IRS cuts back on audits of large companies

— -- The IRS audit rate for the nation's large corporations last year dropped to 26%, down from a high of 72% in 1990 and the lowest level in two decades, a new analysis of the tax agency's data found.

Additionally, the time the IRS spent on each large corporation also dropped by 20% over the last five years, according to the analysis by the Transactional Records Access Clearinghouse, a data research organization at Syracuse University.

The analysis also showed a 33% decrease since 2002 in the number of in-depth examinations the IRS conducts on large firms with assets of $250 million or more.

The declines occurred as the IRS increased audit rates of small and midsize corporations, raising the overall number of corporate audits. That strategy shift came with a potential financial cost, the analysis said, because audits of the smaller firms produce recommendations for additional taxes as low as $474 per audit hour, compared with $7,498 per audit hour for the largest companies.

"Moving the focus of corporate auditors away from the large corporations and toward the smaller ones … was counterproductive in financial terms," said the analysis, released on the eve of Tuesday's federal tax deadline.

IRS Deputy Commissioner Barry Shott, head of the large and midsize business division, acknowledged the tax agency conducted fewer audits of large firms. But he said focus on corporate tax compliance remains a top priority.

Securities and Exchange Commission filings show the IRS continues to audit many of the nation's largest firms. Aircraft maker Boeing, for instance, reported in February that it is appealing IRS audits for 2002 and 2003, as well as for 1998-2001.

IRS auditors virtually "live in" multibillion-dollar firms, said Timothy McCormally of the Tax Executives Institute, an organization of corporate tax officials.

Shott said audit-related collections from firms with assets of $10 million or more rose from $10.6 billion in federal fiscal year 2006 to $14.2 billion in 2007. Most of that revenue came from the largest firms, the IRS said. "We must be doing something right," Shott said.