Taxpayers are avoiding billions of dollars in withholdings annually because of lax enforcement by the Internal Revenue Service, according to a recent audit by the Treasury Inspector General for Tax Administration.
The long standing problem relates to an IRS requirement that individuals earning income other than from wages or pensions provide the government with a tax identification number (TIN) and pay 28 percent of so-called backup withholdings or face penalties. Income subject to backup withholdings ranges from rents, royalties and gross proceeds paid to attorneys to other forms of fixed gains or profits.
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The inspector general first blew the whistle on this problem a year ago and found in the new audit that payers failed to withhold nearly $9 billion in backup withholdings in 2013 – the most recent tax year reviewed by the auditors.
The inspector general’s staff also identified 13,647 payers who submitted 27,576 tax information returns with their tax identification numbers missing for two years in a row, in 2012 and 2013. Those payers were required by law to withhold nearly $4 billion, yet little more than $1 million – a miniscule fraction -- was actually withheld for the government.
Backup withholding was designed to make certain that the government is able to collect taxes on “all appropriate income,” particularly income that is not usually subject to withholdings as are wages, according to the IRS. At a time when the government is struggling to make ends meet without added borrowing, those billions of dollars in tax withholdings are much needed in the federal coffers.
“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,” J. Russell George, the Treasury Inspector General for Tax Administration, said in a statement accompanying the audit. “The IRS’s enforcement of backup withholding requirements is essential to help ensure that taxes are paid.”
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The backup withholding problem, while serious, pales in comparison to the overall problem of U.S. tax cheating and duplicity.
Last April, the Internal Revenue Service reported an extraordinary $458 billion average annual disparity between taxes that are owed and actually paid. According to that report, between fiscal 2008 and 2010 there was a nearly half-trillion-dollar a year difference between the overall $2.49 trillion federal tax liability and the amount that was paid voluntarily or on time.
That glaring “tax gap,” as it was dubbed, included an estimated $387 billion of underreported taxes, $32 billion of taxes never paid and $39 billion of underpayments of taxes due, as the Fiscal Times reported at the time. The IRS predicted that about $52 billion of the $458 billion total eventually would be recovered.
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George’s office recommended that the IRS commissioner and the agency’s small business/self-employed division devise a new service-wide strategy for more aggressively enforcing the withholding and tax identification number reporting requirement. The IRS has agreed with the recommendation and is now finalizing and implementing its backup withholding strategy, according to the report.
