Financial Services Companies More Likely to Escape IRS Scrutiny

Big banks, insurance companies and brokerage firms are far less likely to face an audit by the Internal Revenue Service than industrial companies, according to a new study.

The study, conducted by Syracuse University researchers and reported by the New York Times, said the IRS audits nearly all large companies in the manufacturing, transportation, mining, heavy construction and agriculture industries, but less than one in five financial services companies.

"The very low attention being given to the financial sector by the IRS is particularly surprising in light of the leading role this industry plays in the country's economy, including the level of income subject to federal corporate income taxes," the researchers wrote.

The study looked at audit rates from 2002 through 2004 and focused on corporations with $250 million or more in assets. Taken as a group, about one out of three were audited.

The IRS, however, said its own statistics masked the number of financial services firms that were actually audited. For example, if a bank or insurance company was audited from a small IRS office with no financial industry specialist, then it would be wrongly categorized as an audit in the manufacturing industry.

Deborah Nolan, the IRS commissioner for large- and medium-size businesses, told the New York Times that researchers "tried to oversimplify" the data and "came to the wrong conclusions."

"There are indeed flaws in the way the IRS gathers its data, but those flaws are nowhere near enough to explain why the audit rates for some industries are five times what the data show for the big banks, insurance companies and brokers,” said David Burnham, co-director of Syracuse's Transactional Records Access Clearinghouse, which analyzed the data ( “The disparity is just too great for that explanation to hold,” he told the newspaper.

Burnham called it “truly amazing” that manufacturers would get such heavy audit attention, considering that banks, insurers and brokerage firms have played a central role in creating and marketing abusive tax shelters, as well as intricate financial derivatives.

The data also show the IRS is conducting fewer face-to-face audits of taxpayers with business income from sole proprietorships, partnerships, S corporations and other business entities. The figure was 5.6 percent in 1997 and 1.7 percent last year.

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