Probably should have mentioned that I already have Vogtland coilovers and the car seems way too stiff with them. The biggest reason I have for doing the torsen rear end is that I want to eliminate understeer and make my car capable of drifting. Is there a better way of achieving this? I've been told that upgrading the sway bar will make the car handle even stiffer, which I don't really want.

 

I am no expert on this chassis, but if you want to reduce understeer, in general you should increase the stiffness rear sway bar. These cars were designed to understeer as it safer for the average joe so it may be difficult to remove all of it.

Another option is to change the torque bias of the center differential. From the factory the A4 is set at 40/60 front/rear. You can buy differentials that have been modified to 20/80 making it behave more like a rear wheel drive car.
Differential: High-Bias Torsen Center A4 01A Mid-Late (1996-2001) | STaSIS ::: Race Bred Adrenaline

If this option is a bit pricy, you can do the modification yourself.
Audi A4 4:1 Center Diff Mod

 

Something else you may want to consider what class this type of modification would put you in.

 

I never thought about modifying the center differential even though that seems to be more common. I'll probably just leave things as they are until I have the money to drop into making this thing into a track car. Thanks for all the advice guys, hopefully I'll get to put it to use in the future.