Focus of IRS tax audits is shifting to smaller firms

WASHINGTON - Tax returns from the nation's largest corporations are being audited about half as often as they were 20 years ago, while small- and mid-size businesses are receiving increased scrutiny, according to an IRS watchdog group.

The group, the Transactional Records Access Clearinghouse, described what it said was a "historic collapse" in audits for corporations holding assets of $250 million or more. About 26 percent of them were audited in the 2007 budget year, which ended last September, compared with 34 percent in 2006 and 43 percent in 2005.

The Internal Revenue Service did not dispute the numbers. But it disagreed with suggestions it was easing oversight of the biggest corporations.

Revenue from enforcement actions against large companies rose one-third in 2007 from the previous year, from $10.6 billion to $14.2 billion, said IRS Deputy Commissioner Barry Shott, who heads the Large and Mid-Size Business Division.

While the number of examinations has declined, "what we are doing is focusing our resources better on where the noncompliance is," Shott said in an interview.

Shott said the focus in recent years had been on tax shelters and "extraordinarily complicated" partnerships and S corporations for which shareholders, rather than the company, must report income or losses. Last year, the IRS examined 17,700 S corporations, compared with 14,000 the previous year, and 12,200 partnerships, compared with 9,800.

But the TRAC report concluded that the IRS also was concentrating on small and mid-size companies to boost audit numbers.

The new IRS commissioner, Douglas Shulman, said in a response that he intended to make "targeting noncompliance with our tax laws . . . a high priority."

According to IRS statistics, 15 percent, or 4,473, of companies with $10 million to $50 million in assets were examined in 2007. That compares with 12.3 percent, or 3,535 companies, that were audited in 2005.

In the same two years, the percentage of audits of corporations in the $50 million to $100 million range fell from 16.4 percent to 11.4 percent. For corporations in the $100 million to $250 million range, the percentage dropped from 17.5 percent to 12.1 percent.

Among the largest corporations above $250 million in assets, 3,424 were audited in 2007, down from a peak of 4,859 in 2005.

TRAC also questioned the financial benefits of the shift. The group said that last year, the government uncovered $682 in additional recommended taxes for every revenue agent hour spent auditing the smallest corporations, compared with $7,498 in additional taxes for audits of the largest corporations.