Friday, November 18, 2011

Tax Audits on the Rise as Governments Hunt for Additional Income

If your firm recently has been visited by an IRS or state tax auditor, you’re not alone. More than three-fifths of corporate tax execs surveyed in October by KPMG LLP indicated that activities stemming from federal tax disputes had increased over the past year. In addition, 37 percent indicated that the number of state tax audits had jumped.

The IRS’ own numbers, as presented in its Fiscal Year 2012 Budget Request, confirm the increase. The Service increased the number of large corporation audits by 8.1 percent, and the number of foreign corporation audits by nearly 48 percent, between fiscal year 2009 and 2010. (Individuals didn’t get off any easier, as the number of individual returns examined rose 11 percent, to 1.58 million, between fiscal 2009 and 2010.)

From the IRS’ perspective, the heightened enforcement activity is working. In fiscal year 2010, revenue from enforcement sources topped $57 billion, up 18 percent from fiscal 2009.

At the state level, dropping tax collections appear to be prompting state tax officials to heighten the audit efforts. According to a March 2011 report from the U.S. Census Bureau, “State Government Tax Collections Summary Report: 2010,” the amount of money collected through taxes declined two percent between fiscal 2009 and 2010, dropping from $718.9 to $704.6 billion. Indeed, many state budgets are dropping as well. Of 32 states that had enacted 2012 budgets as of June, 2011, 24 included significant cuts, reports the Center for Budget and Policy Priorities.

The heightened audit activity is likely to continue or even intensify, the execs in the KPMG survey said. More than two-thirds expect the number of federal audits to increase, while more than half said they expected the same for state tax audits. Additionally, one-quarter of the respondents expect regulators from outside the U.S. to increase their audit efforts, as well.

Given that the focus on audit activity appears unlikely to settle down any time soon, corporate tax execs “should regularly review their accounting methods, tax returns, risk assessments, and other processes and take the time to identify the documents, people, time and resources that might be needed to handle a potential tax audit,” said Sharon Katz-Pearlman, principal-in-charge of KPMG LLP’s Tax Controversy Services practice, in a statement on the survey.