While audits of high-income taxpayers have increased, the actual impact on compliance may be limited, according to a recent report from the Treasury Inspector General for Tax Administration.The inspector general found that while the Internal Revenue Service has increased its audits, the bulk of those have been conducted as correspondence examinations, which limit the issues that the agency can address compared with a face-to-face examination. The TIGTA report also said that the end compliance result could also be limited, because more than half of all wealthy taxpayer assessments are not collected in a timely manner.

The audit coverage rate increased from 1.45 percent for the 2002 fiscal year to 3.52 percent in 2005. During that same period, face-to-face examinations increased by 25 percent, while correspondence examinations increased by 170 percent. Correspondingly, the percentage of audits conducted remotely rose 18 percentage points over the same three years, to 67 percent in 2005.

The report also noted that for 2004, the IRS assessed over $2.1 billion in additional taxes on wealthy taxpayers through audits. That figure includes assessments of $1.4 billion on taxpayers who did not respond to the IRS during correspondence examinations.

Meanwhile in another TIGTA report, the inspector general said that the IRS needs to improve its examinations of partnerships.

Before the enactment of the Tax Equity and Fiscal Responsibility Act of 1982, IRS audits of partnerships were essentially conducted as audits of the business' individual partners. Each partner's return was examined separately, and the determination and treatment of partnership items for one partner was not binding on any other partner. For partnerships subject to the 1982 law, the treatment of items is determined at the entity level in one unified examination.

The act requires that every partnership have a tax matters partner who serves as a liaison with the IRS, that tax adjustments to the partnership are made in one examination and are binding on all partners, and that special notices are issued and procedures followed by the IRS at the beginning and end of examinations.

However, the TIGTA report found that despite IRS controls and an emphasis on case file documentation, additional steps must be taken to ensure that procedures are properly followed when partnership examinations are initiated. Of 60 partnership return examinations closed between Oct. 1, 2003, and June 30, 2005, and examined by the inspector general's office, one or more required procedures was not followed in more than half.

Among the report's top recommendations to the IRS:

* Examiners need to take better advantage of IRS resources when conducting partnership examinations;

* Quality controls should be strengthened; and,

* Examiners and managers should be held accountable for following all of the procedures outlined in the 1982 law.

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