BOSTON -- The Internal Revenue Service is auditing more federal income-tax returns and is taking other steps to crack down on tax cheats, a top IRS official told a national tax conference yesterday.

Kevin M. Brown, who heads one of the IRS's largest divisions, dealing with small businesses that have $10 million or less in assets and the self-employed nationwide, said that the IRS audited about 1.2 million individual income-tax returns last year, up from about 1 million the previous year.

While the percentage of returns audited remains relatively small -- about 130 million individual returns are filed annually -- the trend is toward raising the number the agency selects for scrutiny, he said.

Brown, a native of Wayland, Mass., and a graduate of Boston College Law School, was the featured speaker at the annual conference of the National Association of Tax Professionals, which represents about 18,000 tax preparers nationwide, including lawyers, accountants, enrolled agents, financial planners and others.

More than 900 members are attending the four-day conference, which is being held at the Boston Marriott Copley Place, said Paul Cinquemani, a director of the group.

In the mid-1990s, after a series of well-publicized congressional hearings that highlighted IRS abuses, Congress passed the IRS Restructuring and Reform Act of 1998.

As a result, the IRS focused more on improving customer service and less on audits. The number of IRS revenue agents, revenue officers and criminal investigation personnel also declined, leading to a drop in enforcement.

"I think [some] people took advantage of this, frankly," cheating on their taxes and taking part in tax-evasion schemes, Brown said.

To help combat this, the IRS is hiring more enforcement staff, he said in his speech and in an interview afterward. "We've arrested the decline in enforcement," he declared.

"The vast majority of taxpayers are compliant," meaning that they file their returns and pay what they owe, Brown said. But the IRS has recognized that it needs to do more to stop scofflaws and help close the "tax gap" -- the difference between what taxpayers owe overall and what they actually pay.

One approach is to align IRS staff in ways to boost audit coverage in areas that need it most, he said. For example, of federal estate-tax returns showing $5 million or more in assets, about 28 percent are audited.

But for individual income-tax returns, only about nine-tenths of 1 percent are audited, he said. And for "pass-through" entities -- businesses that may be organized as limited liability companies or Subchapter S corporations, for example -- the audit rate is only about three-tenths of 1 percent, he said.

The IRS also is in the process of adopting a new mechanism for screening returns by computer, Brown said.

The old system was generally effective at telling the IRS whether deductions a taxpayer claimed were appropriate for the taxpayer's level of income, he said.

The new system includes special formulas to help signal to the IRS what items may be missing from a taxpayer's return, Brown said. He offered this example.

Suppose that the interest a taxpayer deducts for a residential mortgage loan suggests that he or she has a house worth $1 million or more.

If the taxpayer is reporting income of only $20,000 on that return, "It just raises a question" whether the taxpayer is reporting all of his income, Brown said. The new computer formula may flag that return for audit, in effect telling IRS staff that they should look at that return more closely, he said.

The IRS is also sharing more information with state tax agencies, another tool to help it find tax scofflaws. "You'd be surprised at the number of people who make good money" but do not file their federal returns, he said.

Such taxpayers may make sure to file their state returns, perhaps because they need state-issued licenses and cannot get them unless they are current on their state taxes. But those taxpayers may simply skip filing their federal returns and paying what they owe, he said.

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