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

United States

General Accounting Office

Washington, D.C. 20548

General Government Division

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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 study1

 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 South2

 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.
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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
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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
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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 agents4

 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
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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).
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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 work9

 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
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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

 10IRS 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.
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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.

 

11CID 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
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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
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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
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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
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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 12The 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.

13GAO/GGD-98-38 and GAO/GGD-98-98.

14In 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.
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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
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(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
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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

Appendix I 20

IRS’ Individual Audit

Rates for Districts,

Regions, and Service

Centers, Fiscal Years

1992 Through 1997

Appendix II 22

IRS’ Criminal

Investigation Initiation

and Prosecution

Referral Rates for

Districts and Regions,

Fiscal Years 1992

Through 1997

Appendix III 25

Total Number of IRS

Audits, Criminal

Investigation

Initiations, and

Prosecution Referrals

for Fiscal Years 1992-

1997

Appendix IV 30

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

Appendix VI 36

Comments From the

Internal Revenue

Service

Appendix VII 38

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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