Corporate Tax Audits Decline, Says Study

Compared with fiscal 2003, this year the IRS has conducted 26 percent fewer audits, spent 30 percent fewer hours examining corporate tax returns, a...
Stephen Taub and Dave CookNovember 3, 2004

The Internal Revenue Service is conducting fewer corporate audits this year and recommending that audited companies pay less in additional taxes, according to IRS data examined by Syracuse University’s Transactional Records Access Clearinghouse (TRAC).

TRAC maintained that despite public statements by IRS Commissioner Mark W. Everson that the agency would get tougher on corporate tax cheats, “the pace of corporate audits is running substantially below the record-low levels registered in fiscal year 2003.”

TRAC compared data for fiscal 2003 with the annual rate for the first six months of fiscal 2004 (ending March 31 of this year). It found that this year, the IRS was conducting 26 percent fewer audits and spending 30 percent fewer hours examining corporate tax returns. Not surprisingly, the additional taxes recommended as a result of those audits are 36 percent lower this year than last — a total of more than $4.3 billion less for the first half of fiscal 2004.

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Smaller corporations, with up to $10 million in assets, are being treated even more leniently by the IRS. The number of small-company audits is down 45 percent this year — though the time for each of these audits has increased 17 percent.

Larger companies, on the other hand, are facing nearly as many audits, though the audits themselves are shorter — and apparently less thorough, according to TRAC. The largest corporations, defined by the IRS as having $250 million or more in assets, faced 1.4 percent fewer audits in the first half of fiscal 2004 compared with fiscal 2003, yet the agency spent an average of one-third fewer hours of each of these audits.

To be sure, the average audit time for the largest companies still amounts to a hefty 783 hours this year, compared with 1,164 hours in fiscal 2003. TRAC suggested, however, that because most of the additional taxes derived from corporate audits come from the largest companies, “the decline in the apparent thoroughness of the audits of these entities may well be a factor in the substantial reduction of the additional taxes the IRS concluded were due from corporations.” Indeed, the average additional taxes for these large-company audits has fallen from $3.7 million last fiscal year to $2.3 million this year.

Susan V. Long, an associate professor of management information at Syracuse University and co-director of TRAC, told The New York Times that the data showed “the length of audit time for the audits of the big guys is really decreasing and that raises questions, clearly, about how thorough audits are and the time pressures the agency is under to produce numbers” rather than quality audits.

A spokesman for the IRS, Terry L. Lemons, told the paper to disregard the data, deeming it “unreliable because of seasonal factors” that affect audit rates. When data for all of fiscal 2004 is available, Lemons reportedly added, it would show that “audit coverage will be up and the average dollars for large corporations will be up.” He also told the Times that the IRS collected $37 billion through enforcement actions in fiscal 2003; Lemons predicted that this figure would rise by at least 10 percent for fiscal 2004.

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