Motivations and Constraints the IRS Provides Large Corporations

David Cay Johnston is a very unique creature – he is a reporter at a major newspaper who writes about taxes well, and he makes the subject matter interesting. His latest, in the NY Times, is one of the best I’ve read. Its hard not to just get myself in trouble and copy and paste the whole thing.

Basically, among other things, the article showed that there were fewer of audits of big companies last year, and the time spent on each audit has dropped by 21% over the past five years. However, additional tax dollars recommended (is this the amount actually collected? I suspect not) by the IRS per audit have increased. An IRS spokesman said this was proof that the IRS was working more efficiently.

Now, an economist – at least one that hadn’t sold his or her soul to the administration, might conclude otherwise. Reducing the number of audits reduces the probability of detection. As far as I know, the penalties for getting caught have not been increased. (In fact, this administration has a reputation for going easy on businesses.) This would mean the expected gains to cheating have increased markedly, leading to a greater amount of cheating – both in terms of number of cheats and the size of the average cheat.

Therefore, what is going on is simple – the administration is “recommending” more tax dollars only because the amount of underpayment has increased. (I wouldn’t be at all surprised if the increase in the recommended additional taxes is much smaller than the increase in underpayment, which in turn encourages even more cheating.)

The article also has several other little gems, including one about how the IRS has not been entirely forthcoming with data they are required, by court order, to provide. The article is short, and well worth a read.