Syracuse, N.Y. (April 13, 2004) -- On the heels of Internal Revenue Service Commissioner Mark Everson's public vow that enforcement is the agency's top priority, a report released this week potrayed IRS efforts at business enforcement as lagging, with declines in the audits of corporations and pass-through entities.
According to an analysis of IRS data by the Transactional Records Access Clearinghouse, which is associated with Syracuse University, audits for business taxpayers are down from three audits per 1,000 tax returns five years ago, to two audits per 1,000 returns in fiscal 2003. In FY 2002, TRAC said the rate was 7 percent higher.
The decline in face-to-face-audits for all corporations was steeper, dropping from 15 per 1000 in 1999, to seven per 1000 in FY 2003 -- and down 21 percent from 2002. For the largest corporations, those with $250 million or more in assets, 347 out of every 1,000 were audited in FY 1999, compared with 290 out of 1,000 last year. A year before, the rate was 16 percent higher. The audit rate for what are known as pass-through entities -- such as partnerships and S corporations -- declined from 4.5 per 1,000 in 1999 to 3.2 per 1,000 in 2003.
The number of civil penalties assessed each year against corporations for tax fraud and negligence -- historically small -- have shrunk even more, according to the report. From 1999 to 2003, the total number of civil negligence penalties aimed at corporations all over the United States dropped from 62 to 12. In the same period, civil fraud penalties fell from 247 to 170. While the number of civil fraud penalties increased slightly in 2003, TRAC noted that the dollar amount of assessed civil fraud penalties was down 19 percent last year.
While Everson has emphasized in recent remarks that the overall audit rate for individual taxpayers has increased from all-time lows a few years ago, the TRAC report notes that the claimed increases are "entirely the result of agency's growing reliance on computer-generated correspondence audits that by their very nature are comparatively superficial."
Responding to the report, the IRS said the study "does not paint a full picture of IRS activity on corporations," and while it acknowledges that corporate audits have fallen in recent years, it said the study overlooks key reasons behind the decline.
The IRS cited as a major reason behind the decline the "explosive growth" of tax shelters and other complex corporate cases that are "more intricate and time-consuming than typical corporate audits." With more time being spent on cases, the agency said, there is less time available for other corporate audits.
"With an increasingly complex workload but no corresponding rise in the IRS workforce, the number of corporate audits declined," the IRS said in its response.
The agency added that, "Historically, the criminal investigation data gathered by TRAC differs considerably from the IRS’s own numbers. Regardless of which information is used, TRAC has historically understated activities by IRS Criminal Investigation -- either numerically or anecdotally."
-- Melissa Klein Aguilar
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