Easier Times for Biggest Corporations
The thoroughness of IRS enforcement efforts for the nation's largest corporations — measured by the number of hours devoted to each audit — has substantially declined since FY 2002, according to data recently obtained from the agency by the Transactional Records Access Clearinghouse (TRAC).
IRS data also show that the annual audit rate for these corporations, all with assets of $250 million or more, while increasing in FY 2004 and 2005 has now receded to about the level it was in 2002 and is much lower than levels that prevailed a decade or more ago.
The previously undisclosed information about the number of hours the agency devoted to the largest corporations challenges the accuracy of Commissioner Mark W. Everson's broad November 20 statement that " ... no matter how you look at our results, they show a strong rebound in our enforcement efforts."
The agency provided the statistical data only after Federal Judge Marsha W. Pechman of the Western District of Washington on April 4 ordered it to do so as a result of a suit brought by TRAC under the Freedom of Information Act. See sidebar.
Although the number of the largest corporations is small, these giants are a very significant force in the American economy. In a recent year, for example, while filing only 0.2% of all corporate returns, these powerful organizations controlled 90% of all corporate assets and received 87% of all the corporate income. See Figure 1 and TRAC's earlier report. Another revealing fact is that in FY 2002 the largest corporations were responsible for three quarters — 74.8% — of all additional taxes the IRS auditors said were owed the government. By comparison, low and middle income taxpayers in the same year were responsible for only 10.4% of the total. See graph and table.
Despite this reality, however, the agency data show that audit attention given those with $250 million or more in assets has substantially declined in the last five years. In 2002, an average of 1,210 hours were devoted to each of the audits of the corporations in this category. But with Commissioner Everson's push to increase "coverage" or the number of large corporations audited, the time devoted to each audit dropped sharply in 2004. By 2006 the average hours per audit remained at this lower level (projected to be 958 based on six months of data) or 20% below what it was in 2002. See Table 1.
But last year, coverage rates — the proportion of the largest corporations that received any IRS audit attention — also dropped. For the largest corporations, IRS data show, the coverage in 2002 was 34.4%. While these numbers went up in 2004 and 2005, the coverage declined in 2006, returning to just about where it was in 2002. See Table 1. This is significantly lower than the levels of just a decade ago when audit rates were running at 50 percent, or higher. See Figure 2.
Coordinated Industry Case Audits
Audits of the largest corporations are of two distinct types: regular audits and Coordinated Industry Case (CIC) audits. [IRS formerly referred to these as "Coordinated Examination Program" audits.] CIC audits are generally more thorough and historically have involved, on average, four times the amount of IRS examination time to complete than regular audits. And it is also the case that CIC audits uncover the lion's share of tax underreporting. In fact, nearly 90% of the agency's recommendations that the largest corporations pay additional taxes result from these in-depth audits.
It is critical, therefore, when looking at IRS enforcement efforts to examine changes in the agency's emphasis on these high intensity Coordinated Industry Case (CIC) audits.
CIC audits of the largest corporations have declined as a percent of all audits aimed at this category. In FY 2002 and 2003, the CIC audits represented 58% of the total. By FY 2006, again based on six-month projection, only 51% were treated as CIC cases. See Table 2.
There has also been some slippage in the average hours spent in large corporate CIC audits. During FY 2002, the average CIC audit took 1,741 hours, while in FY 2006 it was 1,558 hours — down 10.5 percent. See Table 2.
Commissioner Everson, in his November statement, said the "bottom line" for the IRS enforcement efforts was the upward trend in the dollars collected by the agency. The commissioner said this increase in enforcement revenues had been pushed along by "a number of big initiatives" and "our invigorated enforcement efforts."
Some economists and tax experts believe that other explanations are possible, namely that a massive surge in non-compliance is believed to have swept through corporate America. Although government enforcement activities can be measured, accurately tracking the number individuals or corporations who secretly decide to break the law is extremely difficult. In recent years, however, Commissioner Everson, his immediate predecessor and many others have argued that case-by-case evidence strongly suggests more and more corporations are skirting the law. The bottom line: a real increase in the number of non-compliant taxpayers may explain the increase in enforcement revenues.
Therefore, while it is true that enforcement dollars are up, particularly for recommended audit adjustments among the largest corporations, the reason remains unclear. In the face of lowered coverage and audit hours, this increase could be due to a more effective IRS audit program. However, if corporate noncompliance is up, it could be that the dollars require less effort to find.