As readers of this blog know, one of the worrisome developments over the last few decades, related to the rise of the distorted view of commercial markets under the pseudo-scientism of freshwater economics, is a version of "corporatism" that concedes enormous political power to large and wealthy corporations and their managers/owners. The worrisome brand of corporatism is a politico-social view under which large corporations' activities are presumed to be appropriate because they are businesses, and corporations' interventions in the political marketplace are as welcome as individual citizens' participation. Corporate wealth translates to political power and that leads to greater corporate wealth. It requires the government to refrain from actions that might be construed as governmental intervention in corporate decisionmaking--be it compensation of workers, compensation of executives, ability of unions to form freely, concentration and consolidation of industries. But it also assumes the kinds of government support for business that business demands, such as low taxes, relaxation of anti-trust enforcement, supportive legal structures that empower corporations over individual citizens and that further corporate aggrandizement (e.g., the proverbial "tort reform" calls by the medical-insurance establishment; the expansion and relaxation of rules for tax-free corporate mergers and consolidation during the Bush Administration; Treasury's "nullification" of statutory law by administrative fiat in allowing Wells Fargo to use Wachovia's losses in violation of section 382, etc.), and the socialization of losses/privatization of gains that we saw in the way that the financial crisis "bailout" was handled. (See prior ataxingmatter postings regarding the kinds of controls that we should have imposed at the moment of coming to the "too big to fail" financial institutions' aid.)
Corporatism is furthered by the Supreme Court's obscene decision in Citizens United that corporations are "persons" fully protected by the First Amendment free speech protections in respect of how they may spend lobbying money to support (or undercut) political actors. As a result, corporations can now use their huge size, their multinational presence, their enormous coffers to influence elections to ensure that politicians friendly to the corporate agenda will be elected and a corporate-friendly agenda will be enacted and enforced--regardless of the impact on standards of living and life generally for ordinary Americans. This threatens the very foundations of democratic capitalism.
The general support by various propaganda tanks for the corporatist agenda--in the guise of being for "freedom" and "liberty", which are mistakenly constantly evoked as involved when one talks about competitive businesses or the appropriate balance in politico-social-economic policies--has already helped to foster a prevailing mindset in America that anything that big business does must per se be good and that equity concerns should take a back seat to "economic growth" (as prescribed by the pseudo-science). This is like the worst nightmare scenario for development out of the efficient market hypothesis--an absurdly limited theory (based on a slew of assumptions that do not hold water in real life) is used to foster the idea that "the market is always right" and "the market can self-regulate". What we end up with is the financial crisis, where banks gambled on high stakes with socialization of their losses and privatization of their gains.
So in that context, how should we view the information about the IRS audits of large corporations ($250 million or more) versus small and mid-sized businesses? According to the TRAC analysis of IRS data between 2005 and 2009, the IRS has cut back on hours spent auditing large corporations by a third (and decreased the number of audits by 22%), while increasing audit hours of smaller businesses by just slightly less than a third. Average claimed underreporting by those smaller businesses is $1025, while that for large corporations is $9354. This compares to audit rates just twenty years ago of 2 out of 3 of such large corporations. See Despite Rising Deficits, IRS Audits of the Richest and Largest US Corporations Decline, TRAC. See also Kocieniewski, Tax Audits of Big Business Are Decliningm, Study Says, NY Times, Apr. 12, 2010.
It probably is not a bad idea to increase audits of small and medium businesses. On the con side, there is some additional cost to smaller businesses, but this is something that should be calculcated into the cost of doing business from the beginning, and a company that has retained appropriate records and done the proper groundwork for its returns should not have that much trouble dealing with an audit. On the pro side, audit numbers had gotten so low that the temptation to depend on the audit lottery may have increased.
But that logic applies even more strongly to the larger corporations that have come to treat their tax departments as just another place to improve their bottom line. Leaving them to "self-report" is practically inviting laxer tax compliance. Audits are especially important for those institutions--mostly the big corporations-- that have a multinational presence and considerable transfer-pricing and foreign tax credit arbitrage opportunities. The IRS defense that the IRS is "more efficient" seems implausible when three out of four corporations aren't even being reviewed, but to its credit the IRS does audit 100% of the corporations with assets over $20 billion and, in 2009, audited 50% of those with assets between $5 and $20 billion. See NY Times, id.
What may help the IRS be genuinely more efficient in selecting audit targets is the new policy of requiring a statement about uncertain tax positions. See Ann. 2010-9 and Prepared Remarks of IRS Comm'r Doug Shulman to the NYSBA Taxation Section Annual Meeting in NYC, Jan 26, 2010. The new policy would require a schedule to be filed with a return for a business taxpayer with assets in excess of $10 million that prepares financial statements reflecting reserves and has established a reserve for a position or has not established a reserve because the taxpayer expects to litigate or concludes that the IRS generally does not examine such positions. There is considerable practitioner concern about the degree to which that new policy will impose unreasonable disclosure burdens on corporations and how that policy will interact with existing disclosure and penalty rules.
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