IRS Reduces Audits of Large Corporations

The Internal Revenue Service’s audits of the nation’s largest corporations have dropped sharply in recent years, despite growing federal budget deficits, according to a new report.

For corporations with assets of $250 million or more, the IRS in the last five years has cut back on the number of audit hours by 33 percent. In fiscal year 2005, the returns of 43 percent of these large businesses were audited. In fiscal year 2009, the audit rate had dropped to 25 percent.

The report, by Syracuse University’s Transactional Records Access Clearinghouse, is based on data obtained from the IRS in response to a Freedom of Information Act request.

More and more of the largest corporations are not being audited at all, according to the TRAC report. The number of the largest companies that are escaping any IRS examination at all has ballooned — up 74 percent since fiscal year 2005. Thus, three out of four corporate returns reporting assets of $250 million or more last year were not audited by the IRS.

Even among the biggest corporations — those with assets of $5 billion or more for which IRS only began releasing audit data in fiscal year 2007 — the audit rate has declined 17 percent over the last two years, from 78 percent of returns filed in 2007 to only 64 percent of returns filed during fiscal year 2009.

The TRAC report noted that the decline in large corporation audits occurred even though the highest levels of misreported tax dollars per auditor hour are found among the biggest business organizations. On an hour-by-hour basis, IRS audits of all corporations show that misreported tax dollars among the giants came to $9,354 per auditor hour, eight times higher than that uncovered for the small and midsized firms. In addition, since fiscal year 2005, Congress has provided the IRS with extra funds to hire an increasing number of revenue agents trained to handle complex tax returns. The number of IRS revenue agents available grew by 6 percent since 2005.

The decline in audits of large corporations appears to be occurring as audits of small businesses grow. Hours devoted to examining smaller firms with assets of up to $5 million grew by 34 percent since fiscal year 2005, while the auditor hours spent on the top bracket of small companies (assets from $5 to $10 million) shrank by 11 percent during this period.

“Often the audit of a small or medium business will require the time and attention of the business owners themselves — time that could be spent improving and expanding their business and hiring new employees,” said Dean Zerbe, national managing director of alliantgroup, a specialty tax firm, and former tax counsel on the Senate Finance Committee. “Shifting IRS enforcement and the burden of additional scrutiny onto small and medium businesses has an impact beyond just the IRS’s compliance numbers. Small and medium businesses already do not take full advantage of congressionally approved tax incentives and credits because of fear of audit. This news today will only exacerbate a bad situation.”

The IRS did not immediately respond to a request for comment, but the agency has traditionally disputed the methodology used in previous TRAC reports. The IRS also plans to begin requiring corporations to disclose their uncertain tax positions with their returns, which should make it easier for the IRS to conduct audits of large corporations.

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