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Analysis: IRS Audits Businesses Less

The pace of corporate audits by the Internal Revenue Service (search) continued to decline in the first six months of fiscal 2004, despite IRS pledges to crack down on tax violators, an analysis of government data shows. The IRS differed with the findings.

Syracuse University's Transactional Records Access Clearinghouse (search) said Monday that the IRS carried out 7,794 corporate audits from October 2003 through March 2004, down 26 percent from the pace set in fiscal 2003.

It said actual hours spent on examining corporate tax returns were running 30 percent below the 2003 rate.

IRS spokesman Terry Lemons questioned the findings, saying it was "wrong to make any kind of sweeping projections" based on the first six months of the year.

Many audits of large corporations are closed during the third and fourth quarters of the year, Lemons said, predicting the total audit rate will be up this year, "in stark contrast to what TRAC has."

The Syracuse researchers said their findings conflict "with a series of statements made by IRS Commissioner Mark W. Everson (search) asserting that the IRS had halted the long decline in the government's effort to police corporate tax noncompliance."

"There are clearly resource issues," said Susan B. Long, co-director of the clearinghouse, said of the money and manpower issues the IRS faces in increasing its auditing efforts.

The Bush administration this year sought $4.6 billion for IRS enforcement efforts in 2005, up from $4.2 billion in the 2004 budget year. The House and the Senate, still working on the legislation, both reduced the White House number, with the House approving $4.28 billion and the Senate $4.56 billion.

The midyear report dealt only with corporate audits. The report on 2003, issued last April, found the audit rate for all businesses was 2.1 per 1,000 businesses, down slightly from the previous year, while the audit rate for individuals was 6.5 audits for every 1,000 taxpayers, up 14 percent.

The report also said auditors had recommended an additional $4.3 billion in taxes in the first half of 2004, down 36 percent from the 2003 rate. Long said that at the audit stage, such recommendations can be challenged by corporations, "and the big guys do tend to contest."

Lemons contended that overall enforcement revenues the IRS collects would reach a record $40 billion this year.

The IRS Oversight Board (search) has estimated that Americans did not pay $311 billion in taxes owed last year. The government collected $1.8 trillion in revenue.

The Syracuse report also found the audit pace for smaller corporations, those with up to $10 million in assets, was down by 45 percent, while companies in the $10 million to $50 million category saw audits go up 40 percent.

The audit rate for larger corporations showed little change, but the time spent per audit fell, declining by one-third for corporations with assets of more than $250 million.

"The IRS managed to hold the line on the number of large corporate audits it completed only by sharply cutting the time the agents spent doing this challenging work," the report concluded.

Peter Sepp, spokesman for the National Taxpayers Union (search), said the increasing complexity of the tax code has discouraged auditing.

"The IRS itself faces a great deal of trouble increasing audits because the tax code is such a moving target," he said. Unless Congress simplifies the system, he said, "It's a useless game where the agency tries to audit businesses on the basis of a tax code that neither side understands."