Tax Withholding Compliance Comes Up Short

By identifying higher wage earners who are having too few taxes withheld from their paychecks, the Internal Revenue Service could collect as much as $1.6 billion in additional taxes over a five-year period, according to a new report.

The report, by the Treasury Inspector General for Tax Administration, reviewed the IRS's processes for determining whether employers are withholding the proper amount of taxes from their employees' pay. The IRS's Withholding Compliance Program identifies taxpayers with withholding problems and works to increase the amount of tax withheld.

Through this program, the IRS uses information reported on Forms W-2 to identify taxpayers who may not have enough Federal income taxes withheld from their wages. The result has been a significant increase in the amount of wages withheld from taxpayers and a decline in balance due returns filed by taxpayers.

However, TIGTA found that the program's limitations are preventing collection of significantly greater taxes. For example, if the IRS were to focus on cases involving higher wage earners, it could collect an estimated $318.7 million to $1.6 billion in additional underwithheld taxes, according to the report.

"We found that the IRS may be missing significant opportunities to detect and address withholding problems among higher wage earners," said TIGTA Inspector General J. Russell George in a statement. "Corrective action could help reduce perceived inequities in the tax system."

TIGTA recommended that the IRS study the underwitholding compliance risk throughout all segments of the wage-earner population and adjust, if necessary, its case selection methods.

The IRS agreed in general with TIGTA's recommendations and has or will take actions in response to those recommendations.