Budget Cuts Limit IRS’s Time Spent on Large Business Auditsby
A new analysis released on March 16 shows the negative effect budget cuts have had on the time and manpower the IRS spends on auditing the tax returns of large corporations.
While the number of audits of big companies – those with $250 million or more in assets – fell by only 7 percent from fiscal year 2010 to fiscal year 2015, total revenue agent audit hours dropped by more than a third (34 percent), according to an examination of IRS data by Syracuse University’s Transactional Records Access Clearinghouse (TRAC).
For the giants of the business world – those with $20 billion or more in assets – revenue agent audit time dropped 47 percent from FY 2010 to FY 2015.
During that same period, additional taxes of large corporations uncovered by IRS agents that would have been lost to the government dropped by almost two-thirds (64 percent) – from $23.7 billion to $8.5 billion. For giant corporations, recommended additional taxes dropped by almost three-quarters (71 percent).
“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 states.
The data doesn’t paint a rosy picture so far for FY 2016 either. From October 2015 through the end of February 2016, the IRS’s Large Business and International (LB&I) division conducted 3,447 audits of large companies, down 22 percent from the 4,401 audits done during the same five months last fiscal year.
“Monthly internal management reports show the IRS had hoped to limit the further drop to just 2 percent when they set LB&I’s targets for FY 2016,” the analysis states. “IRS had also hoped during FY 2016 to shift more attention to the audits of foreign corporations and Subchapter S corporations with assets of $10 million or more because of its concerns over tax noncompliance by these firms. LB&I targets were to increase the number of audits in these two categories by 10 percent and 20 percent, respectively. However, so far, the numbers of audits are lagging below last year’s pace – down 58 percent for foreign corporations and down 20 percent for S corporations.”
The sharp decline in IRS business audits should come as no surprise to those who follow the goings-on in Congress regarding the IRS’s budget. Between 2010 and 2015, lawmakers cut the agency’s funding by more than $1.2 billion, according to a Treasury Inspector General for Tax Administration report last year.
These cutbacks have scaled down the number of IRS employees by 19 percent from 2010 to 2015, lessening both taxpayer service and enforcement, TRAC says. Even sharper cutbacks have occurred for the agency’s revenue agents. Between September 2010 and September 2015, the number of agents dropped 27 percent – from 14,749 to 10,742.
“These numbers show that when you have fewer employees doing compliance work, you end up leaving tax revenue on the table,” IRS Commissioner John Koskinen said during a speech at an American Institute of CPAs conference last November. “In cutting the IRS budget, the government is forgoing billions just to achieve budget savings of a few hundred million dollars, since we estimate that every $1 invested in the IRS produces $4 in revenue. Some estimates are even higher. No one in all my hearings and private meetings on Capitol Hill has ever disagreed with our assertion that if you give us $1, you will get at least $4 back. Nonetheless, the IRS’s budget continues to be cut.”
At the end of last year, Congress approved $290 million in additional funding for the IRS for FY 2016, which ends on Sept. 30. But that extra money is being used for taxpayer assistance, not enforcement and tax compliance activities.