Sampling for Income Tax and Customs
Will Yancey, PhD, CPA
Office phone 734.744.4400
Contents of this page:
Citations on sampling, computer audits, and production of electronic
for income tax audits.
Related Web pages at this Web site:
Services: Dr. Yancey is the author of Statistical Sampling in Sales and Use Tax Audits, (CCH, 2002)
Disclaimer: Inclusion on this list does NOT imply the
cited work is or was a good authority. This list is NOT an exhaustive
list of the relevant literature.
- Kikalos v. United States, Docket No. 04-1613,
http://caselaw.findlaw.com/data2/circs/7th/041613P.pdf (US Court of Appeals for 7th Circuit, May 24, 2005).
Held that IRS use of an indirect method of estimating income did not preclude taxpayer from presenting alternative methods.
Held that taxpayers are required to prove the IRS method is inaccurate and not that IRS method was irrational.
- Perkin-Elmer Corporation and Subsidiaries v. Commissioner,
Court Memo 1993-414, www.legalbitstream.com
(September 8, 1993). Taxpayer used statistical sampling to determine transfer prices.
- United States v. Davey, 543 F. 2d 996 (CA-2 1976). Taxpayer was not required to produce records that it did not keep in the ordinary
course of business.
- United States v. Fior D'Italia, Inc., No. 01-463, 89
(US Supreme Court, June 17, 2002). IRS may use aggregate estimation
to estimates tips allocable to restaurant employees).
- United States v. Mobil Corporation, 499 F.Supp 479 (N.D.
1980). Taxpayer was not required to produce records in a format that it
did not keep in the ordinary course of business.
Federal Statutes and Regulations
Internal Revenue Service - Rulings and
- Field Directive on the Use of Estimates from Probability
Samples, Large and Mid-Size Business Division, Director of
Specialists, (Issued March 14, 2002. Updated June 5, 2009.), www.irs.gov/pub/irs-utl/dir_use_prob_sampling.pdf and
Describes requirements for samples developed by taxpayers.
- Field Service Advice 200151004, (2001). A taxpayer
could not use a non-statistical stratified sampling method for asset
classification where the sample size was too small and sample items
- Field Service Advice 200219005 and 200209028, (2002). Taxpayers can not use
statistical sampling to establish the portion
of its total meal and entertainment expense that is exempt from the
Code Sec. 274(n) 50% deduction limit. Reversed by Revenue Procedure
- Form 4564. Information Document Request (IDR). Used
request data, reconciliations, and explanations of sample and
- General Counsel Memorandum 38727, (May 21, 1981).
Discusses how a corporation may properly use a statistical sampling
method to determine its basis of stock acquired in a reorganization.
- Internal Revenue Manual - obsolete sections
- Internal Revenue Manual section 4.3.13, Computer
Program (CAAP) Handbook, (revised May 3, 1999). Replaced by IRM
in August 2002.
- Internal Revenue Manual section 126.96.36.199, Sampling
(revised May 14, 1999). Replaced by IRM 4.47.3 in August 2002.
- Internal Revenue Manual section 188.8.131.52.4, Statistical
Applications (revised June 3, 1998).
- Internal Revenue Manual section 42(18)(0), Statistical
Examination Program (revised November 4, 1994).
- Internal Revenue Manual section 42(18)(4.1).
Establishes rules for determination of the proposed population
where the IRS has taken the sample.
- Internal Revenue Manual section 184.108.40.206.9, Computer
Audit Techniques Programs (revised January 1, 2002).
- Internal Revenue Manual section 4.47.1, Computer Audit
Program (revised August 31, 2002).
- Internal Revenue Manual section 4.47.2, Computer Audit
Specialist Technical and Procedural Information (revised August 31, 2002).
- Internal Revenue Manual section 4.47.3, Statistical
Sampling Techniques (revised August 31, 2002).
- Notice 2009-46, (Internal Revenue Bulletin 2009-23, June 8, 2009),
Allows statistical sampling for substantiating business use of employer-provided cell phones.
Revenue Procedures and Rulings since 1990 may be downloaded from www.legalbitstream.com
Internal Revenue Bulletins (IRB) published after June 2003
are online at www.irs.gov/irb/
- Revenue Procedure 64-4, 1964-1 C.B. 644. Describes
statistical sampling procedures
for income tax audits involving sales of personal property under a
revolving credit plan.
- Revenue Procedure 71-21, 1971-2 C.B.
549. If adequate data are available to the taxpayer, statistical
sampling is allowed for determining when services are performed with
respect to contingent service agreements.
- Revenue Procedure 72-36, 1972-2 C.B.771. Describes
statistical sampling procedures for audits of trading
stamps. Appendix in the print verion includes J. Edwards Deming's
"Standards of Probability Sampling for Legal Evidence".
- Revenue Procedure 81-70, 1981-2 C.B. 729.
Describes statistical sampling procedures for determining
shareholder's basis in stock of an acquired corporation. Includes
guidelines for nonresponses from shareholders.
- Revenue Procedure 85-51, 1985-2 C.B. 717.
Describes statistical sampling procedures for
determining qualification of an employer-provided educational grant
- Revenue Procedure 86-19, 1986-1 C.B. 558.
recordkeeping requirements for taxpayers with electronic records.
- Revenue Procedure 91-22,
1991-1 C.B. 526. Describes
procedures for Advance Pricing Agreements (APA). Section 10.04
discusses record retention requirements.
- Revenue Procedure 91-59, 1991-2 C.B. 841. Update Rev.
Describes recordkeeping requirements for taxpayers with
- Revenue Procedure 97-22, 1997-13
I.R.B. 9. Describes
requirements for electronic and imaged records.
- Revenue Procedure 98-25, 1998-1 C.B. 689.
Section 5 describes retention of electronic data. Section 10.01
explains how taxpayers can apply for a Record Retention Limitation
Agreement (RRLA). Section 10.03
describes the IRS District Director's authority to test the
authenticity, readability, completeness, and integrity of a taxpayer's
- Revenue Procedure 98-31, 1998-1 C.B. 1199.
Section 2.03 mentions IRS seeks comments on statistical sampling
determining minimum effectively connected net investment income of
- Revenue Procedure 99-30, 1999-2 C.B. 221. Section
2.03 mentions IRS decided to use population data from all
returns rather than statistical sampling for determining minimum
connected net investment income of insurance companies.
- Revenue Procedure 2000-12, 2000-4
Section 10.04 discusses use of statistical sampling.in connection with
auditing Qualified Intermediaries (QI) for withholding tax on payments
to nonresident aliens.
- Revenue Procedure 2000-32, 2000-33 I.R.B. 172.
IRS decided to use population data from all available returns rather
statistical sampling for determining minimum effectively connected net
income of insurance companies.
- Revenue Procedure 2004-29, 2004-29,
2004-20 I.R.B. Permits statistical sampling
to be used to substantiate meal and entertainment (M&E) expenses
that are excepted from the 50% disallowance rule because of Code Sec.
274(n). Appendix A describes statistical sampling plan standards
including use of upper or lower limit of 95% confidence interval and
minimum sample size of 30 per stratum and 100 for all strata.
Appendix B describes sampling documentation standards.
- Revenue Procedure 2004-34,
2004- I.R.B. This procedure describes the deferral
method of income recognition on contingent service agreements.
Section .03(2)(c) allows the use of "representative
sample contracts". Announcement 2004-48 that accompanied
Revenue Procedure 2004-34 said, "Because the deferral method in the
proposed revenue procedure was based exclusively on the taxpayer's
financial reporting method, the proposed revenue procedure did not
provide an independent method for using a statistical or other basis
for determining when an advance payment is earned through performance.
Section 3.06 of Rev. Proc. 71-21 provided a rule for using a
statistical basis, if adequate data are available to the taxpayer, for
determining when services are performed with respect to contingent
service agreements. Some commentators were concerned that a similar
provision was not included in the proposed revenue procedure."
- Revenue Procedure 2007-35, www.irs.gov/pub/irs-drop/rp-07-35.pdf.
Guidance for determining when statistical sampling may be used for the
purposes of IRC Section 199 qualified production activities.
Appendices A, B, and C define the technical requirements for the sampling plan.
- Revenue Ruling 71-20, 1971-1 C.B. 392. IRS held that punched
cards, magnetic tapes, disks, and other
data media used for recording, consolidating, and summarizing
transactions and records within a taxpayer's automatic data processing
are records within the meaning of section 6001 of the Code and section
of the regulations and are required to be retained so long as the
may become material in the administration of any internal revenue law.
- Revenue Ruling 81-205, 1981-2 C.B. 225. Revenue
agents may impose penalties for failure to maintain
- Revenue Ruling 2003-43, 2003-21 I.R.B. 935.
held employers could not use sampling to validate employee medical
expense reimbursements under a subsection 105(b) plan. IRS held
that the payments were taxable income to the employee unless every item
submitted by the employee was substantiated.
- Revenue Ruling 2003-106, 2003-44 I.R.B. 936.
An employer's travel
and expense reimbursement plan using electronic receipts and credits
cards may meet the accountable plan requirements of subsections 62(a)
Internal Revenue Service - Training and
- Advanced Statistical Sampling, IRS Training Course 3174, (revised May 1992).
- Basic Statistical Sampling, IRS Training Course 3172, (revised August 1993).
- Computer Audit Specialist (CAS) Digest.
- Statistical Sampling Handbook, Research Division -
Statistical Methods Group - Research Document 7391, (November 1988),
GPO Superintendent of Documents call number T 22.19/2:St
2/2. General reference on statistical sampling methods and terminology for use
in auditing, tax return studies, and program evaluation.
- US Customs and Border Protection Service, Focused Assessment Program, Appendix 6 - Sampling,
- Exhibit 6A - Sampling Technical Guide, 10/31/2004
- Exhibit 6A (Appendix I) - Sampling Steps
- Exhibit 6A (Appendix II) - Sampling Methodology Diagrams
- Exhibit 6A (Appendix III) - Sampling Methodology Table
- Exhibit 6A (Appendix IV) - Sampling Plans
- Exhibit 6A (Appendix V) - Example Audit Report Tables
- Exhibit 6A (Appendix VI) - Glossary of Sampling Terms
- Exhibit 6A (Appendix VII) - Reading List for Audit Sampling
Journal Articles and Other
- Australian Tax Office, "Audit statistical sampling guidelines",
- Batcher, Mary, "Statistical sampling: A potential win for
business taxpayers", 53 Tax Executive 464 (November 2001).
- Ekblad, John Michael, "Statistical Sampling: Weighing Costs versus Precision in Providing
Taxpayer Guidance", Illinois Business Law Journal, (October 11, 2009).
- Everett, John O., and Rita P. Hull, "On the Use of Statistical Sampling
in Tax Audits," 34(4) The Tax Executive 51 (October 1982).
- Federation of Tax Administrators Task Force on EDI Audit and
Legal Issues for Tax Administration, Model Recordkeeping and
- Felix, William L, Jr., and Robert S. Roussey, "Statistical
Inference and the IRS", 159 Journal of Accountancy 38 (June
- Loebbecke, James K., "Statistical Sampling in Tax Audits", 28
Tax Executive 313 (July 1976).
- Mulrow, Jeri and Eric Falk, "What's the Risk Due to Sampling in
Tax Audits and Planning?", 90 Tax Notes 939 (February 12, 2001).
- Press, James J., "Sample-Audit Tax Assessment for Businesses:
What's Fair?", 13 Journal of Business & Economic Statistics
357 (July 1995). Discusses assessment at lower-bound of
confidence interval and sample size in tax audits.
- Schiel, Ron, "May Businesses Use Statistical Sampling to Verify
Expense Accounts?", 28 The Tax Adviser 408 (July 1997).