IRS Gearing up For 2001 Random Audits

An article in last week's Wall Street Journal described the Internal Revenue Service plans to revive its random audit process for 2001 tax returns. The agency plans to examine approximately 50,000 returns, chosen randomly, in an effort to gauge taxpayer compliance and update the agency's own expectations.

The random audits will take four forms, ranging from brief examinations by IRS staff and not involving any contact with taxpayers, to completely invasive line-by-line examinations of every amount listed on the tax return. Only about 2,000 returns are expected to be chosen for the detailed audit. Those tax returns will be chosen from various income groups and will include returns of average wage earners as well as small-business owners. The IRS has performed random line-by-line audits in the past, but the annual policy was disbanded in 1988.

Information from the audits will be used to recalibrate the IRS's Discriminant Function System, commonly referred to among tax professionals and IRS staffers as the DIF score. The DIF score is a secret calculation used to determine a range of acceptability that the IRS can expect from taxpayers in different occupations and income brackets. The IRS computer scores returns and selects returns that fall outside of the acceptable DIF range. Tax returns are further sifted to select returns that are most likely to produce significant additional taxes from the errors probably contained therein.

Senator Charles Grassley (R-IA), said of the IRS plans, " The information from these audits will allow the IRS to target its limited resources on examining those taxpayers who are most likely to be up to no good, while leaving honest taxpayers alone."

David Keating, senior counselor at the National Taxpayer's Union, has suggested that the IRS should compensate those audited taxpayers who will need to hire a tax professional to assist them with the comprehensive audit.

The IRS does not have plans to continue the random audits after the 2001 tax year audits are completed, but the agency has not ruled out the possibility that the process will continue after this year.

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