Taxpayers' chances of facing a field audit--the kind where an IRS agent wants to meet face-to-face and look at actual books and records--continue to decline as the agency assigns its resources elsewhere.

IRS Commissioner Charles O. Rossotti told the House Ways and Means Committee last month that the agency audited just 0.38 percent of all returns in fiscal 1999, down from 0.65 percent two years earlier. That's a decline of about 40 percent on an already minuscule base.

And for returns reporting adjusted gross incomes of more than $100,000, the audit rate in fiscal 1999 was 1.31 percent, down from 1.98 percent two years before.

To some extent, the audit numbers understate the agency's compliance efforts since much wage and other income is reported independently and matched with returns by computer. Also encouraging is a recent survey of taxpayers, which found that 87 percent claim the only acceptable level of cheating on their taxes is "none at all."

However, 7 percent said a little bit of cheating would be okay, and 3 percent said as much as you can get away with is acceptable.

TAX CREDIT: The General Accounting Office, the investigative arm of Congress, has traditionally faulted and rarely praised the IRS. But a little-noticed July 22 report gives the IRS credit for getting its reform efforts back on track.

"The modernization effort under way at the IRS has the potential to deliver improved service to taxpayers. . . . We have been impressed by the commissioner's leadership and commitment to change as well as IRS's efforts to date," the GAO said.

Still, the GAO said that the IRS faces formidable challenges. Rossotti wants to revamp how the agency does its work, reorganize the structure, install new technology and hold the agency accountable through "balanced measures of performance" that stress more than just collecting revenue.

Pursuing all that at once, while continuing day-to-day operations, "will push IRS managers and staff to their limits. Particularly important will be the capacity of middle managers to lead and manage comprehensive change," GAO said.

PAIRING UP: Rossotti intends to organize the IRS into four operating divisions over the next two years and has started recruiting executives to run the new divisions. As with last year's headquarters shake-up, he appears to be matching up outsiders with insiders when possible.

Earlier this month, Rossotti named Hewlett-Packard Co. vice president Larry R. Langdon as commissioner of the new IRS Large and Mid-Size Business Division, which will collect taxes from large companies, subchapter S corporations and partnerships with assets greater than $5 million.

Deborah M. Nolan, an IRS executive who joined the agency in 1972, was selected as the division's deputy commissioner. To head the Tax Exempt division, Rossotti named Evelyn Petschek, the commissioner who already handles the administration of tax laws affecting nonprofit organizations. Rossotti also named William E. Boswell as chief of Agencywide Shared Services, which will handle buildings, procurement and provision of services to the operating divisions. Boswell has served as senior vice president for shared services for BP America Inc.

Gregory D. Rothwell, the assistant commissioner for procurement, was named as the deputy for shared services. Headhunters are interviewing candidates for the top executive jobs at the newly created Wage and Investment Division, handling typical taxpayers who file 1040 forms, and the Small Business and Self-Employed Division.

TAXPAYER HARDSHIP: For the first time, the IRS will be allowed to consider economic hardship in cases where taxpayers try to settle unpaid tax debts. The change, published in the Federal Register, expands the IRS "offers in compromise" program, which allows the IRS to negotiate settlements with people unable to pay all of their taxes.

The change grows out of 1998 legislation that provided new taxpayer rights. Taxpayers who might qualify for economic hardship include, for instance, a parent with assets to pay his tax bill but who needs them to care for a child suffering from a long-term illness or a retiree who needs to retain money to meet basic living expenses.

Rossotti said the change should help taxpayers whom the IRS could not help before, but, he warned in a written statement, "it shouldn't be misinterpreted by people as an open invitation to avoid paying taxes."