IRS officials have pointed to individual audit rates, saying taxpayers earning at least $100,000 were 52 percent more likely to be audited last year than they were two years ago. Revenue from tax collection actions reached $35.5 billion in 2003, a 9 percent increase.
But Syracuse researchers were unimpressed. The rise last year in individual audits was attributable to computer-generated letters automatically mailed after discrepancies are found between tax returns and income data, they said. The rate of face-to-face audits of individual taxpayers has not changed in the past three years, remaining at 1.6 audits for every 1,000 returns. High-income individuals did face a slightly higher chance at being audited: four returns per 1,000 were audited last year compared with 3.8 in 2002.
IRS chief Mark W. Everson predicts a turnaround in audits of companies.
(Stephen J. Carrera -- AP)
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But individuals identified by the administration as small-business owners or entrepreneurs -- those who file Schedule C forms to claim business income -- saw their audit rates dip to 11 returns per 1,000 in 2003 compared with 11.4 per 1,000 in 2002.
Everson and other IRS officials said those statistics draw an unfair, partial picture of IRS efforts. Computer-generated "correspondence audits" are effective, they say, bringing in an average of nearly $3,400 per exchange. That is less than the $4,597 brought in by a typical audit, or the $6,335 garnered by more rigorous tax examinations, but the cost is a fraction of that of face-to-face meetings, IRS officials said.
"To say they are not a valid tool, that's ridiculous," Everson said.
Enforcement action on the corporate side has been aimed at getting to the root of the problem by targeting tax scams, dubious tax shelters and their purveyors, Everson said. Audit rates are important, he said, but attacking systemic issues may be more effective than increasing enforcement one tax return at a time.
The commissioner said he was not surprised at the lag in corporate audit rates, given the growing sophistication of business tax dodges. Last year, IRS agents tackled more than 2,200 tax shelter returns, each of which took an average of 71/2 months to unravel. The number of corporate cases that fell into the IRS's "complex" category nearly doubled from 2002, IRS officials said.
But Everson said corporate audit rates would turn around this year. By the end of 2004, the IRS's division monitoring large and medium-sized businesses will have added 250 agents, and if Congress gives President Bush his budget request for 2005, the division will add more than 600 more. All together, the 2005 budget request should bring in 5,000 new auditors, tax collectors, criminal investigators and other workers. That would bring IRS enforcement employment to within 2,000 of the 1996 level, IRS officials said.
Those assertions, however, are in dispute. Late last month, the IRS's presidentially appointed oversight board said much of the requested budget increase would be swallowed by pay increases and other costs unconnected to tax collection. What would be left would actually leave the IRS unable to collect on a half-million delinquent tax accounts and unable to conduct 46,000 audits it had hoped for.
"In fact, FY 2005 is the fourth year in a row in which the Administration has called for IRS staff increases, while not covering pay raises or required expenses," the oversight board's report said.
The IRS lost 303 revenue agents last year and 343 more-highly-trained revenue officers, according to Syracuse figures. The 16,517 agents and officers remaining at the IRS at the end of 2003 were a fraction of the 24,217 employed in 1995, the agency's high-water mark, although the number of individual returns since then has risen by 15.7 million.
The studies by Syracuse and by the oversight board are just the two latest in a string of critical studies that have surfaced in recent weeks. Last month, the Treasury Department's inspector general for tax administration found that the IRS has routinely allowed even convicted tax criminals to evade paying the back taxes, interest and penalties that were part of their criminal sentences. Days later, Deputy Treasury Secretary Samuel W. Bodman told senators that an understaffed, overworked IRS walked away from more than 2 million delinquent tax accounts last year totaling nearly $16.5 billion.
This month, a General Accounting Office report concluded that roughly 60 percent of U.S.-based corporations paid no corporate income tax during the boom years between 1996 and 2000, precisely when tax payments should have risen with soaring profits.
Donald C. Alexander, an IRS commissioner in the Nixon and Ford administrations, said the IRS has made some progress on giving agents the tools to ferret out suspicious business tax returns and has stepped up audits on the rich. But, he added, enforcement remains "totally insufficient."
He said, "While there have been a lot of declarations and strong statements, I think there has been more noise than action."