Billions of dollars in incorrect backup withholdings are overlooked by the Internal Revenue Service, according to a new report.
The report, from the Treasury Inspector General for Tax Administration, found that a lack of IRS enforcement of backup withholding requirements is allowing billions in tax revenue to go uncollected.
The goal of backup withholding is to ensure the federal government can collect taxes on all appropriate sources of income, especially income that isn’t typically subject to withholding. Last September, TIGTA released an earlier report that found problems with backup withholding and other reporting requirements for payment cards. The new report focuses on the IRS’s actions to ensure compliance in general with the backup withholding requirements.
Payers submitted the majority of information returns with valid Taxpayer Identification Numbers, but when they submitted tax year 2013 information returns with missing or incorrect TINs they did not withhold nearly $9 billion in backup withholding tax, according to the report.
TIGTA also identified 13,647 payers who submitted 27,576 information returns that had the same missing payee TIN for two tax years in a row, 2012 and 2013. These information returns reported payments of about $14.3 billion. Payers were supposed to immediately withhold nearly $4 billion from these payees, but instead they only withheld approximately $1 million.
TIGTA also identified 62,714 payers who submitted 203,751 information returns for which the payee TIN was wrong for four consecutive years. These returns reported payments amounting to nearly $17 billion. The payers were required to withhold almost $5 billion from these payees, but just $1 million was withheld.
TIGTA found no justification for the criteria the IRS used to exclude payers from receiving backup withholding notices that include missing or incorrect TINs. The IRS notified payers of the missing or incorrect TINs associated with only 10.8 million returns of the 18.9 million that were identified, or around 57 percent.
The backup withholding problems even extend to dead people. TIGTA’s review of tax year 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 matched a deceased individual’s.
“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 TIGTA Inspector General J. Russell George in a statement. “The IRS’s enforcement of backup withholding requirements is essential to help ensure that taxes are paid.”
The IRS agreed with TIGTA’s audit recommendations and plans to use the report’s findings and recommendations when finalizing and implementing its backup withholding strategy.
The IRS said it has been working to correct the problems since last September’s report, but pointed out it is shorthanded due to budget constraints.
“We note that, as a result of your previous audit and recommendations, we had convened a team to review the backup withholding process from beginning to end,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the latest report. “The team has been mapping and validating the existing processes in order to identify and evaluate potential gaps. They are looking for solutions to close any identified gaps in our process that can be implemented with our current available resources. As TIGTA knows, since 2010, IRS has lost more than 5,000 employees in our enforcement area. Although we are working to add some new enforcement hires to be spread across our various compliance functions, this will not replace the deficit created by those employees who have left and continue to leave. We will continue to make measured allocation decisions on the best use of our limited resources amongst our program areas.”
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