The Internal Revenue Service audits far fewer of the biggest financial service companies — banks, brokerages, accountants, lenders and others — than it does other large corporations, according to an analysis of government data.
The IRS disputed the findings by Syracuse University’s Transactional Records Access Clearinghouse (TRAC) and emphasized that the agency audits returns with a high risk of tax evasion, regardless of the industry.
“The conclusions drawn by the TRAC analysis are not accurate,” said Deborah Nolan, IRS commissioner for the large and midsize business division.
Using information provided by the IRS, the researchers measured disparities in audit rates of corporations with $250 million or more in assets.
The report being released Monday found that about 15 percent of financial services companies were audited between 2002 and 2004. In contrast, virtually every corporation in agriculture, mining, construction, heavy machinery and transportation was audited.
“The very low attention being given to the financial sector by the IRS is particularly surprising in light of the leading role this industry plays in the country’s economy, including the level of income subject to federal corporate income taxes,” the researchers said.
Rangel calls agency ‘paper tiger’
The audit rates for other companies fell in the middle. More than three in five communications, technology and media companies were audited. The rate was about four in five for retail, food, pharmaceutical and health care businesses.
Rep. Charles Rangel of New York, the top Democrat on the House Ways and Means Committee, said the study shows that the IRS “is a paper tiger when it comes to auditing big corporations, particularly financial services.”
The IRS said its internally compiled statistics show that more financial services and heavy manufacturing companies are audited each year than are other businesses.
The tax agency said many more banks and other financial institutions are included in the category of largest companies because their deposits are viewed by the IRS as assets, even though those institutions view the deposits as liabilities owed to depositors. That makes small banks appear much bigger and drives down the audit rate in the sector.
Agency laments ‘apples-and-oranges’
“It is not the same as a manufacturing concern with the same amount of assets,” Nolan said. “The bank might be very low risk. So in that sense, it creates an apples and oranges comparison.”
Nearly 8,000 financial service companies are counted in the category of very large businesses, compared with about 600 in each of the categories where virtually 100 percent of the companies get audited.
Nolan also said the data categorizes the audits according to the specialization of the auditor conducting the examination, not the company’s business.
David Burnham, co-director of the data analysis center, said the study raises questions about IRS management and whether its audit coverage reflects the modern economy.
“If you have five groups and the number of organizations in each group are very different, why do you assign essentially the same number of auditors to each group? The result is that one group is not being audited very much,” Burnham said.
“There is no evidence that one group is more or less compliant.”
IRS: Big-business audits up
Nolan said the IRS studies its audit coverage each year to make sure the right number of agents are being sent to the right geographic areas and handling the right type of returns, focusing on areas with a high risk of tax evasion.
Overall, the IRS said it increased its audits of the country’s largest businesses to almost 40 percent in 2004, compared with 29 percent the previous year.
TRAC is a data gathering, research and distribution organization associated with Syracuse University.