IRS New Findings

Despite Rising Deficits, IRS Audits of the
Largest and Richest Corporations Decline

Despite a growing federal deficit, IRS audit efforts aimed at the nation's largest corporations have precipitously declined in the last few years and now are at an all time low, according to the analysis of agency data by the Transactional Records Access Clearinghouse (TRAC).

Figure 1. Changes for large corporations
with assets of $250 million or more
between FY 2005 and FY 2009

Among corporations reporting assets of $250 million or more, the IRS since FY 2005 has cut back by a third (33 percent) the hours it spends examining their books. IRS has also sharply reduced the number of large corporate returns it examines — these audits have fallen by 22 percent since 2005 (see Figure 1 and Table 1).

This has occurred even though IRS auditors uncover the largest dollar amounts of tax under-reporting in the books of these large corporations (see Table 2) and Congress has actually provided IRS with more revenue agents trained to handle complex returns such as these (see Table 3).

Figure 2. Recommended additional tax
dollars per auditor hour uncovered
during corporate audits for FY 2009

On an hour-by-hour basis, IRS audits of all corporations show that misreported tax dollars among the giants came to $9,354 per auditor hour, eight times higher than uncovered for the small and mid-size firms (see Figure 2). Despite this huge difference in potential yield, as mentioned earlier, the IRS cut back the hours it spends auditing these firms by one-third. And the number of the largest companies that are escaping any IRS examination at all has ballooned — up 74 percent since FY 2005. In concrete terms, this means that three out of four corporate returns reporting assets of $250 million or more last year were not audited by the IRS (see Table 1).

Here is what the data show:

In sheer numbers, IRS audits of large corporations fell from 4,693 in FY 2005 to only 3,675 in FY 2009.

Figure 3. Declining audit rate for large corporations with
assets of $250 million or more between FY 1988 and FY 2009.
(Click for larger graphic and supporting data.)

Audit rates fell even faster. Relative to return filings, during FY 2005 IRS figures show that 43 out of 100 returns filed by these large corporations were examined. During FY 2009, only 25 out of every 100 large corporate returns were audited.

This downward trend continues a long-term slide in audit rates for these large companies. Twenty years ago, two out of three of these corporations were audited by the IRS (see Figure 3 or interactive returns and audits application).

Figure 4. TRAC's interactive returns and audits application. Click to explore how IRS audit practices have changed over time for small to large corporations


Even among the biggest of the big corporations — those with assets of $5 billion or more[1] for which IRS only began releasing audit data in fiscal year 2007 — the audit rate has declined 17 percent over the last two years, from 78 per 100 returns filed in 2007 to only 64 per 100 returns during FY 2009 (see Table 4).

Contrasting with these reductions in large corporate audits, the number of IRS revenue agents available actually grew by 6 percent since FY 2005. IRS revenue agents are the individuals assigned to examine complex returns (see Table 3).

Figure 5. Changes in IRS revenue agent
hours between FY 2005 and FY 2009

Although the state of the economy, the nature of enforcement and other factors can influence the overall outcomes, enforcement dollars collected as a result of all audits — individuals, businesses, estates, gifts, etc. — continued their downward slide and has now fallen below the levels of five years ago (see Table 5).

The finding that the IRS appears to have misdirected its work force is underlined by the fact that while audit hours aimed at the largest entities were sharply cut, the hours the agency chose to focus on other corporations increased. For example, since FY 2005 the audit hours for the small companies (less than $10 million in assets) jumped by 30 percent and the hours devoted to examining mid-size companies (assets of $10 million to less than $250 million) increased by 13 percent (see Figure 5).

The Politics of Tax Collection and Deficits

The dramatic collapse in the auditing of those corporations with assets of $250 million or more has occurred during a period of increasing national concerns about growing federal deficits, growing public distrust of big business and intense worry about the extent of white collar crime personified by executives like the investment adviser, Bernard Madoff.

From the intensity of the recent political debate over the health care law and other budget related issues, there is little doubt that at the federal and state level deficits and how to deal with them have become a major worry. This worry is somewhat reflected in the public polls. On March 10, for example, the Pew Research Center said that while unemployment, health care and the state of the general economy outranked the deficit as the top subjects of worry, that "for the first time in many years, public concern over the budget deficit is increasing." Last August, the Pew poll found, 6 percent of the respondents saw the deficit as the nation's top problem. By last February, this number had almost doubled, with 11 percent expressing this view. At the same time, when it comes to the priorities of the President and Congress, 60 percent said that dealing with the deficit should be the top priority.

Curiously, while both the size of the nation's deficit — now totaling $1.6 trillion — and the decibel level of debates have continued to grow, the subject of the current state of the government's tax collection effort and how it can be improved has rarely if ever been an important talking point for officials in the Obama Administration or members of Congress — Democratic or Republican.

In his weekly radio address on January 30, for example, President Obama made a very general promise to rein in budget deficits. While noting a proposed freeze on discretionary federal spending and the appointment of a bi-partisan commission to tackle the problem, he did not mention the persistent and growing problems of the IRS. Neither did this subject come up when Erskine Bowles and Alan Simpson, the co-chairmen of the new panel, were interviewed on the PBS Newshour in February.

One confounding factor in the national debate may be that many of those most worried about the extent of federal deficits feel most strongly about curbing the role of federal agencies in American life. It should be acknowledged that the current deficit is so huge that tougher enforcement — by itself — will not solve this problem. That is not to say, however, that smarter more focused auditing cannot have an impact.

The IRS's surprising failure to direct its growing army of revenue agents — there now are about 13,000 of them — at the very largest of the nation's large corporations is underlined by new statistics that the agency only recently released to TRAC after litigation with the agency. These data show that while revenue agent audit hours for the super biggest entities — those with $1 billion or more in assets — declined by 8 percent in the 2007/2009 period, the hours increased by 15 percent for those with assets from $250 million to less than $1 billion (see Table 6).

A Perverse Quota System: Has the Agency Set Up the Wrong Goals?

As described in IRS documents obtained by TRAC, each of the agency's divisions routinely establish "goals" or quotas for the aggregate number of audits they expect their revenue agents to complete each month. The mission of the Large & Mid-Size Business (LMSB) Division, for example, is to enforce the tax laws for businesses with at least $10 million in assets. The IRS unit responsible for smaller businesses is called the Small Business/Self Employed (SBSE) Division. Both groups have annual quotas broken down into monthly performance targets for businesses that are a part of their responsibilities. And for both the LMSB and the SBSE those businesses with fewer assets typically take less time to audit than those with more assets.

These quota pressures may well influence revenue agents and their managers when making their decisions about which business will be audited and which will not. Consider, for example, the auditor time spent examining the various sized businesses that are covered by the revenue agents working in both the SBSE and the LMSB Divisions. Within each division the data indicate declines in the auditor time spent on return classes that represent more time consuming audits, and increases for smaller-sized firms.

Figure 6. Performance targets for SBSE and LMSB
Divisions result in increased avoidance of more
time-consuming audits between FY 2005 and FY 2009

For example, for the corporations handled by the LMSB Division, the audit hours for mid-size firms increased by 13 percent in the last five years while the hours devoted to the large companies went the other way, declining by 33 percent (see Figure 6 and Table 7). Curiously, changes in the counts of returns filed showed a different pattern with the number of returns from the middle sized firms growing more slowly than those filed by the large corporations (see interactive returns and audits application).

The same kind of avoidance of the big guys and growing concentration on the smaller businesses over the past five years also can be seen in data about audits undertaken by SBSE. Hours devoted to examining smaller firms with assets of up to $5 million grew by 34 percent since fiscal year 2005, while the auditor hours spent on the top bracket of small companies (assets from $5 to $10 million) shrank by 11 percent during this period (again, see Figure 6 and Table 7).

The 34 percent increase in the audit hours devoted to the corporations reporting less than $5 million in assets occurred during the same time that the number of their return filings were dropping. And while return filings grew for companies with $5 to $10 million in assets since FY 2005, IRS auditors cut the time they devoted to auditing these firms (see interactive returns and audits application).

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.

Supporting Tables

For additional corporate audit figures for FY 1992 through FY 2009 see the interactive returns and audits application accompanying this report. In addition, detailed audit and collection data are available via TRACFED (subscribers only).

Table 1. IRS Audits of Largest Corporations
($250 million in assets or more)
IRS Audit Activity: Fiscal Year Change
09 vs 05
2005 2009
Revenue agent hours (thousands) 4,568 3,053 -33.2%
Number of returns audited 4,693 3,675 -21.7%
Audit rate (per 100 returns) 42.6 25.0 -41.2%
Return Filings:
Number of returns filed 11,027 14,683 33.2%
Number of returns filed but not audited 6,334 11,008 73.8%

Table 2. Where IRS Finds Most Tax Under-Reporting Occurs
Fiscal Year 2009
Corporate Audits Dollars per
Auditor Hour
Total Dollars Percent
Small and mid-size companies (up to $250M assets) $1,025 $1,837,468,431 6%
Large companies ($250M assets or more) $9,354 $28,554,882,530 94%
Total $6,273 $30,392,350,961 100%

Table 3. Revenue Agent Time
  Fiscal Year Change
09 vs 05
2005 2009
All audits (revenue agent FTEs) 12,192 12,958 6.3%
Corporation audits only (thousands of hours)
Small companies (<$10 million assets) 548 714 30.4%
Mid-size companies ($10M to $250 million assets) 958 1,078 12.6%
Large companies ($250M assets or more) 4,568 3,053 -33.2%

Table 4. Audit Rate for Corporations
with $5 Billion in Assets or More
Fiscal Year* Audit Rate
(per 100 returns)
2007 78
2008 78
2009 64
Change: 2009 vs. 2007 -17%
* IRS has not released figures prior to FY 2007.

Table 5. Enforcement Revenue
Collected from All Audits
Fiscal Year Dollars in Billions
2005 17.7
2006 17.2
2007 23.5
2008 20.6
2009 17.4
Change: 2009 vs. 2005 -2%

Table 6. Revenue Agent Hours Spent Auditing the
Biggest Companies within the Large Corporate Class
Largest Corporations Fiscal Year* Change
09 vs 07
2007 2008 2009
$250M up to $1 Billion assets 418,809 407,015 480,850 14.8%
$1 Billion assets or more 2,800,527 2,710,619 2,571,866 -8.2%
* IRS did not provide breakdowns within the $250 million and above asset class prior to 2007

Table 7. IRS Performance Targets for SBSE and LMSB
Result in Avoidance of More Time Consuming Audits
  Fiscal Year Change
09 vs 05
2005 2009
SBSE up to $5M assets 499,314 671,199 34%
$5M up to $10M assets 48,343 43,093 -11%
LMSB $10M up to $250M assets 957,551 1,078,177 13%
$250M assets or more 4,568,398 3,052,716 -33%

[1] Statistics released by the IRS for the $20 billion and above corporate asset class show that the agency has not been able develop a reliable and/or consistent way of distinguishing the largest corporations. Either it under-counts the number of returns filed in this largest class, or it over-counts the numbers of audits. As a result since it started releasing these numbers the IRS has been reporting that it is auditing over 100 percent of the $20 billion and above firms: 118 percent audited in FY 2007, 125 percent in FY 2008, and 113 percent in FY 2009. It is difficult to know what a decline in audit rates means when the numbers suggest IRS is consistently auditing more than the number of returns that are filed.