The Treasury Inspector General for Tax Administration (TIGTA) today publicly released its review of the Internal Revenue Service's (IRS) use of data analysis in selecting individual tax returns for examination.

TIGTA concluded that, overall, examination productivity is improving for individual returns selected by updated formulas developed using National Research Program data. TIGTA also found that taxpayers are agreeing with more of the additional taxes recommended in examinations initiated by the updated formulas. The National Research Program measures taxpayers' voluntary compliance and develops updated formulas to select returns for examination. Updated formulas were introduced in 2006.

The audit also found that examinations closed by IRS Revenue Agents in several of the most recent processing years before the introduction of the updated formulas were generally more productive than the examinations closed using the updated formulas. According to the report, this suggests that there may be opportunities for the IRS to improve how effectively returns selected by the updated formulas are screened before being sent to Revenue Agents.

TIGTA recommended that the IRS's Small Business/Self-Employed (SB/SE) Division establish a process, at least on a test basis, to evaluate the quality and appropriateness of the reasons that Revenue Agents and their managers rejected returns selected for review using the new formulas. This would allow corrective actions, if needed, to be identified and taken. SB/SE Division officials agreed with TIGTA's recommendation.

"We are encouraged by overall improvements in examination productivity for individual tax returns and the fact that taxpayers are agreeing with more of the additional taxes recommended in such examinations," commented J. Russell George, the Treasury Inspector General for Tax Administration. "However, additional opportunities exist for the IRS to improve the effectiveness with which returns are selected for examination," added Inspector General George.