Introducing a major shift in audit strategy, the Internal Revenue Service on Thursday announced plans to implement a new statistical technique designed to identify taxpayers who fail to report their entire income.
The target group is taxpayers with income of over $100,000, which is a major change in focus for the IRS. In recent years the Service has applied its resources to audits of lower-income taxpayers who claimed the earned income credit. Although many errors have been found in those tax returns, due in large part to the complexity of the calculations associated with the earned income credit, a significant number of those audits produced little or no additional tax revenue, and in many cases taxpayers came out of those audits owing less tax than they had owed before the audit.
IRS Commissioner Charles O. Rossotti said the lower income taxpayers were being selected for audit based on statistical information produced by outdated research.
The new audit focus will be on taxpayers who have control over the income they report, primarily non-wage earners. Taxpayers who own their own businesses and those who report income from pass-through entities including partnerships and other investments will be under higher scrutiny.
Mr. Rossotti said that several hundred IRS revenue agents will undergo training as fraud specialists. It is expected that it will take two years to fully implement the new plan, making this plan Mr. Rossotti's legacy. His term as IRS Commissioner is due to expire in November, 2002.