By Dan Horn, The
Cincinnati Enquirer, 4/1/04
America’s largest corporations are less likely to
face an Internal Revenue Service audit this year than at any time in the past
decade.
Average
taxpayers are not so fortunate.
Audits of
individual tax returns have climbed 37 percent from 2000 to 2003, while audits
of corporations have fallen 26 percent over the same four-year period.
Corporations with assets of more than $10 million have seen a drop of nearly 23
percent.
IRS officials
say several years of budget cuts and staff reductions have made it difficult
for them to pursue as many of the complicated, time-consuming corporate audits
that they once did.
Taxpayer groups
and other critics say the trend suggests the IRS is no longer willing or able
to go after the biggest tax cheats, even in an age of corporate accounting
scandals.
With the
tax-paying deadline just two weeks away, those groups say the agency’s approach
to audits has created a disparity that is not only unfair to average taxpayers,
but is costly to the government because corporate audits tend to recover far
more money than individual audits.
“That’s where
the money is,” said Howard Levy, a Cincinnati tax lawyer and former IRS trial
attorney. “It’s harder work for the IRS, but that’s where the bigger dollars
are.”
Despite the
promise of large tax recoveries, IRS statistics show that the number of
corporate audits has tumbled since 1995, when 2 percent of all corporations and
26 percent of companies with more than $10 million in assets were audited.
Last year, 0.87
percent of all corporations and 12 percent of the $10 million-plus companies
were audited.
The individual
audit rate remains lower at 0.65 percent - or about one of every 150 people -
but the gap is closing fast. And that has raised concern among taxpayers who
believe the focus should be on corporations.
“Too many
unscrupulous people are taking advantage of the system. But as we all know, so
are the corporations,” said Bob McIntyre, director of the non-profit advocacy
group Citizens for Tax Justice in Washington, D.C. “It’s a fairness issue and a
dollars and cents issue.”
McIntyre said
the agency’s problem is a budget that does not allow it to do the job well. “They
are hopelessly underfunded,” he said.
The IRS has
19,600 agents and revenue officers today, nearly 7,000 less than in 1996. Most
of the cuts came after the agency took a public beating in Congress in 1998 and
was accused of being too hard on honest taxpayers.
The agency’s
staff was cut, and many of the employees who were left shifted their focus from
enforcement to customer service. Audit rates for individuals and corporations
fell sharply, and the amount of uncollected taxes rose to about $300 billion.
Top IRS
officials say they expect that to change when they hire about 5,000 new agents
this year. Soon, they say, corporate audit rates will begin to climb along with
the individual rates.
“We are
correcting our course,” IRS Commissioner Mark Everson said in a speech two
weeks ago in Washington. “We are strengthening IRS enforcement of the tax laws
in a balanced, responsible fashion.”
At a
congressional hearing Tuesday, Everson said he expects the decline in corporate
audits to end this year.
But some
question whether budget cuts are the only reason the system is out of balance.
They contend it’s no coincidence that individual audit rates began to rise and
corporate rates continued to fall after President Bush took office.
“We’re seeing
it as somewhat political,” said Betsy Leondar-Wright, spokeswoman for United
for a Fair Economy, a liberal advocacy group in Boston. “We’re seeing a shift
toward a heavier burden on individuals and a lighter burden on corporations.
“There’s a
certain, doing-favors-for-your-friends aspect to it.”
Although they
may see different reasons for the decline in corporate audits, taxpayer
advocates and IRS officials agree the agency should be more aggressive overall
and on corporate audits in particular.
They say audits
are important not just for the money the IRS recovers from cheats, but also for
the message they send everyone else.
“Fear of the
audit is important,” said Levy, the former IRS attorney. “It’s like the police.
They’re not at every intersection, but the fear they might be keeps people from
running red lights.”
Without
aggressive enforcement, he said, taxpayers and companies are more likely to
test the boundaries of the law. Honest taxpayers lose faith in the system and
the government loses billions of dollars in revenue.
“Everybody has
got to pay their fair share or others will pay an unfair share,” said U.S. Rep.
Rob Portman, a Terrace Park Republican and member of the congressional
committee that oversees the IRS. “The goal now needs to be bringing the audit
rates up.”
The stakes are
highest with corporate audits because the amounts are larger than in individual
cases and the resources companies devote to picking apart the tax code are
greater.
Although most
corporations are small - such as doctors’ offices or law firms - their returns
are more complicated than those filed by individual taxpayers.
“You’re talking
about super complexity,” said Robert Brant, a Cincinnati tax attorney whose
firm has thousands of individual and corporate clients. “You have a lot of extremely
intelligent people trying to get money into the gray area.
“That means
there is more of a burden on the government to be watching it.”
But Brant said
the government isn’t watching as closely as it used to. “I see very, very few
audits of the corporations,” he said. “Very few.”
He said the
drop in corporate audits is not surprising because IRS agents need significant
training before they’re ready to handle one. The less-sophisticated individual
audits are easier to do with fewer employees and training programs.
“Right now,” he said, “I think the companies generally are not that fearful of the IRS.”