The IRS is spending increasingly less time auditing large companies. This is a good thing, right? But wait, the IRS is starting to launch audit campaigns. And some large taxpayers are still being audited even if they are not caught up in a campaign. What could be some of the consequences of these dynamics?
A recent report confirmed that IRS audits of large companies have fallen steeply in recent years. The report conducted by TRAC (Syracuse University's Transactional Records Access Clearinghouse) (available here) analyzed IRS audit history of large companies from 2010 through 2015. The study found the IRS spent 34 percent less time on average auditing companies with $250 million or more in assets (Big Corps) in 2015 than it did in 2010. Audits of the largest companies are declining even more sharply: the IRS spent 47 percent less time auditing companies with assets of $20 billion or more (Giant Corps). Further, the total number of large businesses audited by the IRS's LB&I (Large Business & International) Division in 2016 is 22 percent lower than it was last year during this time period.
Large taxpayers may take a deep breath once their continuous audit cycle becomes less continuous or stops altogether. This is understandable. But if you are a taxpayer that is audited, a number of important questions immediately come to mind:
- Will we have good rapport with a new IRS audit team? We spent years building our relationship with the previous IRS team—has all that very important work gone out the window? Will I have the time to build rapport with the new IRS team, or will they be under such time pressure to audit discrete issues that we will have little opportunity to interact with the team and shape the audit plan?
- Will the IRS team arrive with a preconceived idea of the "proper outcome"? Will information document requests (IDRs) be standardized? Will we be able to effectively negotiate the scope of IDRs? Or will the IRS team simply be fact-gatherers for a more centralized committee that makes decisions?
- Will we be able to meet with actual decision makers? Or will the decision makers be a committee in the background that we never truly get to engage in a meaningful discussion? Will centralized decision makers take into account the specifics of our situation, or will we be "lumped in" with other taxpayers?
- Will the IRS issue "fighting regulations" in an attempt to chill legitimate transactions? Will IRS audit teams attempt to apply these fighting regulations to transactions that predate the effective date of the new regulations? After all, doesn't the IRS often contend that the new regulations are not really a change and simply reflect existing law?
- Will fewer audits mean bigger adjustments? What institutional pressure is IRS Exam under to propose very large adjustments? What about penalties?
- Will IRS Appeals exercise true independence and concede improper adjustments? Or will IRS Appeals simply "split the baby" based on inflated numbers? Will this combination of factors result in more high-dollar tax cases going to court?
- Were continuous audits really a bad thing?
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