The Internal Revenue Service (IRS) has shortened the average time spent per audit for large corporations by a third over the past five years, according to a research organization that gathers and analyzes government data. This shortening of audits has also coincided with a drastic reduction in the recovery of additional taxes through those audits.
The recent report by the Transactional Records Access Clearinghouse (TRAC) examined IRS auditing of big corporations—those with at least $250 million in assets—and makes for timely reading during this year’s tax season. Over the past five years, the average number of hours IRS agents spent on each of these corporate audits has gone down by 34 percent, and additional taxes recovered from the companies as a result of audits has fallen by 64 percent, TRAC reported.
“Unless there has been a dramatic improvement in the way big corporations complied with complex requirements of the tax laws over the FY 2010-2015 period, this would mean that the potential loss to the government now amounts to at least $15 billion per year,” TRAC said.
The IRS has been through five years of budget cuts, scandal, and more budget cuts. According to data from the Government Accountability Office, the agency’s Fiscal Year 2015 budget of $10.9 billion was the lowest in seven years, and if inflation is accounted for you have to go back to before 2000 to find a budget that has lower buying power.
In an April 2015 speech, IRS Commissioner John Koskinen described the challenges of having to deal with shrinking budgets and growing responsibilities, including a growing taxpayer base and enforcing regulations such as the Foreign Account Tax Compliance Act and portions of the Affordable Care Act. According to Koskinen, 75 percent of the budget goes to personnel, and therefore staffing has taken the biggest hit.
The data released by TRAC supports that account, showing a large decline in staffing numbers. The ranks of revenue agents, who are responsible for performing audits, had slowly grown from roughly 12,000 to 14,000 in the years from 2000 to 2010. Since 2010, however, revenue agent levels have plummeted 27 percent, down to approximately 10,750. Total staffing levels have decreased by 19 percent in the same period. TRAC also reported that the audit count for large and international businesses is currently 22 percent lower than where it was at this time in 2015—far below IRS’s goal of limiting it to a 2-percent reduction in 2016.
Admittedly, agency heads rarely welcome cuts to their agency’s budget, nor do they often miss an opportunity to argue for increased funding. That said, Koskinen’s remarks make the drop in staffing appear especially ominous. In fact, Koskinen has accused the recent IRS budget cuts of being a “tax cut for tax cheats.”
“The risk to our tax system posed by underfunding goes deeper than uncollected dollars, unanswered phones or unpublished guidance,” Koskinen said. “If people think they’re not going to get caught if they cheat, or they’re just fed up because they can’t get the help they need from us to file their taxes, the system will be put at risk.”
The data published by TRAC don’t conclusively prove that budget cuts or shorter audits of big corporations caused a decline in tax recoveries, but the evidence does support that idea. Unfortunately, there is no way to definitively measure tax fraud—we only know about the ones that get caught—which makes drawing definite conclusions impossible. David Burnham, co-director of TRAC and author of the investigative book, A Law Unto Itself: Power, Politics and the IRS, added that while the numbers alone may not prove causation, the budget cuts provide the best explanation of the shorter audits and drastically lower levels of tax recovery. Burnham also worries that less thorough audits and fewer skilled auditors may contribute to an overall decrease in deterrence for corporations contemplating tax evasion or other crimes. As evidence of decreased deterrence, Burnham, who is on the Project On Government Oversight’s board of directors, cites another TRAC report from October 2015 showing federal corporate prosecutions down 29 percent in the past ten years, despite referrals from federal investigators to prosecutors increasing 2.6 percent in that same time frame.
If Burnham’s concern over a decline in deterrence is accurate, there could be huge ramifications. Koskinen has stated that a decline of just 1 percent in the overall tax compliance rate “translates into $30 billion in lost revenue for the government.”