Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) use of random audits during fiscal years 1994 through 1996, focusing on the: (1) 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) profile of the taxpayers subjected to random audits by state, type of taxpayer return, taxpayer income level, and taxpayer occupation; (3) 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 Investigation Division; (4) known burdens imposed on taxpayers subjected to random audits; and (5) alternatives that IRS might have used other than random selection to meet its objectives.

GAO noted that: (1) between the fiscal years 1994 and 1996, the number of audits nationwide increased from 1.4 million to 2.1 million; (2) the increases were due to audits of taxpayers claiming the earned income credit (EIC); (3) during fiscal years 1994 through 1996, the IRS did not randomly select returns for audit from either the population of all taxpayers or all returns; (4) IRS has about 40 audit sources, which are programs and techniques used to select potentially noncompliant returns for audit; (5) 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; (6) IRS did identify six projects involving subpopulations of taxpayers with indications of noncompliance from which taxpayers were randomly selected for audit; (7) IRS chose six 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; (8) the number of audits generated by random selection for these six projects was small compared with the million or more audits done each year; (9) IRS does not randomly audit its 100,000-plus employees; (10) 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; (11) this special program has not used random selection; (12) although the 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; (13) most audited individuals in the six projects reported positive income below $25,000; (14) 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; (15) according to IRS, any audit imposes some level of costs and burden on taxpayers; (16) IRS had no alternative data sources that would accomplish the objectives of the six projects other than random audits; and (17) IRS officials said they have little incentive to randomly select taxpayers for audits because IRS' regular audit programs generally find more noncompliance at lower costs.

Click here for the full GAO Report, PDF Version, 40pgs. 166K