Targeting of Correspondence Audits Improves
IRS revenue agents are now spending substantially more of their time on corporate audits that produce no revenue for the government than they did in the recent past, according to agency data obtained under the Freedom of Information Act by the Transactional Records Access Clearinghouse (TRAC).
The year-to-year growth in nonproductive audit time — defined by the IRS as face-to-face examination hours that produced what it calls “no change” results — occurred for corporations in every asset class.
The 40% increase in the number of corporate audit hours that bore no fruit is troubling primarily because the misdirection of the agency’s enforcement resources ultimately could weaken the long term interest of corporations in paying their taxes.
But IRS data raise more focused concerns. One key finding was that the relative growth in these unproductive hours tended to rise as the size of the corporations increased. In the last five years, for example, the nonproductive audit time for the largest corporations — those with assets of $250 million or above — has more than doubled.
The agency data showing the growth in non-productive corporate audit hours is worrisome on a number of grounds.
1. The poor targeting suggested by these increases indicates the IRS is wasting more and more of the time of its revenue agents during a period when, because of limited resources, the agency is auditing many fewer corporate returns than it did only a decade ago. In fact, the overall corporate audit rate in 2006 (1.2%) was only half what it was in 1996 (2.4%).
2. In addition to documenting the growing number of missed opportunities to identity corporations who are not abiding by the tax laws, however, poor targeting also means that more and more taxpayers are unnecessarily burdened with the expense and bother of unneeded audits.
3. And, to the extent that superficial audits don’t find errors, the core purpose of the overall program to deter corporate misreporting is undermined.