New data show that a taxpayer's chances of being audited by the Internal Revenue Service declined dramatically last year, even in Southern California, which has long led the nation in the percentage of returns that get extra scrutiny.
An individual's chances of a face-to-face audit dropped by 25% last year to the lowest level since 1981, according to statistics compiled by Syracuse University's Transactional Records Access Clearinghouse. Audit rates for corporate returns, small businesses and the self-employed also declined, both nationally and locally.
The trend raises concern among some observers that the lack of IRS enforcement could erode the effectiveness of the U.S. tax system.
"Those kind of numbers tell people that you probably can push the envelope without getting caught, but in the end, that costs everybody else a lot of money," said Noelle Allen, a Cupertino certified public accountant and chairman of the California Society of CPAs' tax committee.
But the trend also gives Orange County taxpayers a reason to breathe easier; the county is in one of the most frequently audited districts in the country.
IRS officials say new efforts to improve customer service have combined with a hiring freeze and employee attrition to lower the number of audits. The agency lost 900 of its 16,700 full-time positions last year and redirected another 400 employees to staff expanded telephone hotline hours and new problem-solving days, among other initiatives, said Tom Smith, the IRS executive in charge of measuring the agency's performance.
"It's part of their goal to be a kinder and friendlier IRS," agreed Diana Sanderson, president of the California Society of Certified Public Accountants. Sanderson said she had no audit notices in her practice last year.
The clearinghouse collects data from the IRS and other federal agencies using Freedom of Information Act requests. For the fourth year, much of what the watchdog group finds is posted on its Web site, http://trac.syr.edu.
Last year's data reflect a trend: Face-to-face audits have plummeted more than 70% in the last two decades. The IRS reviewed 1.59% of taxpayer returns in 1981. By the 1990s, the rate had slipped to about 0.6%, and dropped last year to 0.46%, or 46 out of every 10,000 filers.
In Southern California overall, the percentage of returns being audited has fallen by nearly half since 1996, to 88 out of 10,000 filers, and by more than a third in the Los Angeles district, to 98 out of 10,000.
Northern California was the most audited district overall last year, supplanting Los Angeles, which was first in 1997. But Los Angeles still leads the country in audits of higher-income taxpayers--in fact, Los Angeles taxpayers with incomes over $25,000 are up to four times more likely to be audited than the national average.
The third most-audited area is what is called the Southern California district, which excludes Los Angeles County but includes Orange, San Diego, San Bernardino, Riverside and Imperial counties.
IRS officials credit California's high audit rate to large numbers of high-income taxpayers, cash-based businesses and tax scofflaws. Clearinghouse experts add that California districts also tend to be better staffed than the national average, allowing more audits.
In the Southern California and Los Angeles districts, most audits were triggered by an IRS computer formula known as Discriminant Function System, which scores returns based on national averages for incomes and deductions, or by information-gathering studies conducted by the IRS. These studies, which in recent years have targeted attorneys, commercial fishermen, ministers, taxi drivers and entertainers, among others, have been criticized in Congress as invasive and unnecessary. The IRS says the studies help the agency understand the targeted groups so that auditors can better spot anomalies.
A flat refusal to file a return triggered one in 10 audits in the Southern California district--a rate three times as high as in neighboring Los Angeles and nearly twice as high as the national rate. (When the IRS thinks a return should have been filed, it may create a substitute return for the taxpayer. The taxpayer can accept the substitute, modify it or prove that no return needed to be filed. If the taxpayer and the IRS can't reach an agreement, the agency can start an audit.)
Judith Golden, IRS spokeswoman for the Southern California district, attributed some of the refusal-to-file trend to the popularity of schemes and seminars that promote tax-avoidance trusts or that contend the income tax system is illegal or voluntary.
"We get letters from people who've declared themselves citizens of the Republic of California and who say they don't have to file," Golden said.