Despite Internal Revenue Service assertions that it had halted the decline in the government's efforts to police corporate tax non-compliance, the pace of corporate audits is running well below the record-low levels registered in 2003, according to an analysis of IRS data.

IRS data for the first six months of fiscal 2004 show that the annual pace of audits for all corporations has continued to drop, and is running 26 percent below what it was in FY 2003 so far, according to Syracuse University's Transactional Records Access Clearinghouse. Similarly, TRAC reported that the actual hours spent examining corporate tax returns during the first half of the year are running 30 percent below last year's pace.

During the first half of 2004, the IRS spent 1,877,388 hours auditing 7,794 corporations and recommended additional taxes of $4,333,287,919, down 36 percent from the pace reported during the previous year.

TRAC said that its results are based on six-month audit data provided by the IRS in late October, and noted that the figures, particularly for dollar amounts, can be sensitive to a few individual cases with unusually large tax adjustments, so audit trends for a full fiscal year need to be examined for a "definitive verdict." TRAC said that the IRS wouldn't release nine-month or later figures, and withheld details on how the underlying numbers were derived.

IRS officials could not be reached for comment. However, in published reports, IRS spokesman Terry Lemons questioned the findings, saying it was "wrong to make any kind of sweeping projections'' based on the first six months of the year.

Noting that many audits of large corporations are closed during the third and fourth quarters, Lemons also predicted that, in contrast to the TRAC findings, the total audit rate will be up this year, and said that overall enforcement revenue collected by the IRS would reach a record $40 billion this year, according to reports.

The audit pace varied widely with the size of the corporation, TRAC noted. Audits of corporations with up to $10 million in assets during the first half were off 45 percent from last year, though the amount of time spent was up 17 percent. Among corporations with between $10 million and $50 million in assets, the number of audits jumped 40 percent over last year's levels, while time spent was down 10 percent. For companies with between $50 million and $100 million in assets, the pace of audits was up 3.3 percent, while time spent dropped 19 percent, and for companies with between $100 million and $250 million, audits were down 1.6 percent and time spent was down 25 percent. For the largest corporations ($250 million in assets or more), the pace fell 1.4 percent and time spent fell 33 percent.

"Because most of the additional taxes recommended in the corporate area are derived from the audits of the largest corporations, the decline in the apparent thoroughness of the audits of these entities may well be a factor in the substantial reduction of the additional taxes the IRS concluded were due from corporations," TRAC said.

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