IRS Auditing More Returns Than it Admits

A recent report about the reduction in number of tax returns being audited by the IRS incited the Senate to respond that there are actually considerably more returns that undergo examination. The original report, which appeared last month, stated that the number of tax returns audited during 2000 had decreased nearly 50% from the prior year.

Members of the Senate are now pointing out that the definition of audit seems to have changed from 1999 to 2000, so the comparison from one year to the next isn't exactly accurate.

Senate Finance Committee Chairman Charles Grassley has indicated that the actual number of tax returns being audited may be as much as quadruple the number the IRS is reporting. The reason for the discrepancy can be found in the use of technology.

Much of the traditional audit process has now been automated, with initial examinations of tax returns being performed by computer. Comparisons are made to national averages and letters are sent asking taxpayers to explain or provide support for discrepancies. This process, which was once performed by humans, is now being done electronically, and millions of tax returns that are being examined in this way are not counted among those the tax commissioner includes with his audit figures.

Why is this an issue? The IRS is using the lower numbers of audited tax returns last year as reason for its request for additional funds. The IRS has asked Congress for an 8% increase in its budget and wants to hire an additional 4,000 employees. In previous years, the electronic examinations were included with audit figures to beef up the audit rate and show how well the IRS was doing its job.

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