First the Securities and Exchange Commission got Congress to beef up its enforcement budget to stem the tide of corporate fraud. Now it looks like the Internal Revenue Service will be asking for similar consideration.
Back in 1998, Congress ordered the IRS to focus more on customer service and less on enforcement. The result? Audit numbers have dropped — dramatically. In fact, the IRS audited less than 1 percent of U.S. corporations last year, down from more than three times that number in 1997. And while the IRS audited a greater percentage of companies with assets of more than $10 million (12 percent), even that number fell by half during the same time period.
In a recent speech, IRS commissioner Mark Everson admitted that the agency had "backed away from enforcement." But the IRS maintains that the decreasing number of audits is also due to the time required to investigate complex tax shelters. That's one reason the agency has asked for $393 million for enforcement in its 2005 budget. The money, a 10 percent increase over 2004's budget, will be used to target high-income individuals, corporations, and offshore tax shelters in particular.
Until now, "the Clinton Administration and the Bush Administration have starved the agency," says David Burnham of Syracuse University's Transactional Records Access Clearinghouse, a nonpartisan research group. "They have not asked for enough money for the staffing needed to do this work." Enforcement staff at the IRS, in fact, has dropped 17 percent since 1998, and the work has gotten harder: the agency reports that more than one-third of new corporate cases opened in 2003 involved tax shelters.
Still, the General Accounting Office says even the new budget amount may not be enough. In its annual report on the IRS's budget request, the GAO notes that the agency requested more enforcement funding in the past five years, but spent some of that money in other areas. And a recent Treasury Department inspection found weaknesses in the agency's IT system.
The 2005 budget is still pending on Capitol Hill, but there is a larger issue at hand: have companies been taking advantage of the lax enforcement? "I think many companies are pushing harder not to pay taxes, because they see there's no enforcement," says Burnham. "I'm not saying that they're criminals, but everyone's being pushed very hard on the bottom line."
That pushing may soon invite the already enhanced SEC to step in, says Andrew Liazos, a partner with McDermott Will & Emery. "The IRS commissioner has been talking about sharing audit information with the SEC for purposes of enforcement action," he says. "Given the fact that they have to certify financial results, the last thing any CFO would want to do is [push too hard] in this area."