IRS Cutbacks Curb Audits by L.A. Office

WASHINGTON — Taxpayers in Los Angeles are facing fewer audits by the Internal Revenue Service than in years past as the agency struggles under budget cutbacks and a hiring freeze imposed by an angry Congress.

The agency’s Los Angeles office, which oversees one of the IRS’ largest auditing districts, has been under a hiring freeze for three years and has reduced its audits of both individual and corporate returns, according to IRS figures provided to The Times.

The cutbacks appear to be a key factor in a 41% drop last year in assessments resulting from tax audits, the IRS information shows.

“Any time your budgets are cut, it has an impact on your operations,” said IRS District Director Steven Jensen. “We are able to do less than we have in the past because we have fewer employees.”

What that means for taxpayers is a somewhat-lower likelihood of being drawn into the IRS’ greatly feared enforcement net. For the cash-strapped federal government, however, it is one more potential obstacle on the road to a balanced budget.

The problems in the Los Angeles office broadly reflect trends elsewhere in Southern California and much of the nation. But because the Los Angeles office has a higher turnover than its counterparts in other regions and must deal with complex entertainment- and aerospace-industry tax issues, the cutbacks are hitting particularly hard.

The IRS is under increasing political attack by both liberal and conservative groups that want its budget and power sharply curtailed. Half a dozen congressional committees are investigating the agency’s poor record for modernization and reports of taxpayer abuse. A national commission is scheduled to issue recommendations for restructuring the agency later this year.

After decades in which the IRS routinely received budget increases, the Republican Congress suddenly hit the agency with budget cuts last year and the year before. The IRS budget, which was $7.48 billion in fiscal 1995, fell to $7.35 billion for fiscal 1996 and $7.2 billion for fiscal 1997.

The number of full-time IRS employees, meanwhile, has dropped from 116,700 in 1992 to 102,900 today. The agency is processing about 200 million individual and business tax returns.

Although Congress ostensibly intended the budget cuts to force improvements in IRS efficiency through modernization and better management, the cuts also appear to be cutting into enforcement activities.

Nationwide, the IRS plans to audit about 1.18% of tax returns this year, down from 1.63% for both last year and the year before.

Moreover, just one-third of IRS audits of individual returns in 1996 were prompted by the agency’s computerized analysis system, according to recent testimony by James E. Donelson, the IRS’ acting chief compliance officer.

The majority of audits result from informants’ tips, allegations by disgruntled spouses, taxpayer errors and tax information that the agency receives from banks and employers.

In the Los Angeles district, the IRS audited 41,609 individual tax returns in 1996, 4.2% fewer than in 1994. Assessments made by the IRS as a result of those audits dropped to $1.7 billion in 1996 from $2.9 billion in 1995 and $2.1 billion in 1994. Although these assessments typically vary widely from year to year, officials say the budget cutbacks are at least partly responsible for an underlying downward trend.

IRS veterans worry that if the agency is perceived as a paper tiger, more taxpayers may be inclined to cheat. A key reason for audits is to foster the perception that cheaters eventually pay.

“It has the potential to erode voluntary compliance,” Jensen said.

At the same time, the IRS has been forced to decrease training of its revenue agents despite continued changes in the tax code.

The IRS district headquarters in Los Angeles, located in a dismal federal building, where the lights are turned down to save money, is facing morale problems, Jensen acknowledged.

Jensen said the agency had lost clerical and technical support staff, forcing higher-paid professionals to take on some menial duties. Collections officers generally use paper and pencil for their record keeping, though the district office has been able to secure a few castoff laptop computers.

The most troubling aspect of the budget cutbacks, Jensen said, involves the long-term impact. He said the agency is not training new agents to replace veterans who are leaving for higher-paying jobs in private industry.

Jensen was careful not to blame Congress, though he and other senior IRS officials acknowledge that they do not understand the rationale for small spending reductions that are vastly exceeded by the resulting revenue loss to the government.

“It would seem like the last place to cut,” Jensen said.

Deputy Treasury Secretary Lawrence H. Summers earlier this month praised IRS employees and warned a congressional committee: “It does not serve our country to attack their professionalism or their integrity.”

But for many members of Congress, the IRS is the single biggest cause of constituent complaints, and championing the IRS wins few votes in elections.