Tax Payers can avoid withholding but be careful!
Billions of dollars in underreported taxes by employers and backup withholding for their employees are helping fuel the tax gap, according to a new report.
The report, released Thursday by the Treasury Inspector General for Tax Administration, found the IRS is still not making enough progress on improving federal tax withholding processes and procedures despite previous reports from TIGTA about the problem. In response to recommendations included in previous reviews, the IRS has undertaken several actions to address the problem. But TIGTA’s analysis of information return filings found continued significant backup withholding noncompliance and employer underreporting of employment tax, and discrepancy cases are still not being worked on by the IRS.
The report comes as the Biden administration is counting on an increase in enforcement and compliance by the IRS to pull in additional tax revenue to help fund its ambitious American Families Plan and American Jobs Plan. A separate report issued Thursday by the Treasury Department described how regulation of tax preparers and increased penalties on “ghost preparers” who don’t sign tax returns, along with extra funds for updating the IRS’s antiquated technology and increased information reporting by financial institutions on bank account inflows and outflows, could help raise an additional $700 billion in tax revenue over the next decade (see story).
“The continued noncompliance with backup withholding requirements and underreported taxes by employers and the IRS’s lack of adequate actions to address this noncompliance contribute to the Tax Gap,” said the TIGTA report.
For tax year 2018, TIGTA found 182,075 payers that submitted 440,404 information returns for which the payee’s Taxpayer Identification Number was either missing or incorrect, but the payers didn’t backup withhold $13.3 billion on $55.6 billion in reported income. Some of the same payers are continuing to report billions of dollars in payments associated with Taxpayer Identification Numbers of deceased people. TIGTA’s review found 52,500 payers that submitted 2.7 million information returns for which the payee had been dead for at least three years before the information return was issued. Those 2.7 million information returns had reportable payments totaling $3.7 billion. Usually, payers shouldn’t submit information returns using the Taxpayer Identification Number of a deceased taxpayer for identification of the payee, TIGTA noted. The deceased taxpayers’ Social Security Numbers are probably being used because the payers haven’t been notified about the death of a payee or an estate Employer Identification Number hasn’t been provided to the payer.
Computer-programming errors may have also contributed to the problem. Because of a programming error, the IRS didn’t select wage-reporting discrepancy cases with the biggest potential tax assessment. TIGTA’s analysis of tax year 2017 IRS discrepancy cases found the IRS worked on 21,372 cases and assessed $58.8 million on them. However, for the 21,372 cases it worked on, TIGTA found the IRS still didn’t select cases with the highest potential tax assessment. “Had the programming been working as intended, the IRS could have selected and worked cases with a higher potential assessment, resulting in an additional $133.1 million in assessments,” said the report.
TIGTA recommended the IRS come up with processes and procedures to address the reporting of income on information returns using a deceased payee’s Taxpayer Identification Number and do an analysis of other wage-reporting discrepancy cases to weigh the use of a particular indicator known as a “repeater indicator” as another characteristic to prioritize wage-reporting discrepancy cases.
In response, IRS officials agreed to develop necessary processes and procedures to identify and address the reporting of income on information returns using a deceased payee’s Social Security Number. However, they disagreed with TIGTA’s recommendation to do an analysis on the use of the repeater indicator on discrepancy cases. They don’t believe there’s any evidence that such a study would be worth the diversion of the limited amount of resources at the IRS.
The IRS also disputed TIGTA’s noncompliance estimates. “We believe that you continue to overstate backup withholding noncompliance,” wrote De Lon Harris, commissioner of the IRS’s Small Business/Self-Employed Examination unit, in response to the report. “Numerous factors contribute to whether some or all of a payment is truly reportable and subject to backup withholding by a payer. It cannot be assumed that income reported on an information return with an incorrect payee TIN has not been properly reported by the payee and taxed accordingly. A payer may be relieved of the backup withholding tax liability if it can document on Forms 4669 and 4670 that the payee has reported the payment and paid the tax.”
Thanks to Michael Cohn for this article
posted by Nick Pennewell, CPA at 1:54 PM
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