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IRS audits fewer firms

But 14% more individual returns targeted in 2003

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WASHINGTON — The Internal Revenue Service audited fewer corporations, small businesses and partnerships last year but more individual taxpayers, according to a study of government data.

Syracuse University's Transactional Records Access Clearinghouse, in its analysis of IRS data, made available Sunday, concluded that the audit rate for businesses of all sizes slid slightly last year to 2.1 audits for every 1,000 businesses, down from 2.2 audits per 1,000 businesses the previous year.

At the same time, the IRS audited 14 percent more individual tax returns. The audit rate for individuals increased last year to 6.5 audits for every 1,000 taxpayers.

Official audit rates released by the IRS last month show a similar trend.

Researchers said the declining audits of businesses expose a flaw in the administration's tough stance against corporate wrongdoing.

"These and a number of other measures — documented by the agency's own data — indicate that the actual performance of the IRS differs in significant ways from some of the Bush administration claims when it comes to cracking down on corporate scofflaws," the report said.

Researchers point specifically to declining audits of the largest corporations and a type of business organization that passes income and taxes on to its shareholders or partners — an arrangement found to have been improperly used in some corporate accounting scandals.

IRS Commissioner Mark Everson said in an interview that the agency's broad attack on corporate tax evasion does not show up in the audit numbers.

"Am I satisfied with the numbers? No. I want to see them go up," he said. "I'm not surprised that that's lagging the other indicators. And while I think it's an important indicator, it doesn't tell the whole story."

Some advocates said the trend appears troubling.

"What struck me first was the commissioner earlier this week said that they'd increased enforcement and then I look at these numbers and say, 'What is he talking about?' " said David Keating, senior counselor for the National Taxpayers Union. "It really opens up a credibility gap."

Chellie Pingree, president of Common Cause, a government watchdog group, said the study suggests corporations are not paying their fair share.

"This is at a time when taxes have been drastically cut from the wealthiest in the country, and there are very heavy, legitimate demands on our government, between war in Iraq and homeland security," Pingree said.

In a detailed written response, the IRS said the study ignores the reasons for the decline in corporate audits and other enforcement actions taken against businesses.

The IRS said the decline can be attributed partly to the explosive growth in tax shelters, which make audits more intricate and time-consuming. Tax collectors worked more than 2,200 corporate tax shelter returns in 2003. Each takes an average 7 1/2 months longer than other corporate returns, and their number is growing.

The agency's work force has shrunk while its workload has grown, the IRS said.

The agency has been criticized for shifting money from tax enforcement to pay for other administrative costs. Everson said he has reversed that practice and expects the agency will have hired 250 more agents by autumn. If the agency gets the budget requested by the president, it will hire an additional 600 agents by the same time next year, he said.

Audits and other enforcement activities declined sharply in the late 1990s when Congress mandated that tax collectors pay more attention to customer service. Individual and corporate audits slid sharply.

The Syracuse University study concludes that audits of individuals increased last year. Much of the increase occurred in correspondence audits, not face-to-face meetings between revenue agents and taxpayers.

Researchers said the audits "by their very nature are comparatively superficial."

The IRS said correspondence audits are faster and cheaper than traditional audits. The average additional tax assessed in a correspondence audit was $3,338 last year.

Keating said taxpayers take any communication with the IRS seriously.

"When you get a letter inquiring about a discrepancy . . . you probably feel that's an audit," Keating said. The IRS also has an extensive program to match information on taxpayer returns with information submitted by employers, banks and financial institutions, he said.

"People shouldn't look at these numbers and say, 'I can put whatever I want on the tax return.'"