Tax Administration

Some observers have raised questions about whether the Internal Revenue Service (IRS) disproportionately audits or pursues criminal investigations of taxpayers in some parts of the country. For example, an April 1997 study concluded that IRS enforced the tax laws at higher rates in the South compared to the rest of the country. IRS officials identified several factors to explain variations across the country in audit, criminal investigation initiation, and prosecution referral rates for individual taxpayers. The main factor was that the rates for civil and criminal tax noncompliance vary geographically. IRS officials also cited other factors that might affect geographic variations, such as the location of available audit and criminal investigation staff. Because various factors can affect the geographic variations in IRS' audit, criminal investigation initiation, and prosecution referral rates, comparisons of these rates must be interpreted with caution. For the years 1992 through 1997 combined, the unadjusted audit rate for the Tennessee-Kentucky district was below the national average rate, and the South's rate was about at the national average. The six-year combined criminal investigation initiation and prosecution referral rates for the Tennessee-Kentucky district were below the national averages, and the South's rates were about at the national averages. IRS has established controls for its audits, criminal investigations, and prosecution referrals. These controls generally consist of standards to guide audit and investigation behavior, such as how auditors are to gather and document evidence and how criminal investigators are to conduct investigations of alleged criminal tax and nontax violations. GAO could not determine the extent to which IRS has used most of its controls over audits, criminal investigations, and prosecution referrals.

GAO noted that: (1) IRS officials identified several factors to explain variation across the country in audit, criminal investigation initiation, and prosecution referral rates for individual taxpayers; (2) the main factor was that the rates for civil and criminal tax noncompliance vary geographically; (3) that is, neither the types of taxpayers nor their tax behaviors are homogeneous across districts; (4) IRS officials also identified other factors that might affect geographic variation, such as the location of available audit and criminal investigation staff; (5) because a variety of factors can affect the geographic variations in IRS audit, criminal investigation initiation, and prosecution referral rates, comparisons of these rates must be interpreted with caution; (6) some factors fall outside IRS' direct control, such as the location of taxpayers' noncompliant behaviors; (7) other factors are more subject to IRS' control, such as how many auditors and criminal investigators it assigns to a location; (8) GAO was not able to adjust for all such factors in comparing audit, criminal investigation initiation, and prosecution referral rates across locations; (9) had GAO been able to make these adjustments, the results of its comparisons of rates across locations could have been different; (10) for the years 1992 through 1997 combined, the unadjusted audit rate for the Tennessee-Kentucky district was below the national average rate, and the South's rate was approximately at the national average; (11) the 6-year combined criminal investigation initiation and prosecution referral rates for the Tennessee-Kentucky district were below the national averages, and the South's rates were approximately at the national averages; (12) IRS has established controls for its audits, criminal investigations, and prosecution referrals; (13) these controls generally consist of standards to guide audit and investigation behavior, such as how auditors are to gather and document evidence and how criminal investigators are to conduct investigations of alleged criminal tax and nontax violations; (14) the controls also include a series of reviews to check adherence to the standards; (15) GAO could not determine the extent to which IRS has used most of its controls over audits, criminal investigations, and prosecution referrals; and (16) statistics on how often the controls were used are not maintained in any database except for the reviews done at the close of audits to measure adherence to the audit standards.