For all taxpayers and by taxpayer categories, the audit rate equals the proportion of IRS audits closed in a fiscal year compared to returns filed in the previous calendar year. This allowed us to describe the changes and update the audit rate trends in earlier reports. To describe what is known about the potential effects of changes in the audit rates on tax compliance, we used our previous and ongoing work on IRS audits, other IRS enforcement programs, and tax compliance. Individual Audit Rates Have Been Declining Overall and Across Various Categories

From fiscal years 1996 through 2000, the overall income tax audit rate of individuals declined. The declines in audit rates were spread uniformly across IRS’ four regions. First, IRS had fewer auditors for individual returns for reasons that include a decline in staff and decisions to change staffing priorities to focus on customer service. Third, audits took longer due to additional requirements, such as more written communications with taxpayers about the status of their audit. With respect to changes in the audit rate by income levels, IRS officials cited an increase in the number of high-income tax returns and an audit focus on noncompliance by earned income credit claimants, who are usually lower income individuals. However, due to time constraints, we did not analyze the data to determine the extent to which IRS’ reasons explained the changes in audit rates. Part of the reason for the decline in auditing is that revenue agents and tax auditors spent increasingly more time providing taxpayer assistance between fiscal years 1996 and 2000. IRS Cited Other Reasons for the Varying Individual Audit Rates by Income Levels

IRS officials offered two reasons why the audit rates for lower income individuals exceeded the rates for higher income individuals in selected years among the nonbusiness and business groups.
Why GAO Did This Study

The Internal Revenue Service (IRS) does various compliance checks to ensure the accuracy of information reported on taxpayers' returns. In recent years, the audit rate--the proportion of tax returns that IRS audits each year--has drawn attention because of a long-term decline in audit rates and the differences in audit rates for lower and higher income individuals. This report (1) describes the changes in audit rates for individual income tax returns overall and for categories, such as major sources (i.e., nonbusiness versus business) and levels of income for fiscal years 1996 through 2000; (2) discusses IRS' reasons and related data explaining the changes in audit rates; and (3) describes what is known about the effects of changes in the audit rates on tax compliance.

What GAO Found

In comparing fiscal years 1996 and 2000, GAO found that the overall tax audit rate of individuals declined about 70 percent. These rates declined regardless of the individual taxpayer's income level. IRS cited the following three reasons for the decline in audit rates for fiscal years 1996 to 2000: (1) the number of IRS auditors for individual returns declined by more than half due to a decline in total staff and decisions to change staffing priorities to focus on customer service; (2) the remaining auditors were used in other areas, such as assisting taxpayers; and (3) audits took longer due to additional audit requirements, such as more written communications with taxpayers about the status of their audit. To explain the changes in the audit rates by income levels, IRS officials cited increases in the number of high-income tax returns and an audit focus on noncompliance by earned income credit claimants, who are lower income individuals. Finally, neither IRS nor external observers know how the decline in audit rates affects voluntary tax compliance.