TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Highlights

DUE TO THE lACK OF ENFORCEMENT, TAXPAYERS ARE AVOIDING BILLIONS OF DOLLARS in backup withholding

Final Report issued on September 14, 2016

Highlights of Reference Number:  2016-40-078 to the Internal Revenue Service Commissioner for the Small Business/Self-Employed Division.

IMPACT ON TAXPAYERS

The purpose of backup withholding is to make sure that the Government is able to collect taxes on all appropriate income, particularly income that is not usually subject to withholding.  Although backup withholding legislation was enacted more than 30 years ago,*************************************************************2************************************************************************************** **********************************************2************************************************************************************************2********************************************.

WHY TIGTA DID THE AUDIT

In September 2015, TIGTA issued a report that identified deficiencies with backup withholding and other reporting requirements related to payment cards.  This audit continues TIGTA’s assessment of the IRS’s actions to ensure compliance with backup withholding provisions.

WHAT TIGTA FOUND

TIGTA’s review found that although the majority of information returns are submitted by payers with valid TINs, nearly $9 billion in backup withholding tax was not withheld by payers submitting Tax Year (TY) 2013 information returns with missing or incorrect TINs as required.

TIGTA’s review identified 13,647 payers that submitted 27,576 information returns with the same missing payee TIN for two years in a row (TYs 2012 and 2013).  These returns reported payments of about $14.3 billion.  As such, payers were required to immediately withhold nearly $4 billion from these payees, yet just more than $1 million was withheld.

TIGTA identified 62,714 payers that submitted 203,751 information returns for which the payee TIN was incorrect in four consecutive years.  These returns reported payments totaling nearly $17 billion.  As such, payers were required to withhold nearly $5 billion from these payees, yet only $1 million was withheld.

*****************************************************2*************************************************************************************2****************************.  Because the IRS is unable to match these documents with tax returns, tax revenue may be lost each year.  Therefore, enforcing payer backup withholding requirements is essential to ensuring that the Government is able to collect taxes on all appropriate income, particularly income that is not usually subject to withholding.

TIGTA also found that there is no justification for criteria used to exclude payers from receiving backup withholding notices that include missing or incorrect TINs.  For example, the IRS notified payers of the missing or incorrect TINs associated with only 10.8 million (57 percent) returns of the 18.9 million that were identified.

Finally, TIGTA’s review of TY 2013 information returns identified 2.3 million returns were submitted for 1.6 million individuals with reportable payments totaling more than $4 billion for which the payee TIN was that of a deceased individual.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the Commissioner, Small Business/Self-Employed Division, establish a Service-wide information returns backup withholding enforcement strategy, document criteria used to exclude payers from receiving a notice, and include specific actions that will be taken to address information return reporting of income under a deceased individual TIN as part of the development of the IRS’s Service-wide information returns strategy.

The IRS agreed with our recommendations and will use the findings and recommendations from this report when finalizing and implementing its backup withholding strategy.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

https://www.treasury.gov/tigta/auditreports/2016reports/201640078fr.pdf.

 

Redaction Legend:

2 = Risk Circumvention of Agency Regulation or Statute

 

Phone Number   /  202-622-6500

E-mail Address  /  TIGTACommunications@tigta.treas.gov

Website             /  https://www.treasury.gov/tigta