how did the IRS or any other revenue agency audit dozens of millions of paper tax returns every year before computers were common?


How did they verify if someone committed fraud or tax evasion in the 1950s for example?

In: 19

Answer: The population was smaller, the IRS employed tens of thousands of clerks, accountants etc. and filing a tax return wasnt mandatory.

The short answer is they didn’t. Tax fraud was far easier to get away with prior to computerized records.

What they would do – and still do to a degree – is look for anomalous data. The IRS has really good comparables for people in just about every income bracket, geography, and line of business. If you file a return that is in line with those comparables, odds are you won’t be audited. If you file a return that is out of line with those comparables – say you report expenses that are far higher than similar companies or income that is far lower than other similar businesses in your area – then they would flag you for an audit.

Once the audit happens, they audit would go more or less like it does today, just slower and with far more people. So, for example, they’d head down to your bank and ask for their deposit records for your accounts; since banking was highly localized, odds are you only had accounts close by geographically and those records would be easier to obtain. Similarly, they’d ask you for all of your books for the previous years – which you are required to keep by the IRS – and if you couldn’t produce them they’d see that as evidence of fraud as well.

The boring answer is that they kind of didn’t really find as much in the past as they do now. Instead, they made sensible decisions on what kind of things to look for, *”this year we are looking extra at all deductions for X and Y”*.

Say, deductible travel expenses AND declarations on property sales, just to name something.

If you didn’t do travel deductions and didn’t sell a property that year, you wouldn’t get audited unless something at a quick glance looked really weird with the numbers.

They’ve never **audited** millions 😉. They don’t even do that today. In FY22 they only audited 700,000 returns.

Auditing is a very involved, time consuming process. Most returns are superficially processed and accounted for. And the IRS started partnering with IBM in the 1950s to help with that.

I had a family member go through an audit in the 90s. What the guy did was show up at his office, sit at a desk and request and go through financial records to make things tie out. Could you give fake documents (which would be a major crime)? Sure, but the way accounting works is that all inflows and outflows are recorded on a general ledger which rolls into trial balances which then become financial statements. So as they look through your financial statements and tax returns, etc., it should all tie back to a general ledger, which should then be further supported by evidence like invoices, credit card processing statements, bank statements, things like that. So let’s say I recorded a bunch of erroneous expenses to try and reduce my taxable income. An auditor should be able to try that back through the general ledger to see what those expenses were, and then match those to the bank statements and accounts payable systems to see what the actual invoices for those were. If stuff doesn’t match or make sense, then that’s where you dig in. And as someone else said, they learn to have a general sense of how things should be and dig in on things that don’t look right. In one example I’ve heard, a construction company was recording like $75k per year (this was in the 90s) on “Training and Education.” Now, you’d expect some cost there for workers getting certifications, but 75k for a company of that size was insane. So the IRS looks into what was in there. Turns out it was the owner expensing his kids’ college tuition to reduce taxable income. That’s a no-no, and I think he got fined for that.

Another thing the agent would do is start conversations with employees. He would always start like general chit-chat kind of stuff, and by asking questions would gradually steer the conversation towards mining them for information which would assist in the audit.

As someone else said, you submit returns every year but they don’t audit all returns every year. Even today with computers, a full audit is an intensive process.