Statistical Sampling in Tax Audits

Abstract

The courts, with some important qualifications, have been reluctant to uphold tax assessments based on a review of only a sample of all transactions. In this article we argue that audit assessments based on appropriately drawn and analyzed statistical samples do not suffer from the defects that the courts have correctly concluded mar assessments based on nonstatistical samples. We do, however, argue that because of the inherent imprecision of assessments based on a less-than-complete review of all records, the calculation of the assessment should include a factor to take into account the risk that the taxpayer has been overassessed. We suggest an assessment rule that does just this and also recommend guidelines for the use of statistical sampling in tax audits.