Management Advisory Report: Tax Return Filing and Examination Statistics
September 2001
Reference Number: 2001-30-175
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
September 21, 2001
MEMORANDUM FOR COMMISSIONER ROSSOTTI
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for Audit
SUBJECT: Final Management Advisory Report - Tax Return Filing and Examination Statistics
This management advisory report presents the results of our review of statistical information that impacts the Examination function. The overall objective of this review was to provide statistical information requested by the Internal Revenue Service (IRS) Oversight Board.
In summary, as has been reported by the Treasury Inspector General for Tax Administration and the media in recent years, the number of tax returns selected for examination by the IRS has decreased, while the number of tax returns filed by taxpayers has increased. As a result, the number of tax returns examined went from 1 out of every 79 in 1988 to 1 out of every 232 in 2000. This drop has been particularly drastic since the beginning of 1998.
Decreases in the examination rate can be partially attributed to:
We made no recommendations in this report. However, information in this report could be useful to IRS officials who are responsible for establishing the annual examination plan that details the number and types of tax returns to be examined each year. In addition, these results might be useful to the Examination Reengineering team.
Please contact me at (202) 622-6510 if you have questions or your staff may call Gordon C. Milbourn III, Assistant Inspector General for Audit (Small Business and Corporate Programs), at (202) 622-3837.
Summary of Statistical Information
Examination Function Staffing and Time
Number of Tax Returns Filed and Examined
Individual Tax Returns Filed and Examined
Corporation Tax Returns Filed and Examined
Partnership Tax Returns Filed and Examined
Employment Tax Returns Filed and Examined
Fiduciary Tax Returns Filed and Examined
Excise Tax Returns Filed and Examined
Estate Tax Returns Filed and Examined
Gift Tax Returns Filed and Examined
Number of Individual Tax Returns Filed and Dollar Amounts for Selected Line Items
Appendix I – Major Contributors to This Report
Appendix II – Report Distribution List
We initiated this review of nationwide statistical information that impacts the Examination function at the request of the Internal Revenue Service (IRS) Oversight Board. We relied on information accumulated by the IRS and did not verify the accuracy of the information. We performed this review between June and August 2001 in Chicago, Illinois, in accordance with the President’s Council on Integrity and Efficiency’s Quality Standards for Inspections. Major contributors to this report are listed in Appendix I.
Summary of Statistical Information
As has been reported by the Treasury Inspector General for Tax Administration (TIGTA) and the media in recent years, the number of tax returns examined by the IRS has decreased while the number of tax returns filed by taxpayers has increased. As a result, the number of tax returns examined went from 1 out of every 79 in 1988 to 1 out of every 232 in 2000. This drop has been particularly drastic since the beginning of 1998. For example, the following is a comparison of information from 1998 to 2000:
Decreases in the examination rate can be partially attributed to:
In addition to the increase in the number of returns filed, income amounts from various sources increased between Tax Years (TY) 1990 and 1998 (years for which the data were available). For example, the number of individual tax returns filed with:
Additional details follow for the Examination function staffing levels and time spent on cases, tax returns filed and examined by type of tax return, and dollar amounts of certain types of income reported on individual tax returns.
Examination Function Staffing and Time
The following charts show the Examination function staffing and the percent of direct and non-direct examination time. The information is based on data obtained from Examination Table 37, Examination Program Monitoring, for FYs 1994 through 2000.
Examination Staffing
Since FY 1995, the number of revenue agents and tax auditors decreased by 25 percent. Figure 1 shows the number of revenue agents and tax auditors as of the end of FYs 1994 through 2000.
Figure 1. Examination Staffing
Figure 1 was removed due to its size. To see Figure 1, please go tot he Adobe PDF version of the report on the TIGTA Public Web Page.
Examination Time
Since FY 1998, the percent of non-direct examination time increased by eight percent, while direct examination time decreased by the same amount. Non-direct examination time consists of direct support time and non-examination time. Direct support time is for activities such as identifying tax returns to examine, group management activities, and quality reviews. Non-examination time consists of items such as administrative duties, time spent assisting other IRS functions, training, and leave. The latter two account for about 50 percent of the non- examination time. Figure 2 shows direct and non-direct examination time as a percentage of total examination time.
Figure 2. Percent of Direct and Non-Direct Examination Time
Figure 2 was removed due to its size. To see Figure 2, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
In addition, revenue agents are spending more time per return. For example, hours per return for individual returns and corporation returns increased by 24 percent and 47 percent, respectively, from FYs 1998 to 2000. During the same time period, the proposed tax adjustment amount per hour of examination time decreased by 7 percent for individual returns and 22 percent for corporation returns.
Number of Tax Returns Filed and Examined
Information in this and the following sections shows the percent change from 1988 in the number of tax returns filed and examined for various types of tax returns. The information is based on data from the IRS Data Books for 1988 through 2000. We used the IRS’ method for computing examination rates. For all categories of tax returns, the examination rate equals the proportion of IRS examinations closed in a fiscal year compared to returns filed in the previous calendar year.
The number of tax returns examined does not include notices sent to taxpayers as a result of the IRS’ document matching program. This program compares third-party information, such as wages paid by employers and interest paid by banks, to the amount of income reported on the appropriate income tax return.
From 1988 to 2000, the total number of tax returns filed increased by 18 percent (from 140.33 to 165.77 million). During the same time period, the number of tax returns examined decreased by 60 percent (from 1.77 million to 715,915). Taking both statistics into account, the number of tax returns examined went from 1 out of every 79 in 1988 to 1 out of every 232 in 2000.
Figure 3. Examination Coverage of All Returns Filed – Percent Change From 1988
Figure 3 was removed due to its size. To see Figure 3, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Individual Tax Returns Filed and Examined
From 1988 to 2000, the number of individual tax returns filed increased by 21 percent (from 103.25 to 124.89 million). The number of individual tax returns examined; however, decreased by 62 percent (from 1.62 million to 617,765).
Figure 4. Examination Coverage of All Individual Tax Returns - Percent Change From 1988
Figure 4 was removed due to its size. To see Figure 4, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The following charts provide statistics from 1988 to 2000 for the various types of individual tax returns.
Non-Business Individual Tax Returns
These are individual tax returns that contain income primarily from wages, dividends, and interest (non-business income). The number of these tax returns filed increased by 20 percent (from 97.02 to 116.39 million). The number of these tax returns examined decreased by 65 percent (from 1.42 million to 492,529).
Figure 5. Individual Tax Returns With Primarily Non-Business Income - Percent Change From 1988
Figure 5 was removed due to its size. To see Figure 5, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Business Individual Tax Returns (Excluding Farms)
These are individual tax returns that contain primarily business income as reported on a Profit or Loss from Business (Schedule C). The number of these tax returns filed increased by 48 percent (from 5.30 to 7.84 million), while the number examined decreased by 32 percent (from 178,076 to 121,702).
Figure 6. Examination Coverage of Individual Tax Returns With Primarily Business Income (Excluding Farms) – Percent Change From 1988
Figure 6 was removed due to its size. To see Figure 6, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Farm Business Individual Tax Returns
These are individual tax returns that contain primarily farm business income as reported on a Profit or Loss from Farming (Schedule F). The number of these tax returns filed decreased by 29 percent (from 929,000 to 659,300), and the number examined decreased by 84 percent (from 21,480 to 3,534).
Figure 7. Examination Coverage of Individual Tax Returns With Primarily Farm Business Income – Percent Change From 1988
Figure 7 was removed due to its size. To see Figure 7, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Corporation Tax Returns Filed and Examined
During the same 13-year period, the number of corporation tax returns filed increased by 29 percent (from 3.76 to 5.28 million). The number of corporation tax returns examined decreased by 10 percent (from 47,581 to 43,383). The number of examinations actually kept pace with the increase in returns filed until 1998, then decreased.
Figure 8. Examination Coverage of All Corporation Tax Returns - Percent Change From 1988
Figure 8 was removed due to its size. To see Figure 8, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The following charts provide statistics from 1988 to 2000 based on corporation asset value and various types of corporation tax returns.
Corporation Tax Returns With No Balance Sheet or With Assets of Under $5 Million
The number of these tax returns filed decreased by 14 percent (from 2.78 to 2.40 million), and the number examined also decreased by 32 percent (from 24,425 to 16,582). While the number of examinations fluctuated during this time period, the number significantly decreased beginning in 1998.
Figure 9. Examination Coverage of Corporations With No Balance Sheet or With Assets of Under $5 Million – Percent Change From 1988
Figure 9 was removed due to its size. To see Figure 9, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Corporation Tax Returns With Assets of at Least $5 Million, but Under $250 Million
The number of tax returns filed by these taxpayers increased by 10 percent (from 69,000 to 75,900). At the same time, the number of these tax returns examined was decreasing by 26 percent (from 11,079 to 8,173).
Figure 10. Examination Coverage of Corporations With Assets of $5 Million but Under $250 Million – Percent Change From 1988
Figure 10 was removed due to its size. To see Figure 10, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Corporation Tax Returns With Assets of $250 Million and Over
From 1988 to 2000, the number of these tax returns filed increased by 118 percent (from 4,500 to 9,800), and the number examined also increased by 7 percent (from 2,880 to 3,080).
Figure 11. Examination Coverage of Corporations With Assets of $250 Million And Over – Percent Change From 1988
Figure 11 was removed due to its size. To see Figure 11 please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Foreign Corporation Tax Returns
The number of such tax returns filed increased by 33 percent (from 17,000 to 22,600). However, the number examined decreased by 21 percent (from 440 to 348).
Figure 12. Examination Coverage of Foreign Corporation Tax Returns – Percent Change From 1988
Figure 12 was removed due to its size. To see Figure 12, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
S Corporation Tax Returns
The number filed increased by 210 percent (from 892,000 to 2.77 million), and the number examined increased by 74 percent (from 8,757 to 15,200). While the number of examinations kept pace with the number of returns filed through 1998, the number decreased significantly in 1999 and 2000.
Figure 13. Examination Coverage of S Corporation Tax Returns - Percent Change From 1988
Figure 13 was removed due to its size. To see Figure 13, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Partnership Tax Returns Filed and Examined
The number of partnership tax returns filed increased by 16 percent (from 1.70 to 1.97 million) from 1988 to 2000. On the other hand, the number of these tax returns examined decreased by 55 percent (from 14,652 to 6,539).
Figure 14. Examination Coverage of Partnership Tax Returns - Percent Change From 1988
Figure 14 was removed due to its size. To see Figure 14, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Employment Tax Returns Filed and Examined
Between 1988 and 2000, the number of employment tax returns filed increased by 3 percent (from 28.17 to 29.00 million). However, the number of these tax returns examined decreased by 26 percent (from 27,270 to 20,074). The number of returns examined did not drop below the 1988 level until 2000. However, a downward trend occurred since 1997. Since then, the number of examinations dropped by 67 percent.
Figure 15. Examination Coverage of Employment Forms – Percent Change From 1988
Figure 15 was removed due to its size. To see Figure 15, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Fiduciary Tax Returns Filed and Examined
From 1988 to 2000, the number of fiduciary tax returns filed increased by 46 percent (from 2.34 to 3.40 million). The number of these tax returns examined also increased by 19 percent (from 6,138 to 7,318).
Figure 16. Examination Coverage of Fiduciary Tax Returns Filed - Percent Change From 1988
Figure 16 was removed due to its size. To see Figure 16, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Excise Tax Returns Filed and Examined
The number of excise tax returns filed decreased by 14 percent (from 952,204 to 822,200). The number of these tax returns examined also decreased by 72 percent (from 37,231 to 10,294).
Figure 17. Examination Coverage of Excise Tax Returns – Percent Change From 1988
Figure 17 was removed due to its size. To see Figure 17, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Estate Tax Returns Filed and Examined
The number of estate tax returns filed increased by 110 percent (from 55,500 to 116,500), while the number of these tax returns examined decreased by 37 percent (from 12,640 to 8,024).
Figure 18. Examination Coverage of Estate Tax Returns – Percent Change From 1988
Figure 18 was removed due to its size. To see Figure 18, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Gift Tax Returns Filed and Examined
The number of gift tax returns filed increased by 181 percent (from 104,000 to 291,900) between 1988 and 2000. The number of these tax returns examined also increased by 38 percent (from 1,518 to 2,097).
Figure 19. Examination Coverage of Gift Tax Returns – Percent Change From 1988
Figure 19 was removed due to its size. To see Figure 19, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Number of Individual Tax Returns Filed and Dollar Amounts for Selected Line Items
Information in the following charts shows the percent change in the number of individual tax returns filed and dollar amounts on selected line items. The information is based on data obtained from the IRS’ Statistics of Income Table 1, Individual Income Tax Returns: Selected Income and Tax Items for Specified Tax Years. The data were available for TYs 1990, 1995, 1997, and 1998, and are presented as a percent of change from TY 1990.
Business or Profession Net Income
The number of individual income tax returns filed including business or profession net income increased by 17 percent (from 11.22 to 13.08 million). The income increased by 40 percent (from $161.66 to $226.14 billion).
Figure 20. Individual Returns With Business or Profession Net Income – Percent Change From Tax Year 1990
Figure 20 was removed due to its size. To see Figure 20, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Business or Profession Net Loss
The number of individual income tax returns filed including business or profession net loss increased by 18 percent (from 3.42 to 4.02 million). The loss increased by 17 percent (from $20.23 to $23.74 billion).
Figure 21. Individual Returns With Business or Profession Net Loss - Percent Change From Tax Year 1990
Figure 21 was removed due to its size. To see Figure 21, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Net Capital Gain in Adjusted Gross Income
The number of individual income tax returns filed including a net capital gain (e.g., from the sale of stocks) in Adjusted Gross Income (AGI) increased by 127 percent (from 9.22 to 20.96 million), and the amount of the gain increased by 268 percent (from $123.78 to $455.22 billion).
Figure 22. Individual Returns With Net Capital Gain in AGI - Percent Change From Tax Year 1990
Figure 22 was removed due to its size. To see Figure 22 please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Net Capital Loss in AGI
The number of individual income tax returns filed including a net capital loss in AGI decreased by 7 percent (from 5.07 to 4.73 million), and the amount of the loss decreased by 4 percent (from $9.55 to $9.14 billion).
Figure 23. Individual Returns With Net Capital Loss in AGI - Percent Change From Tax Year 1990
Figure 23 was removed due to its size. To see Figure 23, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Partnership and S Corporation Net Income
The number of individual income tax returns filed including Partnership and S Corporation net income increased by 26 percent (from 3.21 to 4.03 million), and the net income increased by 115 percent (from $112.03 to $240.84 billion).
Figure 24. Individual Returns With Partnership And S Corporation Net Income – Percent Change From Tax Year 1990
Figure 24 was removed due to its size. To see Figure 24, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Partnership and S Corporation Net Loss
The number of individual income tax returns filed including Partnership and S Corporation net loss decreased by 22 percent (from 2.77 to 2.15 million). The net loss amount increased by 19 percent (from $45.01 to $53.48 billion).
Figure 25. Individual Returns With Partnership and S Corporation Net Loss – Percent Change From Tax Year 1990
Figure 25 was removed due to its size. To see Figure 25, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Estate or Trust Net Income
The number of individual income tax returns filed including estate or trust net income increased by 9 percent (from 444,953 to 484,763), and the income amount increased by 127 percent (from $4.63 to $10.50 billion).
Figure 26. Individual Returns With Estate or Trust Net Income - Percent Change From Tax Year 1990
Figure 26 was removed due to its size. To see Figure 26, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Estate or Trust Net Loss
The number of individual income tax returns filed including estate or trust net loss decreased by 39 percent (from 74,127 to 45,412). The loss amount increased by 120 percent (from $468 million to $1.03 billion).
Figure 27. Individual Returns With Estate or Trust Net Loss - Percent Change From Tax Year 1990
Figure 27 was removed due to its size. To see Figure 27, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Appendix I
Major Contributors to This Report
Gordon C. Milbourn III, Assistant Inspector General for Audit (Small Business and Corporate Programs)
Parker F. Pearson, Director
Amy L. Coleman, Audit Manager
Donald L. McDonald, Senior Auditor
Joseph P. Snyder, Senior Auditor
Appendix II
Deputy Commissioner N:C
Commissioner, Large and Mid-Sized Business Division LM
Commissioner, Small Business/Self-Employed Division S
Commissioner, Wage and Investment Division W
Deputy Commissioner, Large and Mid-Sized Business Division LM
Deputy Commissioner, Small Business/Self-Employed Division S
Deputy Commissioner, Wage and Investment Division W
Chief Counsel CC
National Taxpayer Advocate TA
Director, Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis N:ADC:R:O
Office of Management Controls N:CFO:F:M