CBSN

Study: No Plaudits Over Audits

From face-to-face audits to criminal and civil penalties, tax law enforcement by the Internal Revenue Service last year continued its slide, according to new data that question recent Bush administration claims of a more vigilant IRS.

The data, compiled by Syracuse University's Transactional Records Access Clearinghouse, singled out deficiencies in business tax auditing and enforcement. But even on individual tax returns, the IRS's boasts of a clampdown may be inflated, university researchers say.

"The criminal enforcement of the real bad actors is also down, down, down. It really does not match the rhetoric of what the IRS commissioner, Mark Everson, has been saying or the rhetoric of the president," David Burnham, co-director of the clearinghouse, which tracks a variety of federal law enforcement statistics, told CBS Radio News.

IRS officials sharply disputed the assertion that administration officials have overstated efforts to put the tax cop back on the beat.

"Our basic message is, we've arrested the decline in enforcement that started in the '90s," said Everson. "We will start to bring the numbers up rather dramatically. I think we have a responsible, rather aggressive program here."

But the IRS did not dispute the data, which it supplies annually to the Syracuse clearinghouse. And those statistics indicate that tax scofflaws still have little to fear.

"There were 15-per-thousand corporate returns in 1999, there were seven-per-thousand in last year," said Burnham. "This is a major drop."

There was also a dramatic slide for corporations with assets of at least $250 million. Among those, audit rates slid to 28.98 percent last year from 33.68 percent in 2002. In 1995, more than half of such companies were audited.

From 1999 to 2003, the number of civil negligence penalties aimed at corporations fell to 12 from 62. Civil fraud penalties dropped to 170 last year from 247 in 1999. Tax prosecutions fell last year to 538, from 563 in 2002. Ten years ago, the IRS and Justice Department prosecuted more than 1,000 cases.

This is hardly the picture the IRS has been trying to paint as tax deadlines approach this week. As recently as Tuesday, Everson traveled to the Justice Department to proclaim that tax cheaters should beware, and he handed out a list of jailed offenders to prove it.

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.

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.

Burnham says the changes in auditing are the result of personnel cuts.

"The IRS has fewer and people working for it, we believe. Both the Clinton and Bush administrations and Congress have continued to under-fund the agency so it's unable to hire people," he 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 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.

"If you don't have traffic cops out there, individuals and businesses will stretch this. That's just human nature. It's not necessarily that these people are evil, but they stretch it," said Burnham.

And the federal government needs the money, he said.

"We have a war going on in Iraq, we have a Department of Homeland Security, and the budget deficits are getting bigger and bigger, so properly enforcing the tax laws against organizations that have the money is very, very important," he said.