Thursday, April 1, 2004

Tax audits aim more at individuals

IRS ducking complicated corporate cases, critics say

By Dan Horn
The Cincinnati Enquirer

America's largest corporations are less likely to face an Internal Revenue Service audit this year than at any time in the past decade.

Average taxpayers are not so fortunate.

Audits of individual tax returns have climbed 37 percent from 2000 to 2003, while audits of corporations have fallen 26 percent over the same four-year period. Corporations with assets of more than $10 million have seen a drop of nearly 23 percent.

IRS officials say several years of budget cuts and staff reductions have made it difficult for them to pursue as many of the complicated, time-consuming corporate audits that they once did.

Taxpayer groups and other critics say the trend suggests the IRS is no longer willing or able to go after the biggest tax cheats, even in an age of corporate accounting scandals.

With the tax-paying deadline just two weeks away, those groups say the agency's approach to audits has created a disparity that is not only unfair to average taxpayers, but is costly to the government because corporate audits tend to recover far more money than individual audits.

"That's where the money is," said Howard Levy, a Cincinnati tax lawyer and former IRS trial attorney. "It's harder work for the IRS, but that's where the bigger dollars are."

Despite the promise of large tax recoveries, IRS statistics show that the number of corporate audits has tumbled since 1995, when 2 percent of all corporations and 26 percent of companies with more than $10 million in assets were audited.

Last year, 0.87 percent of all corporations and 12 percent of the $10 million-plus companies were audited.

The individual audit rate remains lower at 0.65 percent - or about one of every 150 people - but the gap is closing fast. And that has raised concern among taxpayers who believe the focus should be on corporations.

"Too many unscrupulous people are taking advantage of the system. But as we all know, so are the corporations," said Bob McIntyre, director of the non-profit advocacy group Citizens for Tax Justice in Washington, D.C. "It's a fairness issue and a dollars and cents issue."

McIntyre said the agency's problem is a budget that does not allow it to do the job well. "They are hopelessly underfunded," he said.

The IRS has 19,600 agents and revenue officers today, nearly 7,000 less than in 1996. Most of the cuts came after the agency took a public beating in Congress in 1998 and was accused of being too hard on honest taxpayers.

The agency's staff was cut, and many of the employees who were left shifted their focus from enforcement to customer service. Audit rates for individuals and corporations fell sharply, and the amount of uncollected taxes rose to about $300 billion.

Top IRS officials say they expect that to change when they hire about 5,000 new agents this year. Soon, they say, corporate audit rates will begin to climb along with the individual rates.

"We are correcting our course," IRS Commissioner Mark Everson said in a speech two weeks ago in Washington. "We are strengthening IRS enforcement of the tax laws in a balanced, responsible fashion."

At a congressional hearing Tuesday, Everson said he expects the decline in corporate audits to end this year.

But some question whether budget cuts are the only reason the system is out of balance. They contend it's no coincidence that individual audit rates began to rise and corporate rates continued to fall after President Bush took office.

"We're seeing it as somewhat political," said Betsy Leondar-Wright, spokeswoman for United for a Fair Economy, a liberal advocacy group in Boston. "We're seeing a shift toward a heavier burden on individuals and a lighter burden on corporations.

"There's a certain, doing-favors-for-your-friends aspect to it."

Although they may see different reasons for the decline in corporate audits, taxpayer advocates and IRS officials agree the agency should be more aggressive overall and on corporate audits in particular.

They say audits are important not just for the money the IRS recovers from cheats, but also for the message they send everyone else.

"Fear of the audit is important," said Levy, the former IRS attorney. "It's like the police. They're not at every intersection, but the fear they might be keeps people from running red lights."

Without aggressive enforcement, he said, taxpayers and companies are more likely to test the boundaries of the law. Honest taxpayers lose faith in the system and the government loses billions of dollars in revenue.

"Everybody has got to pay their fair share or others will pay an unfair share," said U.S. Rep. Rob Portman, a Terrace Park Republican and member of the congressional committee that oversees the IRS. "The goal now needs to be bringing the audit rates up."

The stakes are highest with corporate audits because the amounts are larger than in individual cases and the resources companies devote to picking apart the tax code are greater.

Although most corporations are small - such as doctors' offices or law firms - their returns are more complicated than those filed by individual taxpayers.

"You're talking about super complexity," said Robert Brant, a Cincinnati tax attorney whose firm has thousands of individual and corporate clients. "You have a lot of extremely intelligent people trying to get money into the gray area.

"That means there is more of a burden on the government to be watching it."

But Brant said the government isn't watching as closely as it used to. "I see very, very few audits of the corporations," he said. "Very few."

He said the drop in corporate audits is not surprising because IRS agents need significant training before they're ready to handle one. The less-sophisticated individual audits are easier to do with fewer employees and training programs.

"Right now," he said, "I think the companies generally are not that fearful of the IRS."


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