IRS Negligence Destroys Your Privacy
When under the gun from IRS auditors and investigators your records are scrutinized as intensely and meticulously as possible. Yet, when it comes to the IRS’s requirements for following the rules about proper care and diligence of sensitive taxpayer information, they’re more careless than you can imagine.
The IRS has rules about what types of information must be transmitted through a secure and encrypted e-mail service, but a TIGTA investigation of IRS communications found that approximately 49% of IRS employees had used unsecure messaging services to transmit sensitive taxpayer information.
With 95% statistical confidence the investigation concluded that between 614,867 and 1,674,631 unencrypted messages were transmitted containing tax returns and personally identifiable information for the year of investigation.
They estimated that as high as 71,401,886 taxpayers could have had their information jeopardized.
This is not a trivial issue; cyber security breaches are making headline news non-stop. According to a Thales cyber security report, 57% of federal agencies had their data breached in 2018, three times as many as in 2016.
The IRS has a codified policy of harsh penalties for its employees, including the prospect of removal for sending personally identifiable information through unsecure means; however, the investigation concluded that “there was no evidence provided that these penalties were enforced.”
The IRS maintains a labyrinth of tax traps in a 70,000 page maze of a tax code. Whenever a violation of one of the seemingly infinite rules in the tax code is found on a tax return, penalties are alleged no questions asked. Of course, this harsh and unforgiving standard for policing taxpayers is not directed at their own misconduct.
Time and time again the IRS is held to and self-polices under a different standard then the taxpayers it ostensibly serves.
IRS Wastes Taxpayer Dollars and Claims it’s Efficient
The IRS loves to claim it is an efficient organization, often using the most inefficient bureaucracies on the planet as a basis of comparison.
After drawing a single comparison between the IRS’s unproductive exploits and the easy tax revenue it lets slip through the cracks and the essential services it neglects, it’ll be painfully obvious the claim doesn’t hold up.
Every year, according to Treasury Inspector General for Tax Administration, the IRS let’s approximately 1.9 million known taxpayers get away with not paying taxes according to internal IRS sample data audited for years 2012 and 2013.
This data is taken from a follow up on taxpayers who requested and were granted an extension for filing their taxes later than the typical April 15th requirement, but wound up never filing at all.
The total missing revenue from these delinquent tax payments is estimated at $7.4 billion for just tax year 2013. The situation gets worse if you add all the known delinquent taxpayers who never bothered to file at all, which brings the sum total to $15.8 billion for tax year 2013, comprising over 3.1 million taxpayers.
It doesn’t get any easier to collect taxes than this
An efficient operation would compare their current system of collection to an ideal system of collection that targets low-hanging fruit first.
What did the IRS have to say about not going after these easily identifiable, slam-dunk cases of tax delinquency? “Nonfilers with expired extensions for Tax Year 2013 were not addressed due to managerial decisions and resource constraints.”
Essentially, they decided to allocate their resources elsewhere, now all we have to do is compare this total waste to some of what the IRS has spent money on.
Waste! Waste! Waste!
A 2016 Senate Finance report, outlined the grossly excessive usage of IRS resources on palatial housing and first class travel by the IRS as “simply unacceptable.” It was found that a group of just 27 employees at the IRS were found to have spent more than $1.4 million on travel in the fiscal year 2015.
As per IRS rules, an IRS employee traveling in Washington is allowed to spend up to $7,099 a month for housing alone.
IRS claims it lacks the resources to pursue obvious cases of taxpayers failing to file their taxes. They’ve even cut customer service to taxpayers to the extent that only 4 out of every 10 taxpayers were expected to get through to a live person at the IRS in 2018, those that did get through waited approximately 30 minutes on average.
Yet, the IG reports that from Oct. 2015 to Dec. 2016, the IRS has had the spare cash to dole out $141 million in bonuses and time-off awards to its employees. More than $1.7 million in awards were given to 1,962 employees who had a disciplinary or adverse action, such as not paying taxes as an IRS employee.
Far be it from an efficient organization that claims it is swamped to be dishing out massive percentages of its overall budget to bonuses and a lavish travel account.
Like throwing money into a blackhole
According to the Wall Street Journal, the IRS will soon to be losing more money than it is collecting enforcing the Foreign Accounts Tax Compliance Act (FATCA), and according to a TIGTA investigation, “despite spending nearly $380 million, the IRS has taken limited or no action” to enforce a majority of FATCA’s provisions.
Essentially, these enforcement efforts are a monumental failure and a waste of IRS resources, even knowing this, the IRS requested that 20% of its proposed budget increase or an extra $127 million of additional annual spending go towards this financial black hole of an enforcement scheme.
Perpetual crisis is a government marketing strategy
There’s a disturbing trend in Washington that whenever an arm of government is faced with budget cuts, it begins cutting the most vital, visible, and appreciated services it offers first, while conserving as much of the waste and corrupt activities as possible.
Dubbed the Washington Monument Syndrome, this act of insanity is the norm in Washington where perverse incentives lead government officials to be as inefficient as possible so that they can demand ever increasing sums of money for a job that could, in any other setting, be done for a fraction of the cost.
If only the government had to manage its finances before it could demand more from the American taxpayer.
They Lobby to Make Government Inefficient, Frustrating and Costly for YOU!
Simplifying the tax-preparation burden has historically always been a bi-partisan issue, but legislation to that effect rarely ever meaningfully gets passed through Congress.
There are bad actors that fester in the halls of Congress who have continually obstructed the passage of “return-free filing” legislation which would pre-populate tax forms with all the information that is already provided to the IRS by employers so that it is ready to sign and submit.
Economists have estimated that such a system would apply to as much as 40% of all the tax returns. Filing your tax return could be effortless but tax preparation services H&R Block, and Intuit (TurboTax) have collectively spent millions of dollars annually to oppose such legislation.
This doesn’t even include the legions of accountants, lawyers and tax-preparation firms that have a massive vested interest in keeping the tax code complicated. After all, the more confusing your taxes are, the more they get to charge. It doesn’t help that the IRS maintains a labyrinth of tax traps that force otherwise independent Americans into the hands of these profiteers through reasonable fear of being solely liable for making a mistake.
How big of a deal is this?
Data from the Office of Information and Regulatory Affairs reveals that it takes 8.9 billion hours of labor, equivalent to 4.3 million Americans working full time on tax-return paperwork for an entire year, to comply with IRS tax filing requirements. Quantify this into dollars wasted and you’ll find that an inefficient IRS and its tax code costs America $409 billion in total this year.
But that’s just the government’s take on the situation; some organizations say the waste is larger. The Mercatus Center at George Mason University claims the hidden costs of complying with the tax code actually put the high estimate at approximately $1 trillion wasted per year.
A huge chunk of this economic waste is revenue for the tax industry which profits off of the fear and confusion of American taxpayers.
Is this a radical, crazy idea?
NPR and Priceonomics put the situation in an interesting light. What if paying your monthly credit card bill was like filing your taxes. It’s not a ludicrous comparison. They explain it like this:
“Each month, Visa would send you a blank form. The form would instruct you to gather all your receipts, write down every purchase you had made, and calculate the total amount you owed Visa. After you sent in your bill, Visa would check its records. If you’d forgotten a receipt and underpaid, Visa would fine you. If you’d made a big enough mistake, you’d go to jail.”
Not only is return-free filing obviously desirable, but it has precedent too. According to the tax policy center over 36 countries already offer return-free filing. In Estonia, 95% of taxpayers file using return-free filing, while they boast an average tax-return completion time of just 3 minutes.
But Americans won’t get to file their tax returns in 3 minutes, all thanks to H&R Block, Intuit and the legions of less prominent tax lawyers, accountants, specialists, and filing organizations that all profit off of your pain and suffering.
IRS Above the Law!
It’s tax season again, a perfect time to remind America’s taxpayers that “poor management is not a crime,” well if you’re an IRS employee anyway.
It’s been a little over 3 years since Lois Lerner, the former director of the exempt organizations unit of the IRS has been in the public light.
The aftermath of the Department of Justice’s discontinuation of Lerner’s criminal investigation has left the American people with the notion that the IRS is above the law, but just how high in the sky are they?
According to the DOJ, in their probe of the IRS targeting scandal, Lerner was let off the hook because “poor management is not a crime.”
When They Come For You
If we were to juxtapose the IRS’s get out of jail free card, with any one of the common reasons the IRS civilly and criminally penalizes the American taxpayer, would it hold up.
In the case of Lerner, the DOJ itself admitted the IRS targeting scandal was grounded in the disproportionate clamp down on conservative groups. Prior to this, according to the Treasury Inspector General for Tax Administration, the targeting began when the exempt organization unit at the IRS began explicitly searching for applications
with the names “Tea Party” or “patriot” or “political sounding names” with conservative slogans used as examples. These applications were selected for special review in which all discovered applications were put under a microscope for technical violations and essentially frozen. During the period of 2010 to 2012, only four were approved with conservative buzzwords in their title, while several dozen groups with liberal buzzwords were approved.
Corruption and malfeasance in office seems immediately apparent, what the investigation could not come up with is an admission of intent, without an admission of guilt; Lerner can’t be prosecuted, because all these actions are merely “poor management” which is according to the DOJ #8220;not a crime.”
Right off the bat, the tax code is known to be legendary in its ability to confuse and mislead taxpayers into incompletely, improperly and/or inaccurately filing and maintaining records.
The penalties for failing to file a form in the exact way the IRS may interpret it can incur penalties that range from civil to criminal. If you file the right form(s) and pay all the taxes, but the form(s) are not completed to the IRS’s liking, you are subject to an additional array of penalties.
Tax management gets exponentially more complicated the more financially complex your life is. Just filing a simple 1040 accurately is complicated for the average American. Many fail to understand the complicated bureaucratic jargon that litters just this single form and pay tax preparation services to do the legwork instead.
Given the complexity of the tax code, “poor management” should be the first expectation for incomplete, improper, and inaccurate filing with the IRS. When the IRS sends the Department of Justice to prosecute you, do you believe “poor management is not a crime” will hold up for you?
What about your papers?
Not keeping complete financial records merits its own penalties, fortunately the IRS limits this to just 3 years of maintenance, but this comes with a laundry list of exceptions, the most interesting of which is that if you believe you paid the correct amount but the IRS alleges otherwise, you are then legally required to have maintained six years of records to prove otherwise, and if there is suspicion that this underpayment is intentional the record maintenance requirement is indefinite. But just where are Lerner’s records? According to the IRS there are an estimated 24,000 e-mails from 2009 to 2011 considered lost. In addition to this, all of Lerner’s computer records are unrecoverable after a purported hard drive crash.
Failure to maintain and produce legally required records is typically obstruction of justice, but for Lerner it is merely “poor management.” When the IRS comes for the entirety of your records from 2013, do you believe “poor management is not a crime” will hold up for you?
Stopping Senior Scams: Developments in Financial Fraud Affecting Seniors
TESTIMONY OF Timothy P. Camus Deputy Inspector General for Investigations TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION before the SPECIAL COMMITTEE ON AGING UNITED STATES SENATE – February 15, 2017
Stopping Senior Scams: Developments in Financial Fraud Affecting Seniors
CFEG reports that on February 15, 2017 Timothy P. Camus, Deputy Inspector General for Investigations Treasury Inspector General For Tax Administration, testified before the Special Committee On Aging in the United States Senate, concerning tax-related fraud, including schemes employed by criminals who impersonate IRS employees and those who use lottery scams to steal money from taxpayers. CFEG will highlight Mr. Camus’ testimony below. A copy of the full text of Mr. Camus’ testimony may be reviewed by clicking the link below. CFEG recommends that taxpayers read Mr. Camus’ testimony and learn about these scams as a way to avoid becoming a victim.
Mr. Camus testified that the Treasury Inspector General for Tax Administration (TIGTA) was created by Congress in 1998 and is mandated to promote integrity in America’s tax system. It provides independent audit and investigative services to improve the economy, efficiency, and effectiveness of IRS operations. TIGTA’s oversight activities are designed to identify high-risk systemic inefficiencies in IRS operations and to investigate individuals and groups whose criminal activities assail the reputation and integrity of the IRS. TIGTA plays the key role of ensuring that the approximately 83,000 IRS employees who collected more than $3.3 trillion in tax revenue, processed more than 244 million tax returns, and issued more than $400 billion in tax refunds during Fiscal Year (FY) 2016, have done so in an effective and efficient manner while minimizing the risks of waste, fraud, and abuse.
Mr. Camus testified that TIGTA’s Office of Investigations (OI) protects the integrity of the IRS by investigating allegations of IRS employee misconduct, external threats to IRS employees and IRS data, and other attempts to impede or otherwise interfere with the IRS’s ability to collect taxes, which includes the impersonation of IRS employees. Specifically, OI investigates individuals who impersonate the IRS or its employees in order to extort money from innocent taxpayers under the guise of a non-existent IRS tax liability of some kind.
In his testimony Mr. Camus highlighted the two major IRS-related scams that have affected taxpayers over the past several years. He testified that since the fall of 2013, much of OI’s investigative efforts and resources have been focused on the investigation of a telephone impersonation scam in which more than 1.8 million Americans reported to us that they received unsolicited telephone calls from individuals falsely claiming to be IRS or Department of the Treasury employees. In addition, the so-called “lottery scam” has reemerged as a significant threat to tax administration.
IMPERSONATION SCAM
Mr. Camus stated that since October 1, 2013, more than 10,000 individuals in the United States have reported to TIGTA that they fell victim to this scam, and more than 1.8 million people reported to us that they had received a call from individuals impersonating IRS or Department of Treasury employees. The victims are of all ages, gender, economic status, and race. No one is immune from receiving the calls.
Here is how the scam works: The intended victim receives an unsolicited telephone call from a live person or from an automated call dialer. The caller, using a fake name and sometimes a fictitious IRS employee badge number, claims to be an IRS or Department of the Treasury employee. The scammers use Voice over Internet Protocol technology to hide their tracks and create false telephone numbers that show up on the victim’s caller ID system; this technique is known as spoofing. For example, the scammers may make it appear as though the calls are originating from the IRS, in Washington, D.C., or elsewhere in the U.S. when, in fact, they may have originated from other locations around the globe, including India.
The callers may even know the last four digits of the victim’s Social Security Number or other personal information about the victim. The impersonator claims that the intended victim owes taxes to the IRS and that, if those taxes are not paid immediately, the victim will be arrested or sued. Other threats for non-payment include the loss of a driver’s or business license or deportation. The impersonators often leave “urgent” messages to return telephone calls and they often call the victim multiple times.
Mr. Camus testified that the victims who were interviewed say the scammers who made the threatening statements as described above demanded that the victims pay the money using prepaid debit cards, wire transfers, Western Union payments, or MoneyGram® payments.
Mr. Camus testified that the scam has continued to evolve over time. Beginning in April 2016, victims were being told to pay the impersonators using Apple iTunes® gift cards. Between April and October 2016, between 70 and 80 percent of all payments made to the scammers were made via Apple iTunes® gift cards. In all cases, by the time the victims realized that they have been scammed, the funds were long gone.
LOTTERY SCAMS
Mr. Camus testified that while the impersonation scam was growing at an unprecedented rate, another scam, the lottery scam, also continued to target and victimize senior citizens. Although the lottery scam was not nearly the size or scope of the impersonation scam, its results were equally devastating for its victims. Its premise is simple: the scammer contacts the victim to advise the victim that he or she has won a lottery or some other prize, but before the winnings can be released, the victim is instructed to pay a non-existent Federal tax in order to receive the prize. Both the IRS impersonation scam and the lottery scam are very simple, but very effective in their use of the IRS as a means to cause confusion with their intended victims.
Read Full Report
Individual Representative Payees Who Do Not Have a Social Security Number in the Social Security Administration’s Payment Records
OIG – Office of the Inspector General, Social Security Administration
Audit Report February, 2017
Individual Representative Payees Who Do Not Have a Social Security Number in the Social Security Administration’s Payment Records
CFEG reports that the Office of the Inspector General, Social Security Administration, prepared an audit report in February, 2017 in which it identified 224,264 beneficiaries in current pay status who had an individual representative payee who did not have his/her SSN recorded in SSA’s payment records. You may review the entire report by clicking the link below.
SSA is required to obtain the SSNs of representative payee applicants. SSA uses the representative payee’s SSN to (1) verify the payee’s identifying information; (2) determine whether the payee applicant is receiving Old-Age, Survivors and Disability Insurance or Supplemental Security Income; (3) determine whether the applicant is a convicted felon; and (4) determine whether the applicant previously served as a representative payee and has a history of poor payee performance or misuse.
CFEG reports that the Inspector General found that SSA needs to improve controls to ensure it (a) records individual representative payees’ SSNs in its payment records and (b) retains the application for representative payees who do not have an SSN.
CFEG reports that 26,912 beneficiaries had representative payees whom SSA had terminated or not selected and from October 2004 to September 2016, SSA paid these representative payees about $853.1 million. The Inspector General further found that unless SSA takes corrective action, it is estimated that SSA will pay these representative payees about $189.6 million in benefits annually.
The Inspector General also estimated that 22,426 beneficiaries had an individual representative payee who did not have an SSN, and SSA had not followed its policy to retain the paper application. These representative payees were not in the payment records system. From April 2006 to September 2016, SSA paid these representative payees about $1 billion. Unless it takes corrective action, the Inspector General estimated that SSA will pay these representative payees about $182.5 million in benefits annually.
Read Full Report
IRS Summarizes “Dirty Dozen” List of Tax Scams for 2017
CFEG reports that the IRS announced in February, 2017 its “Dirty Dozen” list of tax scams for 2017. The full list may be viewed by clicking the link below. Taxpayers should review this annual list published by the IRS to be on the lookout for scams they may encounter throughout the year and especially during tax-filing season.
CFEG reports that taxpayers need to guard against ploys to steal their personal information, scam them out of money or talk them into engaging in questionable behavior with their taxes.
CFEG will discuss a few of these scams but to review the full list of scams you will need to click open the link below.
Phishing: Taxpayers need to be on guard against fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers via email about a bill or refund. Don’t click on one claiming to be from the IRS. Be wary of emails and websites that may be nothing more than scams to steal personal information. (IR-2017-15
Phone Scams: Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent years as con artists threaten taxpayers with police arrest, deportation and license revocation, among other things. (IR-2017-19)
Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. The IRS continues to aggressively pursue the criminals that file fraudulent returns using someone else’s Social Security number. Though the agency is making progress on this front, taxpayers still need to be extremely cautious and do everything they can to avoid being victimized. (IR-2017-22)
Return Preparer Fraud: Be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest high-quality service. However, there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers. (IR-2017-23)
Fake Charities: Be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally known organizations. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities. IRS.gov has the tools taxpayers need to check out the status of charitable organizations. (IR-2017-25)
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IRS Employee Sentenced for Conspiracy to Commit Identity Theft and Unauthorized Disclosure of IRS Records
CFEG reports that on January 20, 2017 the Treasury Inspector General For Tax Administration (TIGTA) released a report on one of its investigations concerning an IRS employee who committed identity theft and unauthorized disclosure of IRS records. TIGTA’s full report can be reviewed by clicking the link below. TIGTA reported that on November 21, 2016, in the Western District of Tennessee, Internal Revenue Service (IRS) employee Michael Anthony Jones was sentenced for conspiracy to commit identity theft and unauthorized disclosure of information. Jones, was initially charged with, and pled guilty to, the offense on July 19, 2016.
TIGTA stated that according to the court documents, Jones, a resident of Memphis, Tennessee, was employed by the IRS as a contact representative at the IRS Service Center in Memphis. Jones had a personal relationship with his coconspirator, identified only as “TFB.” Jones knowingly and willfully agreed and conspired with TFB and others to commit identity theft and unauthorized disclosure of information. The object of this conspiracy was for TFB to obtain IRS taxpayer information from Jones and use such information for unjust financial enrichment.
As part of the conspiracy, Jones used his access to the IRS databases, specifically the Remittance Transaction Research (RTR) system, to obtain taxpayer information without authorization. According to the Internal Revenue Manual, the RTR system provides access to remittance processing data and images, which generally include the front and back of a cancelled check or money order from a taxpayer, and a voucher, if submitted with the payment.
Jones obtained RTR printouts of cancelled checks made payable to the U.S. Treasury Department and other personal information submitted by taxpayers to the IRS. Jones then disclosed such information to his coconspirator, providing TFB with the printouts and Social Security Numbers (SSNs) of at least three taxpayers for use in fraudulent activities. TFB used the illegally obtained information to breach taxpayers’ bank accounts, obtain monies, and commit other financial fraud against the taxpayers and the IRS. Jones received a portion of the proceeds from TFB.
He was sentenced to two months in prison, followed by two years of supervised release. His supervised release will include two months of home detention and Jones will participate in Moral Reconation Therapy.
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CFEG Report on Taxpayers Avoiding Billions of Dollars in Backup Withholding Because of the Lack of IRS Enforcement
CFEG reports that the Treasury Inspector For Tax Administration (TIGTA) issued a report on September 14, 2016 (released to the public on October 26, 2016) finding that taxpayers are avoiding $billions of dollars in backup withholding because of the lack of IRS enforcement. CFEG views this lack of enforcement as a form of neglect or waste because enforcement of backup withholding requirements is essential to help ensure that taxes are paid. You may review the full report by clicking the link below.
Purpose of Backup Withholding
The purpose of backup withholding is to make sure that the Government is able to collect taxes on all appropriate income, particularly income that is not usually subject to withholding. In September 2015, TIGTA issued a report that identified deficiencies with backup withholding and other reporting requirements related to payment cards. TIGTA’s audit released October 26, 2016 continues an assessment of the IRS’s actions to ensure compliance with backup withholding provisions.
TIGTA’s Findings that Billions of Dollars Are Not Being Withheld By Payors
TIGTA found in its report that, although payers submitted the majority of information returns with valid Taxpayer Identification Numbers (TINs), they did not withhold nearly $9 billion in backup withholding tax when they submitted Tax Year (TY) 2013 information returns with missing or incorrect TINs. TIGTA also identified 13,647 payers who submitted 27,576 information returns with the same missing payee TIN for two years in a row (TYs 2012 and 2013). These returns reported payments of about $14.3 billion. Payers were required to immediately withhold nearly $4 billion from these payees, but just more than $1 million was withheld.
In addition, TIGTA identified 62,714 payers who submitted 203,751 information returns for which the payee TIN was incorrect in four consecutive years. These returns reported payments totaling nearly $17 billion, and payers were required to withhold nearly $5 billion from these payees, but only $1 million was withheld.
TIGTA also found that there is no justification for criteria used to exclude payers from receiving backup withholding notices that include missing or incorrect TINs. For example, the IRS notified payers of the missing or incorrect TINs associated with only 10.8 million (57 percent) returns of the 18.9 million that were identified. Finally, TIGTA’s review of TY 2013 information returns identified 2.3 million returns were submitted for 1.6 million individuals with reportable payments totaling more than $4 billion for which the payee TIN was that of a deceased individual.
“While the legal requirements for backup withholding have been in effect for over 30 years, a substantial amount of tax is not being withheld as required,” said J. Russell George, the Treasury Inspector General for Tax Administration. “The IRS’s enforcement of backup withholding requirements is essential to help ensure that taxes are paid,” he added.
CFEG FOIA to IRS
CFEG also reports that in response to a recent a Freedom of Information Act (FOIA) request it sent to the IRS on November 8, 2016, the IRS produced documents pertaining to the data on the number of 1099s which were filed by payors that contained missing TINs (taxpayer identification numbers, invalid SSNs (Social Security Numbers), unmatchable EINs (Employer Identification Numbers) and non-numeric 1099s. CFEG has provided pertinent documents produced by the IRS for review in this report. The data may be found by clicking the link below.
Types of 1099s
There are seven different types of 1099 forms that are filed with the IRS. There is the 1099-INT form which is used by payors to report interest income. There is a 1099-MISC form which is for miscellaneous income. There is a 1099-DIV form used to report dividend income and distributions. There is a 1099-PATR form used to report distributions received from cooperatives. There is a 1099-K used to report payment card and third party network transactions. There is a 1099-B form used to report proceeds from Brokers and Barter Exchange transactions. There is a 1099-OID form (Original Issue Discount) which is used when you purchase a bond or note for an amount less than face value. The OID is the difference between the bond’s stated redemption price (usually its face value) and its issue price (generally the amount the bond or note was first sold by the issuer).
A congressional study focusing on income and Social Security tax compliance in the fall of 1978, identified three areas of concern: 1.) failure of payors to file Forms 1099; 2.) incorrect Taxpayer Identification Numbers (TIN) being used for identification; and 3.) non-reporting of income by independent contractors. The Tax Equity and Fiscal Responsibilities Act of 1982 (TEFRA) and the Interest and Dividend Tax Compliance Act of 1983 enacted provisions to combat these failures. The backup withholding provisions of IRC § 3406 was one of the remedies. This section requires payors to deduct withholding taxes from certain reportable payments.
Form 945, Annual Return of Withheld Federal Income Tax, is used to report income tax withheld from certain reportable, non-payroll payments, which include, but are not limited to, non-employee compensation, pensions and annuities, IRA distributions, gambling winnings, and Indian gaming per capita payments. The return is filed on an annual basis and is due by the last day of the month following the end of the year, generally January 31.
IRC § 3406(a)(1) requires that, in the case of any reportable payment, the payor shall deduct and withhold from such payment a tax equal to a product of the fourth lowest rate of tax applicable under IRC § 1(c), if: 1.) the payee fails to furnish his/her taxpayer identification number (TIN) to the payor in the manner required; 2.) the Secretary notifies the payor that the TIN furnished by the payee is incorrect; 3.) there has been a notified payee underreporting; or 4.) there has been a payee certification failure. Items 3 and 4 apply only to “reportable interest or dividends” as defined in IRC § 3406(b)(2).
In general, reportable payments as described in IRC § 6041 and § 6041A(a), such as rent, commissions and non-employee compensation, aggregating $600 or more in a calendar year are subject to backup withholding. Treas. Reg. § 31.3406(b)(3)-1(b)(3)(i) clarifies the amount subject to withholding as: 1.) the entire payment that causes the total amount of each reportable kind to the payee during the calendar year to equal $600 or more, plus 2.) the amount of additional payments to that payee subject to reporting IRC § 3406(e) addresses the period(s) for which withholding is required in the four situations which trigger backup withholding: 1.) the payee fails to furnish his taxpayer identification number (TIN) to the payor in the manner required; 2.) the Service notifies the payor that the TIN furnished by the payee is incorrect, first and 2nd notices; 3.) there has been a notified payee underreporting: or 4.) there has been a payee certification failure. Paragraphs 3 and 4 apply only to interest and dividends.
Data on the Number of Missing TINs, Incorrect TINs and Unmatchable TINs
In 2016, as of April 20, 2016, with respect to the 1099-INT form there were 34,056 missing TINs, 25,606 incorrect TINs and 386,541 where the name was incorrect and did not match the TIN.
In 2016, as of April 20, 2016, with respect to the 1099-DIV form there were 16,452 missing TINs, 47,459 incorrect TINs and 261,803 where the name was incorrect and did not match the TIN.
In 2016, as of April 20, 2016, with respect to the 1099-OID form there were 5,757 missing TINs, 447 incorrect TINs and 10,448 where the name was incorrect and did not match the TIN.
In 2016, as of April 20, 2016, with respect to the 1099-PATR form there were 1,320 missing TINs, 878 incorrect TINs and 9,557 where the name was incorrect and did not match the TIN.
In 2016, as of April 20, 2016, with respect to the 1099-B form there were 269,255 missing TINs, 116,220 incorrect TINs and 4,308,678 where the name was incorrect and did not match the TIN.
In 2016, as of April 20, 2016, with respect to the 1099-MISC form there were 241,415 missing TINs, 200,122 incorrect TINs and 2,418,320 where the name was incorrect and did not match the TIN.
In 2016, as of April 20, 2016, with respect to the 1099-K form there were 7,567 missing TINs, 17,108 incorrect TINs and 266,681 where the name was incorrect and did not match the TIN.
In 2014 there were 1,771,047,047 1099s issued. Of that total there were 701,662 invalid SSNs, 11,045,816 unmatchable EINs, and 2,476,698 non-numeric 1099s. In 2013 there were 1,447,859,143 1099s issued. Of that total there were 763,410 invalid SSNs, 13,959,950 unmatchable EINs, and 3,866,772 non-numeric 1099s. In 2012 there were 1,294,528,346 1099s issued. Of that total there were 756,025 invalid SSNs, 12,635,821 unmatchable EINs, and 3,147,692 non-numeric 1099s.
Conclusion
Backup withholding has been in effect for over 30 years. A substantial amount of tax is not being withheld as required by law. The IRS’s enforcement of backup withholding requirements is essential to help ensure that taxes are paid.
Read TIGTA Report
Read CFEG IRS Data
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Analysis of Resources Allocated to Taxpayer Services
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Analysis of Resources Allocated to Taxpayer Services
CFEG reports that the Treasury Inspector General For Tax Administration (TIGTA) released a report titled, “Analysis of Resources Allocated to Taxpayer Service” on January 5, 2017. The full report may be reviewed by clicking the link below. CFEG will summarize highlight TIGTA’s findings. In this report TIGTA performed an analysis to address congressional inquiries regarding the IRS’s allocation of resources to taxpayer services. TIGTA noted in its report that the IRS pointed to budgetary constraints as the cause for reducing its taxpayer service activities, including its telephone assistance, in FY 2015. However, based on TIGTA’s analysis the IRS had sufficient funds out of the Taxpayer Services appropriation, which had increased by $198 million, and $421 million available in user fee receipts in FY 2015 for taxpayer service activities.
TIGTA found that the amount of the IRS’s Taxpayer Services appropriation increased $198 million from FY 2013 to FY 2016. However, the amount of user fee receipts that the IRS used to supplement its annual Taxpayer Services appropriation was only about $40 million of the total $421 million user fee receipts in FY 2015. This $40 million represented a 79 percent decrease since FY 2013. TIGTA found that the IRS increased this amount to $99.6 million in FY 2016. IRS management noted that they increased the amount of user fees used to supplement the annual Operations Support appropriation in FY 2015 because appropriated funds for Operations Support were reduced in the last several fiscal years despite funding needs to implement legislative obligations.
TIGTA found that the overall number of resources allocated by IRS executives to work taxpayer correspondence and provide telephone assistance steadily decreased from FY 2013 to FY 2015. The overall staff hours allocated by IRS executives to answer telephone calls from taxpayers and work taxpayer correspondence decreased by approximately 11 percent between FYs 2013 and 2015. During this period, the IRS also used a higher percentage of resources to work correspondence which contributed to a lower level of telephone assistance. For example, of the total full-time equivalents allocated, the percentage used to work correspondence increased from 47.6 percent in FY 2013 to 52.4 percent in FY 2015 which, in turn, resulted in fewer full-time equivalents available to answer telephones. In other words, there were fewer hours worked by assistors to answer calls form taxpayers.
While TIGTA noted that IRS officials stated that using employees to work correspondence and setting a sharply lower level of telephone assistance goal were to address the significant aging of taxpayer correspondence, TIGTA’s analysis of correspondence inventory at the beginning of FY 2015 did not support the justification for using a higher percentage of staff to work correspondence.
https://www.treasury.gov/tigta/auditreports/2017reports/201740013fr.pdf
