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On Tax Day, the IRS Is Preparing to Look Closely — at You


The Internal Revenue Service building in Washington (Flickr: functoruser)

Today is the deadline to file federal income taxes, and individuals and businesses are scrambling to get their books in order. The recession continued to batter individuals and families in 2009, with income falling and unemployment rising. But corporate profits started to rebound — nowhere more spectacularly than in the financial sector. Given those fundamentals, one might imagine that the Internal Revenue Service would focus more on corporations than individuals or small businesses.

[Economy1]But a new report from the Transactional Records Access Clearinghouse, a nonpartisan research group affiliated with Syracuse University, shows that throughout the downturn, the agency has gone after fewer and fewer big businesses and more and more mom-and-pop outfits — the traditional engine of job growth.

Five years ago, the IRS instituted a “perverse quota system,” according to TRAC, pressuring auditors to complete more audits, rather than to recover more tax losses or to go further in depth. As a result, auditors turned away from more complicated and larger companies, despite clear evidence that they can defraud the federal government for much more vast amounts than their smaller counterparts. In 2009, the IRS performed audits on only around 25 percent of the biggest corporations — representing the lowest audit-rate in 20 years. Since 2005, the IRS has audited 22 percent fewer big businesses and allocated 33 percent fewer hours to looking at big-company books. Time spent on small businesses and the number of small businesses examined, on the other hand, have increased.

“The decision to audit the smaller companies does not help the government collect more taxes,” the TRAC study says. “This is because the data indicate that the larger the business, the larger the dollar amounts of tax underreporting and back taxes on average that they may owe.” Indeed, the IRS itself estimates that of the $50 billion collected in back taxes via audits last year, around 60 percent comes from the audits of big businesses.

“The system is perverse and counterproductive,” argues Susan Long, the co-director of TRAC and a professor of managerial statistics at Syracuse. “The number of revenue agents actually peaked in 1988, and Congress has whittled back [the IRS's] appropriations and thus the amount of hours that they had for agents to look into corporate profits. But we actually looked at a period where Congress was providing more resources to the IRS [between 2005 and 2009], and they still continued to cut back on these kinds of audits.”

More troubling, TRAC reports that the IRS is going after fewer financial firms — despite increasing fraud in the run-up to the recession and quickly rebounding corporate profits since then. In 2008, the IRS audited just 15 percent of large financial companies, the low point in a five-year decline. That year, for instance, Goldman Sachs earned $2.3 billion in profit and paid an effective corporate income tax rate of just one percent. Long says that TRAC requested data regarding 2009 audits and taxation for the financial sector, but the IRS “refused to produce” the data. (TRAC asks for IRS information via Freedom of Information Act requests.) “Overall, audits of large corporations are going down, and the financial sector is such a large portion of that corporate sector,” Long says. “Plus, a very, very complicated one. It is hard to imagine any fundamental change in trends.”

The IRS disputes some of TRAC’s findings, telling reporters that it audits every company with assets over $20 billion and has changed the rules this year to help agents flag troublesome business filings. (The IRS did not respond to TWI’s repeated requests for comment.) But TRAC contends that the agency’s refutation of its data in several cases does not make sense. For instance, the IRS claims to audit 118 percent of one income-bracket of companies, but has not yet explained why the number is above the logical limit of 100 percent.

And in another sign that individuals, rather than big corporations, will be subject to IRS scrutiny, the agency recently promised to expand audits for new homeowners using the Obama administration’s tax credits – an $8000 credit for first-time buyers and $6500 credit for repeat buyers, available for purchases between January 1, 2009, and April 30, 2010. More than 1.5 million people have claimed the credit, and the IRS has promised to audit those claimants heavily.

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