David Cay Johnston reports on pressure IRS agents are feeling to end corporate cases prematurely so that managers can meet case load goals and receive bonuses:
I.R.S. Agents Feel Pressed to End Cases By, David Cay Johnston, NY Times: The head of the Internal Revenue Service faces questions in Congress today about auditors’ complaints that they are being forced to close corporate cases prematurely, allowing billions in tax dollars to go unpaid. ...
The agency countered that it had increased the number of companies whose tax returns it examined by a fourth since 2001, even though the number of auditors was virtually the same. ... [T]he officials say they have shortened the average time to complete an audit from almost two years in 2001 to less than 18 months last year.
I.R.S. officials say the auditors who are complaining are mostly older agents unwilling to adopt new approaches. ... Deborah M. Nolan, the I.R.S. official in charge of auditing businesses with more than $10 million of assets, said that her auditors recommended payment of almost $27 billion in additional taxes last year, more than double the amount in 2001, but down 15 percent from 2005 when added taxes totaled almost $32 billion...
Asked about data showing that additional taxes recommended for each audit are up, the agents who were interviewed all said that this showed only how pervasive tax cheating had become. ...
One veteran agent of the largest corporate audits compared the I.R.S. to a crew that walks through an orchard instead of working from ladders. “You can grab all the low-hanging fruit in a few highly productive hours, while leaving most of the harvest untouched,” he said.
In an interview last week, Ms. Nolan ... reiterated her position that the agency would “do the right thing” by keeping cases open past preset deadlines when evidence points to large amounts of tax due.
All 21 agents interviewed over the last two months said that the I.R.S. paid lip service to its “do the right thing” policy. They provided e-mail messages and memos in which managers and executives made little or no mention of anything but closing files quickly.
In one widely circulated directive, Cheryl P. Claybough, who oversees half the audits of communications, technology and media companies, alternately encouraged and chastised subordinates for not closing cases quickly enough, while making only passing references to the “right thing” policy. ...
A Feb. 1 e-mail message from Kenneth L. Kates of the audit quality assurance operation orders nine subordinates to complete their reviews of audits without mentioning quality.
“We must have ten case apiece closed by 3-7-2007,” Mr. Kates wrote. “You must keep me informed and make me aware immediately if you will have any problems meeting this goal. The goal translates into two cases per week.”
All of the agents interviewed said they believed that the controlling factor in determining whether their superiors qualified for cash bonuses and promotions was their success at closing cases. “How the managers get paid; that’s the real policy,” one auditor in Texas said.
Only in cases of blatant fraud, agents said, are deadlines ignored. A few agents supplied e-mail messages and memos to support their statements.
Two auditors described separate training sessions that began with a few words about the “right thing” policy, then focused entirely on closing cases by the preset deadlines.
“What message do you think employees get when almost an hour is spent on cycle time and overage, and doing the right thing gets a brief mention?” one auditor said.
One agent, who said he had worked on some of the largest I.R.S. cases, said he was admonished for resisting management pressure to close a case in which his team believed that vast sums were due.
The agent said his team was forced to sign off on a closing agreement allowing the company to permanently underpay its taxes by hundreds of millions of dollars a year. When a taxpayer receives a formal closing agreement from the I.R.S. .., the taxpayer may forever follow that practice, even if it violates the tax law. ...
[O]ne of the agents ... said, “in most cases management is making these decisions in order to drive case closure goals.”
Over and above whatever politics might be behind this policy, this is an example of an agency problem, i.e. the problem of having the incentives of those making the decisions (cases processed) differ from the incentives needed to produce optimal public policy (tax equity and efficiency). Performance goals can work, but they have to be constructed carefully so that the incentives of decision makers are consistent with overall policy goals. Basing bonuses of managers on closed cases within a particular time frame does not appear to produce optimal corporate tax compliance policy.