Unlike compliance study audits, enforcement audits are not random. According to IRS, return selection formulas—first used to select 1968 tax returns for audit—have reduced the number of audits that resulted in no change to tax liability. Under NRP, IRS will review randomly selected individual tax returns to determine whether the taxpayer has complied with statutory income, expense, and tax reporting requirements. IRS has termed this comparison a “calibration” of the study results. NRP Is on Track To Meet Objectives, but Critical Cadre Development and NRP Testing Steps Remain

Based on our assessment of NRP in light of government guidance on performance measurement and data reliability, IRS appears likely to meet the objectives the agency has set for NRP. The data IRS plans to capture includes the sort of detailed information that the agency will need to determine overall compliance levels, update selection formulas, and identify specific compliance problems. The sample of about 49,000 returns is designed to be representative of the population of about 129 million Form 1040 returns. Conclusions

IRS needs accurate and up-to-date information on taxpayers’ compliance with the tax laws in order to help it understand the effectiveness of its programs to promote and enforce compliance and target its enforcement audits on noncompliant returns. Appendix III: Comments from the Internal Revenue Service
What GAO Found

The U.S. tax system is based on taxpayers voluntarily complying with the tax laws. However, the Internal Revenue Service (IRS) last measured taxpayers' rate of compliance using 1988 tax returns. As time has passed, IRS has become concerned that its ability to understand the effectiveness of its programs and target audits on noncompliant returns has deteriorated, potentially resulting in poorer service to taxpayers, reduced confidence in the fairness of the tax system, and unnecessary audits of compliant taxpayers. IRS is now planning a new compliance study called the National Research Program (NRP). NRP is designed to review 49,000 individual tax returns randomly selected from the population of over 129 million. According to the NRP plan, IRS will review each sampled return to determine whether the taxpayer has complied with statutory income, expense, and tax reporting requirements. Unlike past compliance studies, not all of the reviews will include contacting taxpayers. Based on GAO's assessment of the NRP in light of government guidance on performance measurement and data reliability, research design guidelines, and IRS's goals for the program, NRP's design is likely to yield the sort of detailed information that IRS needs to measure overall compliance, develop formulas to select likely noncompliant returns for audit, and identify compliance problems to address.