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TIGTA Report Concludes That IRS’s Lax Enforcement of Backup Withholding Is Costing $9 Billion in Lost Revenue

November 1, 2016

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.

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Streamlined Processing of Installment Agreements

October 31, 2016

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.

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IRS Nets $10 Billion From > 100,000 Taxpayers in the OVDP Program

October 24, 2016

The IRS in news release IIR 2016-137 highlighted the accomplishments of its Offshore Voluntary Disclosure Program (OVDP) and encouraged taxpayers with undisclosed offshore accounts to come into compliance with the federal tax obligations. The OVDP and streamlined compliance programs have been used to bring over 100,000 taxpayers into compliance and have brought in over $10 billion in taxes, interest, and penalties.
Background—OVDP. On Mar. 26, 2009, IRS announced its first OVDP (2009 OVDP), a form of a tax amnesty program. It permitted U.S. taxpayers with unreported foreign accounts to avoid criminal charges and pay reduced civil penalties by making a voluntary disclosure to IRS. The 2009 OVDP ran through Oct. 15, 2009.
Thereafter, on Feb. 8, 2011, IRS announced a second OVDP (2011 OVDP). The 2011 OVDP was originally scheduled to close on Aug. 31, 2011, but IRS extended the closing date to Sept. 9, 2011.
On Jan. 9, 2012, IRS reopened the OVDP (2012 OVDP). On June 18, 2014, IRS announced changes to the 2012 OVDP, which took effect on July 1, 2014.
Unlike the previous programs, the 2012 OVDP is open-ended and does not impose a deadline by which taxpayers must make a voluntary disclosure to be eligible for avoiding criminal prosecution and pay reduced penalties. However, IRS has indicated that it can terminate the program at any time.
Background—streamlined filing. IRS has also established streamlined programs for taxpayers who have unreported foreign accounts and whose reporting failures are considered non-willful. There are separate programs for U.S. taxpayers residing in the U.S. and for U.S. taxpayers residing outside the U.S. The qualifications for the programs vary. By way of example, to be eligible for the program for residents, taxpayers must have previously filed a U.S. tax return (if required) for each of the most recent three years and have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law as a result of negligence, inadvertence, mistake, or a good faith misunderstanding as to what was required of them.
Taxpayers who come into compliance under the streamlined filing procedures must file amended returns (with all required information returns) for the most recent three years, file any delinquent Reports of Foreign Bank and Financial Accounts (FBARs) for the most recent six years, and pay an offshore penalty equal to 5% of the highest aggregate balance/value of the taxpayer's foreign financial assets that are subject to the miscellaneous offshore penalty during the 3-year tax return period and 6-year FBAR period.
IRS milestones. In IR 2016-137, IRS stated that 55,800 taxpayers have used the OVDP to resolve their tax obligations, paying more than $9.9 billion in taxes, interest, and penalties since 2009. In addition, 48,000 taxpayers have used separate streamlined filing procedures to correct prior non-willful omissions and meet their federal tax obligations, paying approximately $450 million in taxes, interest, and penalties. Combined, this adds up to over $10 billion collected and over 100,000 taxpayers coming into compliance.
“As we continue to receive more information on foreign accounts, people's ability to avoid detection becomes harder and harder,” said IRS Commissioner John Koskinen. “The IRS continues to urge those people with international tax issues to come forward to meet their tax obligations.”
New forms. IRS recently revised the certification forms used for the Streamlined Filing Compliance Procedures. The most current versions of Forms 14653, Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures, and 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures, are available on IRS's website.                   

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IRS Provides Legal Advice on When Data Exchange With Foreign Countries is Confidential

October 21, 2016

In Legal Advice Issued by Associate Chief Counsel 2016-004, the IRS has given its opinion on the exact moment when information that it provides to and receives from foreign tax administrations via the Organization for Economic Cooperation and Development's Common Transmission System becomes protected under the Code's confidentiality rules. Legal Advice Issued by Associate Chief Counsel 2016-004.
 
In light of recent global developments in the areas of transparency and exchange of
information, and recognizing that automatic exchanges of information between tax administrations will likely increase over the coming years, the OECD is developing a
common system for transmissions of data between governments.
 
The projected increase in the number of automatic exchanges of information is due, in large part, to the OECD’s “Standard for Automatic Exchange of Financial Account Information in Tax Matters” (a/k/a, “Common Reporting Standard” or “CRS”), which provides for automatic exchanges of financial account information, and the output of Action Plan 13 of the OECD’s Base Erosion and Profit Shifting (BEPS) Project, which calls for automatic exchanges of “country-by-country” reports.
 
The development of a common solution for the transmission of data in the form of the CTS was viewed by the OECD as well as member jurisdictions of the FTA as an efficient and economically beneficial way to accommodate the global needs in the area of automatic exchange of information.

We have been asked to opine on the moment during the exchange of information via the CTS when information becomes protected under the various sources of statutory and tax convention protection from disclosure.

Returns, return information, and tax convention information are categories of information related to taxes that are generally protected from disclosure under Internal Revenue Code sections 6103 and 6105. Data transmitted via the CTS will fall within one or more of these categories. In addition, the language of the United States’ bilateral and multilateral tax conventions, tax information exchange agreements, as well as intergovernmental agreements concerning the implementation of FATCA all contain provisions concerning the obligation to protect covered information from disclosure.

Briefly, information that will be transmitted by the IRS to foreign tax administrations (outbound transmissions) through the CTS is return information under section 6103 in
the hands of the IRS, so throughout the exchange process should be protected as required by section 6103. Furthermore, that information becomes treaty-protected information in the hands of the foreign country when the information is exchanged pursuant to a tax convention or other international agreement on taxes.

In the case of information provided to the IRS by foreign tax administrations (inbound transmissions) through the CTS, the moment when legal protection arises is less certain. While there are two moments when legal protection could arise in an inbound transmission (i.e., the moment information is uploaded to the CTS by the foreign tax authority, and the moment when the United States downloads the information from the CTS), we believe the most likely moment is when the United States downloads the information from CTS.

There is no direct authority regarding the precise moment legal protection arises. However, close reading of the various statutory and tax convention language, as well as related court decisions seem to indicate that protection will not arise until the information is actually held by the IRS.

As discussed in this advice, the CTS is different from the International Data Exchange Service (IDES), which is a system funded, designed, and managed by the IRS. In a prior memorandum, we concluded that information transmitted via IDES by a foreign jurisdiction to the United States would most likely be treated as gaining section 6103protection upon upload to IDES. The CTS is not a U.S.-designed system. The OECD, and not the IRS, will negotiate the agreement with the CTS vendor; and the costs associated with the development and operation of the CTS will be borne by all users globally and not just by the IRS.
Therefore, our view is that with regard to information transmitted to the IRS through the CTS, section 6103 protection arises when the information is downloaded by the IRS. It is our understanding that if the IRS adopts the CTS, as a matter of convenience to the IRS, the IRS will continue to use IDES as a regional router in order to facilitate exchanges of information via the CTS. Therefore, with regard to inbound transmissions to the IRS, section 6103 protection arises when the information is uploaded from the CTS to IDES.

Furthermore, we believe section 6105 and treaty protections are likely to follow the conclusion under section 6103. In other words, with regard to inbound transmissions to

the IRS, the protection under section 6105 and tax conventions arise, not when the data
is uploaded to the CTS by the foreign tax administration, but only when the data is uploaded to IDES from the CTS.


 Have a Tax Problem? 

 
Contact the Tax Lawyers at
Marini & Associates, P.A.
 for a FREE Tax Consultation Contact US at
or Toll Free at 888-8TaxAid (888 882-9243).
 
 
 

 

 

Read more at: Tax Times blog

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