NEW YORK (CNNMoney.com) -- IRS audits have increased significantly since 2003. One group, however, has questioned the effectiveness of the agency's corporate audits, while giving higher marks to the agency for its audits of individuals.
The Transactional Records Access Clearinghouse (TRAC), a nonpartisan research group affiliated with Syracuse University, analyzing IRS data, found that the time spent on corporate audits that yielded "no change" in a company's tax liability went up 40 percent from 2005 to 2006. TRAC defines hours spent on "no change" cases as "unproductive" since audits are usually conducted when a change in tax liability (either higher or lower) is suspected.
TRAC characterizes the increase in nonproductive hours for corporate audits to be the result of "poor targeting," noting in its report that "the IRS is wasting more and more of the time of its revenue agents during a period when, because of limited resources, the agency is auditing many fewer corporate returns than it did only a decade ago."
TRAC also found the percent of large companies audited fell from 44 percent in 2005 to 35 percent in 2006, and the average number of hours per audit fell from 978 to 941. The amount of audit dollars recommended for collection from large corporations, meanwhile, also fell -- from $30.1 billion in 2005 to $25.5 billion.
The IRS contests TRAC's interpretation. "TRAC is overlooking the bottom line," said IRS spokesman Terry Lemons. "We're auditing 50 percent more (large corporate) returns since 2003. ... The increase in the no-change rate is a reflection of the fact that we're doing more work in the corporate arena."
When considered as a percentage of total hours spent on corporate audits, hours spent on "no-change" cases accounted for 11 percent in 2006, up from 8 percent five years earlier.
The total dollars recommended for collection, Lemon added, has gone up from $13.1 billion in 2003 to $26.8 billion in 2006.
Lastly, he noted, 2005 was a big year for the IRS in terms of closing out big audit cases and large tax shelters, so short-term comparisons are bound to be unfavorable. "You can't look at a one-year pattern in compliance," he said.
TRAC gives the IRS higher marks for its audits of individuals. TRAC found that correspondence audits -- audits by mail, which make up the majority of individual audits -- yielded $7.6 billion in additional taxes recommended for collection in 2006. That's up from $7.4 billion in 2005 and $1.3 billion in 2001. And more than half of the additional taxes recommended after audits -- $4.5 billion -- came from the audits of individuals with taxable incomes of more than $100,000.
And the number of correspondence audits that resulted in "no-change in tax liability" fell 10.5 percent from both 2005 and 2001. The "no change" rate showed an even stronger decline in the correspondence audits of high-income taxpayers.
In 2006, individuals (including small business owners) paid 76 percent of federal income taxes, while corporations paid the remaining 24 percent, according to TRAC.
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