Tax Audits Will Hit Small Biz Much Harder

Study showing that biggest companies are being audited less also notes that a U.S. plan has firms with assets under $50m getting scrutinized more.
Stephen TaubApril 14, 2008

The largest corporations have a much less chance of being audited than in the past. But smaller companies — especially those with less than $50 million assets — are getting much more Internal Revenue Service attention.

According to a new report by the Transactional Records Access Clearinghouse (TRAC), in 2007 the audit rate for the nation’s largest corporations plunged to its lowest level in the last 20 years. And the decline accelerated sharply in the past two years, when the rate dropped from 43 percent in fiscal 2005, to 34 percent in 2006 and to an all-time low of 26 percent in 2007.

TRAC, a Syracuse University-based company that tracks the IRS, also found that the thoroughness of audits for larger corporations has been falling as well. TRAC defines the largest corporations as corporations with just $250 million or more in assets.

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The decline in thoroughness is apparent by several measures. The typical amount of time auditors spend on each of the large corporate audits is down by 20 percent over the last five years, the organization said, for example. Further, the IRS has also cut back on the so called “Coordinated Industry Case” audits it conducts. These are described as 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 percent), from 528 to 353.

“The potential impact of all of these shifts for the nation as a whole is considerable,” according to the TRAC, which points out that in 2007 the audits of the largest companies accounted for the majority of the recommended additional taxes that taxpayers of all kinds were asked to pay. More specifically, the additional taxes the auditors said the large corporations owed came to $24 billion or 54 percent of the total.

Yet TRAC, which said the IRS had not responded to queries about key aspects of the report, also found that the number of field audits and auditor hours aimed at the large corporations declined by 30 percent. Also, the total of additional taxes these entities were found to owe the government was down by 20 percent.

As significant, however, may be the higher audit rates for smaller corporations in the shadow of the large-company findings. From 2005 to 2007, audit rates for the smaller corporations were climbing, particularly for those with $50 million or less in assets. At the same time, the rates for the corporations with assets of $50 million or more were falling.

TRAC believes that the IRS has ordered its revenue agents to concentrate on the smaller corporations that normally take a lot less time to audit. This has enabled the agency to boost the overall number of corporate audits while the examination of the larger entities was sharply declining.

“The dramatic slump in the audits of the large corporations has occurred at the same time that the IRS has assured Congress and the public that audits for all corporations have been increasing,” the report asserts.