For years, Congress has been steadily cutting the IRS’s budget while piling more work on the agency with huge legislative initiatives, such as the Affordable Care Act and the Tax Cuts and Jobs Act.
The result is that the audit rate is down to 0.5, (yes, one-half of one-percent) and the number of IRS auditors has been reduced 1/3 from 2010. The way the IRS has met this challenge is to use data analytics to better focus its audits on the returns that have the most potential for incremental tax revenue.
The IRS’s Large Business and International Division (LB&I) announced its new Large Corporate Compliance (LCC) program, which will use data analytics to determine the population of the largest and most complex corporate taxpayers.
The new LCC program employs automatic “pointing criteria” to guide the examiners in opening compliance cases. The pointing criteria applies the following factors:
- Gross assets
- Gross receipts
- Operating entities
- Total foreign assets
- Total related transactions
- Foreign tax
- Multiple industry status
Each factor is assigned a point value. A corporation becomes the subject of an LCC case if the case totals 15 or more points.
For example, for gross assets, points are determined as shown below, according to the Internal Revenue Manual for IRS personnel.
Gross Assets (12 points maximum)
Total assets are determined by combining the assets of the principal taxpayer with those of all effectively controlled domestic and foreign entities. The asset ranges are:
- 1 point up to $500 Million in assets
- 2 points for assets above $500 Million to $1 Billion asset range
- 3 points for assets above $1 Billion to $2 Billion asset range
- 4 points for assets above $2 Billion to $5 Billion asset range
- 5 points for assets above $5 Billion to $8 Billion asset range
- Add 1 point for each additional $3 billion in assets or fraction thereof in excess of $8 Billion in assets.
Looking at total foreign assets, the pointing criteria are:
- Up to $250 Million – 1 point
- $250 Million to $6 Billion – 2 points
- $6 Billion to $100 Billion – 3 points
- Add 1 point for each additional $100 Billion or fraction thereof.
As the IRS describes it, “LCC works in tandem with LB&I agents and examiners who apply their experience and expertise in undertaking compliance actions and determining compliance treatment streams of the biggest and most-complex corporate taxpayers. Each enhances the other.”
In other words, humans will continue to be involved in the selection process, even with the use of enhanced data analytics.
What are the long-term implications? The LCC program is likely to narrow the population of corporate taxpayers that are audited and also reduce the practice of continuous audit. IRS efforts will focus on corporate tax filings with the greatest potential to bring in tax revenues, a smaller but more effective targeting system.