April 13, 2010

A study by the Transactional Records Access Clearinghouse, a nonpartisan research group (with a terrible mouthful of a name) affiliated with Syracuse University, found that tax audits of the nation's largest corporations are declining. In 2009, the Internal Revenue Service (IRS) audited just one in four of the largest corporations (those with $250 million or more in assets), lower than any rate in more than 20 years. The study reported that since 2005 the number of hours devoted to audits of the largest corporations fell 33%, while the hours spent auditing small businesses increased 30.4% and increased 12.6% for midsized businesses. In that same period, the number of audits of large corporations dropped 21.7% (from 4,693 to 3,675). The researchers suggested that a "perverse quota system" within the IRS may be pressuring auditors to focus on small and medium sized businesses and give less scrutiny to the largest corporations. The study concluded, "The decision to audit the smaller companies does not help the government collect more taxes. This is because the data indicate that the larger the business, the larger the dollar amounts of tax underreporting and back taxes on average that they may owe."

The IRS criticized the study's findings and its methodology. One criticism the IRS has of the study is that they say it is misleading to use 2005 as a basis for comparison because that's the year the IRS carried out a major drive to close old cases. As a result, audits were carried forward from previous years and thus they had an unusually high number of audits that year. In addition, the IRS director of enforcement said the study was skewed because it did not take into account a surge in hours that IRS agents spent working with businesses before they filed their returns to prevent errors or underpayments. He said the IRS has actually become more efficient in recovering unpaid taxes from the largest corporations because the average amount of money the auditors recovered per hour had risen to $9,704 in 2009 from $6,928 in 2005 (you mean to tell me that in one hour of auditing they recovered almost $10,000 on average of unpaid taxes. That right there seems all the more reason to audit the largest corporations more.)

The IRS estimates that the nation's tax gap -- which is the amount of taxes underpaid by businesses and individuals -- is more than $345 billion (wow, we are a terrible country...) . Last year, the IRS collected $48.9 billion in underpaid taxes through audits and other collection actions. Of that amount, $28.5 billion were from large corporations and $1.8 billion from small and medium sized businesses. For most of this past decade, as corporate profits soared and the number of wealthy individuals increased, the IRS had decreased the level of scrutiny they directed towards the highest-earning individual taxpayers. However, in the last two years the IRS reversed that trend and are giving increased attention to the wealthiest individuals (hmm...I wonder what changed two years ago that led to this about-face? So from 2000-2008, the richest individuals were given less attention. And then in these past two years, the IRS is auditing more individuals at the top of the income scale. I sense a connection...).

This January, the IRS Commissioner announced that all major businesses would be required to include a detailed statement in their tax return that describes any potentially questionable deductions. This new plan will be put into effect later this year. Yeah, I'm sure corporations that are trying to cheat the government out of taxes will be sure to make a note of all the places they employed trickery or questionable deductions. "And this right here is where I write off my yacht and trips to the Caribbean with hookers as a business expense. And here is where I should owe $50,000, but I put it in an off-shore hidden account in a country that has lax laws and we just have a P.O. Box there." (Full Story)

Regardless of the IRS's complaints that this study's methodology is questionable (which, of course, you expect the IRS to say), I believe the conclusion of this study still stands. Large corporations are not being audited as much as they should. Is there any (real) argument that corporations are being audited too much or just enough? Look at the tax gap -- $345 billion is underpaid and only $48.9 billion of underpaid taxes is collected (which means $296.1 billion dollars in underpaid taxes was not collected). Is that a sign that we need to reduce the number of audits? Especially from these large corporations that make a huge difference in the amount collected? Is there any (real) argument that large corporations shouldn't be audited? Or that there aren't benefits to auditing large corporations? I think this study makes a good case for the importance of auditing large corporations, especially as the federal government has repeatedly pledged to crack down on big businesses that underpay their taxes. These large corporations make an ungodly amount of money; and they might be opposed to it, but tax law is just that...law. So whether they like it or not, they do in fact owe what they owe. And there needs to be more scrutiny of companies to ensure they're following the law.