TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

 

 

Filing Characteristics and Examination Results for Small Business Corporate Returns

 

 

 

June 11, 2010

 

Reference Number:  2010-30-067

 

 

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

 

Phone Number   |  202-622-6500

Email Address   |  inquiries@tigta.treas.gov

Web Site           |  http://www.tigta.gov

 

HIGHLIGHTS

 

Filing Characteristics and Examination Results for Small Business Corporate Returns

Highlights

Final Report Issued on June 11, 2010

Highlights of Reference Number:  2010-30-067 to the Internal Revenue Service Commissioner for the Small Business/Self-Employed Division.

IMPACT ON TAXPAYERS

The Internal Revenue Service (IRS) examines income tax returns to determine whether corporations and other taxpayers have voluntarily complied with tax laws and reported the proper amount of tax.  Despite continuing efforts to improve its examination process, Small Business/Self-Employed Division examiners closed almost 1 out of every 3 (32 percent) corporate return examinations in Fiscal Year 2009 without recommending any adjustments.  Examinations that result in no change to the tax reported can result in an inefficient use of limited examination resources and place an unnecessary burden on compliant taxpayers.

WHY TIGTA DID THE AUDIT

The overall objectives of this review were to analyze IRS data for Fiscal Years 2005 through 2009 and to identify trends in the filings and audits of conventional small business corporate returns.  This audit was part of our Fiscal Year 2010 Annual Audit Plan to highlight the important role a National Research Program study could have in understanding what the filings and audits of corporate returns mean for tax compliance.  If approved and implemented, the National Research Program study would evaluate the extent to which corporations and their shareholders comply with the tax laws.

WHAT TIGTA FOUND

Between January 2005 and December 2009, the number of corporate returns processed annually by the IRS fell 7 percent, from almost 2.2 million to approximately 2 million.  Despite the decrease in the number of filings, the amount of income taxes reported by corporate returns is significant.  In Processing Year 2009, IRS records show that approximately $11 billion in corporate income taxes was reported from about 542,000 corporate returns. 

One factor that may be contributing to the modest decline in corporate return filings is the popularity of organizing a business as a partnership or S corporation, which allows the partners and shareholders of these entities to avoid double taxation on business profits.  According to the IRS, the number of partnership and S corporation filings is expected to increase by 49 percent and 39 percent, respectively, between 2006 and 2014.

IRS officials told us they are not permitted to set a target for the examination no-change rate.  However, in 2003, the IRS reported to Congress that a high no-change rate means a significant amount of resources are being devoted to unproductive examinations, and compliant corporations are being unnecessarily burdened by examinations.

The results of the National Research Program study are expected to improve the IRS examination process by helping ensure the taxes on hundreds of billions of dollars of income earned by United States corporations are reported and paid properly.  The statistical validity and comprehensiveness of the study is designed to provide the IRS with updated compliance data needed for deciding which corporate returns should be examined and how best to focus examination resources on the most significant areas of noncompliance.

WHAT TIGTA RECOMMENDED

Although TIGTA did not make any recommendations in this report, IRS officials were provided an opportunity to review the draft report.  IRS management did not provide any comments on the draft report.   

 

June 11, 2010

 

 

MEMORANDUM FOR COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION

 

FROM:                            Michael R. Phillips /s/ Michael R. Phillips

                                         Deputy Inspector General for Audit

 

SUBJECT:                    Final Audit Report – Filing Characteristics and Examination Results for Small Business Corporate Returns (Audit # 200930041)

 

This report presents the results of our review to analyze Internal Revenue Service (IRS) data for Fiscal Years 2005 through 2009 and to identify trends in the filings and audits of conventional[1] small business[2] corporate returns.  This review was included in our Fiscal Year 2010 Annual Audit Plan to highlight the important role a National Research Program study could have in understanding what the filings and audits of corporate returns mean for tax compliance.  This review addresses the major management challenge of Tax Compliance Initiatives.

Although we made no recommendations in this report, we did provide IRS officials an opportunity to review and provide comments on a draft of this report.  IRS management did not provide us with any comments on the draft report.

Copies of this report are also being sent to the IRS managers affected by the report conclusions.  Please contact me at (202) 622-6510 if you have questions or Margaret E. Begg, Assistant Inspector General for Audit (Compliance and Enforcement Operations), at (202) 622-8510.

 

 

Table of Contents

 

Background

Results of Review

Corporate Return Filings Have Decreased Modestly but Remain a Substantial Source of Income Tax Revenue

National Research Program Results Are Critical to Understanding How Well Corporations Are Complying With the Tax Laws

Appendices

Appendix I – Detailed Objectives, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Detailed Figures of Statistical Information

Appendix V – Glossary of Terms

 

 

Abbreviations

 

AIMS

Audit Information Management System

BRTF

Business Return Transaction File

DIF

Discriminant Index Function

FY

Fiscal Year

IRS

Internal Revenue Service

NRP

National Research Program

PY

Processing Year

SB/SE

Small Business/Self-Employed

U.S.

United States

 

 

Background

 

The corporate income tax is an important source of Federal income taxes.  The common method used by United States (U.S.) corporations to report their income is the U.S. Corporation Income Tax Return (Form 1120).  Due to special situations or because the Internal Revenue Service (IRS) needs specific information to administer the tax law, some corporations file unique versions of Form 1120.  For example, the U.S. Income Tax Return for an S Corporation (Form 1120S)[3] is filed by qualifying small corporations that elect to be treated as flowthrough entities that pass their profits, credits, and other items through to their shareholders, who then pay the taxes on their individual returns.  Another example is the Form 1120 consolidated[4] that is filed by affiliated corporations that want to combine their financial data in one return for tax purposes.

We conducted the review to highlight the important role a NRP study could have in understanding what the filings and audits of corporate returns mean for tax compliance.

This review was included in our Fiscal Year (FY) 2010 Annual Audit Plan to highlight the important role a National Research Program[5] (NRP) study could have in understanding what the filings and audits of corporate returns mean for tax compliance.  If approved and implemented, the NRP study would evaluate the extent to which corporations and their shareholders comply with the tax laws.  The IRS anticipates the study will involve the identification, selection, and examination of approximately 22,000 tax returns processed by the IRS for Tax Year 2009 filed by corporations with $50 million or less in total assets.  Like NRP studies covering other types of tax returns, statistically valid sampling techniques will be used so the results from the examinations can reliably measure the level of compliance in the universe of corporations filing Form 1120 series tax returns reporting $50 million or less in total assets.

From a compliance perspective, this effort and other NRP studies are critically important for several reasons.  One of the most important reasons is that the study results are expected to improve the IRS examination process by helping ensure the taxes on hundreds of billions of dollars of income earned by U.S. corporations are reported and paid properly.  The statistical validity and comprehensiveness of the NRP study is designed to provide the IRS with updated compliance data needed for deciding which corporate returns should be examined and how best to focus examination resources on the most significant areas of noncompliance.

During the review, we relied on data from IRS databases.  Although we did not audit the IRS databases, we did perform routine tests on the data and noted instances where data elements were duplicated from the databases.  This situation occurred when a taxpayer filed multiple returns.  Where information was missing or records were unable to be matched, we noted this by using the term “Unknown” in the figures presented throughout the report.

This review was performed at the IRS Small Business/Self-Employed (SB/SE) Division National Headquarters in New Carrollton, Maryland, during the period September 2009 through January 2010.  Except for not auditing IRS databases to validate the accuracy and reliability of the information, we conducted this performance audit in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives.  We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.  Detailed information on our audit objectives, scope, and methodology is presented in Appendix I.  Major contributors to the report are listed in Appendix II.

 

 

Results of Review

 

Organizing a business as a corporation has long provided a way of limiting owners’ (shareholders) personal liability for business debts and court judgments because it is considered an independent entity, separate from the shareholders who own, control, and/or manage the business.  As a separate entity, the corporation itself realizes a profit or loss, pays taxes to the IRS, and may distribute profits as dividends to its shareholders.  Dividends that are distributed create a potential for double taxation since the dividends are taxed first as profits of the corporation and then at the shareholder level when received.

Between January 2005 and December 2009, the number of corporate returns processed annually by the IRS fell 7 percent, from almost 2.2 million to approximately 2 million.  One factor that may be contributing to the modest decline in corporate return filings is the popularity of organizing a business as a partnership or S corporation, which allows these entities, as well as their partners and shareholders, to avoid double taxation on business profits.  According to the IRS, the number of partnership and S corporation filings are expected to increase by 49 percent and 39 percent, respectively, between 2006 and 2014.

Corporate Return Filings Have Decreased Modestly but Remain a Substantial Source of Income Tax Revenue

While there was an overall decrease in corporate return filings between Processing Years (PY) 2005 and 2009, the decrease was not uniform across all segments of the corporate return filing population.  In fact, corporations with assets of $5 million to less than $10 million filed 5 percent more returns in PY 2009 than they did in PY 2005.  There was also significant growth (16 percent) from PYs 2005 to 2009 in the filings of corporate returns with no balance sheet.  However, the increases in these two segments of corporate returns were not enough to offset the decrease in the filing of corporate returns in three other segments, as shown in Figure 1.

Figure 1:  Corporate Return Filings for PYs 2005 and 2009, by Asset Class

 

Corporate Return Filings

Asset Class

PY 2005

PY 2009

Percentage Change

No Balance Sheet

385,637

448,992

16 %

Less than $250,000

1,227,169

1,026,452

-16 %

$250,000 to less than $1 million

373,487

348,261

-7 %

$1 million to less than $5 million

174,892

173,570

-1 %

$5 million to less than $10 million

28,187

29,630

5 %

Total

2,189,372

2,026,905

-7 %

Source: Our analysis of Business Return Transaction File (BRTF) data for PYs 2005 and 2009.

Despite the overall 7 percent decrease in filings, the amount of income taxes reported in corporate returns is significant when compared to individual income tax returns.  In PY 2009, IRS records show that more than $1.1 trillion in taxes was reported from about 104 million individual income tax returns.[6]  Comparatively, approximately $11 billion in corporate income taxes was reported from only about 542,000 corporate returns.[7]  On a tax return basis, this equates to individuals reporting and paying an average of $10,602 in income taxes while corporations reported and paid an average of $19,813.

In PY 2009, among the top 5 industries with the highest percentage of corporate return filers were the professional services (12 percent), real estate industry (12 percent), retail trade (11 percent), construction (11 percent), and wholesale trade (7 percent).  That same year, the professional services and real estate industry sectors reported holding $173 billion in assets and distributing $96 billion of income in the form of salaries and wages ($63 billion) and other compensation ($33 billion) to officers.

While seemingly a large amount, the $173 billion in assets held by corporations in the professional services and real estate industries represented only 21 percent of the total assets reported on all small corporate returns[8] processed in 2009.  Moreover, total income fell 2 percent from amounts reported on corporate returns processed in PY 2005.  In addition, the corporate returns processed in 2009 showed that shareholders borrowed 139 percent more from corporations than they did in 2006.  The increase in borrowing and decrease in total income may be reflective of the recent economic downturn.

With businesses continuing to expand operations across international boundaries and engaging in cross-border transactions, it is not surprising that there was a 12 percent growth in the number of corporate returns with an attached Form 5471[9] and/or Form 5472[10] from PYs 2005 to 2008.  In general, these forms are information documents that corporations, as well as other businesses, attach to their income tax returns to report results of foreign operations and amounts from certain transactions with foreign-related parties.

With U.S. businesses expanding to overseas markets and more foreign entities doing business in the U.S., the IRS increasingly needs and uses the information provided on these forms as a road map to assist in identifying international transactions for examination and for combating tax avoidance schemes that are developing in the international arena.  The forms, among other things, disclose international inter-company transactions.  This information can be used as a starting point for determining whether these related-party transactions for goods, services, and other property were fairly priced.  Both the IRS and Congress are concerned with the loss of taxes due to questionable transfer pricing arrangements between related parties.

National Research Program Results Are Critical to Understanding How Well Corporations Are Complying With the Tax Laws

The IRS last collected data on how well corporations complied with the tax law in 1988 under its Taxpayer Compliance Measurement Program.  As we reported in 2004,[11] these data are out of date and, accordingly, less reliable for identifying, selecting, and examining the corporate returns that pose the greatest compliance risk.  As a result, the IRS increasingly selects corporate returns for audit under special projects to address specific types of noncompliance such as abusive tax schemes and transactions.

Due in part to the absence of current compliance data, IRS executives have additionally invested considerable effort in various initiatives aimed at better focusing examinations.  Although we did not attempt to measure the impact of these various projects and initiatives on the examination process, IRS statistics show the number of corporate examinations are increasing and taking less time to complete while generating more recommended additional taxes.  Despite these positive trends, the number of examinations closed with no adjustment remains high, but could be reduced if NRP data were available to assist in the return identification, selection, and examination processes.

The number of corporate returns examined[12] in the SB/SE Division is not likely to decrease in the near term

The SB/SE Division closed 34 percent more corporate examinations in FY 2009 than it did in FY 2005.  As Figure 2 shows, the increase occurred in every size of corporation the Division serves, and at least two factors suggest the number of small corporate returns examined will not likely decrease in the near term.

Figure 2:  SB/SE Division’s Examinations of Corporate Returns
in FYs 2005 and 2009, by Asset Class

 

Corporate Returns Examined

Asset Class

FY 2005

FY 2009

Percentage Change

No Balance Sheet

1,073

1,571

46 %

Less than $250,000

4,757

5,348

12 %

$250,000 to less than $1 million

2,507

3,693

47 %

$1 million to less than $5 million

1,483

2,590

75 %

$5 million to less than $10 million

517

696

35 %

Total

10,337

13,898

34 %

Source:  Our analysis of Audit Information Management System (AIMS) data for corporate return
examinations completed in FYs 2005 and 2009.

The first factor is the IRS’ strategic goal of enhancing enforcement of the tax laws, which involves maintaining examination coverage across all segments of the taxpayer population and in the areas presenting the greatest compliance risk.  Despite the modest decrease expected in the number of small corporate return filings in the near term, there may not be a corresponding decrease in the number of small corporate returns examined if coverage is to be maintained over this segment of the taxpayer population. 

In terms of areas presenting the greatest compliance risk, the IRS has identified abusive tax schemes as a priority area for increased examination activity.  According to the IRS Strategic Plan 2009 - 2013,[13] the focus on abusive tax schemes and transactions will continue to be a priority and, accordingly, may contribute to increases in the number of corporate returns examined.  For example, in Calendar Year 2000, the IRS published guidance on 10 transactions that could trigger an examination because they purportedly abuse the tax law, represent a significant loss of tax revenue, and undermine the public’s confidence in the tax system.  By Calendar Year 2010, there were 34 such transactions of which at least 17 (50 percent) directly involved corporations.

The second factor that will likely have an impact on the number of corporate return examinations is the hiring of new revenue agents.  After receiving budget increases in FYs 2009 and 2010, the IRS is in the midst of its largest hiring initiative in recent years, resulting in the hiring of scores of new revenue agents, as well as other enforcement personnel.  Once hired, in addition to receiving individual taxation training, revenue agents attend a multi-week training class devoted solely to corporate and flowthrough entity taxation and subsequently participate in approximately 3 months of on-the-job training where they examine corporate returns under the supervision of an on-the-job coach. 

Corporate return examinations are taking less time, generating more recommended additional taxes, and resulting in more agreements

IRS executives continue to invest considerable effort in developing and implementing work process changes aimed at reducing the length of examinations and better focusing examinations on areas of high noncompliance.  Although we did not attempt to measure the impact the efforts have had on examination results, IRS statistics show that the length of corporate return audits fell a modest 4 percent in FY 2009 when compared to FY 2005 (see Appendix IV, Figure 13).  However, as shown in Figure 3, the additional taxes recommended by examiners on an hourly basis increased by 28 percent from FY 2005 to FY 2009 and increased by 59 percent on a per return basis during the same period.

Figure 3:  Additional Recommended Taxes in SB/SE Division’s
Corporate Return Examinations on an Hourly and Return Basis in
FYs 2005 and 2009, by Asset Class

 

Hourly Basis

Return Basis

Asset Class

FY 2005

FY 2009

Percentage Change

FY 2005

FY 2009

Percentage Change

No Balance Sheet

$1,189

$2,015

69 %

$37,660

$65,334

73 %

Less than $250,000

$338

$559

65 %

$7,579

$18,690

147 %

$250,000 to less than $1 million

$531

$548

3 %

$14,536

$20,377

40 %

$1 million to less than $5 million

$576

$607

5 %

$24,239

$24,580

1 %

$5 million to less than
$10 million

$784

$810

3 %

$41,603

$34,246

-18 %

Overall Averages for
Asset Classes

$569

$729

28 %

$16,481

$26,287

59 %

Source:  Our analysis of AIMS data for corporate return examinations completed in FYs 2005 and 2009.

Besides the favorable patterns in the length of and additional taxes from corporate return examinations, more corporations are agreeing to the additional taxes recommended during examinations.  This acknowledgement is important from a revenue collection perspective because, as we have previously reported,[14] the additional taxes owed from agreed examinations are more likely to be collected than those that are either assessed by default or disputed and appealed through the IRS administrative processes or the courts.

The number of corporate audits that result in no adjustment is a concern

Despite continuing efforts to improve its examination process, SB/SE Division examiners closed almost 1 out of every 3 (32 percent) corporate return examinations in FY 2009 without recommending an adjustment (no change).  The no-change rate was substantially higher among the larger corporate returns examined and remained about the same as in FY 2005.  As Figure 4 shows, examiners no changed 44 percent and 42 percent of their examinations in FYs 2005 and 2009, respectively, when assets of $5 million to less than $10 million were reported on a corporate return.  When assets of $1 million to less than $5 million were reported, 44 percent and 36 percent of examinations resulted in no change in FYs 2005 and 2009, respectively.

 

Figure 4:  FYs 2005 and 2009 Corporate Return No-Change Rates,
by Asset Class

 

Corporate Returns No-Change Rates

Asset Class

FY 2005

FY 2009

Percentage Change

No Balance Sheet

25 %

19 %

-24 %

Less than $250,000

36 %

31 %

-14 %

$250,000 to less than $1 million

45 %

34 %

-24 %

$1 million to less than $5 million

44 %

36 %

-18 %

$5 million to less than $10 million

44 %

42 %

-5 %

Overall No-Change Rates for
Asset Classes

39 %

32 %

-18 %

Source: Our analysis of AIMS data for corporate return examinations completed in FYs 2005 and 2009.

Although IRS officials told us they are not permitted to set a target for the no-change rate, they were not satisfied with the current results.  Officials also noted that the additional recommended taxes from corporate return examinations may be higher than reflected in IRS statistics because the IRS reports examination results as no change when the adjustments do not affect the corporate return, even though the adjustments may change a shareholder’s tax return.  Nevertheless, in 2003 the IRS reported to Congress that a high no-change rate means a significant amount of resources are being devoted to unproductive examinations, and compliant corporations are being unnecessarily burdened by examinations.

We do not know what the no-change rate should be in examinations of corporate returns.  However, no change to almost 1 out of every 3 corporate returns examined suggests there may be improvement opportunities in deciding which returns to examine and/or in how well returns are examined once selected.  If implemented, the NRP study for corporate returns that is under consideration should provide the IRS with the current compliance data needed to better identify and select problem returns for examination.  Consequently, we plan to focus the next phase of our work in this area on evaluating how well returns are examined.

Besides providing updated data for deciding which corporate returns should be examined, the NRP study data are expected to be used for other important tax administration activities such as identifying areas in which filing instructions could be improved, suggesting legislative changes, and refining estimates of the tax gap.  Because of its benefits, numerous stakeholders support the NRP.  In addition to the Treasury Inspector General for Tax Administration, the Government Accountability Office has discussed and reiterated the need for such compliance data in several reports and Congressional testimony.  The previous IRS Commissioner has indicated the NRP is critical for measuring the level and sources of noncompliance.  In its FY 2005 annual report, the IRS Oversight Board also expressed support for a NRP assessment of corporate taxpayers.

 

Appendix I

 

Detailed Objectives, Scope, and Methodology

 

The overall objectives of this review were to analyze IRS data for FYs 2005 through 2009 and to identify trends in the filings and audits of conventional[15] small business[16] corporate returns.  During the review, we relied on databases provided to us by the IRS.  We did not conduct audit tests to determine the accuracy and reliability of the information in any of the databases.  However, we did assess the completeness and reliability of the data as described below and concluded the data were complete, reliable, and adequate to conduct our work.  To accomplish our objectives, we:

I.                    Reviewed the types of business entities and the reasons taxpayers chose to file using the Form 1120 series of tax returns and analyzed the SB/SE Division Strategic Assessment for FYs 2009-2010, published by the SB/SE Division Research organization.

II.                 Analyzed the IRS’ Individual Return Transaction File[17] data for PY 2009 to determine the number of returns filed and amount of taxes reported.

III.               Analyzed the IRS’ BRTF data for small corporate returns for PYs 2005 through 2009 to determine the:

A.  Number of small corporate returns filed by total assets.

B.   Number of small corporate returns filed by industries.

C. Amount of taxes reported.

D. Amount of salaries, wages, and other compensation to officers reported in PY 2005 and PY 2009.

E.   Amount of loans to shareholders reported in PY 2006 and PY 2009.

IV.              Analyzed the IRS’ AIMS data for small corporate returns for FYs 2005 through 2009 to determine the:

A.     Number of small corporate returns examined.[18]

B.     Amount of additional taxes recommended for the small corporate returns examined.

C.     Length of examinations for the small corporate returns examined.

D.     No-change rates for the small corporate returns examined.

E.      No-change rates by types of examinations for the small corporate returns examined.

F.      Number of training returns examined by total assets.

V.                 Analyzed revenue agent hiring for FYs 2005 through 2009.

VI.              Analyzed revenue agent training agenda.

VII.            Discussed and obtained IRS management’s input on filing and examination trends.

VIII.         Assessed the completeness and reliability of Individual Return Transaction File, BRTF, and AIMS data to complete the above objectives.

A.     Reconciled BRTF data to IRS Data Books for PYs 2005 through 2009.

B.     Reconciled BRTF data to Business Master File data.

C.     Reconciled Individual Return Transaction File data to the IRS’ Statistics of Income Bulletin - Winter 2010.

D.     Reconciled Individual Return Transaction File data to Individual Master File data.

E.      Reconciled closed AIMS data for FYs 2005 to 2009 with appropriate sections of Table 37, Examination Program Monitoring report.

F.      Reconciled closed AIMS data with Business Master File data.

Internal controls methodology

Internal controls relate to management’s plans, methods, and procedures used to meet their mission, goals, and objectives.  Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations.  They include the systems for measuring, reporting, and monitoring program performance.  We did not assess internal controls because they were not significant to the review.

 

Appendix II

 

Major Contributors to This Report

 

Margaret E. Begg, Assistant Inspector General for Audit (Compliance and Enforcement Operations)

Frank Dunleavy, Director

Robert Jenness, Audit Manager

William Tran, Lead Auditor

Julia Tai, Senior Auditor

 

Appendix III

 

Report Distribution List

 

Commissioner  C

Office of the Commissioner – Attn:  Chief of Staff  C

Deputy Commissioner for Services and Enforcement  SE

Deputy Commissioner, Small Business/Self-Employed Division  SE:S

Director, Examination, Small Business/Self-Employed Division  SE:S:E

Director, Research, Small Business/Self-Employed Division  SE:S:R

Chief Counsel  CC

National Taxpayer Advocate  TA

Director, Office of Legislative Affairs  CL:LA

Director, Office of Program Evaluation and Risk Analysis  RAS:O

Office of Internal Control  OS:CFO:CPIC:IC

Audit Liaison:  Commissioner, Small Business/Self-Employed Division  SE:S

 

Appendix IV

 

Detailed Figures of Statistical Information

 

Figure 1 – Corporate Return Filings by Asset Class

Figure 2 – Industry Composition of Corporate Return Filings

Figure 3 – Corporate Return Filings by Industry Classification

Figure 4 – Corporate Return Examinations by Asset Class

Figure 5 – Top Six Industry Classifications of Corporate Return Examinations

Figure 6 – Corporate Return Audit No-Change Rates by Asset Class

Figure 7 – Discriminant Index Function (DIF) and DIF-Related Corporate Return No-Change Rates

Figure 8 – Non-DIF Corporate Return No-Change Rates

Figure 9 – Corporate Return No-Change Rate by Industry

Figure 10 – Additional Recommended Taxes in Corporate Return Audits

Figure 11 – Additional Recommended Taxes in Corporate Return Audits on an Hourly Basis

Figure 12 – Additional Recommended Taxes in Corporate Return Audits by Return

Figure 13 – Average Length of Corporate Return Audits by Asset Class

Figure 14 – Training Return Examinations by Asset Class

 

Figure 1 Corporate Return Filings by Asset Class

Between January 2005 and December 2009, the number of small corporate returns[19] processed annually by the IRS fell 7 percent, from almost 2.2 million to approximately 2 million.  The decrease was not uniform across all segments of the corporate return filing population.  In fact, the number of larger corporations in this filing population, those with assets of $5 million to less than $10 million, filed 5 percent more returns in PY 2009 than they did in PY 2005.  There was also significant growth (16 percent) from PY 2005 to PY 2009 in the filings of corporate returns with no balance sheet.  However, the increases in these two segments of corporate returns were not enough to offset the decrease in the filings of the three other segments of corporate returns.

 

Processing Years

Percentage Change

Asset Class

2005

2006

2007

2008

2009

2005-2009

No Balance Sheet

385,637

403,009

440,043

464,040

448,992

16 %

Less than $250,000

1,227,169

1,184,892

1,119,672

1,104,608

1,026,452

-16 %

$250,000 to less than $1 million

373,487

371,996

359,374

364,361

348,261

-7 %

$1 million to less than $5 million

174,892

179,203

177,273

181,652

173,570

-1 %

$5 million to less than $10 million

28,187

29,482

29,905

30,653

29,630

5 %

Total

2,189,372

2,168,582

2,126,267

2,145,314

2,026,905

-7 %

Source:  Our analysis of BRTF[20] data for PYs 2005 2009.

 

Figure 2 Industry Composition of Corporate Return Filings

The top 5 industry classifications accounted for 52 percent of all small corporate filings in PY 2009.  “Professional, Scientific, and Technical Services” and “Real Estate and Rental and Leasing” made up 24 percent of these corporate filings in PY 2009.[21]

Figure 2 was removed due to its size.  To see Figure 2, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Figure 3 Corporate Return Filings by Industry Classification

Corporate returns processed in PYs 2005 - 2009 were concentrated in the real estate and professional, scientific, and technical services sectors.  The filings for the top 5 industry categories of corporate returns decreased by 7 percent during this period.

 

Processing Years

Percentage Change

Industry Classification

2005

2006

2007

2008

2009

2005-2009

Professional, Scientific, and Technical Services

259,371

         255,148

251,412

253,944

244,591

-6 %

Real Estate and Rental and Leasing

248,776

         255,019

255,139

258,884

243,366

-2 %

Retail Trade

243,152

         240,127

230,752

231,354

217,895

-10 %

Construction

233,136

         236,303

232,928

232,674

214,573

-8 %

Wholesale Trade

148,006

         147,234

142,538

145,965

137,507

-7 %

Totals for Top Five Industries

1,132,441

1,133,831

1,112,769

1,122,821

1,057,932

-7 %

Health Care and Social Assistance

146,037

142,303

139,712

137,892

133,199

-9 %

Other Services (except Public Administration)

133,507

134,788

134,136

137,264

132,510

-1 %

Manufacturing

118,642

115,784

111,637

112,073

104,855

-12 %

Finance and Insurance

89,652

89,167

88,202

89,028

84,208

-6 %

Accommodation and Food Services

88,898

90,324

88,901

90,254

86,719

-2 %

Transportation and Warehousing

73,264

74,629

75,528

77,341

73,573

0 %

Agriculture, Forestry, Fishing, and Hunting

68,148

67,818

65,018

67,158

64,687

-5 %

Administrative and Support and Waste Management and Remediation Services

64,349

64,694

65,380

67,422

65,638

2 %

Information

42,711

42,457

42,407

43,466

41,505

-3 %

Arts, Entertainment, and Recreation

39,941

39,479

39,387

40,765

38,754

-3 %

Mining, Quarrying, and Oil and Gas Extraction

15,404

15,343

15,040

15,722

15,385

0 %

Management of Companies and Enterprises

14,658

14,945

14,890

15,436

15,020

2 %

Educational Services

12,014

12,040

12,092

12,595

12,307

2 %

Utilities

4,290

4,082

4,186

4,161

4,127

-4 %

Public Administration

119

90

76

92

60

-50 %

Unknown

145,297

126,808

116,906

111,824

96,426

-34 %

Totals

2,189,372

2,168,582

2,126,267

2,145,314

2,026,905

-7 %

Source:  Our analysis of BRTF data for PYs 2005 –  2009.

 

Figure 4 Corporate Return Examinations by Asset Class

Small corporate return examinations[22] increased 34 percent between FYs 2005 and 2009 with the largest increase, 75 percent, taking place in corporate returns with assets of $1 million to less than $5 million.

 

Fiscal Years

Percentage Change

Asset Class

2005

2006

2007

2008

2009

2005-2009

No Balance Sheet

1,073

987

1,268

1,518

1,571

46 %

Less than $250,000

4,757

3,743

5,315

4,846

5,348

12 %

$250,000 to less than $1 million

2,507

2,201

3,213

3,296

3,693

47 %

$1 million to less than $5 million

1,483

1,797

2,109

2,522

2,590

75 %

$5 million to less than $10 million

517

764

725

735

696

35 %

Total

10,337

9,492

12,630

12,917

13,898

34 %

Source:  Our analysis of AIMS data for corporate examinations completed in FYs 2005 – 2009.

 

Figure 5 – Top Six Industry Classifications of Corporate Return Examinations

Examinations of small corporate returns in the construction and the wholesale trade industry classifications increased 166 percent and 149 percent, respectively, between FY 2005 and FY 2009.

 

Fiscal Years

Percentage Change

Industry Classification

2005

2006

2007

2008

2009

2005-2009

Professional, Scientific, and Technical Services

2,678

1,269

1,986

1,762

2,093

-22 %

Health Care and Social Assistance

2,388

1,030

1,850

1,232

1,147

-52 %

Construction

879

1,398

1,720

1,929

2,336

166 %

Retail Trade

699

940

1,273

1,236

1,333

91 %

Manufacturing

564

699

724

941

1,016

80 %

Wholesale Trade

451

683

882

1,060

1,124

149 %

Totals for Top Six Industries

7,659

6,019

8,435

8,160

9,049


18 %

Source:  Our analysis of AIMS data for corporate examinations completed in FYs 2005 – 2009.

 

Figure 6 – Corporate Return Audit No-Change Rates by Asset Class

The overall corporate return no-change rate decreased 18 percent from 39 percent to 32 percent between FYs 2005 and 2009.  The largest decreases were in returns with no balance sheet and returns with assets between $250,000 to less than $1 million, which decreased 24 percent from a 25 percent no-change rate to a 19 percent no-change rate, and a 45 percent no-change rate to a 34 percent no-change rate between FYs 2005 and 2009, respectively.

 

Fiscal Years

Percentage Change

Asset Class

2005

2006

2007

2008

2009

2005-2009

No Balance Sheet

25 %

23 %

26 %

21 %

19 %

-24 %

Less than $250,000

36 %

35 %

40 %

27 %

31 %

-14 %

$250,000 to less than $1 million

45 %

39 %

37 %

30 %

34 %

-24 %

$1 million to less than $5 million

44 %

39 %

39 %

32 %

36 %

-18 %

$5 million to less than $10 million

44 %

49 %

46 %

37 %

42 %

-5 %

Overall No-Change Rates for Asset Classes

39 %

37 %

38 %

28 %

32 %

-18 %

Source:  Our analysis of AIMS data for corporate return examinations completed in FYs 2005 – 2009.

 

Figure 7 – Discriminant Index Function (DIF) and DIF-Related Corporate Return
No-Change Rates

The overall DIF and DIF-related no-change rate decreased by 5 percent in FY 2009 when compared to FY 2005.  The largest decrease of 15 percent occurred in returns with assets between $1 million to less than $5 million.

 

Fiscal Years

Percentage Change

Asset Class

2005

2006

2007

2008

2009

2005-2009

No Balance Sheet

26 %

37 %

36 %

23 %

27 %

4 %

Less than $250,000

35 %

40 %

36 %

29 %

40 %

14 %

$250,000 to less than $1 million

41 %

39 %

35 %

31 %

37 %

-10 %

$1 million to less than $5 million

48 %

41 %

38 %

34 %

41 %

-15 %

$5 million to less than $10 million

50 %

52 %

49 %

36 %

49 %

-2 %

Overall No-Change Rates for Asset Classes

41 %

41 %

37 %

30 %

39 %

-5 %

Source:  Our analysis of AIMS data for corporate return examinations completed in FYs 2005 – 2009.

 

Figure 8 – Non-DIF Corporate Return No-Change Rates

The overall non-DIF corporate return no-change rate decreased by 37 percent in FY 2009 when compared to FY 2005.  The largest decrease of 40 percent occurred in returns with no balance sheet. 

 

Fiscal Years

Percentage Change

Asset Class

2005

2006

2007

2008

2009

2005-2009

No Balance Sheet

25 %

18 %

22 %

19 %

15 %

-40 %

Less than $250,000

36 %

33 %

43 %

25 %

23 %

-36 %

$250,000 to less than $1 million

45 %

38 %

39 %

28 %

29 %

-36 %

$1 million to less than $5 million

43 %

38 %

41 %

30 %

29 %

-33 %

$5 million to less than $10 million

41 %

46 %

43 %

39 %

34 %

-17 %

Overall No-Change Rates for Asset Classes

38 %

34 %

39 %

27 %

24 %

-37 %

Source:  Our analysis of AIMS data for corporate return examinations completed in FYs 2005 – 2009.

 

Figure 9 – Corporate Return No-Change Rate by Industry

The overall corporate return no-change rate decreased by 16 percent between FYs 2005 and 2009.  The largest decrease of 37 percent occurred in Educational Services.

 

Fiscal Years

Percentage Change

Industry Classification

2005

2006

2007

2008

2009

2005-2009

Professional, Scientific, and Technical Services

48 %

38 %

43 %

34%

35%

-27 %

Health Care and Social Assistance

34 %

39 %

51 %

27%

27%

-21 %

Construction

34 %

32 %

34 %

26 %

30 %

-12 %

Manufacturing

42 %

39 %

41 %

28 %

38 %

-10 %

Retail Trade

33 %

36 %

32 %

27 %

31 %

-6 %

Wholesale Trade

47 %

45 %

38 %

35 %

36 %

-23 %

Real Estate and Rental and Leasing

38 %

39 %

32 %

26 %

31 %

-18 %

Arts, Entertainment, and Recreation

53 %

40 %

41 %

28 %

36 %

-32 %

Finance and Insurance

33 %

34 %

36 %

27 %

31 %

-6 %

Administrative and Support and Waste Management and Remediation Services

41 %

36 %

32 %

29 %

33 %

-20 %

Other Services (except Public Administration)

33 %

31 %

27 %

25 %

28 %

-15 %

Transportation and Warehousing

32 %

38 %

36 %

26 %

31 %

-3 %

Agriculture, Forestry, Fishing, and Hunting

38 %

36 %

37 %

24 %

28 %

-26 %

Accommodation and Food Services

34 %

39 %

35 %

26 %

25 %

-26 %

Information

42 %

40 %

36 %

27 %

43 %

2 %

Management of Companies and Enterprises

40 %

35 %

61 %

44 %

51 %

28 %

Mining, Quarrying, and Oil and Gas Extraction

40 %

40 %

38 %

31 %

36 %

-10 %

Educational Services

41 %

27 %

49 %

21 %

26 %

-37 %

Utilities

31 %

17 %

43 %

14 %

20 %

-35 %

Overall No-Change Rates for
Industry Classifications

38 %

36 %

38 %

28 %

32 %

-16 %

Source:  Our analysis of AIMS data for corporate return examinations completed in FYs 2005 – 2009.

 

Figure 10 – Additional Recommended Taxes in Corporate Return Audits

The additional taxes recommended by examiners increased 114 percent in FY 2009 when compared to FY 2005.  The largest increase of 177 percent occurred in returns with assets less than $250,000.

 

Fiscal Years

Percentage Change

Asset Class

2005

2006

2007

2008

2009

2005-2009

No Balance Sheet

$40,408,903

$25,377,020

$26,773,559

$27,812,723

$102,639,335

154 %

Less than $250,000

$36,053,482

$40,712,723

$62,259,449

$76,523,042

$99,956,174

177 %

$250,000 to less than $1 million

$36,442,550

$36,726,414

$62,888,003

$69,878,140

$75,251,914

106 %

$1 million to less than $5 million

$35,947,022

$41,510,827

$64,393,321

$70,056,347

$63,660,999

77 %

$5 million to less than $10 million

$21,508,505

$13,007,802

$38,562,962

$24,195,102

$23,835,021

11 %

Total

$170,360,462

$157,334,786

$254,877,294

$268,465,354

$365,343,443

114 %

Source:  Our analysis of AIMS data for corporate return examinations completed in FYs 2005 – 2009.

 

Figure 11 – Additional Recommended Taxes in Corporate Return
Audits on an Hourly Basis

The additional taxes recommended by examiners on an hourly basis increased 28 percent in FY 2009 when compared to FY 2005.  The largest increase of 69 percent occurred in returns with no balance sheet.

 

Fiscal Years

Percentage Change

Asset Class

2005

2006

2007

2008

2009

2005-2009

No Balance Sheet

$1,189

$702

$623

$567

$2,015

69 %

Less than $250,000

$338

$266

$343

$443

$559

65 %

$250,000 to less than $1 million

$531

$377

$481

$525

$548

3 %

$1 million to less than $5 million

$576

$490

$670

$704

$607

5 %

$5 million to less than $10 million

$784

$337

$1,075

$753

$810

3 %

Overall Averages for Asset Classes

$569

$384

$523

$552

$729

28 %

Source:  Our analysis of AIMS data for corporate return examinations completed in FYs 2005 – 2009.

 

Figure 12 – Additional Recommended Taxes in Corporate Return Audits by Return

The additional taxes recommended by examiners on a return basis increased 59 percent in FY 2009 when compared to FY 2005.  The largest increase of 147 percent occurred in returns with assets less than $250,000.

 

Fiscal Years

Percentage Change

Asset Class

2005

2006

2007

2008

2009

2005-2009

No Balance Sheet

$37,660

$25,711

$21,115

$18,322

$65,334

73 %

Less than $250,000

$7,579

$10,877

$11,714

$15,791

$18,690

147 %

$250,000 to less than $1 million

$14,536

$16,686

$19,573

$21,201

$20,377

40 %

$1 million to less than $5 million

$24,239

$23,100

$30,533

$27,778

$24,580

1 %

$5 million to less than $10 million

$41,603

$17,026

$53,190

$32,919

$34,246

-18 %

Overall Averages for Asset Classes

$16,481

$16,576

$20,180

$20,784

$26,287

59 %

Source:  Our analysis of AIMS data for corporate return examinations completed in FYs 2005 – 2009.

 

Figure 13 – Average Length of Corporate Return Audits by Asset Class

The length of examinations as measured by average cycle time declined a modest 4 percent, from 24 months to 23 months between FYs 2005 and 2009.  The largest decrease of 32 percent occurred in returns with assets of $5 million to less than $10 million.

 

Fiscal Years

Percentage Change

Asset Class

2005

2006

2007

2008

2009

2005-2009

No Balance Sheet

22 mo.

23 mo.

23 mo.

23 mo.

23 mo.

5 %

Less than $250,000

23 mo.

25 mo.

26 mo.

24 mo.

24 mo.

4 %

$250,000 to less than $1 million

23 mo.

25 mo.

24 mo.

22 mo.

22 mo.

-4 %

$1 million to less than $5 million

29 mo.

26 mo.

26 mo.

20 mo.

22 mo.

-24 %

$5 million to less than $10 million

31 mo.

27 mo.

25 mo.

21 mo.

21 mo.

-32 %

Average Exam Length for Asset Classes

24 mo.

25 mo.

25 mo.

22 mo.

23 mo.

-4 %

Source:  Our analysis of AIMS data for corporate return examinations completed in FYs 2005 – 2009.

 

Figure 14 – Training Return Examinations by Asset Class

The number of training returns increased 9 percent in FY 2009 as compared to FY 2005.  The largest increase of 2,015 percent was in returns with assets of $1 million to less than $5 million.

 

Fiscal Years

Percentage Change

Asset Class

2005

2006

2007

2008

2009

2005-2009

No Balance Sheet

241

568

326

221

138

-43 %

Less than $250,000

2,031

2,035

2,655

2,648

1,571

-23 %

$250,000 to less than $1 million

793

903

1,385

1,532

1,076

36 %

$1 million to less than $5 million

27

61

640

845

571

2,015 %

$5 million to less than $10 million

6

2

8

29

14

133 %

Total

3,098

3,569

5,014

5,275

3,370

9 %

Source:  Our analysis of AIMS data for FYs 2005 – 2009.

 

 

Appendix V

 

Glossary of Terms

 

Audit Information Management System A computer system used by the SB/SE Division and others to control returns, input assessments/adjustments to the Master File, and provide management reports.

Balance SheetAn accounting tool used to show the financial condition of a business at a particular date.

Business Master File – The IRS database that consists of Federal tax-related transactions and accounts for businesses.  These include employment taxes, income taxes on businesses, and excise taxes.

Business Return Transaction FileA computer file of transcribed line items on all business returns and their accompanying forms and schedules.

Discriminant Index Function – Mathematical formulas used by the IRS to calculate and assign a score for all individual returns based on their examination potential. 

Flowthrough EntitiesCertain entities, such as partnerships and S corporations, that generally distribute their income, losses, credits, and other tax items to their owners untaxed.

Individual Master File – The IRS database that maintains transactions or records of individual tax accounts.

Individual Return Transaction File – A computer file containing data transcribed from initial input of the original individual tax returns during return processing.  Subsequent or amended return data are not contained in the file.

IRS Oversight Board A nine-member independent body charged to oversee the IRS in its administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws and to provide experience, independence, and stability to the IRS so it may move forward in a cogent, focused direction.

National Research ProgramResearch conducted by the IRS to determine filing, payment, and reporting compliance by taxpayers for different types of taxes.  The IRS established the program in Calendar Year 2000 to resume measuring taxpayers’ voluntary compliance.

Processing YearThe calendar year in which tax returns and other tax data are processed by the IRS.

Revenue Agents Employees in the Examination function who conduct face-to-face examinations of more complex tax returns such as businesses, partnerships, corporations, and specialty taxes (e.g., excise tax returns).

S Corporation A small business corporation with a limited number of shareholders that elects to be a flowthrough entity for income tax purposes. 

Tax Gap - The difference between what taxpayers should have paid and what they actually paid timely.

Tax Year Annual accounting period taxpayers use to keep records and report income and expenses on their tax returns.

Taxpayer Compliance Measurement Program The IRS’ method of data collection that audits every line on tax returns for a random sample of taxpayers.



[1] Corporations that file U.S. Corporation Income Tax Returns (Form 1120).

[2] Corporations with assets less than $10 million.

[3] Eligible taxpayers must make an election to be a small corporation by filing Election by a Small Business Corporation (Form 2553).

[4] Taxpayers file Form 1120 consolidated by filing the regular Form 1120 by checking box 1a in section A.

[5] See Appendix V for a glossary of terms.

[6] Number of returns does not include those reporting losses or tax credits that eliminate tax liability.

[7] Number of returns does not include those reporting losses or tax credits that eliminate tax liability.

[8] Corporations with assets less than $10 million.

[9] Information Return of U.S. Persons With Respect To Certain Foreign Corporations.

[10] Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.

[11] Additional Efforts Could Further Improve the Execution of the National Research Program (Reference
Number 2004-30-044, dated January 29, 2004).

[12] All examination statistics in this report exclude training returns.

[13] Publication 3744 (4-2009).

[14] Potential Opportunities Exist to Enhance the Favorable Productivity Trends for Audits Initiated by the Updated Return Selection Formulas (Reference Number 2009-30-105, dated August 5, 2009).

[15] Corporations that file U.S. Corporation Income Tax Returns (Form 1120).

[16] Corporations with assets less than $10 million.

[17] See Appendix V for a glossary to terms.

[18] All examination statistics in this report exclude training returns.

[19] Corporations with assets less than $10 million.

[20] See Appendix V for a glossary of terms.

[21] Total may not add up to 100% due to rounding.

[22] All examination results in this report exclude training returns.