Authored by Manny Muriel and Mark Heroux
The U.S. income tax system operates under the assumption of voluntary compliance. Through the Internal Revenue Service’s (IRS) civil and criminal enforcement efforts, the IRS fosters confidence in the tax system and compliance with the law. One of the IRS’s objectives in its enforcement strategy is to reduce the tax gap, which is the projected difference between the amount of tax that taxpayers should pay and the amount voluntarily collected. The IRS estimates the tax gap to be roughly $441 billion for tax years 2011 through 2013. More importantly, the IRS estimates that approximately 9% or $39 billion stems from taxpayers who do not timely file and pay the tax due. High-income non-filers are considered taxpayers whose income exceeded $100,000 during a tax year and fail to file an IRS tax return; they contribute to the majority of the non-filer tax gap.
The Treasury Inspector General for Tax Administration (TIGTA) is responsible for providing independent oversight of IRS activities and regularly conducts audits to assess the IRS’s efficiency and effectiveness in the administration of the nation’s tax laws (treasury.gov/tigta, n.d.). In previous audits, TIGTA examined whether the IRS adequately addressed high-income non-filers and found serious lapses with the IRS’s non-filer strategy. In the most recent audit, which analyzed tax years 2014 through 2016, TIGTA identified 879,415 high-income non-filers that did not have a satisfied filing requirement. These non-filers had an estimated tax due of $45.7 billion. Of these, TIGTA found that the IRS had not addressed 42% of the high-income non-filers with a total estimated tax due of $20.8 billon. The remaining 58% are purportedly sitting in the IRS Collection function inventory stream. There are various arguments that can be made to explain this missed opportunity to bring repeat high-income non-filers back into compliance. One is a direct consequence of decades of significant budget and staffing reductions and another is a lack of prioritization. Regardless, all indications point to a stronger revamped enforcement campaign.
In 2018, the IRS established a new strategy for handling non-filing cases and has said it will identify and prioritize cases to maximize revenue and encourage voluntary compliance. The IRS has also committed to implementing more data analytics to identify cases and deploy resources. In 2019, the IRS Criminal Investigation Division announced the use of data analytics to help identify areas of tax noncompliance.
Undoubtedly, the IRS recognizes the importance of systematically pursing the most egregious non-filers, and it is reasonable to expect the IRS will leverage its resources and compliance checks to foster voluntary compliance. In fact, on Feb. 19, 2020, the IRS issued a news release announcing that "it will step up efforts to visit high-income taxpayers who in prior years have failed to timely file one or more of their tax returns."(1) In this same news release Paul Mamo, Director of Collection Operations, Small Business/Self Employed Division, was quoted "[t]axpayers having delinquent filing or payment obligations should consult a competent tax advisor before waiting to be contacted by an IRS revenue officer.”(2)
This is bad news for high-income non-filers, particularly the top 1%. It has been reported that TIGTA has identified the top 100 violators which make up approximately one-third of the estimated tax gap or $9.9 billion in uncollected tax revenue.
These stepped up efforts will not be limited to civil enforcement. Failure to file is a federal crime, specifically a violation of 26 U.S.C. § 7203 and as part of this revamped strategy it is logical to conclude there will be an increase in prosecution recommendations for the most egregious violators. The IRS reserves the right to refer for prosecution those who do not file or pay taxes. But more importantly, the IRS encourages individuals to be proactive in disclosing their noncompliance to avoid criminal prosecution.
For questions related to this article or any tax controversy matter, please contact Baker Tilly’s Tax Advocacy and Controversy Services team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
(1)IR-2020-34 (Feb. 19, 2020). You can read the News Release in full online.