Tax

IRS Audits Not Paying Off, Says Study

Nonproductive audit time, defined by the Internal Revenue Service as face-to-face examination hours that produced ''no change'' results, is reporte...
Stephen Taub and Dave CookApril 13, 2007

Internal Revenue Service agents are “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 a study by Transactional Records Access Clearinghouse.

TRAC, a data-research organization associated with Syracuse University, asserted that nonproductive audit time — defined by the IRS as face-to-face examination hours that produced “no change” results — was higher, year-on-year, for companies of all sizes.

Also troubling, according to TRAC, is that the relative growth in unproductive hours tended to rise as the size of the companies increased. In the past five years, for example, nonproductive audit time more than doubled for companies with assets of $250 million or more. Historically, the study pointed out, “the largest corporations produce the lion’s share of all audit dollars.”

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Indeed, although audit-dollar recommendations for the largest companies increased substantially during fiscal years 2001 to 2005, they declined by about 15 percent, to $25.5 billion, last year. TRAC also noted that the correlation between nonproductive audit time and company size was puzzling “because the bigger the institution the more likely that the sheer volume and complexity of its business transactions will result in misreporting errors.”

One reason for the correlation, the study suggested, might be shorter audits. According to TRAC, between 2001 and 2006 the average length of an audit dropped by 21 hours for companies of all sizes; for the largest companies, audit time dropped by an average 193 hours.

“Although the growth in nonproductive audit time has accelerated in the last few years, the problem has existed for the last decade,” the study asserted. TRAC maintained that by poorly “targeting” its audits, the agency was wasting the time of its examiners, burdening some taxpayers with unneeded audits, and undermining “the core purpose of the overall program to deter corporate misreporting.”

TRAC also made note of a report earlier this month by the Government Accountability Office. Although the GAO acknowledged that the IRS “has increased revenue collected through its enforcement programs in recent years,” the watchdog agency added that “enforcement continues to be included on our list of high-risk federal programs” due to a persistent, large gap “between what taxpayers pay in taxes voluntarily and on time and what they should pay under the law.” The GAO’s current estimate of that “tax gap”: $290 billion.

A November 2006 GAO report went even further, asserting that the IRS has faulty internal controls.