The Transactional Records Access Clearinghouse (TRAC) has filed a lawsuit against the IRS for its failure to provide information that it is required to provide to Susan Long, co-director of TRAC, under a court order. Information about the suit is available at this link.
As the release explains, Long is a professor in the Management Information and Decision Sciences department at Syracuse University and was the beneficiary of the court order in 1976, when she was a PhD student studying the IRS. She uses the detailed IRS enforcement and compliance statistics to compile reports that are made available to the public.
The IRS still collects the information and, according to Long, has acknowledged that the court order requires it to provide the information to Long. But it stopped providing Long with the information in mid-2004. The release on the TRAC website indicates that the IRS provided no explanation for its actions. Without explanation, this appears to be yet another in the long line of hurdles that this Administration has put in place to prevent easy access to government information that should be in the public domain.
It might be worth considering the type of information that TRAC provides through its analysis of IRS statistics. It bills itself as a resource for "comprehensive, independent and nonpartisan information about federal enforcement, staffing, and spending." See TRAC home page, here. On its TRAC-IRS site, for example, there is a report about the audit rates for large corporations with $250 million or more in assets. See this link. These large corporations account for almost all of the corporate assets in the country.
"The [large corporations] are an extremely small but powerful part of the economy. During a recent filing period, the 10,989 returns they sent to the agency represented only a fraction of all corporate filings -- 0.2% of the total. Despite their small numbers, however, these organizations controlled 90% of all corporate assets and received 87% of all the corporate income." Id.
Yet audit rates for these super-corporations are surprisingly variable depending on the particular industry, without (according to TRAC) any clear rationale supporting the variability. TRAC notes that financial service companies such as investment banks and insurers receive far less IRS scrutiny than other large corporations. Fewer than one in five financial firms faced audits in 2002-2004, whereas four of five food and pharmaceutical companies were subject to audits and 100% of big oil companies were subject to audits. Id. Financial services corporations are near the top in income and also at the top in terms of political contributions.
"[A]mong the most generous donors identified by the [Center for Responsive Politics] in the 2003/2004 election cycle were Goldman Sachs, Morgan Stanley, J.P. Morgan Chase & Co., Citigroup and Bank of America." Id.
Of even more concern is the IRS's apparent laxness when it comes to audits of the mega-banks--the top ten or so with billions in assets.
"Although the IRS does not publish audit rates for the giant corporations -- those with assets of $2.5 billion or more -- other available information indicates that audit rates for the finance sector corporations of this gigantic size are substantially lower than the rates for companies one-tenth this size in other industry sectors. " Id.
Note that this comes at a time when investment banks have been required to pay considerable sums as penalties for assisting in transactions that enabled fraudulent accounting, such as the Enron deals (see this SEC link about the Merrill Lynch settlement), or other securities fraud (see this link about Deutsche Bank's $270 million settlement). Banks have also been implicated in marketed tax shelter deals. See, e.g., this link and this link about the KPMG tax shelters involving Deutsche Bank and ABN Amro. At the same time, the IRS has recently proposed special accounting rules for securities dealers that would permit them to use their accounting income to determine their taxable income (the "mark-to-market" safe harbor set forth in proposed regulations promulgated under section 475). See Beale, Book-Tax Conformity and the Corporate Tax Shelter Debate (discussing the safe harbor and potential problems of "self-help" manipulation of income when relying on financial institution's financial statement values for determining taxable income). That context should lead to enhanced scrutiny of financial institutions, not a decline in audits.
Another statistic that suggests IRS is still not achieving its enforcement goals is the reduction of audits to "paper" audits rather than face-to-face audits that are more likely to explore subjects in depth.
"Considered as a whole, the returns of about one third of the largest corporations were audited in the FY 2002/2004 period. However, the rate of face-to-face audits for all corporations -- regardless of their size -- has been far lower, less than one out of a hundred. In FY 2004, for example, only 0.65 percent of all corporations were subject to a face-to-face audit." Trac Report, above.
This corporate tax report is just one example of the work that TRAC does. These reports provide an important, independent analysis of IRS compliance and enforcement statistics that should be available to those interested. Without the IRS data, the American public will be deprived of an extremely important window on the activities of a vital government agency.
The new IRS secrecy is particularly disturbing because it represents a reversal of prior policies. As the TRAC release notes, "The agency's current closed-door policy reverses information practices that have been generally followed for the last three decades." Id. According to TRAC, the IRS has formerly released both number of audit and audit hours, permitting a fine-tuned analysis of actual audit effort.
"With the availability of both measures a judgment was possible about the actual thoroughness of the audits. If, for example, the data show that the number of audits has gone up but total audits hours have declined, the actual impact of the agency's enforcement activities may be less than suggested by a simple increase in the audit counts. But IRS has refused to release this information. Without it, the significance of claims that corporate audits are up cannot begin to be judged." Id.
Government secrecy means that government actions are not accountable to the people. If statements by commissioners or agents cannot be verified by independent analysis, we may not be able to trust in the credibility of those statements. Yet trust is central to our voluntary compliance system. It behooves the IRS to be more forthcoming with information about its enforcement efforts. If it does not do so voluntarily, then it is important for organizations like TRAC to follow through in the courts as TRAC is doing in this instance.