Mortgage Interest Data Could Be Used to Pursue More Nonfilers and Underreporters
August 6, 2009
Reference Number: 2009-40-112
Redaction Legend:
1 = Tax Return/Return Information
Phone Number |
202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site |
http://www.tigta.gov
August 6, 2009
MEMORANDUM FOR COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Mortgage Interest Data Could Be Used to Pursue More Nonfilers and Underreporters (Audit # 200840025)
This report presents the results of our review to determine
how effectively the Internal Revenue Service (IRS) uses Mortgage Interest
Statements (Form 1098) to identify unreported income. The review was part of our Fiscal Year 2009 Annual
Audit Plan under the major management challenge of Tax Compliance Initiatives.
Impact on the Taxpayer
Individuals who fail to file required
returns and/or underreport their income can create unfair burdens on honest
taxpayers and diminish the public’s respect for the tax system. We recognize that, given the current state of
the economy, many individuals are struggling to meet their mortgages and other
financial obligations. Nevertheless, a
large number of individuals are paying a significant amount of mortgage
interest and either are not filing tax returns or are filing tax returns
reporting income that is not sufficient to cover their mortgage obligations and
basic living expenses. The considerable difference
between income and expenditures on these returns raises serious questions about
whether additional income should have been reported.
Synopsis
To its credit, the IRS recognizes the potential benefits of incorporating Forms 1098 into its compliance efforts and is using these documents in its Return Delinquency Program.[1] While this Program is experiencing success in identifying potential nonfilers, our samples of Forms 1098 show the documents may also provide some good audit leads for use in the IRS Examination function.
We evaluated 2 statistically valid samples of 100 individuals with combined Forms 1098 totaling $20,000 or more of mortgage interest that were filed with the IRS for Tax Year (TY) 2005.[2] For the first sample, we matched the taxpayer identification numbers on Forms 1098 meeting our criteria to accounts in the IRS Individual Return Transaction File and found 219,593 individuals without a corresponding tax return. From the 219,593 potential nonfilers, we randomly selected 100 for review and identified 21 individuals who appeared to have a filing requirement for TY 2005, but had yet to be contacted by the IRS.
To determine the amount of taxes the 21 potential nonfilers may owe, we used the IRS Examination function’s cash transaction analysis process to obtain an estimate of each individual’s taxable income. Next, we followed the IRS procedures for preparing proposed assessments in situations where a tax return was not filed and estimated that the 21 individuals may owe as much as $177,715 in delinquent taxes and $107,209 in penalties and interest. When projected to our population of 219,593 potential nonfilers, our results indicate that 46,115 potential nonfilers may collectively owe $625 million in delinquent taxes, penalties, and interest for TY 2005. The projection is based on a 95 percent confidence level. We expect the number of potential nonfilers to fall between 28,500 and 63,729 with amounts owed ranging between $351,894,360 and $899,456,350.
In the second sample, we matched the taxpayer identification numbers on Forms 1098 meeting our criteria to the accounts in the IRS Individual Return Transaction File and identified 245,535 individuals who reported less adjusted gross income on the returns they filed for TY 2005 than the amount of mortgage interest reflected on their Forms 1098. After randomly selecting 100 of the 245,535 individual returns for review, we used the IRS’ cash transaction analysis process and identified 37 individuals who may have underreported their income because their mortgage interest and basic living expenses appear to exceed their income. For example, we found ****(1)**** Overall, based on our sample results, we estimated that these 37 individuals may owe $265,018 in additional taxes and $61,233 in penalties and interest. When projected to our population of 245,535 filers, our results indicate that 90,848 taxpayers may owe $801 million in additional taxes, penalties, and interest for TY 2005. The projection is based on a 95 percent confidence level. We expect the number of individuals with insufficient funds to fall between 67,501 and 114,195 with the amounts owed ranging between $548,757,358 and $1,053,363,428.
It is important to note that we do not know if the potential nonfilers identified in our review were, in fact, required to file tax returns. Nor do we know, without an IRS examination, if the potential underreporters owe additional taxes, penalties, and interest. However, Examination function officials reviewed our results and agreed with the conclusions. In addition, an outside statistician confirmed the accuracy and validity of our sampling methodologies as well as our projections.
Recommendation
Given the potential compliance implications and revenue at stake, we recommended that the Director, Examination, Small Business/Self-Employed Division, explore the feasibility of making greater use of mortgage interest data to pursue additional nonfilers and underreporters for audit.
Response
IRS management agreed with our recommendation and will expand an existing Area-wide Compliance Initiative Project on the mortgage interest deduction to a Nationwide Compliance Initiative Project. IRS management also indicated that the Small Business/Self-Employed Division will form a task team to study the existing processes for identifying nonfiler workload to ensure that mortgage interest is appropriately considered in selecting nonfiler cases for delivery to examiners. Management’s complete response to the draft report is included as Appendix VII.
Copies of
this report are also being sent to the IRS managers affected by the report
recommendation. Please contact me at
(202) 622-6510 if you have questions or Margaret E. Begg, Assistant Inspector General
for Audit (Compliance and Enforcement Operations), at (202) 622-8510.
High Mortgage Interest
Payments May Be Useful to Pursue Potential Nonfilers and Underreporters
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix V
– Example of Computing a Nonfiler Assessment
Appendix
VI – Glossary of Terms
Appendix VII
– Management’s Response to the Draft Report
Abbreviations
|
IRS |
Internal Revenue Service |
|
TY |
Tax Year |
At the end of each tax year, Federal law requires financial institutions to provide the Internal Revenue Service (IRS) with Mortgage Interest Statements (Form 1098) detailing the amount of interest received from the mortgages they hold. Besides identifying the amount of mortgage interest received, the law requires financial institutions to identify the names and taxpayer identification numbers of the individual borrowers on the Form 1098 and provide a copy of the document to the borrower responsible for paying the interest. Individuals, in turn, use the documents to report their mortgage interest payments on their tax returns, including the interest paid for mortgages on their primary residences, vacation homes, or commercial properties.
The role
and benefits of third-party information reporting, such as Forms 1098, are
central to the success of our nation’s tax system.
The role and benefits of third-party information reporting, such as Forms 1098, are central to the success of our nation’s tax system because they help assure taxpayers accurately report certain deductions and income.[3] Because information reporting generally is required to take place shortly after the end of the calendar year, it provides a reliable information source taxpayers can use in preparing their annual tax returns. This reduces the likelihood that taxpayers may inadvertently neglect to include items such as the mortgage interest paid on a vacation home or the interest income from a small savings account.
Besides assisting taxpayers with preparing their annual tax returns, information reporting is a key component in IRS compliance programs that are designed to detect and pursue noncompliant taxpayers who underreport income, overstate deductions, or do not file tax returns. Individuals who fail to file required returns and/or underreport their income can create unfair burdens on honest taxpayers and diminish the public’s respect for the tax system. In the Information Reporting Program, IRS computers match the items reflected on the information documents submitted by third parties to the related items on the filed tax returns of those who received the documents. If the match shows a discrepancy between income reported or deductions claimed, a potential underreporter[4] case may be developed so the IRS can determine whether an audit is warranted to resolve these potential issues. For a match that shows no corresponding tax return, a potential nonfiler case could be initiated.
As a result of this matching process, the IRS annually contacts about 3 million taxpayers regarding potential discrepancies in their tax information. Another 2 million taxpayers are contacted to resolve potential nonfiler situations.[5] According to Fiscal Year 2008 IRS statistics, these contacts resulted in tax assessments of about $6 billion against taxpayers who had filed their tax returns but underreported their income. In addition, the IRS reported making another $10 billion in tax, penalty, and interest assessments against taxpayers who had not filed their tax returns.
This review was performed in the Small
Business/Self-Employed Division and the Campus Compliance Services function in
New Carrollton, Maryland, during the period January 2008 through April
2009. Except for auditing IRS databases
to validate the accuracy and reliability of the information and evaluating the
adequacy of IRS internal controls over Forms 1098, this audit was conducted in accordance with generally accepted
government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objective.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objective. Detailed information on our audit
objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed
in Appendix II.
High Mortgage Interest Payments May Be Useful to Pursue Potential Nonfilers and Underreporters
Among the widely reported factors contributing to the high default rate in the home mortgage industry are individuals who may have assumed mortgages requiring payments that exceeded their ability to pay. We recognize that, given the current state of the economy, many individuals are struggling to meet their mortgages and other financial obligations. Nevertheless, a large number of individuals are paying a significant amount of mortgage interest and either are not filing tax returns or are filing tax returns indicating their income is not sufficient to cover their mortgage obligations and basic living expenses. The considerable difference between expenditures and income raises very serious questions about whether these taxpayers have additional sources of income that should have been reported on their tax returns.
The IRS may be able to enhance its efforts to address taxpayers who
are making high mortgage interest payments, but are not filing tax returns
To its credit, the IRS recognizes the potential benefits of incorporating Forms 1098 into its compliance efforts and is using the documents in its Collection function to bring nonfilers into compliance. Under the Collection function Return Delinquency Program, nonfilers who meet specific income and mortgage interest criteria are being identified and sent notices requesting that they file their tax returns or provide explanations as to why they are not required to file. Taxpayers who are required to file, but have not done so after receiving these notices, may be sent to the Automated Collection System and/or the Collection Field function for further contact. If a taxpayer still refuses to file and the case meets the high income referral criteria, the Collection function may refer the taxpayer to the Examination function to have a “substitute” tax return prepared for them.
IRS statistics for Tax Years (TY) 2004 and 2005 combined show that Forms 1098 have been used as the basis to open cases and issue contact letters to 227,019 potential nonfilers soliciting that they file their tax returns or explain why they do not need to file. Although most (54 percent) of the potential nonfilers have yet to respond to the contact letters, statistics provided to us by the IRS indicate 69,693 delinquent returns have been received and processed. The tax assessed on 28,026 TY 2005 returns filed after nonfilers had received a delinquency notice from the IRS because of mortgage interest conditions totaled $276 million.[6] While the Return Delinquency Program is experiencing success in identifying potential nonfilers, our samples of Forms 1098 show the documents may also provide good audit leads for the IRS Examination function. These leads could be used with other sources of information to pursue additional potential nonfilers as well as underreporters who might otherwise not be pursued due to resource constraints.
To illustrate, we evaluated 2 statistically valid samples of 100 individuals with combined Forms 1098 totaling $20,000 or more of mortgage interest[7] that were filed with the IRS for TY 2005. For the first sample, we matched the taxpayer identification numbers on Forms 1098 meeting our criteria to accounts in the IRS Individual Return Transaction File and found 219,593 individuals without a corresponding tax return. From the 219,593 potential nonfilers, we randomly selected 100 for review and identified 21 individuals who appeared to have filing requirements for TY 2005, but had yet to be contacted by the IRS.
To determine the amount of taxes the 21 potential nonfilers may owe, we first followed the cash transaction analysis process used by the IRS Examination function to obtain an estimate of each individual’s income. The cash transaction analysis process is an auditing technique that uses personal living expense estimates published by the Bureau of Labor Statistics in comparing a taxpayer’s expenditures to their income sources. If a taxpayer’s expenditures exceed their income and the source to pay for such expenditures cannot be explained, the excess represents potential unreported income.
Next, we followed the IRS procedures for preparing proposed assessments in situations where it estimates the taxes owed and prepares a “substitute” return. We found that the 21 individuals may owe as much as $177,715 in delinquent taxes and $107,209 in penalties and interest.[8] When projected to the population of 219,593 potential nonfilers, our results indicate 46,115 potential nonfilers may collectively owe as much as $625 million in delinquent taxes, penalties, and interest for TY 2005, but have not been contacted by the IRS Return Delinquency Program.[9] The projection is based on a 95 percent confidence level. We expect the number of potential nonfilers to fall between 28,500 and 63,729 with amounts owed ranging between $351,894,360 and $899,456,350.
Significant
underreporting may exist on tax returns filed with high mortgage interest
payments
In the second sample, we matched the taxpayer identification numbers on Forms 1098 meeting our criteria to the IRS Individual Return Transaction File and identified 245,535 individuals who reported less adjusted gross income on the returns they filed for TY 2005 than the amount of mortgage interest reflected on their Forms 1098. After randomly selecting 100 of the 245,535 individual returns for review, we used the cash transaction analysis process and identified 37 individuals who may have underreported their income because their mortgage interest and estimated basic living expenses appear to exceed their income.
For example, we found ****(1)**** In another instance, ****(1)**** As Figure 1 shows, we also found significant differences between the adjusted gross incomes reported by the 37 potential underreporters and the adjusted gross incomes reported by all individuals filing tax returns for TY 2005 who had $20,000 or more of mortgage interest.
Figure 1: Comparison Between the Adjusted Gross Incomes
Reported
by 37 Potential Underreporters
and the Individual Filing Population
|
Description |
Average Adjusted Gross Incomes |
Average Mortgage Interest Reported |
|
37 potential underreporters who
filed tax returns for TY 2005 with $20,000 or more of mortgage interest. |
$8,479 |
$33,916 |
|
All individuals who filed tax
returns for TY 2005 with $20,000 or more of mortgage interest. |
$165,841 |
$34,753 |
Source: Analysis of Individual Return Transaction File and Information Returns Master File data for TY 2005.
Overall, our sample results indicate the 37 potential underreporters may owe $265,018 in additional taxes and $61,233 in penalties and interest. When projected to our population of 245,535 individuals, our results indicate there are 90,848 potential underreporters who may owe $801 million in additional taxes, penalties, and interest for TY 2005.[10] The projection is based on a 95 percent confidence level. We expect the number of individuals with insufficient funds to fall between 67,501 and 114,195 with the amounts owed ranging between $548,757,358 and $1,053,363,428.
It is important to note that we do not know, without the IRS contacting the individuals, if the potential nonfilers indentified in our review are required to file tax returns. Nor do we know, without an IRS examination, if the potential underreporters owe additional taxes, penalties, and interest. However, Examination function officials reviewed our results and agreed with our conclusions, and an outside statistician confirmed the accuracy and validity of our sampling methodologies as well as our projections. Given the potential compliance implications and revenue at stake, we believe the next step is for the IRS to explore the potential opportunities that may exist for making greater use of mortgage interest data in its compliance efforts.
The IRS has a long history of using special projects to explore and evaluate new approaches to address potential areas of noncompliance. For example, some suspected areas of noncompliance within various taxpayer segments are currently evaluated and managed through various Compliance Initiative Projects within the IRS’ operating divisions. With years of experience to draw upon, the IRS staff involved in these and other projects are better positioned than us to implement cost effective approaches to broadening the use of Forms 1098 in IRS compliance efforts.
Recommendation
Recommendation
1: The Director, Examination,
Small Business/Self-Employed Division, should explore the feasibility of making greater use of mortgage interest data to pursue additional nonfilers
and underreporters for audit.
Management’s Response: IRS management agreed with our recommendation and will expand an existing Area-wide Compliance Initiative Project on the mortgage interest deduction to a Nationwide Compliance Initiative Project. IRS management will also evaluate the results and modify the Compliance Initiative Project, as appropriate, based upon the results. Further, they will form a task team to study the existing processes for identifying nonfiler workload to ensure that mortgage interest is appropriately considered in selecting nonfiler cases for delivery to examiners.
Appendix I
Detailed Objective, Scope, and Methodology
The objective of this review was to determine how effectively the IRS uses Mortgage Interest Statements (Form 1098) to identify unreported income. Unless otherwise noted, our limited tests of the reliability of data obtained from various IRS systems did not identify any material errors. We tested the reliability of the data by scanning the data received for blank, incomplete, illogical, or improper data. In addition, we traced a judgmental sample for each data set to the source IRS files to ensure accuracy. We did not perform any testing of internal controls over the systems that were the sources of our data. To accomplish this objective, we:
I. Determined whether the IRS effectively uses mortgage interest information provided by third parties to identify individuals who are not reporting all of their income for tax purposes.
A. Identified what processes are in place where the IRS uses mortgage interest data to identify unreported income.
B.
Analyzed information returns and individuals’
tax records on IRS systems to determine whether there
is a potential for identifying unreported income by:
1.
Identifying whether
the taxpayers who had paid mortgage interest had filed tax returns and reported
the mortgage interest as a deduction.
2.
Profiling and
comparing the mortgage interest data on the Information Returns Master File[11] against income data on the Individual Return Transaction
File to identify where there is more potential for underreporting of
income.
a)
We chose individuals with combined Forms 1098
reporting $20,000 or more of mortgage interest because it would enable us to
focus on those who were more likely to have tax return filing requirements for
TY 2005. Individuals with income over
$18,400 would have to file a tax return regardless of filing status or age and,
if they paid at least $20,000 in mortgage interest, it is reasonable to assume
they more than likely made at least $18,400 in income.
b)
We eliminated
taxpayers who had filed Supplemental Income and Loss (Schedule E) with their
tax returns to focus on mortgage interest on personal residences.
3.
Using the available
income, mortgage interest, and other expense data to identify the amount of
income reasonably needed to be able to afford the mortgage interest payments.
4. Selecting a statistically valid random sample of 100 taxpayers from a population of 245,535 taxpayers who had filed tax returns in TY 2005 with $20,000 or more in third-party reported mortgage interest and with adjusted gross income less than mortgage interest paid, and did not file a Schedule E with their tax return. Precision, as computed based on our sample analysis using a 95 percent confidence level, is 9.51 percent.
5. Selecting a statistically valid random sample of 100 taxpayers from a population of 219,593 nonfiling taxpayers with $20,000 or more in third-party reported mortgage interest in TY 2005. Precision, as computed based on our sample analysis using a 95 percent confidence level, is 8.02 percent.
6. Analyzing the filing and payment compliance history for both samples of taxpayers to identify (a) any tendencies towards noncompliance and unreported income and (b) whether the IRS has taken any enforcement actions on these taxpayers for TY 2005.
7. Using variable sampling techniques to quantify the potential unreported/underreported income, taxes, penalties and interest for the cases in both samples with a 95 percent confidence level.[12]
8. Confirming the accuracy and validity of our sampling methodologies and projections with an outside statistician.
Appendix II
Major Contributors to This Report
Margaret
E. Begg, Assistant Inspector General for Audit (Compliance and Enforcement
Operations)
Frank
Dunleavy, Director
Bryce
Kisler, Audit Manager
Alan
Lund, Acting Audit Manager
Craig
Pelletier, Senior Auditor
Bob
Carpenter, Information Technology Specialist
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Deputy Commissioner, Small Business/Self-Employed Division SE:S
Director, Collection, Small Business/Self-Employed Division SE:S:C
Director, Communications, Liaison, and Disclosure, Small Business/Self-Employed Division SE:S:CLD
Director, Examination, Small Business/Self-Employed Division SE:S:E
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaison: Commissioner, Small Business/Self-Employed Division SE:S
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective action will have on tax administration. This benefit will be incorporated into our Semiannual Report to Congress.
Type and Value of Outcome Measure:
· Increased Revenue – Potential; 136,963 taxpayers owe $1.4 billion in additional taxes, penalties, and interest (see page 3).[13] This outcome measure does not include amounts (cost) that could offset this benefit due to reallocating resources from other IRS investigations.
Methodology Used to Measure the Reported Benefit:
Outcome calculation methodology for the nonfiler[14] exception cases:
Specific computations:
§ Additional Taxes Due................................................................. $177,715
o Includes Self-Employment Tax.......... $144,637
§ Penalties Applied.......................................................................... $71,666
o Failure to File..................................... $39,986
o Failure to Pay..................................... $26,657
o Estimated Tax....................................... $5,023
§ Interest......................................................................................... $35,543
§ Total Additional Taxes, Penalties, and Interest Due..................... $284,925[16]
Outcome calculation methodology for the underreporter
exception cases:
Specific computations:
§ Additional Taxes Due................................................................. $265,018
o Includes Self-Employment Tax.......... $164,234
§ Penalties Applied............................................................................ $8,257
o Failure to File....................................... $8,257
§ Interest......................................................................................... $52,976
§ Total Additional Taxes, Penalties, and Interest Due...................... $326,251
Appendix V
Example of Computing a Nonfiler Assessment
Note: This is a hypothetical example of a potential nonfiler[21] that we are using to present additional details on how we computed the assessments for the 21 potential nonfilers discussed in the report.
In TY 2005, an individual who did not file a tax return had third-party reported wages of $15,000 and a bank reported that the individual paid $25,000 in mortgage interest. We used Bureau of Labor Statistics estimates of personal living expenses for housing, utilities, transportation, health costs, and food costs to determine, based on household size,[22] what additional funds would be necessary to meet all expenditures.
We then used this information to compute the taxable income, taxes due, and self-employment taxes due. Since there is no record of additional wages reported for the individual, we assumed that additional income computed would be subject to self-employment tax. So, for this individual, we would have added the $10,000 additional funds needed to pay the mortgage interest and $18,000 to have enough money to afford the other personal living expenses. Assuming the individual is single, his or her taxable income would be $12,822, income tax would be $1,559, and self-employment tax would be $3,956.
Since the 2005 tax return was not filed as of
October 2008 and the individual owes taxes, he or she would also be assessed a
$1,241 failure to file penalty, an $827 failure to pay penalty, and a $221
estimated tax penalty. In addition, he
or she would owe $1,103 of interest on the taxes, for a total balance due of
$8,907.
Appendix VI
Adjusted Gross Income – The income reported on individual tax returns after certain
allowable adjustments are made from total income, such as Individual Retirement
Arrangement contributions and moving expenses.
It is used as a basis for various calculations, including determining
the limitations on itemized deductions.
Automated Collection
System – A telephone contact system through which
telephone assistors collect unpaid taxes and secure delinquent tax returns from
taxpayers who have not complied with previous notices.
Bureau of Labor Statistics – A Federal Government agency that researches and publishes a range of data, from inflation and consumer spending to employment, productivity and wages, and other economic measures.
Cash Transaction Analysis – An auditing technique in which a taxpayer’s expenditures are compared to his or her income sources. Under this technique, if a taxpayer’s expenditures exceed reported income and the source to pay for such expenditures cannot be explained, the excess represents potential unreported income.
Collection Field Function
– A unit
in the Small Business/Self-Employed Division field offices where IRS personnel
contact taxpayers to collect delinquent accounts or secure unfiled tax returns.
Collection Function – The IRS operation that collects delinquent accounts or secures unfiled tax returns.
Compliance Initiative
Project – An IRS activity that identifies
and addresses areas of noncompliance within specified taxpayer groups.
Examination Function – The IRS
operation that conducts audits of tax returns of individuals, partnerships, corporations, and other
entities.
Individual Return Transaction File
– A database the IRS maintains that contains
information on the individual tax returns it receives.
Information
Returns Master File – An IRS database containing all information returns
transcribed or electronically received by the IRS. It contains data about both the payer and the
payee from various forms, including Mortgage Interest Statements (Form 1098) and
Wage and Tax Statements (Form W-2), among others.
Master File
– The IRS database that maintains transactions or records of individual
and business tax accounts.
Nonfiler – A taxpayer who has not filed required
tax returns.
Return Delinquency Program – An
IRS program that identifies and addresses taxpayers who have not filed a tax
return by the return due date.
Supplemental Income and Loss (Schedule E) – An attachment to a tax return that is used in reporting the income and losses from rental real estate, royalties, partnerships, and other entities.
Underreporter – A
taxpayer who fails to report all of his or her income for income tax reporting
purposes.
Appendix VII
Management’s Response to the Draft Report
The response was
removed due to its size. To see the
response, please go to the Adobe PDF version of the report on the TIGTA Public
Web Page.
[1] See Appendix VI for a glossary of terms.
[2] We chose individuals with aggregate Forms 1098 reporting $20,000 or more of mortgage interest because it would enable us to focus our efforts on those who were more likely to have higher incomes.
[3] There are many different types of information returns used by third parties to report income earned by taxpayers. For example, income earned from interest is reported on Interest Income (Form 1099-INT), while income earned from dividends is reported on Dividends and Distributions (Form 1099-DIV). Income from wages is reported on Wage and Tax Statement (Form W-2).
[4] See Appendix VI for a glossary of terms.
[5] Average number of contacts for Fiscal Years 2004–2008 as reported in the IRS Data Book for each fiscal year.
[6] Tax assessed on these returns processed by November 13, 2008.
[7] We chose individuals with aggregate Forms 1098 reporting $20,000 or more of mortgage interest because it would enable us to focus our efforts on those who were more likely to have higher incomes.
[8] Appendix V provides a detailed example of how we computed the assessments for the 21 potential nonfilers.
[9] See Appendix IV for additional details.
[10] See Appendix IV for additional details.
[11] See Appendix VI for a glossary of terms.
[12] For the filer sample, the average adjustment was $3,262.51 and the standard deviation was $5,243.84. For the nonfiler sample, the average adjustment was $2,849.25 and the standard deviation was $6,362.61.
[13] This number is rounded. The actual figure is $1,426,735,748, which is made up of $625,675,355 for nonfilers and $801,060,393 for underreporters. We are 95 percent confident that the estimated total amount owed is between $1,054,428,423 and $1,799,043,073.
[14] See Appendix VI for a glossary of terms.
[15] We are 95 percent confident that there are between 28,500 and 63,729 (8.02 percent precision) potential nonfilers that appear to have a filing requirement and have not been contacted by the IRS.
[16] Total adjusted due to rounding to whole dollars.
[17] Total adjusted due to rounding to whole dollars. Using the computed standard deviation of $6,362.61 for our sample, we are 95 percent confident that the total amount owed by the projected nonfilers (exception cases) will be between $351,894,360 and $899,456,350.
[18] Our data extract contained an error on 1 of 100 data segments processed (Social Security Numbers ending in “08”). Our population of 245,535 is the total records in the 99 valid data segments.
[19] We are 95 percent confident that the number of individuals with insufficient funds to cover their mortgage obligations and basic living expenses will be between 67,501 and 114,195 (9.51 percent precision).
[20] Using the computed standard deviation of $5,243.84 for our sample, we are 95 percent confident that the total amount owed by the projected underreporters (exception cases) will be between $548,757,358 and $1,053,363,428.
[21] See Appendix VI for a glossary of terms.
[22] We used information from previously filed tax returns to determine the size of household if the individuals were nonfilers in TY 2005, but they had filed previously. Otherwise, we considered them to be single.