"Historic collapse" of IRS audit rates of big companies

WASHINGTON — The tax audit rates of the largest companies are less than half what they were 20 years ago while more small and midsize businesses are coming under scrutiny, according to an organization that monitors the Internal Revenue Service.

The Syracuse University-based Transactional Records Access Clearinghouse (TRAC) described what it said was a "historic collapse" in audits for corporations holding assets of $250 million or more. About 26 percent of them were audited in the 2007 budget year compared with 34 percent in 2006 and 43 percent in 2005.

The IRS did not dispute the numbers, based on agency data. But it strongly disagreed with suggestions it was easing oversight of the biggest corporations.

Enforcement revenues from large companies rose by one-third in 2007 from the previous year, from $10.6 billion to $14.2 billion, said IRS Deputy Commissioner Barry Shott, who heads the Large and Mid-Size Business Division.

While the number of examinations has declined, "what we are doing is focusing our resources better on where the noncompliance is," Shott said.

Shott said the focus in recent years has been on tax shelters and "extraordinarily complicated" partnerships and S corporations where shareholders, rather than the company, must report income or losses.

Last year the IRS examined 17,700 S corporations, compared with 14,000 the previous year, and 12,200 partnerships, compared with 9,800.

But the TRAC report concluded that the IRS also was concentrating on regular small and midsized companies to boost audit numbers.

"Moving the focus of the corporate auditors away from the large corporations and toward the smaller ones has been quite effective when it came to increasing the overall number of these kinds of audits but actually was counterproductive in financial terms," the researchers said.

TRAC said that last year the government uncovered $682 in additional recommended taxes for every revenue agent hour spent auditing the smallest corporations, compared with $7,498 in additional taxes for audits of the largest corporations.

IRS Commissioner Douglas Shulman told the Senate Finance Committee last week that audits of businesses in general rose from 52,000 in 2006 to 59,500 in 2007.

He acknowledged that audits of the largest corporations were down. But he said that "in times of flat budgets, the agency cannot increase activity across the board, but must address the areas where there is growth and potential risk."

Shott also cited a new program where larger companies work with the IRS during the year so there will not be disputes at tax-filing season. Participants in this program rose from 17 in 2005 to 73 this budget year, he said.