Computer Formulas Help IRS Find Fishy Returns

The IRS’s use of computer formulas is paying off for the agency, improving productivity and picking out returns that taxpayers agree to settle for the recommended additional amounts.

A report by the Treasury Inspector General for Tax Administration found that the updated formulas introduced by the IRS in 2006 are proving effective in identifying returns that merit a closer look. However, the audit also found 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 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,” said TIGTA Inspector General J. Russell George in a statement. “However, additional opportunities exist for the IRS to improve the effectiveness with which returns are selected for examination.”