We also collected information on the number of returns filed and the number of returns audited each year by IRS’ regions and by the district offices within those regions. Trends in IRS’ Audit Rates

Between fiscal years 1988 and 1993, IRS’ audit rate for individuals decreased from 1.57 percent to 0.92 percent. During fiscal years 1994 and 1995, the audit rate increased, reaching 1.67 percent by 1995. As shown in figure 2, two of these—returns selected because of DIF or potential tax shelters—declined by at least half, while the other two—returns involving potential nonfilers or unallowable items—at least tripled. As figure 3 shows, for fiscal year 1995 the rates tended to be highest in the western regions of the country and lowest in the middle regions. As figure 5 shows, from fiscal year 1992 to fiscal year 1994, additional taxes recommended per return (1) decreased among business individuals for the lowest-income group and increased for the highest-income group and (2) increased among nonbusiness individuals for the lowest-income group and decreased for the highest-income group. They basically agreed with the information presented in the report and provided additional explanations for some of the audit trends and results, such as (1) the downward trend in overall audit rates, as well as the rate for the highest-income nonbusiness individuals, from fiscal years 1988 to 1993; (2) the increases or decreases in additional taxes recommended for the highest-income business and nonbusiness individuals from fiscal years 1992 to 1994; (3) the decrease in additional taxes recommended for the lowest-income business individuals from fiscal years 1992 to 1994; and (4) the amount of additional tax recommended per direct hour for the highest-income individuals compared to that for the lowest-income individuals. Nonfilers

Audits initiated against known taxpayers who did not file a return with IRS.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) audits of individual taxpayers, focusing on: (1) IRS audit rates for individual returns; and (2) the overall results of IRS most recent audits of individual returns.

What GAO Found

GAO found that: (1) while the audit rate for individuals decreased between fiscal years (FY) 1988 and 1993 from 1.57 percent to .92 percent, it increased to 1.67 percent by FY 1995; (2) between FY 1992 and FY 1994, the number of audited computer-selected returns and returns with potential tax shelters declined by half, while the number of audited returns with potential nonfilers and returns with unallowable items tripled; (3) audit rates varied by region and district office; (4) between FY 1988 and FY 1995, audit rates were highest in the western region of the country and lowest in the central United States; (5) between FY 1988 and FY 1995, audit rates increased among those in the lowest-income group and decreased among those in the highest-income group; (6) audits of the highest-income group yielded the most recommended additional tax per return; and (7) between FY 1992 and 1994, additional taxes recommended for each direct audit hour increased for business individuals in the lowest and highest-income groups and nonbusiness individuals in the lowest-income group, and decreased for nonbusiness individuals in the highest-income group.