IRS chief: Chance of tax audit not affected by a company’s industry, location or politics


IRS Acting Commissioner Daniel Werfel reviews his notes before testifying to the House Small Business Committee on July 17, 2013. (JAMES LAWLER DUGGAN/REUTERS)

The Internal Revenue Service’s top official says there is no reason to believe the improper auditing criteria used to evaluate political groups was ever used to screen businesses, nor does the agency target firms in industries and locations identified as particularly prone to tax cheating.

In May, IRS officials admitted to unfairly targeting conservative groups when selecting which tax-exemption applications to audit. During the ensuing uproar, Republicans immediately raised concerns that tax officials may have screened private companies using the same methods used to assess nonprofits.

IRS Acting Commissioner Daniel Werfel during a congressional hearing last week stopped short of saying undue targeting of private firms never happened, but explained that the nature of the information collected from businesses made the chances of politically based scrutiny “extremely low.”

“We don’t have any particular evidence at this time that the objective and analytical criteria that we put in place to review small businesses for potential increased scrutiny has any fundamental flaw that would lead one to the conclusion that there was unfair targeting,” said Werfel, who stepped into the role after Steven Miller resigned in May, told members of the House Small Business Committee.

Werfel explained that, while it was used inappropriately, most of the political information collected from nonprofits was applicable in determining whether they qualified for tax-exempt status, including their affiliation with political campaigns.

On the other hand, such information is not required to assess the tax status for private companies; therefore, he said, “it is rare or virtually nonexistent that the political activity” of a private business could be used to determine whether it should be audited.

A month before the conservative targeting scandal, the auditing process for small businesses had already garnered attention following a report by the National Taxpayer Advocate, an independent office within the IRS. The study found that small-business owners were particularly likely to skimp on their taxes, especially those in certain industries, such as real estate and construction, as well as those in several wealthy metropolitan areas across the country.

Consequently, researchers concluded that the agency would likely target small businesses this year as it combed for tax cheats.

Werfel pushed back against that notion, too. Responding to questions from Rep. Nydia Velázquez (D-N.Y.) about the study, he said neither a company’s location nor its industry were used to determine whether it warranted additional scrutiny.

“I do not believe or have specific knowledge that some of the risk factors that would be placed into our audit selection programs would include the type of criteria that you mentioned,” Werfel said.

During the hearing, Committee Chairman Sam Graves (R-Mo.) asked Werfel to explain how the agency determined which firms to audit.

Sticking to a familiar line concerning the agency’s enforcement methods, Werfel said tax returns are scored by a computer program that assesses compliance risks, and those considered most likely to have shorted the coffers are selected for audits. Others may be selected randomly as part of the agency’s National Research Program.

Graves responded by noting that individuals are responsible for writing and tweaking the computer program, as well as deciding how to use the risk scores it generates, which opens the door to wrongdoing.

Werfel said his team is taking steps to ensure that does not happen. Recently, the agency began a full review of the criteria by which all taxpayers are selected for additional audit scrutiny, which the commissioner said would provide “a more definitive answer” concerning any unfair targeting of individuals or private businesses, political or otherwise.

“We will do everything possible to ensure that small businesses are treated fairly and given the assistance they need to comply with our nation’s tax laws,” he said.

“We will do everything possible to ensure that small businesses are treated fairly and given the assistance they need to comply with our nation’s tax laws.”

Daniel Werfel

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he manages the Post's On Small Business blog.
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