http://www.forbes.com/2004/04/12/cx_da_
04.12.04, 8:54 AM ET
NEW YORK -
Just three-quarters of 1% of business tax returns were audited by the Internal Revenue Service in the past year, down from 2.62% in 1997, according to a study released today by Syracuse University's Transactional Records Access Clearinghouse (TRAC). The largest companies--those with sales of $250 million or more--face a much larger risk of being audited--29%. But even for the biggest firms, audit rates are down from 34% in 2002 and from more than 50% in 1995.
The slide in enforcement comes at a time where corporate contributions to the federal treasury are at historic lows. Corporate income tax revenue fell to $132 billion in 2003, down 36% from $207 billion in 2000, according to the Center for Budget Priorities, a Washington, D.C.-based study group. Overall, corporate revenue represents just 1.2% of the Gross Domestic Product, the lowest level since 1983. Corporate revenue represented only 7.4% of all federal tax receipts in 2003, a low point since the 1930s, the Center For Budget Priorities says.
While any decline in enforcement would have caused just a tiny fraction of the overall decline in tax payments by corporations--sheltering of income overseas likely plays a much larger role--the situation can hardly help fill federal coffers. The IRS says it's eager to change course and indeed claims it already has.
But the TRAC study indicates otherwise. David Burnham, a director of the Syracuse University research organization, says: "President Bush and the IRS commissioner have been running around talking about how they are going after corporate scofflaws, but the IRS data suggest that the effort against corporate scofflaws is continuing to decline."
TRAC points to a 50% decline in the number of revenue officers at the IRS since 1995, when the number was at an all-time high. Meanwhile, the number of individual returns has climbed by 15.7 million. There are also more corporate returns--including millions of small businesses not subject to federal corporate income tax at all.
The upshot is that in 2003 there were just 12 civil negligence penalties aimed at corporations. In 1999, there were 62. In the same period, civil fraud penalties dropped from 247, to 170. In 2003, there were 538 tax prosecutions, about half as many as 10 years ago, the TRAC report says.
IRS officials don't dispute the numbers, but they draw their own conclusions. "Our basic message is, we've arrested the decline in enforcement that started in the '90s," IRS Commissioner Mark Everson told the Washington Post. "We will start to bring the numbers up rather dramatically. I think we have a responsible, rather aggressive program here." He pointed to computer-generated reviews, which to some extent have taken the place of individual audits.
IRS officials also pointed to individual audit rates. But TRAC says that while individual audits ticked slightly higher in the past year, mostly due to the computer-generated reviews, those audit rates are not increasing. Fewer than two out of every 1,000 individual returns are audited. The rate for high-income taxpayers is higher, but it is still just four per 1,000, or less than one half of 1%. Filers claiming small-business income on Schedule C face about a 1% chance of an audit.
The decline in audit rates comes at a time where questions about honesty in corporate suites remains near an all-time high with federal prosecutions of Enron (otc: ENRNQ - news - people ), WorldCom (otc: WCOEQ - news - people ), HealthSouth (otc: HLSH - news - people ) and Adelphia Communications (otc: ADELQ - news - people ), as well as individual criminal charges against former executives of Tyco International (nyse: TYC - news - people ) and Martha Stewart Living Omnimedia (nyse: MSO - news - people ), and rafts of civil charges against leading financial institutions like Citigroup (nyse: C - news - people ), J.P. Morgan Chase (nyse: JPM - news - people ) and . None of these cases involved tax dodges.
But the legal and political atmosphere would seem to counsel an increase in revenue agency diligence, not a decrease. On the other hand, the wider tax policy has been to shift the tax burden away from corporate taxes to payroll taxes. While the take from corporations has been decreasing payroll taxes represented about 40% of federal tax receipts in 2003, up from 10% in the 1950s, the Center For Budget Priorities indicates, citing IRS data. Of course, payroll taxes are withheld and taken off the top, so to the extent the government relies on them, it needs no auditors at all.
04.12.04, 8:54 AM ET
NEW YORK -
Just three-quarters of 1% of business tax returns were audited by the Internal Revenue Service in the past year, down from 2.62% in 1997, according to a study released today by Syracuse University's Transactional Records Access Clearinghouse (TRAC). The largest companies--those with sales of $250 million or more--face a much larger risk of being audited--29%. But even for the biggest firms, audit rates are down from 34% in 2002 and from more than 50% in 1995.
The slide in enforcement comes at a time where corporate contributions to the federal treasury are at historic lows. Corporate income tax revenue fell to $132 billion in 2003, down 36% from $207 billion in 2000, according to the Center for Budget Priorities, a Washington, D.C.-based study group. Overall, corporate revenue represents just 1.2% of the Gross Domestic Product, the lowest level since 1983. Corporate revenue represented only 7.4% of all federal tax receipts in 2003, a low point since the 1930s, the Center For Budget Priorities says.
While any decline in enforcement would have caused just a tiny fraction of the overall decline in tax payments by corporations--sheltering of income overseas likely plays a much larger role--the situation can hardly help fill federal coffers. The IRS says it's eager to change course and indeed claims it already has.
But the TRAC study indicates otherwise. David Burnham, a director of the Syracuse University research organization, says: "President Bush and the IRS commissioner have been running around talking about how they are going after corporate scofflaws, but the IRS data suggest that the effort against corporate scofflaws is continuing to decline."
TRAC points to a 50% decline in the number of revenue officers at the IRS since 1995, when the number was at an all-time high. Meanwhile, the number of individual returns has climbed by 15.7 million. There are also more corporate returns--including millions of small businesses not subject to federal corporate income tax at all.
The upshot is that in 2003 there were just 12 civil negligence penalties aimed at corporations. In 1999, there were 62. In the same period, civil fraud penalties dropped from 247, to 170. In 2003, there were 538 tax prosecutions, about half as many as 10 years ago, the TRAC report says.
IRS officials don't dispute the numbers, but they draw their own conclusions. "Our basic message is, we've arrested the decline in enforcement that started in the '90s," IRS Commissioner Mark Everson told the Washington Post. "We will start to bring the numbers up rather dramatically. I think we have a responsible, rather aggressive program here." He pointed to computer-generated reviews, which to some extent have taken the place of individual audits.
IRS officials also pointed to individual audit rates. But TRAC says that while individual audits ticked slightly higher in the past year, mostly due to the computer-generated reviews, those audit rates are not increasing. Fewer than two out of every 1,000 individual returns are audited. The rate for high-income taxpayers is higher, but it is still just four per 1,000, or less than one half of 1%. Filers claiming small-business income on Schedule C face about a 1% chance of an audit.
The decline in audit rates comes at a time where questions about honesty in corporate suites remains near an all-time high with federal prosecutions of Enron (otc: ENRNQ - news - people ), WorldCom (otc: WCOEQ - news - people ), HealthSouth (otc: HLSH - news - people ) and Adelphia Communications (otc: ADELQ - news - people ), as well as individual criminal charges against former executives of Tyco International (nyse: TYC - news - people ) and Martha Stewart Living Omnimedia (nyse: MSO - news - people ), and rafts of civil charges against leading financial institutions like Citigroup (nyse: C - news - people ), J.P. Morgan Chase (nyse: JPM - news - people ) and . None of these cases involved tax dodges.
But the legal and political atmosphere would seem to counsel an increase in revenue agency diligence, not a decrease. On the other hand, the wider tax policy has been to shift the tax burden away from corporate taxes to payroll taxes. While the take from corporations has been decreasing payroll taxes represented about 40% of federal tax receipts in 2003, up from 10% in the 1950s, the Center For Budget Priorities indicates, citing IRS data. Of course, payroll taxes are withheld and taken off the top, so to the extent the government relies on them, it needs no auditors at all.
