Assuring Individual Taxpayer Compliance: Audit Rates, Selection Methods, and Electronic Auditing

By Cecil, H. Wayne | The CPA Journal, December 1998 | Go to article overview

Assuring Individual Taxpayer Compliance: Audit Rates, Selection Methods, and Electronic Auditing


Cecil, H. Wayne, The CPA Journal


THE POPULAR BELIEF THAT AUDIT RATES represent the statistical chances of being audited is not accurate.

Audits are a very important part of the IRS's efforts to assure compliance with Federal income tax laws. However, auditing returns is only one element of the IRS's compliance strategy. Two additional components are the use of nonrandom methods to select returns for auditing and the electronic matching of third party information documents (Form W-2s, Form 1099s, etc.) to returns.

Audit Rates

The IRS classifies individual returns into ten categories based on total positive income (TPI) for nonbusiness returns and total gross receipts (TGR) for business returns. The audit rate for each category is computed by multiplying 100 times the number of audits performed during the year and dividing by the number of returns filed during the year. The number of audits performed is primarily for returns from one of the three prior years while the number of returns filed is for the current year. Table I reports audit rates by category for 1992 through 1996. As Table 1 shows, the frequently reported audit rate of one to two percent is not accurate for six of the ten categories. Table 1 also shows that audit rates for high-income, nonbusiness returns and business returns are about twice the 1.67% overall rate.

The U.S. General Accounting Office (GAO) reports that audit rates also vary by geographic location. The difference in rates across the United States is attributed to differences in compliance, with higher noncompliance in the western and southwestern regions and lower noncompliance in the central and eastern regions.

Selection Methods

The returns selected for examination are not chosen randomly. The IRS's policy is to identify and audit those returns with the most potential for noncompliance. This policy better utilizes limited funds and helps avoid burdening compliant taxpayers with unnecessary audits. The IRS reports that its programs to identify and audit those returns with the most potential for noncompliance has helped to decrease its "no change" findings from more than 40% to approximately 15% of all individual audits. Nonrandom selection of returns means that the popular belief that audit rates represent the statistical chances of being audited is not accurate.

The IRS uses several nonrandom methods to select returns for auditing purposes. Table 2 reports the sources of audited returns for the preceding three years. It shows that unallowable items accounted for 42% of all audited returns for 1996 The second most important source (18%) of audited returns was discriminant function analysis (DIE), a sophisticated scoring system that relies on statistical data collected from the most recent Taxpayer Compliance Measurement Program (TCMP), which was last performed in 1988. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Assuring Individual Taxpayer Compliance: Audit Rates, Selection Methods, and Electronic Auditing
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.