IRS lagging on implementing its plan to speed corporate audits

The Internal Revenue Service isn’t effectively auditing corporations despite a change in how the agency conducts tax examinations that was supposed to make the process more efficient, according to the agency watchdog.

The IRS is only using the new audit selection system for about 15 percent of audits of large businesses and international companies, according to a report Thursday from the Treasury Inspector General for Tax Administration. The remaining audits are coming from old processes that take more time and cost more for the IRS to conduct.

The agency in 2016 announced a new system for selecting cases to audit. The IRS said it would focus on examining high-risk transactions, rather than auditing a company’s entire tax return as part of an effort to more efficiently enforce tax laws.

Sign in front of IRS building in Washington, D.C.
The IRS building in Washington, D.C.

The IRS is also failing to use the results of past audits to select and prioritize future cases to examine, the report said. The agency said it is using data to manage its audit caseload and that initial results shouldn’t be used to scrap the program.

“We agree that these results, also described by IRS management as lackluster, should not be used to assess the success or failure of the program as a whole,” the IRS Office of Audit said in response to the Inspector General analysis.

The report illustrates how the IRS has struggled to ensure tax compliance in recent years. The number of revenue agents fell to 2,923 in 2018, from 5,224 in 2010, as budget cuts and hiring freezes have impeded the agency’s audit capability.

“Given the diminished examination resources, the IRS should be even more focused on emphasizing areas that have the highest compliance risk,” the report said.

The IRS also said that staff and resources were allocated to work on implementing the 2017 tax law in 2018 and 2019, directing funds away from the audit program.

This isn’t the first time the IRS has received a negative report about how it is auditing corporations. In September, the Inspector General released a report saying IRS employees had collectively spent nearly 28,000 work days over a four-year period auditing mergers and acquisitions that ultimately yielded no additional tax revenue.