With corporate tax receipts at record lows, IRS Commissioner Mark W. Everson recently declared that corporate audits, which now take an average of 38 months, should be completed in less than half that time. Everson believes that by hastening the audits, the IRS will collect more taxes because more companies will fear that audits are coming. But others say faster audits will miss major tax fraud and would only embolden corporate tax cheats.

Everson said dramatic change is necessary to overcome the agency's "scandalous" complacency in a worrisome deterioration in corporate attitudes toward paying taxes. Corporate auditors are still finishing work on tax returns from 1997, or even earlier, he noted. The IRS was not even a "player" in uncovering the corporate scandals that erupted in the late 1990s because "we were not even near the year these returns were filed, which is inexcusable," said Everson, who took control of the agency in May.

"What I'm trying to do is re-center the agency," said Everson, who spotlighted the corporate auditing problems during his confirmation hearing in March. "Incremental progress in this area is not success. I'm looking for a real rupture in the way we do audits."

But the architects of the new strategy say Everson has gone too far, too fast, tying the hands of the agency's best auditors and putting too much power in the hands of potential tax cheats. By declaring that audits should take 15 to 18 months, Everson is virtually guaranteeing that IRS auditors will miss tax dodges, fail to explore suspicious transactions, or even walk away from audits that are on the verge of finding wrongdoing, said B. John Williams Jr., the recently departed IRS chief counsel.

"It's a bad way to run a railroad," Williams said.

Larry R. Langdon, the former chief of the IRS's large and mid-size business division who formulated much of the new auditing approach, agreed. "At one level, I appreciate [Everson's] energy and enthusiasm," he said. "At another level, he needs to understand the complexity of the situation. He tends to see these things in black and white when in reality, they're shades of gray."

Tax Receipts Slide Lower

Tax experts agree that corporate tax avoidance has become a serious problem. Corporate tax receipts -- already in a long, steady decline -- fell to $132 billion in the fiscal year that ended Sept. 30, the lowest since 1993, even before adjusting for inflation. Expressed as a percentage of total tax receipts or as a share of the economy, corporate tax receipts this year will be at their second-lowest level since the Great Depression. Only 1983's receipts were lower.

In 1970, corporate tax revenue was 17 percent of the government's tax take, before it began its long slide. This year, it will be about 7 percent of the total.

For most businesses, the IRS is simply not a factor in deciding whether to comply with the tax code, IRS officials concede. While the nation's 1,300 largest corporations face constant IRS scrutiny, 148,000 mid-size companies face an audit rate of 4 percent, or perhaps once every 20 years.

"That's atrocious," Everson said.

The new audit methods are designed to give businesses with good tax compliance records far more say in what books they will show the IRS and how quickly an audit should end. That way, outgunned corporate auditors could focus on suspected cheats and recognized tax-evasion schemes.

But working auditors, tax lawyers and IRS veterans say that in the push to expand the number of audits, federal tax sleuths will be discouraged to follow the winding money trails that obscure corporate tax cheating.

"There used to be a point of no return, where when you found something wrong, you were there, and you were going to stay there," said one corporate tax auditor, who spoke only on condition of anonymity out of fear of being fired. "There was no way they were going to get you out, and you had the power of the IRS behind you.

"Now, even if you find the adjustment, find actual fraud, management is still throwing you out of the building," the auditor said.

Langdon said that when he devised the limited-scope audit process, he envisioned perhaps a quarter of new audits using the procedure. That would cut those audit times in half, he said, but barely dent the overall average audit time. To reach Everson's time limit, nearly three-fourths of all corporate audits would have to use the procedure, threatening the intention of reserving the limited audits only for taxpayers with good compliance records, Langdon said.

An IRS lawyer, who also spoke on condition on anonymity, said there is already a "strong push to walk away from audits" in order to prepare for 2003 tax returns that IRS supervisors want to be handled according to Everson's schedule.

"The exam people were told to clear out their inventory before the 18-month cycle begins," he said. "It's happening now."

Schemes Abound

Much of the recent decline in corporate taxation mirrors the slow economy. The longer-term trend was exacerbated by changes in federal tax law and the increasing complexity of business tax structures, including the vast overseas operations of multinational corporations.

Congress has made it easier for small businesses to organize themselves as partnerships or what are called S corporations, leaving business revenue to be taxed as individual income. Another big factor is the proliferation of stock options, which also effectively shift the tax burden from employer to employee, since they can be deducted from corporate tax bills once exercised.

But one piece of the puzzle is cheating, IRS, Treasury and independent tax experts say.

"The [declining] numbers are prima facie evidence that something significant is going on," said Douglas A. Shackelford, an accounting professor at the University of North Carolina's Kenan-Flagler Business School. "It's such a huge, central question, it's hard to work in the tax field and not wrestle with this."

Tax-sheltering estimates range from insignificant numbers proffered by senior Treasury Department officials to $20 billion a year, a number floated by a high-ranking IRS source.

"There's no question that the aggressiveness and use [of tax shelters] is going up in a very, very significant way, and is being promoted by very sophisticated users," said Charles O. Rossotti, the former internal revenue commissioner. "The system has deteriorated over a long-term basis. The IRS has slowed down the deterioration, but it's still going on."

Facing increasingly sophisticated corporate tax offices, increasingly hostile tax courts and stubbornly tight budgets, the IRS has retooled.

Last December, the agency's large and medium-size business division established what it calls the limited issue focused examination (LIFE), which allows businesses with good tax records to sit down with the IRS and agree on audit plans, including time limits. A company would know just what records the IRS was interested in. It would agree to produce records expeditiously and limit its appeals of IRS decisions.

The division also reorganized from regional offices, each with broad authority, to industry-focused offices. Chicago would have the retail and pharmaceutical group; New Jersey, heavy manufacturing; Detroit, automotive; Houston, energy, and so on. Each of the groups would focus on aggressive tax avoidance strategies particular to its industry.

"For the first time, we have the ability to say there is an issue regarding XYZ provision of the [tax] code sweeping an industry. We need that raised in every audit in this industry," said Pamela F. Olson, undersecretary of the Treasury for tax policy.

A "pre-filing" system was also set up, so companies could bring up transactions of questionable legality before a formal audit so they could be resolved before they surprise auditors. And a fast-track program was begun, allowing appeals officials to come into an audit when just two or three issues remain and mediate the issues on the spot, thus avoiding the appeals process altogether.

IRS economists and academic consultants are poring over statistics to establish a computer-based model of a "normal" corporate tax return. That way, IRS computers could finger odd returns for further examination.

And Everson is organizing meetings to come up with more ways to save time.

"There are some people in the [IRS] workforce who would prefer to have no change in the way they've done business for 20 years," said Robert E. Brazzil, an IRS director in the large and mid-size business division. "We have to learn to do business differently."

Langdon said all the efforts have one goal: to focus scant IRS resources on the most fruitful targets instead of chasing lower-risk companies. With quick audits, more companies will feel the IRS's tap on the shoulder.

"We were looking for a more rational way to put real targets in the audit crosshairs," said Michael P. Dolan, a former acting internal revenue commissioner, now at KPMG LLP.

But even before the changes were implemented, the IRS was aware of serious risks inherent in expedited examinations, IRS officials concede. Rigid audit plans, agreed upon ahead of time, would clip auditors' "peripheral vision," as one tax lawyer put it, allowing some companies to skirt the tax law even as an IRS auditor is examining records that may be a page away from blatant fraud.

Such complaints are already coming in to the National Treasury Employees Union, which represents IRS agents and auditors. Colleen M. Kelley, the union president and a former IRS agent, said auditors feel stifled by increasingly standardized procedures, a limited auditing scope and far more supervisory control.

"Is there change? Oh yeah," Kelley said. "And is it something that is proving to be hard, especially for auditors and agents who are used to making those judgments? Certainly."

Donald C. Alexander, a former internal revenue commissioner, joked that the word "focused" was slipped into LIFE's abbreviation "to make the acronym turn out correctly. Without it, look what it would be: a LIE."

Deborah M. Nolan, Langdon's successor at the IRS large and mid-size business division, said the new procedures allow auditors to follow trails off audit plans if solid evidence indicates problems. If a shelter that was not disclosed ahead of time appears in the records, she said the audit plan is automatically voided.

But a Bush administration official, speaking on condition of anonymity, acknowledged that such rules may not work in the real world.

"Any time you're dealing with a bureaucracy, you have to write the rules with a certain amount of rigidity, and people with no judgment will follow the rules to the letter," the official said. "They decide the rules are set, and they can't use their judgment. And you have managers who will say you can't deviate from the rule."

New Rules, New Problems

The new focus on industry groups has also raised questions. If, for example, the retail group is trained to look at one set of tax issues and the financial, insurance and real estate group at a different set, what will happen when one industry group's tax tricks jump to another group?

The problem is that accounting firms and corporate tax offices are too plugged in to what the IRS is focusing on, an IRS official said. Focusing on particular issues simply changes the behavior of tax cheats.

"About 24 hours after they set up that industry matrix, it began to unravel," Dolan conceded.

IRS leaders, including Everson, say much of the griping is from career IRS auditors who are too comfortable with their old methods to willingly adopt the changes. A corporate auditor would routinely spend years on one company's books, eating at the corporate cafeteria and getting reimbursed for the mileage between their homes and their targets.

"Does it make sense spending literally five or six years auditing routine matters that won't produce much when there are people out there promoting billion-dollar shelters in the open market?" Rossotti said. "I used to say to some of these people, 'You're not in the auditing business. You're in the archaeology business.' "

So far, the business division has begun about 500 LIFE examinations of mid-size businesses and more than 100 among the largest companies, Brazzil said. And the numbers are increasing rapidly. The last thing the IRS needs to do is wait until all the kinks are worked out of the new procedures and all of the concerns are answered before moving forward at full steam, Everson said.

"Of course, there could be some problems, but we're going to address them as we go along," Everson said. "Speed counts."

-- Jonathan Weisman