The audit rate for the largest corporations in the United States in 2007 plunged
to its lowest level in the last 20 years, less than half what it was in FY 1988,
according to Internal Revenue Service data analyzed by the Transactional Records
Access Clearinghouse (TRAC) at Syracuse University.
The TRAC study found that a historic collapse in audits for corporations
with USD250mn or more in assets has been especially notable during the last
two years, when the rate dropped from 43% in FY 2005, to 34% in FY 2006, and then
to an all-time low of 26% in FY 2007.
It also concluded that less time is being spent by IRS auditors on large corporate
audits. Over the last five years, the length of these audits has decreased by
20%.
Accordingly, there has been a 20% fall in the amount of recommended additional
tax that should be paid as a result of audits from 2005 to 2007 to just over
USD24mn - a figure which still accounted for 54% of the total additional
taxes that auditors said should have been paid in 2007.
However, TRAC observed that the decline in the number of large corporate audits
has occurred simultaneously with claims by the IRS that the overall audit rate
has increased, suggesting that the agency has changed its strategy to focus
on smaller corporations, which take less time to audit, and therefore boost
its overall audit completion figures.|
This seems to have been borne out by the
data analyzed by TRAC, which noted that while the FY 2005 to FY 2007 audit rates
for the smaller corporations were climbing - particularly for those with USD50mn or less in assets - the rates for the corporations with assets of USD50mn or more were falling.
In recent years, the audit burden appears to have been falling particularly
heavily on the smallest class of business overseen by the IRS Large and Mid-sized
Business Division (LMSB).
The audit rate of these companies, which have assets
of between USD10mn and USD50mn, increased to 14.7% in 2007, significantly
higher than either the 10.9% or 11.5% audit rates for larger firms in each of
the next two higher asset brackets (USD50 to USD100mn, and USD100 to 250mn).
However, because small company audits tend to produce less in extra revenues
than larger companies, there was a major cost involved in the IRS's effort to
drive the overall corporate audit rate higher, TRAC found.
For example, in FY
2007, for each revenue agent hour spent auditing the smallest corporations,
the government uncovered USD682 in additional recommended taxes. For mid-size
corporations whose audit rates increased so fast that they surpassed the rates
for the larger corporations, each hour of revenue agent's time resulted in even
less money, only USD474 in recommended additional taxes.
At the other extreme,
however, for every hour that the IRS devoted to auditing the corporations with
more than USD250mn in assets, the revenue agents recommended USD7,498 in additional
taxes.
"Moving the focus of the corporate auditors away from the large corporations
and towards the smaller ones has been quite effective when it came to increasing
the overall number of these kinds of audits," the TRAC researchers observed,
"but actually was counter productive in financial terms."
The IRS did not respond to queries from TRAC about key aspects of its report.
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