The Transactional Records Access Clearinghouse (TRAC) is a data gathering, research and distribution organization operating in association with Syracuse University. Established in 1989, TRAC's purpose (in their own words) is,

...to provide the American people -- and institutions of oversight such as Congress, news organizations, public interest groups, businesses, scholars and lawyers -- with comprehensive information about federal staffing, spending, and the enforcement activities of the federal government.

To that end, TRAC has recently released a new report that analyzes the IRS audit rate of firms in various industrial sectors. The data in the report is draw from the last three years of IRS records and TRAC set a minimum value of $250 million in business assets for inclusion in the survey. TRAC's conclusions are quite interesting, especially regarding the apparently privileged place of the financial services industry.

A few highlights:

• On an annual basis, less than one in five of the large corporations falling into the IRS's financial services category were audited during FY 2002, 2003 and 2004 (affected industries).

• For the big communication, technology and media corporations, more than three out of five were audited (affected industries).

• When it came to the very large businesses in the retailing, food, pharmaceuticals and health care businesses, four out of five faced IRS audits (affected industries).

• But for those corporations engaged in either agriculture, mining, and construction (affected industries) or in heavy manufacturing and transportation (affected industries), the audit burden was even heavier, 100 percent.

As to financial services firms seemingly getting off light, TRAC had this to say:

The very low attention being given to the financial sector by the IRS is particularly surprising in light of the leading role this industry plays in the country's economy, including the level of income subject to federal corporate income taxes. A comparison of the economic activity carried out by these large corporations by most any measure shows that the financial sector is at the top or close to the top. For example, measured by the total dollars of receipts or by net income after expenses, the financial sector ranks number one (graph) or two (graph) against other major economic sectors, according to data from the IRS' own analyses.

Evaluating the IRS's apparent priorities is one thing, but sorting out exactly how the situation came to be is quite another. The TRAC report features comments from a variety of experts who attempt to handicap the situation. A common theme running throughout their analyses, however, is lack of resources and the resulting inability of the IRS to internally and structurally keep pace with changes in the economy. TRAC had this to say on the subject:

In setting up the LMSB (Large and Medium-Sized Businesses) Division, the data show the IRS decided to create five roughly similar-sized staffs for each of the five industry sectors. As a result, the sectors that have fewer companies in them are audited a lot more, and those with more companies get audited a lot less. In fact, the smallest sectors -- natural resources/construction and heavy manufacturing and transport -- are the ones with the highest audit rates. And the sector with the most corporations, financial services, has the lowest audit rates. (See Figure 5 and supporting table.)

While the IRS over the years has undertaken a number of special studies aimed at tracking the compliance levels of taxpayers with various incomes, it has not undertaken such research in relation to major corporate industry groups. Therefore, the possibility that the different audit rates are based on any sort of research showing that one of the sectors is more or less law abiding than the others can be ruled out.

Much, much more of interest to be found in the full report, which can be read here.

-- MDT