Internal Revenue Service to launch new compliance study

Published 10:44 pm Saturday, September 1, 2007

One June 6, the IRS announced plans to launch a new compliance study for individual taxpayers. This program is formally called the National Research Program (NRP) and is designed to provide the IRS with updated individual taxpayer compliance data. This data will be used as a tool in the audit selection process in an attempt to reduce the nation’s growing tax gap.

According to the IRS, the tax gap in 2001 was $290 billion. The tax gap is the estimated difference between what the nations taxpayer’s should have paid and what was paid. Using the NRP, the IRS will determine areas of noncompliance in the areas of underreported income and overstated deductions and tax credits. Using the data that is collected, presumably, the IRS’ selection process for returns to audit will be improved and the burden on compliant taxpayers will be reduced.

The study will begin with the examination of approximately 13,000 randomly selected individual income tax returns for the 2006 tax year. Lucky winners will begin receiving letters sometime in October of this year. Because this is a three year project, approximately the same number of returns will be selected for examination in 2008 and 2009 as well. There have been previous studies, but they have involved the examination of over 45,000 returns for a single year. The process involved in the current study will allow the IRS to more evenly mange the work load and adjust the audit and selection process over the next two years.

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Most of the IRS audits will be in-person examinations by IRS agents. These agents will be looking for confirmation of specific line items in individual income tax returns. A fortunate few whose returns are selected might not be contacted at all if the accuracy of the return can be confirmed by matching data received from third parties. This third party data would include 1099’s, K-1’s, and reports of mortgage interest paid.

Chuck Caldwell is a Certified Public Accountant and Partner at the firm of Silas Simmons, LLP, in Natchez.