
review and approval by the CID manager, branch chief, and chief
prior to review by District counsel and DOJ.

If the evidence cannot be obtained in any other way, IRS criminal
investigators can request search warrants to authorize the search
of property and possible seizure of evidence related to the
alleged criminal activity. The request for use of a search warrant
is to be approved by the CID chief and District counsel, if tax
related, before going through the DOJ approval process prior to
presentation before a magistrate.

Throughout the process of gathering evidence, the investigator
continually analyzes and assesses the information to determine if
the evidence substantiates criminal activity. If not, the
investigator discontinues the case. Upon completion of data
gathering, the criminal investigator prepares a written report
detailing findings of violations of the tax law and refers the
case for prosecution. The report is to be reviewed by the CID
manager, branch chief, and chief for the adequacy of the factual
investigation, sufficiency of the evidence, and conformance of the
report to the legal requirements for prosecution. The CID manager,
branch chief, or chief may determine that the evidence does not
substantiate criminal activity and the case should not be
prosecuted. In such instances, the case may be sent to the IRS
Collection or Examination divisions for civil action.

If the referral is approved in CID, it moves to the IRS District
counsel. If the District counsel approves the case, a criminal
reference letter is prepared, and the case file is sent to DOJ's
Criminal Tax Division. When prosecution is recommended by a
Criminal Tax Division attorney and authorized by the Chief and
Assistant Attorney General of the Tax Division, the case file is
forwarded to the office of the U. S. Attorney in the judicial
district where criminal proceedings will be carried out. The case
file is sent with instructions to either obtain an indictment--
formal accusation or charge for a tax- related crime or other
offense-- or use a grand jury to obtain further information
bearing on the decision to prosecute.

Appendix V IRS' Controls for Audit, Criminal Investigation, and
Prosecution Referral Processes

Page 35 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

By the time a case file reaches the U. S. Attorney's Office, the
case should have been reviewed and approved at all levels,
including CID, the IRS District counsel, and DOJ's Criminal Tax
Division, to ensure that established policies and standards have
been met. However, upon a final review of the case file by the U.
S. Attorney, a decision can also be made not to prosecute the
case.

The U. S. Attorney leads the prosecution of individuals charged
with violations of federal criminal law. The U. S. Attorney
usually relies on the recommendation of the criminal tax
specialists in DOJ's Criminal Tax Division on whether to proceed
with the prosecution. However, the ultimate responsibility for
carrying out the prosecution of a criminal tax case lies with the
U. S. Attorney. 3 Generally speaking, the U. S. Attorney exercises
a large degree of independence and discretion in handling cases as
well as in determining which cases to prosecute.

3 The path described is that of a general criminal tax case.
However, exceptions include cases that can be directly referred
from CID to (1) DOJ and then to the U. S. Attorney, (2) IRS'
District Counsel and then to the U. S. Attorney, and (3) the U. S.
Attorney.

Appendix VI Comments From the Internal Revenue Service

Page 36 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Appendix VI Comments From the Internal Revenue Service

Page 37 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Appendix VII Major Contributors to This Report

Page 38 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Thomas D. Short, Assistant Director Michelle E. Bowsky, Evaluator-
in- Charge Mark Abraham, Evaluator General Government

Division, Washington, D. C.

Atlanta Field Office

Page 39 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

Page 40 GAO/GGD-99-19 Audit and Criminal Enforcement Rates

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