Each year, IRS screens all individual tax returns and selects a small percentage in which to contact taxpayers about potential noncompliance. Prior to doing automated checks of tax returns, IRS had relied on its audit program to contact taxpayers about apparent inaccuracies in reporting income, deductions, and other issues on their tax returns. For example, to verify interest income or dependent exemptions claimed by taxpayers, IRS auditors had to contact taxpayers, request and review documentation. Thus, if IRS audited the returns of 5 percent of all taxpayers, it could at most check on the accuracy of interest income for 5 percent of taxpayers. Since the 1970s, IRS’s ability to verify some items on individual returns expanded as IRS’s capacity to use automated processes grew and as Congress enacted laws requiring third parties (like banks, mortgage finance firms, etc.) to provide information returns to taxpayers and IRS on income paid. These steps enabled IRS to more universally and efficiently check taxpayer compliance for those tax issues covered by information returns. For example, with the initiation of information returns for interest income and the development of IRS’s automated capacity, IRS began to check whether every taxpayer for whom it had received an applicable information return had accurately reported that interest on their tax return. As a result, for some wage earners who claim no deductions, IRS can review the accuracy of all, or nearly all, items reported on their tax return to the extent that third parties correctly filed all information returns. In these cases, IRS effectively receives information that should be in taxpayers “books and records” and no longer needs to use auditors to obtain such information from taxpayers’ records for these selected issues. Concurrent with these expansions in IRS’s ability to check the accuracy of certain issues on taxpayers’ returns, the number of taxpayer returns that IRS audited began to decline. For example, between fiscal years 1981 and 1992, the number of document matching contacts rose from 1.2 million to 3.8 million and the number of audits dropped from 2.5 million to 1.1 million. Several GAO reports have discussed IRS audits, other enforcement contacts, and taxpayer burden as follows: In 1996, we reported that audit rates fell from 1988 to 1993 and then rose to a high of 1.67 percent in 1995. In 2001, we reported that audit rates had steadily dropped from 1996 to 2000, declining to 0.49 percent. During 2000, we reported that IRS made almost 10 million nonaudit contacts of taxpayers in 1998 through about 6 million math error notices, 2 million document matching notices, and 2 million soft notices. We recommended that IRS analyze the data collected for each of the three major nonaudit contact programs to improve taxpayer compliance and taxpayer service. During 2000, we reported on IRS’s efforts to estimate taxpayer compliance burden for prefiling, filing, and postfiling activities. We found that IRS was developing two models that, when combined, should provide more reliable estimates of compliance burden for wage earners. To compare audit and other enforcement programs, we obtained information on their legal and operational characteristics. For legal authority, we reviewed the Internal Revenue Code (IRC) and IRS documents. For program operations, we reviewed IRS documents and interviewed responsible IRS officials to understand how each program works. For the average time spent on each type of contact, we analyzed available IRS data for fiscal years 1993 through 2002. For how taxpayers perceive IRS’s enforcement programs, we interviewed IRS officials; reviewed tax research studies and press articles; and contacted four large national organizations representing attorneys, certified public accountants, enrolled agents, and tax preparers, as well as the largest tax return preparation firm, and IRS’s national taxpayer advocate. To summarize trends in the number and rate of individual taxpayer audits and other enforcement contacts in total and by taxpayer income, we analyzed available IRS data from fiscal year 1993 to fiscal year 2002 on each type of contact. To compute the audit contact rate, we used IRS’s method, which equals the proportion of IRS audits closed in a fiscal year compared with returns filed in the previous calendar year. IRS has not stated a method for computing math error, document matching, and nonfiler rates. For the document matching and nonfiler programs, we compared the proportion of notices sent in a fiscal year to return filings in the previous year because these contacts generally occur in the year after a return is filed. For the math error program, we based the contact rate on the proportion of math error notices to the returns filed in that year because the notices are sent to taxpayers as IRS processes tax returns. For the math error, document matching, and nonfiler programs, we based the contact rate on the number of initial notices sent to taxpayers rather than closures because (1) it is the broadest measure of IRS’s enforcement efforts with taxpayers and (2) the math error and document matching programs usually conclude the contact with the taxpayer within a few months after the initial notice is sent. Nonfiler contacts can take considerably longer to close, making it difficult to know which tax year to use in computing a contact rate. We used the number of initial notices so that the nonfiler program could be measured on a consistent basis with the document matching and math error programs. To understand the reasons for the trends, we analyzed our previously issued reports and IRS reports and interviewed IRS staff for each enforcement program. To determine how audit and other enforcement programs affect individual taxpayer compliance and burden, we obtained and reviewed available data such as IRS studies and reports, our previous reports, and other research. We also interviewed responsible IRS officials. To assess whether IRS should expand reporting on its enforcement efforts, we analyzed the types of enforcement data already publicly reported on an annual basis by IRS. We also analyzed the tradeoffs for two options we identified—expanding the definition of audit to include the other enforcement programs and reporting more data on each program. We used much of the information from the previous objectives and interviews with IRS officials. For all objectives, our work focused on the four major enforcement programs identified by IRS—math error, document matching, nonfiler, and audit. We attempted to verify the completeness and accuracy of IRS’s data but could not reconcile all differences given time constraints. As a result, we either did not report some data or disclosed limitations in the data being reported. Further, in analyzing audit and document matching rates by income level, we did not adjust the income levels for the effects of inflation over the 1993 to 2002 period because detailed data on taxpayer income was not available during the timeframes for the assignment. All data used in the report are final except for the number of tax returns filed in 2002. Because this number is preliminary, the final math error contact rate for fiscal year 2002 may differ somewhat from what we report. In addition, you asked us to analyze two newer IRS efforts—voluntary compliance agreements and soft notices. Appendix IV describes the two newer efforts. We did our work at IRS’s national office in Washington, D.C., and offices in New Carrolton, Maryland, and Atlanta, Georgia, between August 2002 and December 2002 in accordance with generally accepted government accounting standards. We requested comments on a draft of this report from IRS (see app. V). Whether audits and other enforcement programs vary from each other depends on a number of factors. With regard to legal characteristics, audits and other enforcement programs are all authorized to contact taxpayers about apparent noncompliance and to determine and adjust taxpayers’ tax liability. However, audits have the broadest authority to detect possible noncompliance, significant powers to obtain information, and the most restrictions on how IRS is to interact with taxpayers. With regard to operational characteristics, the extent to which audits are operationally similar to or different from other enforcement programs varies depending on the type of audit. Audits done in taxpayer locations and IRS offices are not similar operationally to other enforcement programs and audits done through correspondence with the taxpayer, while still different, are more operationally similar to some of the other programs. IRS officials were unaware of any research on whether taxpayers perceive differences among IRS’s enforcement programs. However, looking at audits and other enforcement programs from the taxpayers’ perspective, IRS officials and officials we interviewed who represent taxpayers believe that taxpayers may not perceive distinctions among many of the enforcement programs. In a general sense, the IRC provisions for enforcement are similar in that they authorize IRS to contact taxpayers about apparent noncompliance and to determine and adjust taxpayers’ tax liability. However, the IRC provisions grant IRS the authority to review all matters that may affect a taxpayer’s tax liabilities under audits but only certain specified tax issues under other enforcement programs. The IRC also establishes more rules— including significant powers to obtain information as well as restrictions on those powers—that govern the nature of audit contacts with taxpayers than for the other programs. The IRC does not explicitly limit the tax issues to be covered by an audit, unlike for the other enforcement programs. Under the authority of section 7602, audits can cover any issue on a tax return, including those that the other programs cover. In contrast, the IRC specifies the scope of legal authority for the three other enforcement programs. For example, after five statutory expansions since 1976, math error authority now covers 11 tax issues (see app. I). Document matching—which grew primarily through the 1980s as Congress authorized more information reporting— now covers over 20 types of individual income as well as certain tax credits and deductions (see app. II). The IRC also specifically authorizes the nonfiler program to pursue unfiled tax returns that should have been filed. The IRC also establishes more rules governing IRS’s contacts with individual taxpayers under the audit program than it does for the math error, document matching, and nonfiler programs. These rules give IRS significant powers to obtain information needed to determine an individual’s tax liabilities when doing an audit and, in turn, places restrictions on the use of those powers. If resolving issues raised under the other enforcement programs requires that IRS auditors become involved, the contacts with taxpayers become audits subject to these greater powers and restrictions.