IRS Scrutiny of Large Corporations

The Transactional Records Access Clearinghouse (TRAC) has caused a stir by issuing a reported entitled Audits of Largest Corporations Slide to All Time Low:

The FY 2007 audit rate for the nation’s largest corporations has plunged to its lowest level in the last 20 years, less than half what it was in FY 1988, according to IRS data analyzed by the Transactional Records Access Clearinghouse (TRAC). The historic collapse in audits for the corporations with $250 million or more in assets was 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. See Figure 1. But along with the declining number of audits for the largest corporations, the IRS data point to a second significant finding: the thoroughness of these essential audits has been dropping. One example of this broad problem can be seen by the fact that the typical amount of time auditors spend on each of the large corporate audits is down by 20 percent over the last five years (see table). The IRS has also cut back on the so called “Coordinated Industry Case” audits it conducts. These are the in-depth examinations the agency reserves for the largest of the large corporations. Over the last five years, the number of CIC cases has dropped by one third (33%), from 528 to 353. See Table 1. The potential impact of all of these shifts for the nation as a whole is considerable. In FY 2007, for example, the audits of the giants were responsible for the majority of the recommended additional taxes that taxpayers of all kinds were asked to pay. In concrete terms, the additional taxes the auditors said the large corporations owed came to $24 billion or 54% of the total.

Lynnley Browning reports on the TRAC study and some excuses from Barry Shott of the IRS. Browning ends with this:

The IRS is bringing in more money from corporations of all sizes through its audits. Last year it brought in over $59 billion in unpaid tax revenues, according to statistics from the agency. That is nearly double the level of 1998 and is consistent with a steady climb since then.

Of course, some of this increase may be attributable to cases started years ago. Glaxo was a big recent win for the IRS but this controversy dates back about 15 years. And then there is this:

“I’m still trying to find my jaw on the ground from the finding that audit rates for the big boys are plummeting,” said Dean Zerbe, the national managing director of Alliant Group, a tax planning company.

It seems the big boys are aware that IRS risk is down, which means they can focus more on tax planning or foreign tax authority risk. The excuse makers for the IRS are focused on the wrong metric. They should be thinking of all those tax dollars they are missing but letting the tax planners do their thing at low risk of ever being detected.