WASHINGTON - Additional steps are needed to ensure that the Internal Revenue

Service (IRS) expands audits to include returns from prior or subsequent years when

taxpayers being audited may owe substantial taxes, according to a report issued publicly

today by the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA reviewed the work of tax compliance officers at the Small Business/Self-

Employed (SB/SE) Division Examination function to determine whether they were

conducting required filing checks in accordance with IRS policies and procedures. IRS

examiners complete certain filing checks to determine that a taxpayer under audit is

complying with all Federal tax return filing requirements and evaluate the returns for

potential areas of noncompliance.

The report found that tax compliance officers working on such cases seldom expand an

audit to a taxpayer's prior year return because the IRS strives to keep its audit inventories

free of old tax year returns. Also, it is unclear whether tax compliance officers are taking

full advantage of the IRS's internal sources of information when conducting required

filing checks. According to TIGTA's study, an estimated 1,124 to 1,691 taxpayers may

have avoided between $9.3 million and $17.7 million in additional tax, interest, and

penalty assessments as a result.

"The Internal Revenue Service's own estimates show that more than half of the Tax Gap

is caused by individuals underreporting their income tax liabilities," said J. Russell

George, Treasury Inspector General for Tax Administration. "The IRS should take all

possible measures to help close that Gap," he added.

TIGTA recommended that IRS officials provide: 1. detailed examples to tax compliance

officers on when it would be appropriate to expand audits to prior or subsequent year

returns; 2. Information to tax compliance officers that focuses on using IRS systems to

enhance the quality of required filing checks; and 3. Additional guidance to first-line managers to improve the feedback provided to tax compliance officers on the quality of

required filing checks.

IRS officials agreed with TIGTA's recommendations, but did not agree with the potential

monetary benefits associated with the recommendations.