IRS misdirects audit resources, study finds

IRS audits of larger companies have dropped sharply over the past few years and are now at an all time low, according to a report by Transactional Records Access Clearinghouse (TRAC), a legislative and regulatory watchdog. 

Since 2005, the IRS has cut examination hours of corporations with at least $250 million in assets by a third. Audits for this segment have declined by 22 percent over the same time period, meaning 3 out of 4 of these firms were not audited by the IRS in a given year. Twenty years ago, 2 out of 3 of these companies would have been examined by the IRS.  

"The decline in audits of large corporations is surprising because (1) the highest levels of misreported tax dollars per auditor hour are found among the biggest business organizations and (2) since FY 2005 Congress has provided the IRS with the funds it needs to hire an increasing number of revenue agents to handle these very complex returns," TRAC stated in release. 

The IRS yields $9,354 per auditor hour when examining larger firms, versus $1.025 at smaller firms, the group found. 

Since 2007, audits of firms with more than $5 billion in assets have have declined by 17 percent. Meanwhile, the number of revenue agents available to work these types of cases grew by 6 percent since 2005. 

"The findings that the IRS appears to have misdirected its workforce is underlined by the fact that while audit hours aimed at the largest entities were cut sharply, the hours the agency chose to focus on other [smaller] corporations increased," TRAC stated. "For example, since 2005 the audit hours for small companies (less than $10 million in assets) jumped by 30 percent and the hours devoted to examining mid-sized companies (assets of $10 million to less than $250 million) increased by 13 percent."

TRAC based its findings on information extracted from the IRS under the Freedom of Information Act.