Just Trying To Help, Says IRS About Latest Random Audit Program

(RIVERWOODS, ILL., June 20, 2002) – If all goes according to plan, this fall the Internal Revenue Service (IRS) will conduct searching, line-by-line audits in order to update its statistical profiles of likely tax cheats – and one reason given by the IRS is that they actually want to spare more taxpayers from the rigors of having their returns examined, according to CCH INCORPORATED (CCH), a leading provider of tax and business information and software (tax.cchgroup.com).

In the past, the IRS randomly selected a number of returns for a detailed inspection under what was called the Taxpayer Compliance Measurement Program (TCMP). The TCMP produced guidelines that could sift through vast numbers of returns and focus IRS suspicions on the likeliest candidates for understated income and overstated deductions. They were last performed on 1988 returns.

"The TCMP audits were fairly excruciating from the taxpayer’s point of view," noted Mark Luscombe, principal tax analyst for the CCH federal and state tax group. "Those being audited had to back up every number and every decimal point. The audits antagonized a lot of taxpayers and generated a lot of hostile comment in Congress."

The IRS proposed an updated and expanded random audit program in 1994, but withdrew the idea under withering criticism.

But now the IRS is gearing up to sit down with 2,000 taxpayers for long talks about their 2001 returns under what they are calling the National Research Program (NRP).

At a recent IRS conference in Washington, D.C., IRS financial analyst Janet McCubbin said that the NRP would end a "13-year data drought."

"The question is, how hard are people going to be squeezed to get that data," Luscombe asked.

According to the IRS, they won’t be squeezed as hard as under the old TCMP. NRP auditors will be instructed to request "reasonable substantiation" for income and deductions taken on their tax returns. This is less stringent and more taxpayer friendly than the rigid documentation requirements of the old TCMP.

In addition to the 2,000 taxpayers undergoing face-to-face, line-by-line examinations, 30,000 more will be called in for audits of a more limited scope – for example, the audit might be confined to their charitable deductions.

A further 9,000 taxpayers will be asked to respond to inquiries from the IRS by mail and a final 8,000 returns will be examined by the IRS with no taxpayer contact – by matching information documents, such as Forms W-2, 1099 and 1098.

All told, nearly 50,000 taxpayers will supply data to the research program in one way or another.

"Under the old TCMP program, those 50,000 would all face line-by-line audits," Luscombe noted.

The IRS claims that by putting a small number of returns under the microscope, they will actually spare many taxpayers the time, money and uncertainty of unnecessary audits.

At the press conference earlier this year at which he unveiled the NRP, IRS Commissioner Charles O. Rossotti claimed that for lack of up-to-date data, the IRS was conducting more and more audits that resulted in no change to the taxpayer’s return.

He pointed to a chart that showed the number of no-change audits by year. In 1987, the percentage of no-change audits was less than 20 percent. Currently, the rate of no- change audits has risen to more than 25 percent and that number is expected to increase as long as the IRS continues to use the outdated and inaccurate TCMP data.

Rossotti promised that the IRS would audit at least 15,000 fewer taxpayers using the updated NRP formulas than under the TCMP formulas.

At the same time, Rossotti predicted that with the NRP up and running, the IRS would be able to determine how much of tax that should be paid is paid and determine who is not paying their fair share of tax.

"Perhaps this is a little increased security measures being taken these days," Luscombe observed. "Some people are inconvenienced by being examined pretty closely so that everyone can feel more secure that the system is working as it should."

CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company produces more than 700 electronic and print products for the tax, legal, securities, insurance, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer U.S. The CCH web site can be accessed at cch.com. The CCH federal and state tax web site can be accessed at tax.cchgroup.com.

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