IRS serious about market-segmented audits.

Under the Internal Revenue Service's soon-to-be-implemented market segment specialization program (MSSP), taxpayer's returns will be classified for audit purposes according to type of business. Current audit selection and processing methods segment taxpayers by type of retrun (1040, 1120, etc.) and income level, not by industry. With MSSP, IRS agents will become experts in the industry that is being audited, which should result in more effective audits and better audit selection.

The IRS issued MSSP audit guidelines for

* Attorneys (see "MSSP Guidelines for Lawyers" below).

* Mortuaries.

* Air charters.

* Trucking.

* Bed and breakfasts.

* Taxi cabs.

The IRS expects to issue guidelines for 74 other industries.

IRS agents' reactions to MSSP are said to be positive. Several agents who used MSSP in California for more than five years were interviewed by an IRS assistant commissioner and a member of the Commissioner's Advisory Group not employed by the IRS. The majority of agents interviewed were optimistic about MSSP's effectiveness and efficiency because, in their experience, MSSP had reduced the time necessary for audits.

The market segments involved in California included auto dealers, entertainers and athletes, contractors, real estate, attorneys, the garment industry, medical practices, child care and service stations. The agents said industry reaction to the new methods was mixed.

The IRS also in changing its Taxpayer Compliance Measurement Program (TCMP)--the major IRS compliance measurement program--through which audit selection criteria are set. Compliance and audit selection data are gleaned from TCMP audits--the "fine-toothed comb" audits of randomly selected taxpayers. The TCMP audit program currently measures taxpayer compliance by audit class (individual, corporate) in 7 geographic regions. The new TCMP will measure compliance by market segments in about 30 geographic regions, according to an IRS spokesperson.