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IRS Auditing Fewer Big Companies, More Small Ones

April 12, 2010
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The nonprofit watchdog group Transactional Records Access Clearinghouse (TRAC) has yet another report out based on data released by the Treasury Department showing that our tax collectors are auditing fewer large companies while bringing the hammer down on the little guys.

The trend has continued since the last year of the George H.W. Bush administration. In 1990, IRS agents audited more than 70 percent of the tax returns from companies showing more than $250 million in assets. In 2009, about a quarter of such returns were audited.

This is good news for our titans of industry; it’s very bad news for all us other taxpayers. Statistics have shown that large enterprises scam misreport the largest amounts of money on their taxes. Historically, every hour a revenue agent spends buried in the big guys’ books yields $9,354 in additional tax revenue. Audits of small and medium-sized businesses pull in an average of only $1,025 per hour.

We have more revenue agents now than we did five years ago, thanks to a congressional push to train and hire more agents to tackle big company audits. There are more big companies now than ever too, yet the number of audits of those big companies has fallen, even as audits of smaller companies has increased, both as a percentage and in absolute numbers.

TRAC’s analysts don’t know why the IRS is putting its agents into less productive work, but theorizes that it has something to do with that the agency’s quota system, which rates the performance of revenue agents based on the number of audits they conduct monthly. Since megacorporate audits take much longer than those of mom-and-pop outfits, agents might be making their numbers look better by racking up more wins against smaller fish. According to the report:

Although a direct causal relationship between the well-documented quota systems and the audits by corporation income class has not been established, choosing to audit the smaller rather than the larger businesses would on its face help the individual agents meet their performance targets in the two divisions. But the decision to audit the smaller companies does not help the government collect more taxes. This is because the data indicate that the larger the business, the larger the dollar amounts of tax under-reporting and back taxes on average that they may owe.

I looked in vain today for news stories about the report, which was released to journalists last week and to the general public last night. Given the nation’s unprecedented debt and huge annual deficits, I have no idea why this report isn’t interesting to other media people.

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