The Internal Revenue Service hasn’t been pursuing cases involving hundreds of billions of dollars in income from individuals and businesses whose income has been showing up in Form 1099-K information returns filed by credit and debit card providers, but has been otherwise unreported.
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The Form 1099-K data is used by the IRS to cross-check the money actually paid to businesses and individuals against the income they report themselves. The 1099-K forms are filed by merchants about income they receive from payment cards such as credit and debit cards, as well as through third-party network transactions. If taxpayers aren’t reporting or are underreporting their Form 1099-K income, the report pointed, they potentially aren’t paying the appropriate taxes.
The problem, however, is that the IRS can’t use the Form 1099-K data to identify business nonfilers and create cases if the taxpayers’ accounts are coded as not having an open filing requirement, or if no tax account exists because the business has never filed a tax return. The IRS also doesn’t identify all the individual nonfilers who have significant Form 1099-K income. For its audit, TIGTA identified 62,087 individual nonfilers with $575 million in Form 1099-K income whom the IRS had not identified as nonfilers and therefore nonfiler cases weren’t created.
The IRS can’t work on all the nonfiler cases it identifies because it simply doesn’t have the resources in terms of budget or available staff. Due in part to such constraints, TIGTA found there was a significant number of cases that weren’t selected to be worked on by the IRS (325,060 business nonfilers and 103,991 individual nonfilers with $203 billion and $3 billion in Form 1099-K income, respectively). For tax year 2017, a number of business and individual taxpayers with reporting discrepancies of at least $10,000 between the tax year 2017 income reported on their returns and the Form 1099-K income weren’t identified by the IRS’s underreporter programs, or they were identified, but weren’t worked on by the IRS examiners.
The report pointed out that the IRS doesn’t identify fiscal year business underreporters. TIGTA found a total of 3,314 corporate tax nonfilers with $1.5 billion in underreported Form 1099-K income. In addition, TIGTA identified a significant number of underreporter cases (45,169 business underreporter cases) that weren’t chosen to be worked on by the IRS’s Field Case Selection unit, with $73 billion in potentially underreported Form 1099-K income.
TIGTA estimates that if the IRS identified, created, and actually worked on just the nonfiler and underreporter cases with Form 1099-K income of $1 million or more for businesses (Form 1120) and $100,000 or more for individuals, the IRS could potentially assess an extra $5.723 billion in taxes.
TIGTA made seven recommendations in the report to help improve the case identification, creation and work selection processes for the IRS’s nonfiler and underreporter programs. The IRS agreed with three of the seven recommendations, but disagreed with four of them. The IRS plans to evaluate the start date criteria for reviewing newly created entities, define high-income business nonfilers, and work on a percentage of the individual nonfiler cases identified by TIGTA.
“The IRS recognizes the impact proper utilization and analysis of 1099-K information has on our tax compliance activities,” wrote Eric Hylton, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “This information can be useful in identifying activity that may not be reported accurately on an income tax return, which may, in turn, help to uncover sources of unreported income. As such, we continue to utilize 1099-K information during the case building, examination and collection phases for both filed and non-filed returns.”
Hylton contended that the report points to the success of the IRS’s nonfiler and underreporter programs. “While there may be potential discrepancies that have not been addressed by the IRS, it is not due to the failure of our programs but rather due to resource constraints,” he added.
