Fewer Large Corporations Audited by IRS

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

The Syracuse University-based Transactional Records Access Clearinghouse 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 Commissi

oner 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 in an interview with The Associated Press.

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 mid-sized 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.

The new IRS commissioner, Douglas Shulman, said in a response that he intends to make "targeting noncompliance with our tax laws ... a high priority."

According to IRS statistics, 15 percent, or 4,473, of companies with $10 million to $50 million in assets were examined in 2007. That compares with 12.3 percent, or 3,535 companies, that were audited in 2005.

In the same two years, the percentage of audits of corporations in the $50 million to $100 million range fell from 16.4 percent to 11.4 percent. For corporations in the $100 million to $250 million range, the percentage dropped from 17.5 percent to 12.1 percent .

Among the largest corporations above $250 million in assets, 3,424 were audited in 2007, down from a peak of 4,859 in 2005.

TRAC also questioned the financial benefits of the shift. The group 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.

Dean Zerbe, national managing director for Houston-based alliantgroup, which provides tax services for medium-sized companies, said his fear was that "in the IRS' zeal to show Congress improved numbers in corporate audit, it is America's small and medium businesses that are taking it on the chin."

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.

The returns of these companies do not show up in enforcement statistics, he said, but the collaboration can avoid controversies that can go on for years.

Having more money was not necessarily an advantage for individual taxpayers. The IRS said that last year it audited 9.25 percent of those with incomes of more than $1 million, compared with 6.3 percent in 2006. For those earning less than $100,000, the chances of getting audited were less than 1 percent.

The tax agency said total enforcement revenues in the 2007 budget year, from collections and appeals activities, were $59.2 billion, up from $48.7 billion the previous year.