IRS Plans to Cut Back on Big Company Audits This Year

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By Frank Byrt

The IRS plans to spend 18 percent less time auditing businesses with assets of $10 million or more in its current fiscal year (FY) compared to two years ago, according to a report from Syracuse University's Transactional Records Access Clearinghouse (TRAC) issued April 9. 

The IRS also projects a 14 percent drop in the amount of available time for the specialized revenue agents the agency needs to conduct these audits in its FY 2013, which ends September 30, compared to what it was in FY 2011.

These projections, which don't take into account the potential impact of sequestration budget cuts in the months ahead, were outlined in a special agency report that TRAC was able to access due to a court order it won as a result of a suit it filed under the Freedom of Information Act.

The report measures IRS employee budgeted time in staff years and says there are 2,935 employee staff years in the IRS Large Business and International Division budget for FY 2013, versus 3,567 staff years in FY 2011, an 18 percent decline.

Additional TRAC findings include:

  • Tax audit rates for individual taxpayers fell by 5.3 percent in FY 2012, but because the number of returns filed had increased, the chances of an audit fell at an even faster pace, by 7 percent.
  • The declines were roughly parallel to the reductions in the IRS' overall staffing levels, which declined just under 5 percent in FY 2012. That decline continues a long-term trend, as over the last two decades, IRS staffing has been cut by 23 percent, while the number of individual tax returns it receives has grown by 27 percent.

"The IRS has tried to manage this squeeze by shifting away from in-depth, face-to-face audits and toward semi-automated correspondence audits", the report said. "The agency data show that while in-depth audits dropped by more than half in the last twenty years, correspondence audits nearly tripled. 

"This shift has enabled the IRS to limit the decline in the overall audit rate for individual taxpayers – from 10.7 audits per thousand returns in FY 1992 to 10.3 audits per thousand returns in FY 2012", the report said. "However, as just noted, the nature of an audit in these years has drastically changed."

The TRAC report said",The IRS has also leveraged computer technology to identify returns with unreported income through computerized matching with the information returns (1099s) it receives. As a result of this program, last year, three times as many returns received a computer unreported income notice than were subject to a tax audit – 4.5 million notices compared with 1.5 returns audited. 

"There is little question that tax enforcement today – with computer technology, semi-automated correspondence audits, and computer matching – is less costly than it was previously, and may well be adequate to deal with many simpler tax situations. It is less clear, however, that this computerized audit process can provide adequate coverage for wealthier individuals, many of whom have complicated business or investment income."

The IRS told AccountingWEB in a statement that the agency "is committed to running a balanced enforcement program that delivers appropriate levels of review to individual and corporate tax returns. Our audits of large corporate tax returns remain at high levels by historical standards. In fiscal 2012, we audited more than 10,700 returns of large corporations representing more than 17 percent of businesses in this category. The IRS will remain focused on this area in 2013 during a challenging budget period." 

"The IRS budget has been reduced by around $1 billion since 2010. That represents an almost 8 percent cut in our budget, even as we are aggressively pursuing and dedicating staff to priority issues such as identity theft. We have seen a reduction in the total number of full-time permanent IRS employees by almost 7,000 between the end of 2010 and 2012. And staffing for key enforcement occupations fell nearly 6 percent in the past year", the IRS said.

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