IRS Audits More Small Businesses Than Large Corporates

Internal Revenue Service Commissioner Douglas Shulman testifies during a hearing before a House committee in Washington, D.C. last year. (Alex Wong/Getty Images)

NEW YORK—The U.S. Internal Revenue Service (IRS) has been more diligent in auditing the tax returns of small businesses, while reducing the time it spends auditing large corporations of $250 million or more in assets, a new report says.

According to the Transactional Records Access Clearinghouse (TRAC) at Syracuse University, the IRS has increased the amount of time it spends auditing the tax records of small U.S. businesses—with less than $10 million in assets—by approximately 30 percent over the past five years while decreasing big business audits by 33 percent.

“This has occurred even though IRS auditors uncover the largest dollar amounts of tax underreporting in the books of these large corporations,” according to the TRAC report.

The biggest of the large corporations—those with assets in excess of $5 billion—saw 17 percent fewer audits over the past two years, according to TRAC data, despite the fact that they paid less in taxes due to the global financial crisis.

Overall, IRS has spent less time and resources to enforce proper filing of tax returns than five years ago due to budget cuts and other factors.

The trend is disconcerting to U.S. small-business owners, hailed as the engine of the U.S. economy by President Barack Obama.

The report found it curious that while the U.S. federal deficit has ballooned in recent years, the government has spent less money enforcing proper tax returns which could recoup billions of dollars for the federal government.

“It should be acknowledged that the current deficit is so huge that tougher enforcement—by itself—will not solve this problem,” TRAC noted.

IRS Takes ‘Exception’

According to Frank Keith, IRS spokesman, “We do take significant exception to the conclusions that [TRAC has] drawn.”

The IRS says that it looks at all tax records of companies with $10 billion or more in assets, and certain cases can drag on for years—TRAC looks at hours spent in a given year, which could distort the true picture of the number of tax audits.

But some analysts say that the problem lies in the lack of skill of IRS auditors.

“The reasons for the problem may go deeper than mismanagement,” according to columnist Douglas McIntyre of 24/7 WallStreet. “Reviews of the financial statements of the largest companies need sophisticated accounting skills.”

“Those best qualified to do audits that may find tax payment shortfalls at big firms may be unwilling to work for the IRS due to its low pay.”