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Enforcement Trends Over Time

Analysis of IRS data show that a wide range of agency tax enforcement programs continue to falter. The central purpose of these enforcement activities is to make sure that all taxpayers -- individual and corporate -- meet their lawful responsibilities.

When a police department stops handing out parking tickets it often sees an increase in illegal parking. But whether less tax enforcement will lead to less compliance with the tax laws is not known. This is partly because Congress several years ago eliminated a special agency program developed to measure compliance levels by various kinds of taxpayers. Although the IRS has announced it is developing a new technique for measuring taxpayer behavior, comprehensive findings have not yet been disclosed. Another problem making compliance measurement difficult is that many different factors -- including the state of the economy, national emergencies like the 9/11 events, etc. -- can influence how well or poorly taxpayers meet their obligations.

Looked at over the last ten years, the deterioration in IRS enforcement activities has been considerable.

  IRS contacts resulting from the agency's largely computerized information matching program dropped by more than half from 1992 to 2001. This means that during the last ten years a taxpayer’s chance of receiving such a notice went from 1 out of 21 to 1 out of 50.

  For individual taxpayers reporting $100,000 or more in income, there was a seven-fold decline in audit rates during the 1992 to 2001.

  For business returns reporting gross receipts of more than $100,000 there was a three-fold decline.

  Levies, liens and seizures saw a five-fold decline, from 4,717,000 in 1992, to 875,832 in 2001.

  IRS recommendations for prosecution of criminal suspects dropped off from 5,319 to 2,056. The odds of such a referral thus went from 1 in 21 in 1992 to 1 in 62 in 2001.

[For specifics by enforcement activity, see National Profile and Trends.]

Of course the slump in the rates of audits can be partly explained by the overall increase in tax returns, which went up by 12% during the period. But other factors appear to be in play. One of them, of course, is the availability of trained staff.

From 1992 to 2001, the overall number of IRS employees dropped from 114,819 to 100,577, or 12%. The number of full-time employees, however, dropped by one quarter, from 103,020 to 83,007. This cut was partially offset by a substantial increase in part-time employees, who went from 1,191 to 17,570. (See summary.)

The increase in tax returns filed and the decrease in staff obviously must impact the reach of the IRS. But the agency enforcement data appear to indicate that other factors are at work.

The IRS, for example, has long favored what it call correspondence audits. This is because they are relatively inexpensive to conduct and bring in a lot of revenue. In a recent year, for example, fully 40% of all additional taxes claimed by the IRS from individual taxpayers was based on the semi-automated correspondence audits conducted from the IRS Service Centers. During the past ten years, the use of correspondence audits was one of the few enforcement activities that IRS actually increased, rising from 459,213 in 1992 to 529,241. (See graph.)

However, targeting of these correspondence audits has undergone a radical change over the past decade. In 1992 the correspondence audit rate for America’s wealthiest taxpayers was five times higher than for any other income class and resulted in an average claim of more than $4,500. Despite the proven success of correspondence audits in extracting taxes from high income taxpayers, however, the agency’s use of this technique has sharply declined during the last ten years. In 1992, 74,000 individual taxpayers reporting $100,000 or more in income faced correspondence audits, in 2001 there were only 29,000 such audits. (See graph and table.) This single factor alone accounts for the fact that now the odds of audit for high income individuals has fallen below that for the lowest income taxpayers who file the simplest returns. (See graph.)

Probably the single most significant event influencing the performance of the IRS in recent years was the passage by Congress of the Restructuring and Reform Act of 1998. This law mandated a major reorganization of America’s largest enforcement agency. Ten years ago, the IRS was divided into 63 districts, each of which dealt with most of the taxpayers within its borders. This meant, for example, that the district headquartered in Dallas or San Jose or Albany would process the returns of all of the individuals, businesses, farmers, corporations, and tax exempt organizations that were located within their boundaries. (Districts were consolidated from 63 to 33 at the end of FY 1996.) These geographically defined districts are now being replaced with four main operating divisions that will handle the returns filed anywhere in the county according to four kinds of customer segments. One will specialize in wages and investment, a second in small business and self employed, a third in large and mid-sized businesses and a fourth in tax exempt returns. This re-organization -- which one congressional expert likened to the creation of a unified Defense Department immediately after World War II -- is still in the works.

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