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Risk of IRS Audit Declines for Many Businesses

IRS Audit Rates

The likelihood that companies in the highest tax bracket will be audited by the Internal Revenue Service is on the decline, according to a new report by a Syracuse University research center.

Following a 20-year trend of declining audit rates of large corporations, IRS staff will spend 18 percent less time this year than they did two years ago auditing businesses with assets of $10 million or more, the report said.

“If enforcement [of tax payments] goes down, there’s a threat that compliance goes down,” according to David Burnham, co-director of the Transactional Records Access Clearinghouse (TRAC), the university research center that released the April 9 report. (Burnham sits on the Project On Government Oversight’s board of directors.)

In the long run, less compliance means less revenue for the federal government, Burnham said.

TRAC based its report on a series of internal IRS reports it obtained through a Freedom of Information Act lawsuit.

The IRS calls any company with assets of more than $10 million a “large business,” but there’s a wide range of companies that fall into this category. IRS data from recent years shows, despite an overall decline in auditing, companies with the largest assets experience the highest percentage of audits.

For instance, in 2012, the IRS audited 10.5 percent of companies with assets of $10 million to $50 million, according to publicly available data. By contrast, it audited 93 percent of the companies with assets of $20 billion or more.

The IRS spends more time auditing these companies because they have the greatest risk of noncompliance, according to IRS spokesperson Anthony Burke.

“As the money increases, companies get more complex,” Burke said.

Businesses with assets of $10 million or more face a tax rate of at least 35 percent, according to the IRS. However, as a Washington Post analysis recently detailed, many of these giant companies use legal loopholes, such as keeping money overseas, which allows them to pay significantly less than the 35 percent tax rate.

“The result is lower revenue here that could pay for infrastructure, education and other services that support domestic growth—and that make life easier for U.S. firms,” the Post analysis said.

The IRS has already cut back on auditing individual taxpayers, according to the TRAC report. For every 1,000 returns in 2012, the IRS only audited 10.3 people, the report said. By contrast, the IRS audited 11.1 people for every 1,000 returns in 2011.

Individuals are also more likely to experience “correspondence” audits rather than traditional face-to-face audits, according to TRAC. Face-to-face audits are more in-depth than correspondence audits, and they require resources the IRS can’t expend as much these days, Burnham said.

The report attributes the decline in audits to reductions in IRS staff, though it says that the projected declines do not take into account sequestration cuts, which may further reduce the agency’s available resources for auditing.

Image from the TRAC Reports.