NYT: Agents Say Fast Audits Hurt IRS

New York Times
January 12, 2007
Agents Say Fast Audits Hurt I.R.S.
By DAVID CAY JOHNSTON

Top officials at the Internal Revenue Service are pushing agents to prematurely close audits of big companies with agreements to have them pay only a fraction of the additional taxes that could be collected, according to dozens of I.R.S. employees who say that the policy is costing the government billions of dollars a year.

''It's catch and release,'' said Douglas R. Johnson, an I.R.S. auditor in Colorado for three decades who said he grew so frustrated at how large corporations were allowed to pay far less than what he thought they owed that he transferred to the agency's small-business division.

With one exception, other working agents would talk about the issue only on condition they not be identified because they feared being fired. They said a policy intended to avoid delays in auditing corporations was being pushed so rigidly that it prevented them from pursuing numerous examples of questionable corporate tax deductions.

I.R.S. officials said the complaints were misguided. In an interview yesterday, Debbie Nolan, the I.R.S. executive in charge of auditing large and medium-size businesses, denied that audits were being closed over the objections of agents who had evidence that significant additional taxes were owed. Ms. Nolan said she had not heard any such complaints from auditors.

She noted that the amount of additional tax recommended for each hour auditors spend on large and medium-size companies more than doubled, to $5,195 in 2006 from $2,394 in 2002. And she said that internal reviews of corporate tax audits showed that their quality had improved.

''On the whole, we are moving in the right direction,'' she said. ''All of our indicators tell me that we are doing the right thing.''

But auditors said they were told to limit questioning only to those specific issues that the I.R.S. and the companies had agreed in advance to examine. When other questionable deductions emerged in the course of the audit, they said, additional taxes were ignored.

Rank-and-file auditors said that the sharp rise in tax dollars collected per hour of audit was not a sign of an improved auditing system but simply reflected the fact that abusive and illegal tax shelters had become so common that it was easy to find additional taxes due.

James Lynch, who retired 18 months ago after two decades auditing large corporations in the San Diego area, said that ''of course dollars per hour are up, because they put in smaller teams and you just grab what you can and get out.''

Of roughly 50 auditors interviewed, only one said he agreed with the new policy, arguing that it was better to audit more companies lightly than a few thoroughly as a strategy to improve compliance with the tax laws. But even this agent agreed with the others that large companies were being allowed to pay far less than they owed.

Mr. Johnson and some of these agents also said that I.R.S. management reports indicate that the quality of audits was improving only because the agency did not accurately record these actions.

One longtime auditor in New York said that when ordered not to pursue an issue ''you just write 'closed per case manager' to cover yourself.''

The auditor was asked why she did not file an official memo indicating that she disagreed and that she believed it was premature or improper to close the audit.

''Why would I do that?'' the auditor replied. ''So my manager will give me a bad performance review?'' Others gave similar explanations.

Ms. Nolan said agents who believed that an important issue should have been pursued should report the matter to higher-level supervisors or go to the inspector general's office. She said she was not aware of any such complaints.

But Coleen M. Kelley, president of the National Treasury Employees Union, said that Ms. Nolan should not be surprised that there was widespread unhappiness in the ranks about the quality of audits.

''We have been hearing complaints since they started the policies of short cycle time and limited-scope audits,'' Ms. Kelley said. ''These are policy decisions the I.R.S. has the right to make, whether they are right or wrong.''

She said any agent who went up the chain of command would have the complaint rejected out of hand.

''The agents are told that this is the scope of the audit and this is the time you have to deliver,'' Ms. Kelley said. ''Their professional judgment is being ignored.''

Ron McGinley said it was clear when the new policies went into effect in 2003, shortly before he retired as an I.R.S. economist in Southern California, that tax law enforcement was being weakened.

Mr. McGinley drew an analogy contrasting the I.R.S. approach to the way the government investigated John Gotti, the organized crime boss known as the Teflon Don.

''The way they limit audits,'' he said, ''is like the FBI going to the Teflon Don and saying, 'We'd like to look around, so what are you willing to let us see?' ''

Across the country, several presidents of local I.R.S. union chapters said there had been a steady flow of complaints from auditors, specialists and others who examine tax returns that they are not being allowed to do their jobs. They said some of the most highly trained and respected auditors had quit or plan to leave the moment they were eligible to retire.

''Agents in the large- and mid-sized business division complain to me constantly that what are supposed to be estimated dates to complete audits are hard deadlines,'' said Frank Heffler, president of the local in Manhattan, which has the largest contingent of I.R.S. corporate tax auditors.

The auditors said that many companies were cooperative, but others took advantage of the shortened time periods to delay turning over crucial documents until the end of the audit.

Two auditors told of corporations that when asked for a specific document, produced thousands of pages of ill-organized material in an apparent effort to waste their time and limit the issues that would be fully examined. Both auditors said they complained to supervisors, but to no avail.

Kay Rogers, the union president in Orange County, Calif., said that official I.R.S. policy calls upon auditors to ''do the right thing'' and pursue an audit beyond the deadline if the issues warrant it. But in practice, Ms. Rogers said, that does not happen.

The reason, she explained, is because supervisors receive cash bonuses, promotions and other benefits based on closing cases within the time allowed, not on the quality of audits or the dollars collected.

''When a person is rewarded monetarily for keeping to the cycle time,'' she said, they are going to close audits to get their reward.

Individual auditors in eight states, interviewed over the last seven months, told of case managers and higher supervisors ordering them to drop issues because it would prevent closing the audit by a predetermined date.

Many of these agents said they were troubled most when the sums involved pre-negotiated agreements with the I.R.S. on how much profit multinational companies could take overseas in tax havens and how much must be taken inside the United States.

''They are giving away the store,'' one agent in New Jersey said.

Agents told of being refused access to specialists, including economists, engineers and historians, because if these specialists developed an issue the audit would have to continue past the deadline.

''They are not letting us do our job, which is to enforce the law,'' said one I.R.S. auditor who handles the most complicated international cases.

Ms. Nolan, the official in charge of the division, said that such comments reflected the difficulty many I.R.S. veterans were having in adapting to new policies, not any flaws in those policies.

Mr. Lynch, the auditor who retired in California, and many others complained that the effect of the policy was to allow the Bush administration to achieve administratively a further easing of the corporate income tax burden far beyond what Congress has approved legislatively.

According to Melanie Fox, the only current auditor besides Mr. Johnson who agreed to be quoted by name, a large number of the most experienced corporate auditors plan to retire as quickly as they can because they feel their efforts are not respected.

''A lot of audit experience is about to walk out the door,'' Ms. Fox said. ''And then what will happen?''

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