By Ashlea Ebeling. Forbes Staff
The Internal Revenue Service watchdog TIGTA says the IRS is ignoring delinquent taxpayers who owe billions of dollars, and it looks like a lot of them won’t ever hear from the IRS. The IRS failed to identify and contact approximately 1.9 million nonfilers in tax years 2012 and 2013 with expired extensions, and as of May 2016, they still owed an estimated $7.4 billion, according to a new Treasury Inspector General for Tax Administration audit report. At a minimum, TIGTA says the IRS should be pursuing high-income nonfilers on extension. A typical balance due: $42,735.
“ It’s a great time to be a tax dodger” says Robert E. Mckenzie, a tax lawyer with Arnstein & Lehr in Chicago. But he doesn’t put the blame on the IRS, rather on Congress. “Our Congress continues to empower and enable noncompliant taxpayers by cutting the IRS budget. The 81% of Americans who are fully compliant are receiving less and less service while the IRS lacks the resources to pursue known noncompliant taxpayers,” he says.
Nonfilers account for $26 billion (6%) of the $458 billion estimated tax gap—that measures taxpayers who don’t file their tax returns and pay the correct tax on time. In a typical year, the IRS identifies more than 7 million nonfilers and sends them delinquency notices. High-income nonfilers are supposed to be a high priority, according to IRS procedures. In February 2014, the IRS outlined goals to increase nonfiler compliance, but as of July 2016, it hadn’t implemented any of the proposed initiatives, the report says.
The TIGTA report, Improvements Are Needed to the IRS’ Nonfiler Program, explores how programming errors, managerial decisions and resource constraints led to the nonfiler shortcomings and substantial losses to the Treasury. Tax collections from nonfilers in tax years 2012 and 2013 were only $433 million and $290 million, compared to $4.3 billion and $3.6 billion for TY 2010 and 2011.
How does the IRS track down nonfilers in the first place? There’s third party reporting—those are forms sent to both the IRS and the taxpayer, including Form W-2 for wages, Form 1099-Misc. for self-employment income, and Form 1099-B for stock sales. The IRS also looks at past filers who later fail to file.
The snafu in 2012 was that programming errors basically meant the system overlooked nonfilers who had expired extensions, and approximately half of the high income nonfilers weren’t identified. They’re the ones who typically have a higher filing rate with higher tax dollars collected per return once they get an IRS notice. The nonfiler program is done on a stand-alone basis for each tax year, so it’s unlikely the IRS will revisit the missed 2012 tax year nonfiler population.
The IRS caught the lack of notification problems while the nonfiler program for tax year 2013 was underway and fixed the programming mistakes. But it canceled notifications to the 2013 tax year nonfilers on extension due to reduced staffing and the unavailability of overtime. Instead, IRS officials told TIGTA that it chose to work on establishing installment agreements—payment plans—for taxpayers who had filed returns but failed to pay in full. TIGTA was critical of this: “While we understand the resource constraints, a decision to not address any nonfilers with expired extensions is concerning, especially because IRS procedures require that notices be sent to certain nonfiler cases, regardless of the balance due, as such cases have historically been considered to be high compliance risk cases.”
TIGTA calculated that notifying the 2013 high income nonfilers with expired extensions could bring $3.8 billion alone in collections and recommended that the IRS notify them now since they’ve already been identified, just not notified. The IRS agreed to review this subset of 127,000 outstanding cases, but noted that it expects potential collections more in the $2.7 billion range.