IRS chief admits audit rate can be misleading

The head of the Internal Revenue Service acknowledged Monday that the agency's reported audit rates may be misleading because they do not include computer-based reviews of tax returns. IRS Commissioner Charles O. Rossotti's remarks were in response to a March 19 letter from Senate Finance Committee Chairman Charles Grassley, R-Iowa, questioning the agency's reported drop in audit rates for fiscal 2000. Grassley asked whether the numbers for the audit rate take into account computer-based audits, as well as those conducted in person. "I am concerned that understatements may be used to justify budget and staff increases--and that it is statements such as this that could undermine our tax system," Grassley said in his letter. In a March 26 letter to Grassley, Rossotti acknowledged that focusing only on the publicly reported audit rate, which does not include computer-based audits, understates the IRS' ability to find errors in tax returns. According to IRS statistics released last month, the agency's audit rate dropped to 0.49 percent in fiscal 2000 from 1.68 percent in 1995. During a meeting of the IRS Oversight Board earlier this month, some participants, including National Treasury Employees Union President Colleen M. Kelley, attributed low audit numbers to staff shortages. Still, Rossotti said in-person audits are necessary to ensure fairness. "To the extent that the IRS uses more and more [computer reviews] and less and less auditing, the effect may be perceived as, and will in fact, be unfair because higher-income taxpayers will not have their returns verified to the same degree as middle-income taxpayers," said Rossotti. Computer-based audits, also called "document matching," are not considered true audits because they do not require the taxpayer to submit any records to the IRS. According to IRS statistics, only 10 percent of income for taxpayers with income less than $100,000 cannot be verified through document matching, compared with 35 percent for taxpayers with income over $100,000. Also, document matching cannot verify itemized deductions, said Rossotti, and more than 90 percent of returns reporting income over $100,000 include itemized deductions. The IRS commissioner said advanced technology would eventually reduce the dependence on in-person audits for individual tax returns, and lower audit rates in general. "With the use of document matching as well as other return verification techniques that will eventually be enabled by new technology, it is my view that there is no need to return to the levels of individual audit coverage that existed even five years ago, which was three times the fiscal 2000 level," said Rossotti in the letter. Grassley praised Rossotti for clarifying the agency's audit coverage and for helping to dismiss "histrionic claims that we must return to earlier high levels of face-to-face audit levels."