A report released by Transactional Records Access Clearinghouse (TRAC) at Syracuse University highlights a disturbing trend in Internal Revenue Service (IRS) audit rates of large corporations. Audit rates for corporations with $250 million or more in assets (large corporations) are at a historic low at 26 percent. Analyzing IRS data — portions of which had to be obtained through Freedom of Information Act (FOIA) requests — TRAC also found that the decline in audit rates has been accompanied by declines in audit quality.

The new data released by TRAC underscore a disturbing trend in tax enforcement. The number of hours per audit spent on the largest corporations has declined 20 percent, while the numbers of both field audits and revenue agent hours spent on such audits have declined by 30 percent. That audit rates and audit quality have fallen is especially troubling given that audits of large firms return an average of $7,498 per hour. This is significantly higher than the next-highest dollar-per-hour audit rate, which is $1,559 for firms with assets between $100 million and $250 million.

This decline in large-company audit rates, however, is masked in part by an increase in the overall audit rate. These trends have allowed the IRS to testify before Congress and the public that it is robustly enforcing the law and to offer increased overall audit rates as evidence, yet that data is not telling the whole story. The TRAC report indicates that:

[M]oving the focus of the corporate auditors away from the large corporations and towards the smaller ones has been quite effective when it came to increasing the overall number of these kinds of audits but actually was counter productive in financial terms.

Indeed, the TRAC report's findings are similar to a trend in individual audit quality that OMB Watch described in Bridging the Tax Gap: The Case for Increasing the IRS Budget in January.

[C]orrespondence audits — not face-to-face audits — have accounted for 74 percent of the recent increase in audits among high-income individuals. . . . This trend is problematic because correspondence audits are less effective than face-to-face audits, partly because this type of audit can only spot problems that are evident from information submitted by the taxpayer or from information reported by third parties (employers, banks, and other sources). . . . The IRS has decided, perhaps because of limited resources, to shift to less efficient and effective processes for auditing.

Both the House and the Senate have hearings scheduled the week of April 14 to explore the IRS budget request and enforcement policies — an opportunity for Congress to get more information on why this recent data shows a decrease in the IRS's most effective type of audit.