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IRS casts wider net for small business audits

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in Hiring,Human Resources,Leaders & Managers,Management Training,Office Management,Records Retention

Good news for large corporations means bad news for small business owners: Instead of going after the big fish, the IRS is spending more resources on the small fry.

Alert: A new study by the Transactional Records Access Clearinghouse (TRAC) provides some sobering insights. TRAC is a nonpartisan research group affiliated with Syracuse University.

The TRAC study shows that the IRS reduced the number of hours agents spent auditing corporations with assets of $250 million or more by one-third since 2005 and increased the number of hours spent on audits of companies with assets of less than $10 million by 30%.

This trend in IRS priorities will not yield greater revenue gains. Data show that audits of larger corporations produce significantly higher returns per audit hour—$9,354 for audits of large corporations compared with $1,025 for small to midsize companies. Revenue per audit hour for large companies increased from $6,594 in the five-year period while revenue from audits of small to midsize companies actually decreased in 2009 from the $1,294 reported for 2005. IRS statistics show 94% of tax underreporting comes from large companies with only 6% coming from small companies.

The authors of the study, TRAC co-directors Susan Long and David Burnham, found the shift puzzling, given increasing national concerns about growing federal deficits, growing public distrust of big business and worries over white-collar crime.

Other statistics based on data provided to TRAC confirm the trend. The number of large corporate audits has fallen from 4,693 in 2005 to 3,675 in 2009. The audit rate of these companies has also fallen from 43% of all returns in 2005 to 25% in 2009. While the total number of returns filed by large corporations has increased from 11,027 to 14,683 since 2005, the number of large-company returns filed but not audited has decreased significantly, from 57% of returns not audited in 2005 to 75% of returns not audited in 2009.

Long said the trend could not be explained by a shortage of resources, because the IRS was hiring more staff during the period. “The IRS also was not responding to return growth, since where returns were growing fastest—larger corporations—they were cutting back the most, and where returns were declining—smaller corporations—they were expanding their audit hours,” Long said.

For example, for corporations handled by the Large & Mid-size Business (LMSB) Division, the audit hours for midsize firms increased by 13% in the past five years while the hours devoted to the large companies declined by 33%.

Audit data for Small Business/Self-Employed Division (SBSE) show a similar pattern. Hours devoted to examining smaller firms with assets of up to $5 million grew by 34% since fiscal year 2005, while the auditor hours spent on the top bracket of small companies (assets from $5 million to $10 million) shrank by 11% during this period.

Tip: Data for TRAC reports are obtained from the IRS, the Department of Justice and the U.S. Office of Personnel Management. The data are supplemented by interviews with current and former government officials, tax attorneys and data processing specialists.

— Adapted from AccountingWEB,Inc., www.accountingweb.com.

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