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US Lawmakers Question IRS Audit Practices

by Leory Baker, Tax-News.com, New York

19 January 2007


US Representatives Rahm Emanuel (D-IL) and Richard E. Neal (D-MA) have written to Internal Revenue Service Commissioner Mark W. Everson to express concerns about recent reports alleging that top IRS officials are pushing auditors to prematurely close audits of large companies, leaving billions of dollars of taxes owed on the table.

Reflecting the level of their concern, Emanuel and Neal have announced that they plan hold a hearing on this matter in the Ways and Means Committee’s Subcommittee on Select Revenue Measures "at the earliest possible date".

The lawmakers' letter was motivated by an article in the New York Times, based on interviews with dozens of IRS employees, which alleged that senior agency officials pressurised auditors to close large audits early with agreements to have them pay only a small fraction of the taxes they owe.

"In the face of the tax gap and our budget deficits, we can scarcely afford to leave billions of dollars of corporate taxes owed on the table. To do so would be unfair to the millions of middle-class families who dutifully pay their taxes but must shoulder the burden for those who do not," Emanuel and Neal wrote.

The IRS estimates the current gross annual federal tax gap at approximately $345 billion. After collection efforts, the net annual federal tax gap is about $295 billion.

The letter goes on to state that the interviewees claimed their superiors are "so focused on avoiding delays and closing cases...that agents are unable to pursue obvious examples of questionable deductions and sheltering activity".

"We are also concerned that IRS officials and companies are agreeing in advance to the scope of audits, effectively handcuffing auditors by prematurely declaring certain areas of inquiry off-limits. Even if questions emerge during the audit, agents are being denied the authority to expand the scope of their investigations," the letter stated.

The lawmakers said the Times report suggested that IRS supervisors are closing audits early "out of old fashioned self-interest" because they receive cash bonuses and promotions based on closing cases within the time allowed, not on the quality of audits or the dollars collected.

Pointing to the IRS's own figures, Emanuel and Neal said that the time devoted to each large company audit in 2006 was more than 20% below what it was in 2002, and while a larger share of companies was audited between 2003 and 2005, that number declined substantially in 2006.

"While IRS officials point to a rise in tax dollars collected per hour of audit, revenue agents claim this merely reflects the fact that tax sheltering now is so prevalent that it is easy to find additional taxes due," the letter concluded.


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