IRS plans to conduct detailed, line-by-line audits on 1,683 of the  approximately 47,000 returns in the NRP sample in order to assess the  accuracy of NRP classification and, if necessary, to adjust NRP results—a  process called calibration. Scope and Methodology

To describe IRS’s implementation of NRP, we have conducted frequent  meetings with officials in IRS’s NRP Office and other IRS officials as they  have implemented the program. We considered whether NRP is being implemented in accordance with its  design. For this review, we also considered whether IRS  was maintaining a focus on meeting NRP’s objectives of obtaining quality  research results while, at the same time, minimizing taxpayer burden. Our evaluation focuses only on IRS’s efforts to obtain  voluntary reporting compliance information. Staff members were trained  before they began to carry out NRP tasks. As of the end of March 2003, IRS completed NRP casebuilding for about 94  percent of the approximately 47,000 returns in the NRP sample and about  73 percent of NRP returns have been classified. Also, for 3,651 NRP cases,  IRS completed all necessary audit work. IRS made substantial progress in casebuilding and classification starting in  2002, and the number of cases assigned to NRP auditors has been  increasing quickly since January 2003. The NRP audit  process also includes quality assurance measures that include both in- process and completed case reviews, with all NRP audits reviewed before  they are formally closed with the taxpayer. IRS Is Taking Steps to Minimize and Assess Taxpayer Burden

As IRS planned, NRP casebuilding and classification processes are helping  minimize the burden on taxpayers with returns in the NRP sample. NRP Processes Are Helping to Reduce Taxpayer Burden

IRS is following its plans to reduce burden on taxpayers selected as part of  the NRP sample by (1) compiling NRP casebuilding materials that allow  IRS to verify certain items on tax returns without requesting the  information from the taxpayer, (2) classifying returns according to items  that need to be verified through an audit, and (3) limiting most NRP audits  to items that cannot be verified without an audit. IRS now estimates that more face-to-face  audits will take place than initially projected because (1) as the NRP plan  recognized, IRS’s initial estimates were uncertain and based on aging data  and (2) the final form of NRP classification guidelines meant more face-to- face and fewer correspondence audits. Conclusions

IRS continues to be on track for meeting its NRP goal of obtaining  meaningful compliance data while minimizing the burden on taxpayers  with returns in the NRP sample. Appendix I: Comments from the Internal Revenue Service
Why GAO Did This Study

The Internal Revenue Service (IRS) needs up-to-date information on voluntary compliance in order to assess and improve its programs. IRS's last detailed study of voluntary compliance was done in the late 1980s, so the compliance information IRS is using today is not current. IRS is now carrying out the National Research Program (NRP), through which IRS auditors are reviewing about 47,000 randomly selected tax year 2001 individual tax returns. In June 2002, GAO reported that NRP was necessary, that its design was sound, and that it appeared to meet IRS's goals of acquiring useful compliance data while minimizing burden on taxpayers with returns in the sample. GAO was asked to review IRS's implementation of NRP. GAO reviewed IRS's method of gathering internal and third-party data (casebuilding) and IRS's process of reviewing casebuilding materials to determine if audits are necessary (classification) and assessed IRS's plans to ensure consistent data collection while minimizing burden on taxpayers.

What GAO Found

IRS's NRP is being implemented as planned and consequently is on track to meet the agency's objectives of obtaining quality research results while minimizing the burden on the approximately 47,000 taxpayers with returns in the NRP sample. IRS officials have completed the development and testing of NRP processes and have selected and trained staff members to carry out the program. Additionally, as the graphic illustrates, IRS is currently nearing the completion of casebuilding and has made progress in classifying NRP returns. Audits, when required, began in November 2002. As of the end of March 2003, IRS had closed 3,651 NRP cases. In accordance with IRS's plans to minimize burden on taxpayers with returns in the NRP sample, some cases have been closed without any taxpayer contact or with only limited audits. The NRP plan recognized that the initial estimates for the overall NRP sample size and the number of returns to be audited were uncertain because they were based on aging data. The overall NRP sample size will be smaller and IRS officials expect to conduct more face-to face audits than initially estimated. As IRS completes NRP casebuilding, classification, and audits, it is implementing quality assurance steps, including efforts to ensure that key audit steps are completed on all NRP audits before they are formally closed with taxpayers. This is important since the data collected from each NRP audit represent information from thousands of similar taxpayers.