II

105TH CONGRESS

2D SESSION S. 2008

To amend the Internal Revenue Code of 1986 to prohibit the use of random

audits, and for other purposes.

IN THE SENATE OF THE UNITED STATES

APRIL 29, 1998

Mr. COVERDELL (for himself, Mr. ASHCROFT, Mr. SHELBY, Mr. FRIST, Mr.

COCHRAN, Mr. HAGEL, Mr. INHOFE, and Mr. MCCAIN) introduced the

following bill; which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to prohibit

the use of random audits, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Internal Revenue Serv5 ice Random Audit Prohibition Act’’.

6 SEC. 2. FINDINGS.

7 The Senate finds the following:

8 (1) The Internal Revenue Service has at its dis9 posal approximately 40 audit sources, which are pro-
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1 grams and techniques used to select potentially non2 compliant returns for audit. Such audit sources do

3 not rely on random selection from the population of

4 all returns but rather the Internal Revenue Service

5 selects returns having the characteristics indicative

6 of potential noncompliance.

7 (2) The Internal Revenue Service initiated at

8 least 6 projects, covering taxable years 1994 through

9 1996, that involved the performance of random au10 dits on taxpayers.

11 (3) The Internal Revenue Service has selected

12 at least 7,421 taxpayers nationwide at random for

13 audits and completed no less than 2,961 random au14 dits of returns for taxable years 1994 through 1996.

15 (4) More than 80 percent of all random audits

16 completed covering taxable years 1994 through 1996

17 were performed on low-income taxpayers earning

18 $25,000 or less.

19 (5) Nearly half of all random audits have oc20 curred in 11 Southern States.

21 (6) Four of the 6 Internal Revenue Service

22 projects involving random audits were focused on

23 small businesses or the self employed.
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1 SEC. 3. PROHIBITION OF RANDOM AUDITS.

2 (a) IN GENERAL.—Section 7602 of the Internal Rev3 enue Code of 1986 (relating to examination of books and

4 witnesses) is amended by adding at the end the following

5 new subsection:

6 ‘‘(d) LIMITATIONS ON AUTHORITY TO EXAMINE.—

7 ‘‘(1) IDENTIFICATION OF PURPOSE AND BASIS

8 FOR EXAMINATION REQUIRED.—In taking any ac9 tion under subsection (a), the Secretary shall iden10 tify in plain language the purpose and the basis for

11 initiating an examination in any notice of such an

12 examination to any person described in subsection

13 (a).

14 ‘‘(2) RANDOM AUDITS PROHIBITED.—The Sec15 retary shall not base, in whole or in part, the initi16 ation of an examination of a return under subsection

17 (a) on the use of a statistically random return selec18 tion technique from a population or subpopulation.’’

19 (b) CIVIL PENALTY FOR PERFORMING RANDOM AU20 DITS.—Subchapter B of chapter 76 of the Internal Reve21 nue Code of 1986 (relating to proceedings by taxpayers

22 and third parties) is amended by redesignating section

23 7437 as section 7438 and by inserting after section 7436

24 the following new section:
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1 ‘‘SEC. 7437. CIVIL DAMAGES FOR PERFORMANCE OF RAN2 DOM AUDITS.

3 ‘‘(a) IN GENERAL.—If any officer or employee of the

4 Internal Service in initiating an examination of a return

5 of a taxpayer knowingly uses a statistically random return

6 selection technique in violation of section 7602(d)(2), such

7 taxpayer may bring a civil action for damages against the

8 United States in a district court of the United States.

9 ‘‘(b) DAMAGES.—In any action brought under sub10 section (a), upon a finding of liability on the part of the

11 defendant, the defendant shall be liable to the plaintiff in

12 an amount equal to the sum of $5,000 plus the costs of

13 the action.

14 ‘‘(c) PAYMENT AUTHORITY.—Claims pursuant to

15 this section shall be payable out of funds appropriated

16 under section 1304 of title 31, United States Code.

17 ‘‘(d) PERIOD FOR BRINGING ACTION.—Notwith18 standing any other provision of law, an action to enforce

19 the liability created under this section may be brought,

20 without regard to the amount in controversy, at any time

21 within 2 years after the date of the notice described in

22 section 7602(d)(1).’’

23 (c) CLERICAL AMENDMENT.—The table of sections

24 for subchapter B of chapter 76 of the Internal Revenue

25 Code of 1986 is amended by striking the item relating to

26 section 7437 and inserting the following:
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‘‘Sec. 7437. Civil damages for performance of random audits.

‘‘Sec. 7438. Cross references.’’

1 (d) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to examinations initiated after

3 April 29, 1998.

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