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Tax Audits of Big Business Are Declining, Study Says

Despite the federal government’s repeated pledges to crack down on big businesses that underpay their taxes, the Internal Revenue Service has decreased in recent years the time it spends auditing the returns of the nation’s largest corporations, according to a new study.

Internal Revenue Service building in Washington, DC
Thinkstock | Comstock Images | Getty Images
Internal Revenue Service building in Washington, DC

And in 2009, the government audited just one in four of the largest corporations, lower than any rate in more than 20 years, according to the analysis, released Sunday by the Transactional Records Access Clearinghouse, a nonpartisan research group affiliated with Syracuse University.

Researchers said the audit data and other memos, which had both been obtained from the government under the Freedom of Information Act, suggested that a “perverse quota system” within the I.R.S. may be pressuring auditors to focus on small and medium-size businesses and give less scrutiny to the largest corporations — those with $250 million or more in assets.

“The decision to audit the smaller companies does not help the government collect more taxes,” the study concluded. “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.”

I.R.S. officials, who have for years disputed the methodology used by TRAC, were quick to rebut the study’s findings. Steven T. Miller, the I.R.S. director of enforcement, said the study was skewed because it failed to take into account a surge in hours that I.R.S. agents spent working with businesses before they filed their returns to prevent errors or underpayments.

He asserted that the data actually showed that the agency had 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.

“We believe we’re looking at the right cases, we’re looking at the largest cases, we’re adding folks to these programs and have worked to really focus on the largest corporations,” Mr. Miller said. “This issue is about more than just the number of feet on the beat.”

The nation’s tax gap — the amount of taxes underpaid by businesses and individuals — is more than $345 billion, according to the most recent estimates formulated by the I.R.S. The I.R.S. collected $48.9 billion in underpaid taxes last year through audits and other collection actions, including $28.5 billion from large companies and $1.8 billion from small and medium-size businesses.

In much of the last decade, as corporate profits soared and the number of wealthy Americans increased sharply, the I.R.S. periodically decreased the level of scrutiny it directed at individual taxpayers at the top of the income scale.

But the I.R.S. reversed that trend in the last two years, giving increased attention to the wealthiest individuals: in 2009, the agency audited 6.5 percent of those who declared income of $1 million or more; 2.9 percent of taxpayers with income of $200,000 to $1 million; and about 1 percent of those whose income was below $200,000.

But the TRAC study said the I.R.S. had not followed through on federal officials’ promises to help reduce the soaring budget deficit by aggressively recovering underpayments by large corporations. Since 2005, the study reports, the number of hours devoted to audits of the largest companies fell 33 percent, while the hours spent auditing small businesses increased 30.4 percent and rose 12.6 percent for midsize businesses.

In the same period, the number of I.R.S. audits of large corporations fell to 3,675 from 4,693, a decrease of 21.7 percent.

Terry Lemons, an I.R.S. spokesman, said it was misleading to use 2005 as a basis for comparison because the I.R.S. had conducted a major drive to close old cases that year, and thus completed an unusually high number of audits carried forward from previous years.

Mr. Miller, the enforcement chief, said the I.R.S. audited 100 percent of those corporations with assets over $20 billion and 50 percent of those with assets of $5 billion to $20 billion in 2009.

In January, Commissioner Douglas Shulman announced that all major businesses would be required to include a detailed statement in their tax return that described any potentially questionable deductions. That new plan, which will be fully put into effect later this year, will allow auditors to concentrate their efforts on areas where they are most likely to recover any underpayment, Mr. Miller said.

“Enforcement is a function of looking at the right cases and the right issues,” he said.

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