The Internal Revenue Service has needed to significantly cut back a program that automatically followed up with people who failed to file a tax return, due to budget constraints, according to a new report.
The report, from the Treasury Inspector General for Tax Administration, blamed resource constraints for the IRS’s curtailment of the Automated Substitute for Return Program, even though it recently brought in billions of dollars a year. From June 2010 through July 2011, the ASFR program collected over $3 billion, but from June 2015 to July 2016 collections plunged to approximately $430 million after it was scaled back.
When a taxpayer who has a tax filing requirement fails to file a tax return, the IRS is allowed to use third-party information to determine a tax liability and assess it. The IRS handles these cases mostly through the ASFR Program, which enforces filing compliance against taxpayers who haven’t filed individual income tax returns but seem to owe a lot of money in taxes. The IRS has mainly used the ASFR Program to focus on “Refund Hold” cases where the IRS holds a refund on one tax year to get an unfiled return for another year. According to the report, if the IRS refocused its priorities away from small Refund Hold cases and instead focused on high net tax due cases, the IRS could collect $843 million over the next five years. The report also contends that if the IRS worked on Refund Hold cases differently, it could have collected $45 million in unpaid taxes by applying tax refunds to amounts owed from prior years in which no tax return was filed.
Refund Hold inventory includes income tax refunds withheld from taxpayers to cover any potential tax liability on an unfiled tax return. Refund Hold cases are considered the highest priority work for the ASFR Program because refunds are held for only six months. High net tax due cases in the ASFR Program are those in which the potential tax liability from an unfiled return is $100,000 or more.
TIGTA’s analysis of 21,533 of the Refund Hold cases worked on under the ASFR Program between June 2011 and November 2016 identified 12,872 cases (or about 60 percent) that were not resolved within six months, and a refund was released to the taxpayer in 8,115 cases. The report noted that if the IRS held these refunds until the ASFR process was completed, it could have potentially applied $45 million to the taxpayers’ accounts.
However, TIGTA also estimates that if the IRS had worked on the same number of high net tax due cases it closed in the period July 2010 through June 2011 in the most current period of July 2015 through June 2016, it would have potentially increased revenue by about $169 million dollars, which is approximately $843 million over the next five years. Replacing 9 percent of the Refund Hold cases the ASFR Program closed during FY 2016 with high net tax due cases would achieve these results.
On top of that, TIGTA analyzed 103 randomly sampled ASFR cases and found that 9 percent of ASFR inventory could be eliminated if the IRS had considered previously filed tax returns and other information during the selection process.
“The IRS needs to bring noncompliant taxpayers into compliance to ensure fairness and reduce the burden on the vast majority of taxpayers who fully pay their taxes on time,” said TIGTA Inspector General J. Russell George in a statement. “An effective Automated Substitute for Return Program is an important part of its efforts to bring those who do not file tax returns into compliance.”
TIGTA made seven recommendations in the report. The IRS intends to take corrective actions on five of them, but disagreed with two of the recommendations. In one instance, IRS management didn’t agree to reassess the suspension of the ASFR program due to limited resources, and in the other instance, disagreed with extending the refund hold period due to its view that the hold period is sufficient when the ASFR Program is operating as intended.
“The Automated Substitute for Return (AFSR) program is a component of our collection strategy to promote filing compliance,” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “Attempting to bring noncompliant taxpayers into compliance ensures fairness and reduces the burden on taxpayers who fully pay their taxes on time. Resource constraints have forced us to make difficult decisions with respect to some of our programs, even those that provide clear benefits to tax administration. Because a nonfiler strategy is important to our mission, we are currently working to develop one that fits within the current and future IRS operating environment, requiring fewer human resources, while providing an opportunity for us to achieve our desired outcomes.”
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