The Internal Revenue Service is spending more time auditing smaller businesses instead of larger ones, according to a new report out today by the Transactional Records Access Clearinghouse (TRAC). Since 2005, the IRS has cut the time it spends auditing firms with assets of $250 million or more by 33%. Meanwhile, the IRS has increased the hours it spends on businesses with assets of $5 million or less by 34%. Yet the report also shows that auditing big firms is much more lucrative than examining the tax returns of smaller ones. Why is the IRS moving in this direction?
Bigger Firm Audits More Profitable
This chart shows how much more money the IRS makes spending its time looking at larger firms:
As the dollars-per-hour figure clearly shows, audits of the larger companies are far more profitable: the IRS earns a whopping $8,329 more per hour auditing firms with assets of $250 million or more than those smaller. This data makes it seem strange that the IRS would make such a shift. Its boss, the U.S. Treasury, collects far more money per hour from the bigger firms.
The Bigger They Are, The Harder the Audit
The report explains that this is due how much longer it takes auditors to examine the bigger firms than smaller ones. Since IRS employees are under pressure to meet quotas, they are steered away from spending more time on the bigger firms -- even if that time pays off better. That can be seen pretty clearly by the following two charts. This one shows that the number of firms audited in various size categories isn't that vastly different across most of the spectrum: