IRS Eases Audits on Wealthy, Targets Small Business

Happy Tax Day, everyone! Make sure you do that last-minute math right: if you don't, the IRS will come get you... especially if you're a small businessman.

KELO posts a snippet from AP on the "historic collapse" in audits of big corporations -- i.e., those with $250M+ in assets. The article cites the Transactional Records Access Clearinghouse of Syracuse University, which offers much more detail on that and on the story KELO leaves at the bottom: to be able to assure Congress that the total number of corporate audits is increasing, the IRS is targeting the little guys. TRAC offers this chart:

Yup: while audits of the wealthiest corporations have declined 40% since FY 2005, audits of small corporations (those with assets under $5 million) have increased by 40%.

Now I could understand if the IRS had to respond to budget cuts and scale back on audits for everybody. But TRAC reports that between FY2005 and FY2007, Presdient Bush and Congress let the IRS hire 664 more agents (from 12,355 to 13,019, a 5.4% increase).

I could understand if the IRS decided to use its increased staff to order more audits for everyone across the board. But to execute this drastic disparity in audit policy, auditing the really rich 30%-40% less and the small businesses and self-employed (SBSE) 20%-40% more smells of wealthy influence on policy.

This shift in audit policy doesn't even make fiscal sense. TRAC reports that in FY2007, every hour spent auditing small businesses generates revenue of $682 to $840. Every hour spent auditing a top-tier corporation generally produces revenue of $7,498.

TRAC also finds that targeting smaller corporations wastes more agent time. Two-thirds of the hours spent auditing corporations in the Small Business/Self-Employed category results discovery of additional taxes owed; in other words, a third of the time spent auditing small companies gives small companies big headaches for nothing. When the IRS turns its attention to the biggest corporations, it turns up additional taxes owed 96% of the time.

Now the IRS is still auditing a higher percentage of the largest corporations than of the smallest. This "progressive" auditing scheme is justified by the much greater harm to the public welfare done by one mega-corporation failing to fulfill its social obligations. That the IRS appears to be scaling back its audits of the mega-rich at the expense of small business operators is an alarming example of the government's willingness to favor the wealthy over the rest of us.