Yearly Archives: 2016

The report, from the Treasury Inspector General for Tax Administration, said the IRS has a strategy in place as part of its Case Creation Nonfiler Identification Process to identify taxpayers who have not filed a tax return and are required to do so if their income is above a certain threshold. The IRS typically issues delinquency notices to more than 640,000 nonfilers each year whose tax extensions have expired.

While it is mostly an automated process, the IRS failed to identify and address approximately 1.9 million nonfilers with expired extensions in tax years 2012 and 2013. As of May of this year, those taxpayers still owed an estimated $7.4 billion.

Most nonfilers with expired extensions were not identified or addressed in tax year 2012 because of a programming error the IRS did not completely investigate or fix in a timely way. In tax year 2013, IRS management canceled this process for all taxpayers with expired extensions. The nonfiler process runs on a standalone basis each tax year, so the majority of nonfilers with expired extensions in tax years 2012 and 2013 will probably never be notified of their obligation and failure to file a tax return.

The IRS has identified high-income nonfilers as a high compliance risk and one of the agency’s top eight high-priority areas in its annual work plan, yet none of the high-income nonfilers with expired extensions were notified of their delinquency in tax years 2012 or 2013.

In February 2014, the IRS changed its nonfiler strategy and goals in an effort to increase compliance. However, as of July 2016, the IRS has still not implemented any of the nonfiler initiatives it has proposed. On top of that, the nonfiler strategy did not describe any specific actions to improve the compliance rate, including how to reach more of the nonfilers the IRS identifies each year and determining the effectiveness of the return delinquency notice in an effort to increase the response rate.

In response to the report, the IRS agreed with TIGTA’s recommendations and plans to take action.

“We will use your findings and recommendations, coupled with data analytics research that we plan to undertake, to help refine our Nonfiler Program strategy, with a dual goal of prioritizing as much of this work as our resources will allow and also developing a process for selecting productive nonfiler cases,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division.

“To find efficiencies, we will investigate the options for improving the effectiveness of the delinquency notice to increase the number of nonfilers who are contacted and the nonfiler response rate. As part of that process, we will collaborate with our Information Technology function to expand its review of the inventory volume and document fluctuations in inventory counts for each tax year, ensuring that anomalies are addressed.”

The Treasury Inspector General for Tax Administration (TIGTA) issued a report concluding that the IRS’s lax enforcement of backup withholding requirements is potentially causing billions of dollars in lost revenue (TIGTA Rep’t No. 2016-40-078).

The report goes on to say that which says that, although the majority of information returns are submitted by payers with valid taxpayer identification numbers (TINs), nearly $9 billion in backup withholding tax was not withheld by payers submitting Tax Year (TY) 2013 information returns with missing or incorrect TINs.

Under IRC §3406, a payor of any reportable payment, most payments for which information returns are required, such as an interest or dividend paymenst must withhold 28% of the payment if:

• (1)  The payee has failed to furnish his TIN to the payor (Code Sec. 3406(a)(1)(A)) or furnishes an “obviously incorrect number” (Code Sec. 3406(h)(1)), i.e., one without nine digits or which includes letters of the alphabet.
• (2)  IRS or a broker has notified (the “B-notice”) the payor that the TIN furnished by the payee is incorrect. (Code Sec. 3406(a)(1), Code Sec. 3406(d)(2))
• (3)  There has been a notified payee underreporting with respect to interest and dividends. (Code Sec. 3406(a)(1)(C)) or
• (4)  The payee has failed to make the exemption certification (on Form W-9, Request for Taxpayer Identification Number and Certification) with respect to interest and dividends. (Code Sec. 3406(a)(1)(D)).

In 2015, TIGTA did a preliminary investigation of the IRS’s enforcement of backup withholding for Form 1099-K, Payment Card and Third Party Network Transactions, and made recommendations for improvements.

In the latest review (which did not involve Forms 1099-K because of the earlier investigation), TIGTA identified 13,647 payers that submitted 27,576 information returns with the same missing payee TIN two years in a row, 2012 and 2013, reporting payments of about $14.3 billion. The backup withholding rules required payers to immediately withhold nearly $4 billion from these payees, but just a little more than $1 million was withheld.

In addition, 62,714 payers submitted 203,751 information returns for which the payee TIN was incorrect in four consecutive years, reporting payments of almost $17 billion, which should have resulted in nearly $5 billion in backup withholding. Yet, only $1 million was withheld. TIGTA’s review also found that 43% of noncomplying payers were not notified of their failure to comply because of incorrect criteria the IRS was using.

Two other problems TIGTA identified were the lack of IRS enforcement of withholding on Form 1099-G, Certain Government Payments, which is also subject to backup withholding, and payers’ continued use of deceased taxpayers’ Social Security numbers for more than two years after the payees died.

TIGTA made five recommendations, all of which the IRS agreed to follow:

1. To establish an agency-wide backup withholding enforcement strategy, with specific time frames and actions that will be taken to enforce backup withholding compliance.
2. To evaluate and document the criteria used to determine which payers did not receive notices about missing or incorrect TINs.
3. To update payer identification and notification processes to include Forms 1099-G with missing or incorrect payee TINs.
4. To update all applicable publications, instructions, and website information regarding backup withholding provisions to include Forms 1099-G.
5. To include specific actions in its information return compliance strategy that will be taken to address information return reporting of income under a deceased individual’s TIN.

The IRS agreed to the fifth recommendation but questioned its usefulness because the payments are presumably reported by surviving spouses or estates. TIGTA stated that the IRS had provided no evidence to support this statement, noting that, of the 1.6 million deceased payee TINs shown on information returns in 2013, only 482 of those TINs were used to file a 2013 tax return.

The IRS is testing expanded criteria for streamlined processing of taxpayer requests for installment agreements. The test is scheduled to run through September 30, 2017.

During this test, more taxpayers will qualify to have their installment agreement request processed in a streamlined manner. Based on test results, the expanded criteria for streamlined processing of installment agreement requests may be made permanent.

During the test, expanded criteria for streamlined processing will be applied to installment agreement requests submitted to SB/SE Campus Collection Operations, this includes the Automated Collection System (ACS). Expanded criteria will not be applied to installment agreement requests submitted to W&I Accounts Management, SB/SE Field Collection or through the Online Payment Agreement application.

One expanded criterion being tested immediately is this: Individual taxpayers with an assessed balance of tax, penalty and interest between $50,000 and $100,000 may experience accelerated processing of their installment agreement request. This will occur if the taxpayers' proposed monthly payment is the greater of their total assessed balance divided by 84 – or – the amount necessary to fully satisfy the liability by the Collection Statute Expiration Date.