IRS should shed kid gloves for big business

April 14, 2010|By Jay Hancock

The Internal Revenue Service has plenty of resources to hassle Lori Proctor. So it claimed the Bryantown resident improperly deducted tuition for a master's degree in business administration on her 2005 income tax return.

But the IRS seems too busy to go after corporate tax cheats. The agency time spent auditing big business has plunged 33 percent since 2005, a "startling" decline, says a research group at Syracuse University.

It's the Willie Sutton strategy in reverse. In a weak economy, the agency goes after little folks who don't have much money, while slacking off on identifying corporate shenanigans that cost the Treasury billions.

"A key outcome is that more and more of the largest corporations are not being audited at all," Syracuse's Transactional Records Access Clearinghouse found in a report published Sunday.

Proctor is a registered nurse who wanted to reboot her skills with courses from the University of Phoenix. Medicine is as much about insurance and finance these days as about hemostats and chemistry. She wanted to learn the new language.

"My purpose was to speak amongst the physicians on their level when it came to health care regulatory policies and so forth," says Proctor, 48. "Physicians today — their time is money. They want to know that Nurse Lori has the credentials and knows what she's talking about."

But the agency denied her $14,787 deduction for costs to pursue an MBA. The degree that came with a specialty in health care management, the IRS argued with perfect bureaucratic logic, was unrelated to her job as a health care practitioner. So it

wasn't deductible as an unreimbursed employment expense.

Thus began years of letters, hearings and nuisance. In a plucky act of civil disobedience, Proctor continued to deduct MBA costs. The trial didn't occur until late 2008, after the Charles County nurse received her degree.

She thought it would be like traffic court — informal, with cases decided in minutes. Instead, she walked in with no lawyer and no legal expertise except the belief she was right, and she faced not one but two IRS lawyers, some IRS interns and the judge.

Hers was the only case. It took an hour to hear and a year for the judge to issue an opinion.

God knows what all this cost the IRS — for a dispute that amounted to a tax difference of less than $3,000.

Meanwhile, the agency is depriving America's biggest companies of similarly rapt, loving attention.

Not only are audit hours sharply down for corporations with at least $250 million in assets, according to TRAC. The chances of those companies being investigated also have plunged. Last fiscal year only one in four corporations of that size got audited, down from 43 percent in 2005 and from a high of 72 percent in 1990, the TRAC study said.

Corporate tax dodging is more sophisticated than ever. Professional cousins of the guys who designed credit-default swaps for AIG are setting up even more impenetrable tax loopholes. Corporate profits have hit new highs in recent years.

Yet the IRS lets most big business file taxes on the honor system.

The agency has several excuses. It disputes TRAC's use of 2005 as a comparison, saying results for that year look unusually high because they include work performed in multiyear audits. The IRS is training numerous examiners wise to corporate shenanigans, it says, and agents spend more time making sure corporate returns are accurate before the papers get filed.

The IRS also is auditing more efficiently, says spokesman Bruce I. Friedland, getting $9,740 in big-corporation tax "adjustments" per hour of examination in fiscal 2009 versus less than $7,000 in 2005.

Yeah, but that could simply mean companies are cheating more, retorts Susan B. Long, TRAC's co-director.

The agency sure didn't get $9,740 for each hour it spent on Lori Proctor, who works for HCR Manor Care. It didn't get anything. In December the tax judge ruled in her favor, striking a blow for midcareer training and getting Proctor coverage on tax blogs and in The Wall Street Journal.

A few months ago, the Supreme Court implied that corporations are considered people for the purposes of free speech. OK, now let's have corporations be treated like people for tax audits. Record federal deficits might be a little smaller.

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