United States General Accounting Office

GAO Report to the Honorable

Paul Coverdell, U.S. Senate

February 1998 TAX

ADMINISTRATION

IRS’ Use of Random

Selection in Choosing

Tax Returns for Audit

GAO/GGD-98-40

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-277015 

February 5, 1998

The Honorable Paul Coverdell

United States Senate

Dear Senator Coverdell:

In a letter dated March 25, 1997, you requested that we answer a series of

questions about the Internal Revenue Service’s (IRS) use of random

selection in choosing tax returns for audit (also referred to as “random

audits”). On April 14, 1997, we briefed your office on the preliminary

results of our work, and in this report, we provide more complete data.

In responding to your questions on IRS’ use of random audits during fiscal

years 1994 through 1996, our objectives were to provide information on

(1) the number of audits selected overall and at random for tax returns

filed by all taxpayers and by IRS employees across the nation and in

Georgia; (2) the profile of the taxpayers subjected to random audits by

state, type of taxpayer return, taxpayer income level, and taxpayer

occupation; (3) the results of the random audits in terms of the number of

audits for which additional taxes were recommended as well as the

amount of these additional taxes and the number of referrals to IRS’

Criminal Investigations Division (CID); (4) the known burdens imposed on

taxpayers subjected to random audits; and (5) the alternatives that IRS

might have used other than random selection to meet its objectives.1

Results in Brief Between fiscal years 1994 and 1996, the number of audits nationwide

increased from 1.4 million to 2.1 million. Audits done through

correspondence with taxpayers on single issues accounted for most of the

increase as the number of more complex, face-to-face audits with

taxpayers dropped slightly. During this same time, the number of audits

done in Georgia also increased (from 45,451 to 55,446), and these were

also largely correspondence audits done at the service center. Overall, the

increases were due to audits of taxpayers claiming the earned income

credit (EIC).

During fiscal years 1994 through 1996, IRS did not randomly select returns

for audit from either the population of all taxpayers or all returns. IRS has

1

During our work, you also requested that we answer questions about a form of IRS audit project

known as Information Gathering Projects (IGP). For fiscal years 1992 through 1994, you asked us to

determine the number of IGPs, the IRS controls over their use, and the types and results of IGPs in

IRS’ Georgia District. We are preparing a separate report, IRS Use of Information Gathering Projects,

(GAO/GGD-98-39, Feb. 5, 1998), to answer these questions.

Page 1 GAO/GGD-98-40 Random Audits
B-277015 

about 40 audit sources, which are programs and techniques used to select

potentially noncompliant returns for audit. IRS’ audit sources do not rely

on random selection from the population of all returns but rather IRS

selects returns having characteristics indicative of potential

noncompliance. IRS officials did identify six projects involving

subpopulations of taxpayers with indications of noncompliance from

which taxpayers were randomly selected for audit. Available IRS data show

that no taxpayers outside of these six subpopulations were selected at

random for audit.

IRS chose the subpopulations for the six projects nonrandomly on the basis

of known or suspected high noncompliance rates and other criteria,

including geographic location or business size. Three projects studied the

compliance of taxpayers (1) claiming the EIC across the nation,2

(2) claiming dependent exemptions duplicated on other returns in Florida

as well as other locations, and (3) operating certain types of eating and

drinking establishments in Ohio. The remaining three projects studied the

compliance of self-employed individuals who appeared to be (1) filing

questionable Schedule Cs in Illinois, (2) claiming false business losses to

be eligible to claim the EIC in Georgia, or (3) not paying self-employment

tax in Missouri.3

 Three of the six projects included taxpayers from

Georgia. The number of taxpayers in these subpopulations ranged from

2,348 to 15.1 million. By comparison, the population of all taxpayers was

more than 100 million. Appendix I summarizes these projects.

The number of audits generated by random selection for these six projects

was small compared with the million or more audits done each year. The

six projects randomly selected a total of 7,421 taxpayers from the six

subpopulations. As of July 1997, IRS had completed audits of 2,961 of the

returns filed by 2,629 of the 7,421 taxpayers.4

IRS does not randomly audit its 100,000-plus employees; that is, IRS does

not randomly select employees for audit from the population of IRS

employees. A few IRS employees were audited as part of the six projects

that used random selection because they were members of the project

2

IRS’ CID, together with the Examination Division, reviewed taxpayers’ apparently erroneous claims

for the EIC, which could lead to erroneous tax refunds. At the conclusion of the CID review,

Examination closed the reviews as audits through IRS’ service centers.

3

The Form 1040 Schedule C is used to report profit or loss from a business. IRS describes a

“questionable Schedule C” as one in which the taxpayer claims unusual or excessive deductions that

appear to be incorrect.

4

The number of returns audited is greater than the number of taxpayers because some audits led IRS

to audit other returns filed by the same taxpayer.

Page 2 GAO/GGD-98-40 Random Audits
B-277015 

subpopulation. Of the 2,961 returns audited after random selection from

the project subpopulations, 4 involved IRS employees. According to IRS

officials, IRS employees were unlikely to be part of the subpopulations

being studied, such as the self-employed. IRS officials also said IRS treats its

employees the same as other taxpayers for the purposes of audit selection,

with one exception: IRS has a special program for auditing returns filed by

specific types of employees, such as new hires, executives, and employees

in sensitive positions. This special program has not used random selection.

The profile of taxpayers selected randomly for audit in the six projects

reflected the location and the nature of the subpopulations under study.

Although IRS data show the projects covered taxpayers in almost all states,

16 states had fewer than 10 random audits, and 10 states had more than

100 such audits; these 10 states, generally, had a higher number of audits

because an IRS field office for those states ran 1 of the 6 projects.

Most audited individuals in the six projects reported positive income

below $25,000. This is because 2,472, or 84 percent, of the audited returns

dealt with the EIC, which is designed to assist lower income individuals.

The project involving the EIC studies was a response to a congressional

mandate to monitor and improve compliance with the EIC, which IRS’

regular audit programs were unlikely to address on a large scale because

of the lower incomes reported by EIC recipients.

Audit results for the two projects with more than 200 audited returns

showed that the percentage of audits recommending additional taxes was

46 percent for the EIC project and 80 percent for the eating and drinking

establishment project. The average amount of additional tax

recommended per audit was $1,653 for the EIC project and $12,711 for the

eating and drinking establishment project.

According to IRS, any audit imposes some level of costs and burdens on

taxpayers. IRS has not measured these costs and burdens for any type of

audit. As discussed in several of our testimonies, accurately measuring

taxpayer costs and burdens is difficult.5

 Even so, IRS has recognized the

importance of these measures and has been making efforts to develop

them.

5

Taxpayer Rights and Burdens During Audits of Their Tax Returns (GAO/T-GGD-97-186, Sept. 26,

1997); Tax System: Issues in Tax Compliance Burden (GAO/T-GGD-96-100, Apr. 3, 1996); and Tax

System Burden: Tax Compliance Burden Faced by Business Taxpayers, (GAO/T-GGD-95-42, Dec. 9,

1994).

Page 3 GAO/GGD-98-40 Random Audits
B-277015 

According to officials, IRS had no alternative data sources that would

accomplish the objectives of the six projects other than random audits.

Further, they said compliance data that addressed these objectives did not

exist outside IRS. We did not evaluate whether the designs of the six

projects were adequate to meet the objectives or identify alternative data

sources that might have addressed the objectives. However, beyond these

six projects, our previous work as well as research by others has pointed

to a lack of tax compliance data that IRS could use to guide its compliance

efforts. IRS officials said they needed statistically valid data that can be

used to test ways to correct tax noncompliance and improve their audit

selection methodologies to better target noncompliant taxpayers for audit.

Outside these research purposes, IRS officials said they have little incentive

to randomly select taxpayers for audit because IRS’ regular audit programs

generally find more noncompliance at lower costs.

Background

IRS Audits of Tax Returns IRS audits tax returns to check compliance in reporting income or

deductions and in other tax issues as well as in paying the correct tax

liability. IRS auditors check taxpayers’ documents in support of data

reported on tax returns. Through IRS’ 33 district offices, auditors either

visit the taxpayers to review the documentation or ask taxpayers to bring

it to the IRS office. These district-based audits often focus on two or more

tax issues.

Tax examiners in IRS’ 10 service centers are to check taxpayers’

documentation through correspondence audits. These audits usually

involve one tax issue, such as the number of tax exemptions claimed on a

return.

Regardless of the type of audit, IRS auditors decide whether to recommend

that additional taxes be assessed. If auditors recommend additional tax

assessments, the taxpayer can agree with or appeal the change. If the

taxpayer wins the appeal, the additional taxes recommended in the audit

would not be assessed and collected.

IRS has about 40 audit sources, which are programs and techniques used to

select potentially noncompliant returns for audit. The major source is the

discriminant function (DIF) formula, a computer-generated score designed

Page 4 GAO/GGD-98-40 Random Audits
B-277015 

to predict returns that, if audited, would be most likely to result in

additional taxes owed. The other sources prompting audits include

(1) referrals from outside or inside IRS, (2) information provided by a third

party, (3) indications of fraud or noncompliance from another audit,

(4) actions of tax return preparers, and (5) returns filed by IRS employees

who hold sensitive positions. Service center processes also identify

potential noncompliance, such as apparently improper claims for the EIC

on tax returns.

IRS has established procedures to better ensure that auditors promote a

fairer tax system by focusing on potentially noncompliant returns. IRS also

has established nine audit standards to guide auditors’ behavior in areas

such as probing for unreported income and developing evidence of

noncompliance. After an audit, selected IRS staff across the country are to

review a small sample of audits closed by district offices to measure

auditors’ adherence to these standards.

Why Returns May Be

Randomly Selected for

Audit

In its simplest form, random selection is a process by which all members

of a specific population or subpopulation have an equal chance of being

selected for study.6

 This process eliminates personal biases and

subjectivity from the selection process and allows study results to be

generalized to a larger group. On this basis, IRS could study compliance for

a specific taxpayer subpopulation by randomly selecting a sample of

taxpayer returns from that subpopulation for audit. The results of these

audits could be projected to that entire subpopulation. Indications of

noncompliance would not be considered in the random selection of

returns for audit.

Traditionally, the only IRS program using widespread random selection has

been the Taxpayer Compliance Measurement Program (TCMP). Under TCMP,

IRS auditors did line-by-line audits of randomly selected tax returns from

large taxpayer populations such as individuals, partnerships, or small

corporations. TCMP was IRS’ program for gathering comprehensive and

reliable tax compliance data. IRS used the data for measuring compliance

levels, estimating the tax gap, identifying compliance issues, developing

DIF formulas for objectively selecting returns for audit, and allocating audit

resources. In addition, Congress used TCMP data for policy analysis,

revenue estimating, and research. IRS did the last TCMP for individuals who

filed returns for tax year 1988; these audits were generally done during

6

In more complex types of random selection, every member of a specific subpopulation has a known

chance of being selected, but these chances may not be equal since selection depends on statistically

derived formulas and weights.

Page 5 GAO/GGD-98-40 Random Audits
B-277015 

1990, 1991, and 1992. IRS had planned a TCMP for tax year 1994 but

postponed it indefinitely because of concerns about the costs to IRS and

the burdens on taxpayers.

Outside TCMP, IRS’ Examination Division initiates audit projects at IRS

district offices and service centers to improve the selection of the audit

workload. Also IRS’ Compliance Research function runs research projects

at IRS districts and service centers through District Research Offices. IRS

occasionally does research projects, such as the ongoing series of EIC

studies, through other functions.7 All of IRS’ projects focus on measuring

the extent and nature of noncompliance for specific tax issues or specific

groups of taxpayers in which compliance problems have occurred. These

projects also tend to focus on finding solutions to the compliance problem

that use nonenforcement means, such as taxpayer assistance, rather than

enforcement means, such as audits. IRS officials said they may choose to

randomly select samples of tax returns in these projects for research

purposes.

Objectives, Scope,

and Methodology

You asked 12 questions about IRS audits and IRS’ use of random selection

for audits closed during fiscal years 1994 through 1996, which were

1. The total number of IRS audits closed nationwide and in Georgia;

2. The number of audits across the nation and in Georgia that were

randomly selected (i.e., random audits);

3. The number of IRS closed audits of returns filed by IRS employees;

4. The number of audits of IRS employees that were randomly selected;

5. IRS’ plans or efforts to measure taxpayers’ burdens and costs from being

subjected to random audits;

6. The number of nationwide random audits, by location of the taxpayer;

7. The number of nationwide random audits, by type of taxpayer;

8. The number of nationwide random audits, by taxpayer income levels;

7

As of September 1997, IRS had finished an EIC study for filing years 1994 and 1995 and was still

completing the EIC study for filing year 1996.

Page 6 GAO/GGD-98-40 Random Audits
B-277015 

9. The number of nationwide random audits, by type of taxpayer business;

10. The number of nationwide random audits that resulted in additional

taxes recommended and the amounts of those additional taxes;

11. The number of nationwide random audits that resulted in referrals for

criminal investigation; and

12. The alternatives other than random audits IRS might have used to meet

its objectives.

To answer your questions, we defined random audit as any audit of a

taxpayer’s return that was randomly selected, including returns randomly

selected from subpopulations that were nonrandomly targeted because of

suspected or known noncompliance. We used the returns as the basis of

our analysis in order to make some comparisons to the overall audit

universe. However, when IRS selects one taxpayer’s return for audit,

through whatever means, it may also audit other returns filed by the

taxpayer in that or another tax year. Although the first selection may be

random for the subpopulation, the selection of additional returns may not.

In reporting the overall number of random audits, we distinguished

between the number of taxpayers and number of returns.

Within this context, we responded to your 12 questions through 5

objectives on IRS’ use of random audits during fiscal years 1994 through

1996. Our objectives were to provide information on (1) the number of

audits selected overall and at random for tax returns filed by all taxpayers

and by IRS employees across the nation and in Georgia; (2) the profile of

the taxpayers subjected to the random audits by state, type of taxpayer

return, taxpayer income level, and taxpayer occupation; (3) the results of

the random audits in terms of number of audits for which additional taxes

were recommended as well as the amount of these additional taxes and

the number of referrals to IRS’ CID; (4) the known burdens imposed on

taxpayers subjected to random audits; and (5) the alternatives other than

random selection that IRS might have used to meet its objectives.

To identify the number of audits done nationwide and in Georgia as well

as of returns filed by IRS employees for fiscal years 1994 to 1996, we

collected related data from IRS officials in the National Office and Georgia

District. We also used data from IRS’ database on closed audits—the Audit

Information Management System (AIMS)—for each of these fiscal years. We

interviewed Examination Division officials in the National and Georgia

Page 7 GAO/GGD-98-40 Random Audits
B-277015 

District offices to understand these data as well as IRS’ procedures for

selecting and doing audits. We collected data on IRS procedures, including

those on audits of IRS employees.

To identify the number of audits that used random selection, we first

reviewed IRS’ audit selection procedures and interviewed Examination

Division and Research Division officials in the National Office to discuss

the types of audits that may use random selection. These types included

audits done for IGPs in the Examination Division, research projects in the

District Office Research and Analysis (DORA) unit, and EIC project audits.

IRS does not track the use of random selection, so we asked officials to

query the district offices and DORAs about projects that may have used it.8

We reviewed all the information IRS had available on the projects in the

National and Georgia District offices to see whether we could identify

other uses of random selection. Some information was unavailable,

particularly for projects that started in earlier years. Examination officials

explained that IRS is not required to maintain these records. They also said

some records were discarded or lost in consolidating from 63 to 33 district

offices and in shifting responsibilities for record maintenance during

recent reorganization efforts. As a result, we are not sure whether all

projects that used random selection have been identified. IRS officials said

any omission would be minor because IRS lacks the resources to use

random selection extensively.

For one of the six projects that IRS identified as using random selection,

the EIC project, our analyses included the first two EIC studies for filing

years 1994 and 1995 but not the third, because IRS was still checking the EIC

and other claims for filing year 1996. IRS officials would not share the

approximately 2,000 taxpayer identification numbers (TIN) associated with

the tax year 1995 returns that were randomly selected for the 1996 EIC

study, because IRS was still analyzing the audit results and wanted to

prevent early release of data on EIC noncompliance. Our having the TINs

and AIMS data, however, would not have allowed us to accurately compute

the level of noncompliance. IRS provided some summary data on 789

taxpayers whose returns were in the tax year 1995 sample and had been

audited, but we did not incorporate those data into our responses to the

questions because we could not analyze and verify the data to the extent

we could have done with the AIMS data. Appendix II summarizes the data

provided by IRS.

8

IRS officials explained that they do not track the use of random selection because it is used rarely

outside TCMP.

Page 8 GAO/GGD-98-40 Random Audits
B-277015 

For any project that we or IRS identified as randomly selecting returns for

audit, we asked for the TIN on the audited returns. We used these TINs in

two ways. First, we matched them to data on IRS employees in 1994, 1995,

and 1996 to identify IRS employees subjected to random audits. Second, we

matched the TINs to AIMS data to answer the questions about the profile of

the taxpayers (e.g., income level and state location) and audit results (e.g.,

additional taxes recommended and referrals to Criminal Investigation).9

For the taxpayer profile and audit results, we reported the available AIMS

data on each random audit. We did not test the reliability of the AIMS data.

We did not report estimates that may be developed from the data because

we did not evaluate the statistical validity of IRS’ random selection; further,

most of the random audits were not finished. For these reasons, in

combination with the small number of random audits compared with all

audits, we did not attempt to draw conclusions about the profile and

results. Also, we did not report results of audits involving fewer than three

taxpayers because of IRS disclosure rules that protect taxpayer privacy.

To identify IRS’ efforts to measure taxpayers’ costs and burdens, we talked

to Examination officials and collected data on IRS’ plans and surveys to

define and measure taxpayer burden. We reviewed IRS’ ongoing efforts for

measuring taxpayer satisfaction with the audit process through a survey.

We reviewed IRS’ 1992 and 1996 survey results for measuring taxpayer

burden and attitudes of large corporations. We did not attempt to evaluate

these surveys or plans.10

To identify whether IRS had any alternatives to random audits, we first

interviewed IRS officials and collected IRS data about the objectives of each

project using random selection. Next, we reviewed our prior reports as

well as a Price Waterhouse report on compliance data and the trade-offs

with alternative sampling strategies.11 We interviewed IRS officials and

researched the literature to see whether we could find any other data

sources that would meet IRS objectives. We did not attempt to evaluate the

worthiness of IRS objectives.

9

For audits done at service centers, AIMS data did not identify the state in which the taxpayer resided.

As a result, we used zip code information from AIMS to determine state location. We merged this state

information with the state information from AIMS on random audits at IRS districts.

10Examination Customer Satisfaction Survey (June 22, 1997) and Measuring Taxpayer Burden and

Attitudes for Large Corporations: 1996 and 1992 Survey Results (Mar. 5, 1997).

11Tax Administration: Alternative Strategies to Obtain Compliance Data (GAO/GGD-96-89, Apr. 26,

1996); Tax Research: IRS Has Made Progress but Major Challenges Remain (GAO/GGD-96-109, June 5,

1996); and Price Waterhouse, Alternatives to the Taxpayer Compliance Measurement Program

(Feb. 28, 1997).

Page 9 GAO/GGD-98-40 Random Audits
B-277015 

Our work was done at IRS’ National Office in Washington, D.C., the Georgia

District Office, Atlanta Service Center, and Southeast Regional Office

between March and November 1997 in accordance with generally accepted

government auditing standards. We requested comments from the IRS

Commissioner on a draft of this report and these comments are discussed

at the end of this report.

Overall and Random

Audits Done

Nationwide and in the

Georgia District

Between fiscal years 1994 and 1996, according to IRS data, audits increased

nationwide as well as in Georgia. During this period, IRS did not randomly

select any taxpayers from the population of all taxpayers for audit. IRS did

identify six subpopulations with known or suspected noncompliance from

which it randomly selected taxpayers for audit. Compared with the overall

number of audits, IRS did very few random audits during this period—both

across the nation and in Georgia. Similarly, very few of the audits of IRS

employees involved random selection.

Total Audits Done

Nationwide and in Georgia

Table 1 shows that the total number of nationwide audits increased from

1994 to 1996. During that time, the number of audits done in Georgia also

increased (from 45,451 to 55,446). Both of these increases resulted from a

change in emphasis in the types of audits. IRS increased the number of

service center correspondence audits and decreased the number of district

office audits; correspondence audits can be done more quickly than audits

at a district office.

Table 1: Total Returns Audited

Nationwide and in Georgia, Fiscal

Years 1994-1996

Returns audited

Locality 1994 1995 1996

Nationwide 1,426,573 2,100,144 2,136,819

District Office 1,009,163 969,365 948,425

Service Center 417,410 1,130,779 1,188,394

Georgia 45,451 57,617 55,446

Georgia Districta 37,866 38,220 28,430

Atlanta Service Centerb 7,585 19,397 27,016

aGeorgia District Office encompasses the state of Georgia.

bOnly includes the taxpayers within the Atlanta Service Center who are located in Georgia.

Source: IRS data for fiscal years 1994-1996.

Page 10 GAO/GGD-98-40 Random Audits
B-277015 

Random Audits Conducted

Nationwide and in the

Georgia District

During the 3 years, IRS did not randomly select any taxpayers from the

population of all taxpayers for audit. According to IRS data, only those

belonging to one of the six project subpopulations were eligible for being

randomly selected. IRS chose these six subpopulations nonrandomly on the

basis of historically high noncompliance rates or other evidence of

suspected high noncompliance rates. These subpopulations represent

small segments of the population of taxpayers and include taxpayers in a

specific occupation, industry, geographic area, or economic activity; or

with specific characteristics, such as being EIC recipients.

Table 2 shows the number of random audits across the six project

subpopulations for the nation and Georgia during fiscal years 1994 through

1996. Compared with all its audits, IRS rarely did random audits. For the 3

years, IRS audited 2,961 returns across the nation—including 157 in

Georgia—in these six projects. Most of these audits took place at IRS

service centers—2,524 nationwide and 133 in Georgia. These IRS data

reflect the number of returns audited and not the number of taxpayers

audited.

Table 2: Returns Audited After Using

Random Selection From Project

Subpopulations, Nationwide and in

Georgia, Fiscal Years 1994-1996

Project Nationwide Georgia

EIC studiesa 2,472 130

Eating and drinking establishments 247 0

Duplicate dependent SSNs 162 14

Questionable Schedule Cs 5 0

EIC Schedule-C loss 13 13

Self-employment tax 62 0

Total 2,961 157

aIRS had not completed its work on its filing year 1996 EIC study and would not provide the tax

year 1995 sample.

Source: IRS data for fiscal years 1994-1996.

Of the six projects shown in table 2, three included taxpayers from

Georgia. The EIC Schedule C project is managed by the Georgia district; the

duplicate dependent Social Security number (SSN) project is managed by a

neighboring district; and the EIC studies project is national in scope. The

EIC studies accounted for the bulk of the random audits both nationwide

and in Georgia. The other two projects did not involve more than seven

random audits of Georgia taxpayers in any of the 3 years. Additional

Georgia taxpayers may be subjected to random audits because the three

projects were ongoing in 1997.

Page 11 GAO/GGD-98-40 Random Audits
B-277015 

As table 3 shows, the 6 projects included 7,421 taxpayers. For fiscal years

1994 through 1996, as of July 1997, IRS had audited only 2,629

taxpayers—largely in the filing year 1994 and 1995 EIC studies. During the

audits of these 2,629 taxpayers, IRS audited 2,961 returns because some

audits led IRS to audit additional returns from the same taxpayer. The other

4,792 taxpayers had not yet had their audits completed because the

projects had recently begun; specifically, 3,702 of these taxpayers were

selected for the duplicate dependent SSN project, which started during

1996.

Table 3: Taxpayers Randomly Selected for Audit, Those Audited, and the Number of Returns Audited by Project, Fiscal

Years 1994-1996

Project Subpopulation

Taxpayers

randomly

selected

Taxpayer

audits not yet

closed

Taxpayers

audited

Returns

audited

EIC studiesa

Filing year 1994 study 4,966,000 1,060 125 935 1,070

Filing year 1995 study 15,100,000 2,048 674 1,374 1,402

Eating and drinking establishments 24,000 118 7 111 247

Duplicate dependent SSNs 3,200,000 3,835 3,702 133 162

Questionable Schedule Cs 2,348 12 7 5 5

EIC Schedule-C loss 9,343 175 165 10 13

Self-employment tax 25,469 173 112 61 62

Total b 7,421 4,792 2,629 2,961

aIRS had not completed its work on its filing year 1996 EIC study and would not provide the tax

year 1995 sample.

bNot applicable, because some taxpayers fit in more than one of the subpopulations.

Source: IRS data for fiscal years 1994-1996.

Table 3 also shows that IRS’ use of random selection did not cover the

entire population of taxpayers. The subpopulations in the 6 projects

accounted for a small portion of the more than 100 million tax returns filed

annually. The subpopulations ranged from 2,348 to 15.1 million in any 1

year. IRS randomly selected the 7,421 taxpayers after nonrandomly

selecting subpopulations of taxpayers known or suspected to be

noncompliant.

Page 12 GAO/GGD-98-40 Random Audits
B-277015 

Total and Random Audits

of IRS Employees

Compared With All

Taxpayers

Table 4 compares all audited taxpayers and IRS employees with returns

audited as a result of random selection. It makes two basic points. First,

the percentage of returns audited as a result of random selection for both

groups was very small compared with the overall number of returns

audited. For the 3 fiscal years in total, the percentage of audited returns

subjected to random selection was slightly higher for IRS employees than

for all taxpayers (0.06 percent compared with 0.05 percent, respectively).

Second, IRS audited four IRS employees’ returns after random selection

from a subpopulation. According to officials, IRS employees were unlikely

candidates for being selected randomly for audit because they generally

did not fall into the subpopulations. Four of the six projects involved

businesses or self-employed individuals. As a general rule, few IRS

employees would also be self-employed. Two of the projects involved the

EIC, which is designed to help the working poor. Many full-time IRS

employees would be ineligible for the program.

Table 4: All Returns Audited, IRS

Employee Returns Audited, and the

Number of Returns Audited as a Result

of Random Selection, Fiscal Years

1994-1996

Returns 1994 1995 1996 Total

All taxpayers

Audited 1,426,573 2,100,144 2,136,819 5,663,536

Audited as a result of

random selection

714 1,101 1,146 2,961

Randomly audited returns

as a percentage of all

audited returns

0.05% 0.05% 0.05% 0.05%

IRS employees

Audited 1,135 2,828 3,103 7,066

Audited as a result of

random selection

4 0 0 4

Randomly audited returns

as a percentage of all IRS

employees’ audited returns

0.35% 0% 0% 0.06%

Note: The “Audited as a result of random selection” rows do not include any returns from IRS’ tax

year 1995 sample for its filing year 1996 EIC study.

Source: IRS data for fiscal years 1994-1996.

To provide another perspective on these percentages, we analyzed the

overall audit rates for individual taxpayers and IRS employees for fiscal

years 1994 through 1996. For all individual taxpayers, IRS audited

1.08 percent, 1.67 percent, and 1.67 percent, respectively, of the returns

filed. For IRS employees, IRS audited 1 percent, 2.6 percent, and 2.7 percent,

Page 13 GAO/GGD-98-40 Random Audits
B-277015 

respectively, of the roughly 110,000 IRS employees during each of the 3

years. Most of the IRS employees audited were new hires, executives,

candidates for executive positions, and employees promoted into sensitive

positions; the rest were selected for audit just like any other taxpayer

would be.

Profile of Taxpayers

Selected for the Six

Projects

To profile the characteristics of taxpayers audited through the six

projects, we analyzed IRS data on the 2,961 audited returns. The

characteristics included the taxpayer’s state, type of return, income level,

and occupation or business. Our results cannot be considered definitive

because our analysis only involved completed audits, and most of the

projects are ongoing with the audits of 4,405 taxpayers still to be closed.

State Location of the

Taxpayer

For fiscal years 1994 to 1996, 16 states had fewer than 10 random audits,

and 10 states had more than 100 random audits.12 Most of these audits

resulted from the EIC and Ohio’s eating and drinking establishment

projects. In future years, Florida, Georgia, and Missouri will likely have a

higher number of random audits because of three ongoing projects: (1) the

duplicate dependent SSN project in Florida; (2) the EIC Schedule-C loss

project in Georgia; and (3) the self-employment tax project in Missouri.

(See app. III, table III.1.)

Type of Taxpayer Return According to IRS data, the 2,961 returns audited in the 6 projects fell into 3

categories of tax returns—individual, corporate, and employment tax

returns—except in 1996, when fewer than 3 partnership returns were

audited. Of these 2,961 returns, individual returns accounted for 2,781 of

the audits. For example, in fiscal year 1994, all 714 random audits involved

individual returns. (See app. III, table III.2.)

Taxpayer Income Levels Of the 2,961 returns audited in the 6 projects, 2,572 returns reported

positive income of less than $25,000. The project on the EIC, which is

designed to help lower income individuals, accounted for 2,417 of these

returns. This income level accounts for most individual tax returns and

most IRS audits overall (See app. III, table III.3.). For fiscal year 1996, these

lower income taxpayers filed about 59 million of the 116 million returns.

12The 10 states were Florida, Georgia, Illinois, Louisiana, Mississippi, New York, North Carolina,

California, Ohio, and Texas; the last 3 states had between 230 and 301 random audits.

Page 14 GAO/GGD-98-40 Random Audits
B-277015 

Further, 1.1 million (most of them with EIC claims) of the 2 million returns

audited in fiscal year 1996 also involved taxpayers from this income level.

Few of the random audits involved higher income taxpayers, but this is

also true for audits overall. However, IRS usually audits a higher

percentage of returns that report higher income. For fiscal year 1996, IRS

audited almost 3 percent of the individual returns reporting at least

$100,000 in positive income but less than 2 percent of the returns reporting

less than $25,000 in positive income. Before the recent influx of audits

focusing on EIC claims, the audit rates for such lower income returns were

well below 1 percent.

Random audits in the eating and drinking establishment project included

nonindividual returns, such as corporate, employment, and partnership

returns. For this project, 40 percent of the audited nonindividual returns

were filed by corporations with total gross receipts under $250,000. For

corporate returns alone, this category represented 69 percent of the audits.

In 1994, IRS data showed it did not audit any nonindividual returns as a

result of random selection. (See app. III, table III.4.)

Taxpayer Occupation or

Business

AIMS has limited information on the occupation or business of individual

taxpayers. In fact, it does not record an individual’s occupation. Instead,

the database indicates whether a taxpayer filed a Form 1040 Schedule C

(income from an individual business) or Form 1040 Schedule F (income

from farming) and may indicate the type of Schedule C business (e.g.,

retail sales, services). Of the cases we reviewed, AIMS had very little data

on the types of businesses; the data that did exist varied greatly,

suggesting no discernable pattern. However, one of the six projects

identified the type of business by the title—eating and drinking

establishments.

Audit Results From

the Six Projects

We also analyzed data on the reported results of the 2,961 audits in the

projects. These results included the percentage of returns with

recommended additions to reported taxes, the amount of additional taxes

recommended, and the number referred to CID. These results cannot be

considered definitive because our analysis only involved returns with

completed audits, and most of the projects are ongoing with over 4,000

taxpayer returns still to be completed.

Page 15 GAO/GGD-98-40 Random Audits
B-277015 

Percentage of

Recommended Additional

Taxes

For the 3 fiscal years, the percentage of completed audits that

recommended additional taxes to a return was 80 percent or higher for the

projects on eating and drinking establishments and self-employment tax.

The percentage recommending additional taxes for the project on EIC

studies averaged 46 percent for the 3 years. Each year, the percentage for

this project rose—from 12 percent in 1994, to 50 percent in 1995, and to

69 percent in 1996. For the same period, the nationwide average across all

audited returns was 67 percent. (See app. III, table III.5.)

Amount of Additional

Taxes Recommended

The amount of reported additional taxes recommended from audits of

individual returns for all 3 years exceeded $200,000 in three of the six

projects. The project on the EIC studies recommended about $1.9 million in

additional tax; the eating and drinking establishment project

recommended about $712,000, and the duplicate dependent SSN project

recommended about $208,000. The amounts recommended in the other

three projects fell below $20,000 during the same period.

Of the 2 projects with more than 200 audited returns, the average amount

of additional taxes recommended per individual return audited for the EIC

project was $1,653; and for the eating and drinking establishments project,

the average amount of additional taxes recommended was

$12,711—double the national average of $6,251 for fiscal years 1994 to

1996. (See app. III, table III.6.)

Referrals for Criminal

Investigation

None of the 2,961 audited returns during fiscal years 1994 to 1996 resulted

in criminal referrals to IRS’ CID or the Department of Justice. In fact, IRS

auditors referred very few cases to CID for criminal fraud. In fiscal year

1996, auditors only referred 783 of more than 2 million audits.

CID relies on various sources of information for initiating its investigations,

including information from (1) within IRS, such as from the Examination

Division; (2) other government sources, such as U.S. Attorneys; (3) banks

and other financial institutions; and (4) the public. In an effort to increase

the quality of fraud referrals from other IRS groups to CID, IRS established

formal fraud-referral procedures, effective for fiscal year 1996. According

to CID officials, the objective of these procedures was to increase

coordination between CID and other IRS divisions, particularly

Examination.

Page 16 GAO/GGD-98-40 Random Audits
B-277015 

Burden Imposed on

Taxpayers Selected

for Audit in the Six

Projects

According to IRS, any audit—whether randomly selected or

otherwise—imposes some level of cost and burden on taxpayers.

However, IRS has no system or data to measure the costs and burdens

associated with any of its audits. IRS recognizes this situation and, as a

result, is trying to develop measures of taxpayer costs and burden as well

as data sources.

In considering ways to define and measure the burdens and costs imposed

on taxpayers, IRS plans to include all contacts with taxpayers—from

telephone calls and correspondence to audits and collection notices—in

its measures. With these measures, IRS plans to capture savings from

burden reduction initiatives, such as increasing telephone assistor access

at Customer Service sites. IRS plans to measure taxpayer burden by dollars,

in order to compare the savings and costs of burden reduction initiatives

versus tax law enforcement initiatives. IRS also plans to develop alternative

methods for measuring taxpayer burden and satisfaction with all IRS

products and services.

In the interim, IRS began its current survey for measuring taxpayer

satisfaction with the audit process in July 1997. The survey is based on a

Price Waterhouse study done in 1991 and a related prior survey conducted

by Booz-Allen in 1989. IRS decided to use the Price Waterhouse study as a

model for its current survey.

The purpose of the survey is to provide IRS with information from a small

sample of taxpayers on (1) their level of satisfaction with recent income

tax audits, (2) their suggestions to increase the level of satisfaction and

improve the audit process, and (3) recurrent problems and how IRS could

correct them. IRS plans to compare taxpayers’ perceptions of the quality

and efficiency of the audit process with IRS’ assessments. IRS plans to

conduct the survey through the mail for a 1-year span in four of its district

offices. Results of the survey are to be available as early as late 1998;

afterward, IRS plans to make decisions about future surveys.

IRS Alternatives to

Conducting Random

Audits

For the six projects, IRS officials said that they could not have met the

research objectives through alternatives to random selection. Internally

and externally, no statistically valid compliance data addressed the

objectives of these projects according to these officials. We did not

independently evaluate the designs of the six projects to determine if they

would meet their objectives. We have reported on IRS’ lack of statistically

valid data outside the data from TCMP or specialized research that not only

Page 17 GAO/GGD-98-40 Random Audits
B-277015 

measured taxpayer compliance but also offered insights on the nature of

and reasons for tax noncompliance.13 Price Waterhouse has made similar

points about IRS’ ongoing need for statistical compliance data.14

IRS officials said that without such compliance data, IRS has few options to

using random audits for compliance research purposes, particularly for

statistical precision, data quality, and data collection cost considerations.

The officials said they need some source of statistical compliance data to

be able to project research results to a larger subpopulation as a way to

improve audit selection methodologies to better target noncompliant

taxpayers for audit. To the extent that the random selection is adequately

designed and properly done, it allows IRS to develop estimates of

noncompliance for an entire subpopulation without burdening each

taxpayer within that subpopulation.

Outside these research purposes, IRS officials indicated that they would

have little incentive to randomly select returns for audit because IRS wants

to invest its limited audit resources productively. According to IRS officials,

random audits usually generate less additional recommended taxes per

audit hour compared with audits selected for ongoing programs. IRS wants

to target audit resources on returns selected through the ongoing

programs, which attempt to focus on the most noncompliant taxpayers,

rather than on returns selected randomly.

Agency Comments

and Our Evaluation

In a letter dated December 23, 1997, IRS’ Acting Chief Compliance Officer

commented on a draft of this report (see app. IV). He expressed

disagreement with our definition of random audit. He said random audit

involves random selection for audit in which every taxpayer in the filing

population would have an equal chance of being selected. He also said the

six projects discussed in our report are not random audits. He said they

are projects where returns were selected using a statistical random return

selection technique from a subpopulation of returns that were

nonrandomly selected because of suspected or known noncompliance.

We believe our report clearly makes this same distinction between random

selection from the population of all taxpayers and random selection from

subpopulations picked because of suspected or known noncompliance.

And as we noted in the draft report, for the period reviewed, IRS did not

randomly select for audit any taxpayer from the population of all

13GAO/GGD-96-89 (Apr. 26, 1996) and GAO/GGD-96-109 (June 5, 1996).

14Price Waterhouse (Feb. 28, 1997).

Page 18 GAO/GGD-98-40 Random Audits
B-277015 

taxpayers. As a result, we made no changes to the report on the basis of

IRS’ comments.

As we arranged with your office, unless you publicly announce its

contents earlier, we plan no further distribution of this report until 30 days

from its date of issue. We will then send copies to the Commissioner of

Internal Revenue and Members of the Georgia Congressional Delegation,

and we will make copies available to others upon request.

Major contributors to this report are listed in appendix V. Please contact

me on (202) 512-9110 if you or your staff have any questions about this

report.

Sincerely yours,

James R. White

Associate Director, Tax Policy and

 Administration Issues

Page 19 GAO/GGD-98-40 Random Audits
Contents

Letter 1

Appendix I 

Descriptions of

Projects Involving

Random Selection

24

Appendix II 

IRS Summary Data for

IRS’ Study of EIC

Claims for Filing Year

1996

25

Appendix III 

Characteristics and

Results of Random

Audits

28

Appendix IV 

Comments From the

Internal Revenue

Service

34

Appendix V 

Major Contributors to

This Report

36

Tables Table 1: Total Returns Audited Nationwide and in Georgia, Fiscal

Years 1994-1996

10

Table 2: Returns Audited After Using Random Selection From

Project Subpopulations, Nationwide and in Georgia, Fiscal Years

1994-1996

11

Page 20 GAO/GGD-98-40 Random Audits
Contents

Table 3: Taxpayers Randomly Selected for Audit, Those Audited,

and the Number of Returns Audited by Project, Fiscal Years

1994-1996

12

Table 4: All Returns Audited, IRS Employee Returns Audited, and

the Number of Returns Audited as a Result of Random Selection,

Fiscal Years 1994-1996

13

Table II.1: AIMS Summary Data by Audit Class for Returns in IRS’

Filing Year 1996 EIC Study

25

Table II.2: AIMS Summary Data by Return Type for Individual

Returns in IRS’ Filing Year 1996 EIC Study

25

Table II.3: AIMS Summary Data by State of Residence for Returns

in IRS’ Filing Year 1996 EIC Study

26

Table III.1: All Returns Audited and Number Audited as a Result

of Random Selection by State, Fiscal Years 1994-1996

28

Table III.2: All Returns and Number Audited as a Result of

Random Selection by Tax Return Type, Fiscal Years 1994, 1995,

and 1996

30

Table III.3: All Individual Returns Audited and Those Audited as a

Result of Random Selection, by Taxpayer Income Level and by

Project, Fiscal Years 1994-1996

31

Table III.4: All Nonindividual Returns and Those Audited as a

Result of Random Selection by Tax Return Type With a

Breakdown by Corporate Assets, by Project, Fiscal Years

1995-1996

32

Table III.5: Number and Percentage of Returns Audited Overall

and as a Result of Random Selection That Had Additional Taxes

Recommended by Project, Fiscal Years 1994-1996

32

 Table III.6: Additional Taxes Recommended per Audited

Individual Returns Overall, and per Audited Individual Returns

Resulting From Random Selection, by Project for Fiscal Years

1994-1996

33

Page 21 GAO/GGD-98-40 Random Audits
Contents

Abbreviations

AIMS Audit Information Management System

CID Criminal Investigations Division

DIF discriminant function

DORA District Office of Research and Analysis

EIC earned income credit

IGP Information Gathering Project

IRS Internal Revenue Service

SOI statistics of income

SSN Social Security number

TIN taxpayer identification number

TCMP Taxpayer Compliance Measurement Program

Page 22 GAO/GGD-98-40 Random Audits
Page 23 GAO/GGD-98-40 Random Audits
Appendix I 

Descriptions of Projects Involving Random

Selection

Earned Income Credit (EIC) studies—A series of nationwide studies

conducted on 1993, 1994, and 1995 tax returns to provide broader

information on taxpayer understanding of and assess compliance with EIC

qualification requirements. The audits done in these studies were unusual

in that both Criminal Investigation Division (CID) and Examination were

involved. Because of this circumstance, some audits of returns may have

been recorded as closed on the Audit Information Management System

well after CID’s initial contact with the taxpayers.

Eating and drinking establishments—An Information Gathering Project

begun in 1993 at Internal Revenue Service’s (IRS) Cleveland District,

seeking to measure the accuracy of income reported by eating and

drinking establishments that had fewer than 25 locations and that were

licensed to sell alcoholic beverages in Ohio.

Duplicate dependent Social Security numbers (SSN)—A research effort,

managed by IRS’ North Florida District, examining those returns filed in tax

year 1995 where more than one taxpayer claimed the same dependent (a

duplicate dependent SSN). IRS is testing the effectiveness of notices in

modifying taxpayer behavior for 1996, securing amended returns for 1995,

and learning more about the subpopulation.

Questionable Schedule Cs—A research effort, managed by IRS’ Illinois

District, to determine the compliance of “questionable” wholesale and

retail sole proprietorships. IRS drew two samples from tax year 1993 of

Schedule Cs who claimed (1) zero gross receipts, zero other income, and

zero cost of goods sold, and (2) gross receipts of $350 or under, zero cost

of goods sold, and total expenses greater than $1,050.

EIC Schedule-C losses—A research effort, managed by IRS’ Georgia District,

attempting to determine if sole proprietorships might be using losses from

Schedule C to offset other income; such offsets allow a taxpayer that

would have been otherwise ineligible to qualify for EIC. IRS selected its

sample from tax year 1994 returns including a Schedule C and claiming

EIC.

Self-employment tax—A research effort, managed by the IRS’

Kansas-Missouri District, testing the impact of an educational letter as a

means of improving compliance for taxpayers filing a Schedule C,

Schedule F, and/or Other Income but not a Schedule SE with their return.

The returns selected for testing were from tax year 1993.

Page 24 GAO/GGD-98-40 Random Audits
Appendix II 

IRS Summary Data for IRS’ Study of EIC

Claims for Filing Year 1996

Because it was still drafting a report on EIC compliance during the 1996

filing season, IRS did not wish to share the tax year 1995 taxpayer sample.

IRS did provide summary data from the sample, which follows.

Table II.1: AIMS Summary Data by

Audit Class for Returns in IRS’ Filing

Year 1996 EIC Study

Audit classa Number of returns

1040A, TPI under $25,000 706

Non-1040A, TPI under $25,000 57

TPI $25,000 under $50,000 4

Schedule C, TGR under $25,000 16

Schedule C, TGR over $25,000 under $100,000 b

Schedule C, TGR $100,000 and over b

Schedule F, TGR under $100,000 b

Legend:

1040A—U.S. individual income tax return

TPI—Total positive income

TGR—Total gross receipts

Schedule C—Business income schedule

Schedule F—Farm income schedule

aType and class of return examined.

bIn accordance with statistics of income (SOI) criteria, the data have been deleted to avoid

disclosure for specific taxpayers.

Source: IRS summary of 1996 EIC study data.

Table II.2: AIMS Summary Data by

Return Type for Individual Returns in

IRS’ Filing Year 1996 EIC Study

Return type Number of returns

Nonbusiness 767

Businessa 22

aForm 1040A Schedule C or Schedule F filers.

Source: IRS summary of 1996 EIC study data.

Page 25 GAO/GGD-98-40 Random Audits
Appendix II 

IRS Summary Data for IRS’ Study of EIC

Claims for Filing Year 1996

Table II.3: AIMS Summary Data by

State of Residence for Returns in IRS’

Filing Year 1996 EIC Study

State Number of taxpayers

Alabama 12

Alaska 0

Arizona 13

Arkansas 12

California 46

Colorado 5

Connecticut 45

Delaware a

Florida 44

Georgia 14

Hawaii 25

Idaho 0

Illinois 21

Indiana 5

Iowa 4

Kansas 10

Kentucky 4

Louisiana 25

Maine 4

Maryland 15

Massachusetts 0

Michigan 6

Minnesota 11

Mississippi 11

Missouri 17

Montana a

Nebraska a

Nevada 4

New Hampshire 0

New Jersey 14

New Mexico 29

New York 30

North Carolina 28

North Dakota a

Ohio 35

Oklahoma 14

Oregon 6

Pennsylvania 17

(continued)

Page 26 GAO/GGD-98-40 Random Audits
Appendix II 

IRS Summary Data for IRS’ Study of EIC

Claims for Filing Year 1996

State Number of taxpayers

Rhode Island 0

South Carolina 8

South Dakota 0

Tennessee 22

Texas 202

Utah 4

Vermont 0

Virginia 6

Washington 6

West Virginia 0

Wisconsin 7

Wyoming a

Total 789

aIn accordance with SOI criteria, the data have been deleted to avoid disclosure for specific

taxpayers. However, deleted data are included in the total.

Source: IRS summary of 1996 EIC study data.

Page 27 GAO/GGD-98-40 Random Audits
Appendix III 

Characteristics and Results of Random

Audits

Table III.1: All Returns Audited and

Number Audited as a Result of

Random Selection by State, Fiscal

Years 1994-1996

Returns audited

State All Random selection

Alabama 67,216 86

Alaska 17,660 0

Arizona 94,266 41

Arkansas 41,764 59

California 1,479,229 234

Colorado 77,195 23

Connecticut 65,110 21

Delaware 16,948 9

District of Columbia 21,024 10

Florida 272,774 140

Georgia 158,187 157

Hawaii 23,092 b

Idaho 25,332 8

Illinois 239,084 142

Indiana 88,712 8

Iowa 37,927 21

Kansas 40,809 23

Kentucky 40,525 7

Louisiana 85,554 152

Maine 19,626 9

Maryland 105,704 64

Massachusetts 96,787 39

Michigan 129,373 22

Minnesota 84,430 40

Mississippi 57,078 105

Missouri 77,213 67

Montana 14,338 b

Nebraska 26,897 9

Nevada 61,230 13

New Hampshire 19,716 7

New Jersey 153,003 78

New Mexico 31,712 26

New York 366,323 158

North Carolina 97,187 136

North Dakota 12,719 4

Ohio 124,159 263

Oklahoma 67,270 49

(continued)

Page 28 GAO/GGD-98-40 Random Audits
Appendix III 

Characteristics and Results of Random

Audits

Returns audited

State All Random selection

Oregon 62,337 20

Pennsylvania 173,918 73

Rhode Island 22,498 11

South Carolina 60,220 62

South Dakota 11,518 5

Tennessee 66,782 95

Texas 453,770 302

Utah 29,245 5

Vermont 9,187 b

Virginia 119,737 86

Washington 107,975 21

West Virginia 19,501 b

Wisconsin 59,006 38

Wyoming 8,986 5

Totala 5,641,853 2,961

Note: The “Random selection” column does not include any returns from IRS’ tax year 1995

sample for its filing year 1996 EIC study.

aDoes not include returns from U.S. territories or where the state was unknown.

bIn accordance with SOI criteria, the data have been deleted to avoid disclosure for specific

taxpayers. However, deleted data are included in the total.

Source: IRS AIMS data for fiscal years 1994-1996.

Page 29 GAO/GGD-98-40 Random Audits
Appendix III 

Characteristics and Results of Random

Audits

Table III.2: All Returns and Number Audited as a Result of Random Selection by Tax Return Type, Fiscal Years 1994, 1995,

and 1996

1994 1995 1996

Returns audited

Tax type All

Random

selection All

Random

selection All

Random

selection

Individual 1,225,707 714 1,919,437 1,045 1,941,560 1,022

Corporate 78,014 0 71,233 38 80,087 68

Employment 62,189 0 53,978 18 56,181 {56}b

Partnership 8,077 0 7,072 0 7,636

Excise 33,493 0 29,521 0 31,579 0

Estate 11,077 0 11,419 0 11,794 0

Fiduciary 4,662 0 4,326 0 4,511 0

Gift 1,853 0 1,893 0 1,934 0

Luxury 1,399 0 1,149 0 1,316 0

Othera 102 0 116 0 221 0

Total 1,426,573 714 2,100,144 1,101 2,136,819 1,146

Note: The “Random selection” columns do not include any returns from IRS’ tax year 1995 sample

for its filing year 1996 EIC study.

aIncludes returns not falling into one of the nine major tax types and any returns where the tax

type is not specified in the AIMS database.

bIn accordance with SOI criteria, the data in adjoining cells have been combined to avoid

disclosure for specific taxpayers. However, data are included in appropriate totals.

Source: IRS AIMS data for fiscal years 1994-1996.

Page 30 GAO/GGD-98-40 Random Audits
Appendix III 

Characteristics and Results of Random

Audits

Table III.3: All Individual Returns Audited and Those Audited as a Result of Random Selection, by Taxpayer Income Level

and by Project, Fiscal Years 1994-1996

Form 1040/1040A Schedule C (business)

Schedule F (farming)

Individual returns

Project

TPI under

$25,000

TPI

$25,000

under

$50,000

TPI

$50,000

under

$100,000

TPI

$100,000

and over

TGR

under

$25,000

TGR

$25,000

under

$100,000

TGR

$100,000

and over

TGR

under

$100,000

TGR

$100,000

and over

Nationwide 2,759,062 648,020 473,004 353,308 355,273 268,403 187,730 20,552 21,352

EIC studiesa 2,417 10 0 0 {27}b 13 3 {4}b 0

Eating and drinking

establishments

17 7 8 13 9 {14}b 0

Duplicate dependent

SSNs

110 22 {13}b 4 10 {5}b 0 0

Questionable Schedule

Cs

0 4 0 0 0 0

EIC Schedule-C loss 4 4 {13}b 0 0 0 0

Self-employment tax 24 18 0 8 0 0 0 0

Total 2,572 65 34 17 45 27 17 4 0

Legend:

TPI—Total Positive Income

TGR—Total Gross Receipts

aIRS had not completed its work on its filing year 1996 EIC study and would not provide the tax

year 1995 sample.

bIn accordance with SOI criteria, the data in adjoining cells have been combined to avoid

disclosure for specific taxpayers. However, data are included in the appropriate totals.

Source: IRS AIMS data for fiscal years 1994-1996.

Page 31 GAO/GGD-98-40 Random Audits
Appendix III 

Characteristics and Results of Random

Audits

Table III.4: All Nonindividual Returns and Those Audited as a Result of Random Selection by Tax Return Type With a

Breakdown by Corporate Assets, by Project, Fiscal Years 1995-1996

Form 1120S

(nontaxable) Form 1120

Corporate returns

Project

Under

$200k

$200k

and

over

No

balance

sheet

Under

$250k

$250k

under

$1M

$1M

under

$50M

$50M

and

over

All other

1120

related

forms

Partnership

returns

Employment

tax returns

Nationwide 16,603 20,649 6,835 28,357 20,735 40,730 14,185 3,226 14,708 110,159

Eating and drinking

establishments

21 7 8 52 9 9 0 0 {74}a

Note: In fiscal year 1994, IRS did not audit any nonindividual returns as a result of random

selection.

aIn accordance with SOI criteria, the data in adjoining cells have been combined to avoid

disclosure for specific taxpayers.

Source: IRS AIMS data for fiscal years 1995-1996

Table III.5: Number and Percentage of

Returns Audited Overall and as a

Result of Random Selection That Had

Additional Taxes Recommended by

Project, Fiscal Years 1994-1996 Projects Audited returns

Audited

returns with

recommended

taxes Percentage

Nationwide 5,663,536 3,820,467 67%

EIC studiesa 2,472 1,129 46%

Eating and drinking

establishments

247 198 80%

Duplicate dependent

SSNs

162 100 62%

Questionable Schedule

C

5 0 0

EIC Schedule-C loss 13 9 69%

Self-employment tax 62 51 82%

Total 2,961 1,487 50%

aIRS had not completed its work on its filing year 1996 EIC study and would not provide the tax

year 1995 sample.

Source: IRS AIMS data for fiscal years 1994-1996.

Page 32 GAO/GGD-98-40 Random Audits
Appendix III 

Characteristics and Results of Random

Audits

Table III.6: Additional Taxes

Recommended per Audited Individual

Returns Overall, and per Audited

Individual Returns Resulting From

Random Selection, by Project for

Fiscal Years 1994-1996

Project

Amount of

recommended

taxes

Recommended

taxes per return

Nationwide (individual returns) $21,524,190,486 $6,251

EIC studiesa $1,866,252 $1,653

Eating and drinking establishments $711,835 $12,711

Duplicate dependant SSNs $207,952 $2,080

Questionable Schedule Cs 0b 0b

EIC Schedule-C loss $18,889 $2,099

Self-employment tax $17,495 $343

aIRS had not completed its work on its filing year 1996 EIC study and would not provide the tax

year 1995 sample.

bOf the five returns audited for this project, none resulted in any recommended taxes.

Note: For nonindividual returns audited, such as corporate returns, the recommended taxes per

audited return may be skewed by several large recommended assessments that exceeded the

range for the majority of the recommended assessments. For example, the 1996 recommended

taxes per return for nationwide nonindividual audited returns, which included some high

recommended assessments against very large corporations, was $200,164 per return; for eating

and drinking establishments, it was $8,199.

Source: IRS AIMS data for fiscal years 1994-1996.

Page 33 GAO/GGD-98-40 Random Audits
Appendix IV 

Comments From the Internal Revenue

Service

Page 34 GAO/GGD-98-40 Random Audits
Appendix IV 

Comments From the Internal Revenue

Service

Page 35 GAO/GGD-98-40 Random Audits
Appendix V 

Major Contributors to This Report

General Government

Division, Washington

D.C.

Tom Short, Assistant Director

Elwood D. White, Evaluator

Pat H. McGuire, Senior Computer Specialist

Joanne M. Parker, Computer Specialist

Susan F. Baker, Computer Specialist

Elizabeth W. Scullin, Communications Analyst

Atlanta Field Office Michelle E. Bowsky, Evaluator-in-Charge

H. Dean Perkins, Evaluator

(268798) Page 36 GAO/GGD-98-40 Random Audits
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100