IRS Corporate Audits Producing Less For More

by Mike Godfrey, Tax-News.com, Washington

13 April 2007

Internal Revenue Service agents are now spending substantially more of their time on corporate audits that produce no revenue for the government than they did in the recent past, according to agency data obtained under the Freedom of Information Act by the Transactional Records Access Clearinghouse (TRAC).

The year-to-year growth in nonproductive audit time, defined by the IRS as face-to-face examination hours that produced what it calls "no change" results, occurred for corporations in every asset class, according to TRAC.

The report found that the 40% increase in the number of corporate audit hours that bore no fruit was troubling primarily because the misdirection of the agency's enforcement resources ultimately could weaken the long term interest of corporations in paying their taxes.

But IRS data tracking the outcomes by corporate size raise more focused concerns, the report noted. One key finding was that the relative growth in these unproductive hours tended to rise as the size of the corporations increased. In the last five years, for example, the nonproductive audit time for the largest corporations - those with assets of $250 million or above - has more than doubled.

Although audit dollar recommendations for the largest corporations increased substantially from fiscal years 2001 to 2005, they declined by about 15%, from $30.1 billion in 2005 to $25.5 billion last year, a drop of $4.6 billion in potential audit revenue. Historically the largest corporations produce the lion's share of all audit dollars.

TRAC said the pattern of nonproductive auditor time increasing with the larger corporations is puzzling because the bigger the institution, the more likely that the sheer volume and complexity of its business transactions will result in misreporting errors.

In Congressional testimony, IRS Commissioner Mark W. Everson has repeatedly claimed that corporate enforcement is one of his top priorities, and that the number of corporate audits has increased substantially under his leadership of the agency. However, as TRAC pointed out, quantity is not the same as quality, and Everson appears to be brushing aside concerns that increased audit rates are not being justified by higher revenues.

However, according to TRAC, it would appear that the quality of the corporate audits has become an issue for the IRS in the last few months. In a meeting with the American Institute of Certified Public Accountants last fall, Deborah Nolan, Commissioner of the IRS's Large and Mid-Size Business Division, defended the agency's audit policies. According to Tax Notes, Nolan told the accountants that the service's emphasis on speeding up the audits, what she called the "currency and cycle time" effort, had been done "in a smart way, and all of our statistical indicators indicate that our agents made very sound decisions."

Some within the ranks of the IRS disagree with this judgment. On March 20, for example, The New York Times published an article which said that more than a dozen revenue agents — all speaking anonymously — had told the reporter that they had been pressured by their managers to close cases too quickly and that this could result in the loss of billions of dollars in unpaid taxes.

And in March 29 testimony before the House Appropriations Committee on Financial Services and General Government, Colleen M. Kelley, President of the National Treasury Employees Union, agreed. She said the pressure on the auditors that had been reported by the Times was not new, going back to a 2002 IRS policy called the Limited Issue Focused Examination (LIFE) process.

Kelley told the subcommittee that the union had "heard directly from a number of our members about the detrimental effect this policy has had not just on efforts to ensure corporations are in full compliance, but also how this misguided policy is damaging employee morale."

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