National Research Program.

IRS examiners selected nearly 90% of 46,007 cases for face-to-face audits in the first phase of its National Research Program (NRP), despite hopes that it could handle more cases less intrusively.

Background: The NRP was instituted to help the Service isolate problem compliance areas, so that it could better target its enforcement efforts. It replaces the highly controversial Taxpayer Compliance Measurement Program (TCMP), which eventually was terminated amid cost overruns and taxpayer complaints of intrusiveness.

The IRS chose 1,817 tax returns (3.9%) for correspondence audits, while only 2,535 returns (5.5%) were accepted as accurate. Of the remaining returns, 0.9% (402) were accepted with an adjustment, while 0.4% (186) had been previously audited.

Audit reasons: The Service initially estimated that a larger number of returns would be accepted without change or selected for correspondence audits.

There are several possible reasons for the outcome. One is that the final design of the sample to be examined required the selection of more complex, higher-income returns. Another is that the classification procedures had not been fully developed when the initial estimates were released. A third is that the IRS was "overly optimistic" as to the types and numbers of compliance issues that it could handle via correspondence audit.

Future plans: The agency will be implementing new audit selection formulas in early 2006 and expects a fairly decent improvement in the no-change rate.

Despite higher-than-expected numbers of face-to-face audits, the process is still less burdensome than TCMP's rigorous examinations; taxpayers generally have given the NRP positive feedback.

Although the first round of NRP audits yielded large amounts of data and preliminary numbers on the tax gap, the Service is still defining what the numbers mean. Overall, it is too soon to say how the information will affect the agency's long-term compliance initiatives.