IRS Enforcement Targets

[Lee B]

Copied from the IRS Mind website;

 

"IRS compliance enforcement targets

With many new IRS personnel on the job, the IRS will focus their compliance resources on resolving big compliance problems.  Here are 7 targets that we can expect the IRS to pursue in 2020:

#1: Small business taxpayers

The big problem for the IRS:   recent tax gap studies still show that taxpayers who do not receive information returns (W-2s, 1099s) and must voluntarily report their income and deductions are the biggest contributors to noncompliance.  In fact, according to IRS studies, small businesses are the biggest culprits- misreporting their income by 56%.  Unreported tax on small business income for individuals is estimated to be $110 billion a year.   

IRS compliance efforts:  enforcing compliance on small businesses is costly for the IRS.   However, in 2020, the IRS has hired and on-boarded hundreds of new field auditors (called revenue agents).  These new revenue agents will likely be training on audits of small businesses.

#2: Crypto-currency holders

The big problem for the IRS:   there is no audit trail on crypto-currency – and the IRS knows that means noncompliance.  Like small business owners, the IRS knows where there is no virtual currency information reporting (i.e. W-2s, 1099s) and the potential for large gains, there is a high likelihood of noncompliance.   

IRS compliance efforts:    the IRS began its scrutiny of taxpayers with virtual currency transactions in July 2019 with several soft notice and compliance programs.   These programs are just the beginning.  The IRS promises more compliance efforts this year, including several criminal prosecutions for taxpayers who have intentionally not reported virtual currency gains on past returns.

#3: Employers with unpaid payroll taxes

The big problem for the IRS:  72% of all revenue collected in the US tax system comes from withheld payroll taxes.  When employers don’t pay their payroll taxes, the US Treasury takes a double hit.   First, the IRS does not get employees’ withheld income and social security taxes.  Second, the IRS has to give credit to employees on their filed returns for the unpaid withholding. The IRS views employer collection and nonpayment of employees’ withholdings (called “trust fund” taxes) as stealing.  The drop in revenue officers who investigate unpaid payroll taxes has dropped by 47% from 2010 to 2018- and so has enforcement of the IRS # collection priority.

IRS compliance efforts:  the IRS is diligently on-boarding more field collection resources (i.e. revenue officers).  Their #1 priority will be both early intervention visits on employers behind in payroll taxes as well as payroll tax enforcement.   Egregious taxpayers who have multiple incidents of unpaid payroll taxes with different entities (called “pyramiding”) face IRS criminal investigation.

#4: Certain nonfilers

The big problem for the IRS:  the IRS claims that nonfilers only represent $39 billion in lost revenue annually to the US Treasury.  Many tax experts disagree with this estimate.  The big problem with nonfilers is that they leave the tax system for good.  Also, IRS tolerance of nonfilers erodes the integrity of the voluntary compliance system.

IRS compliance efforts:  the IRS has been criticized for not chasing two groups of nonfilers- high income nonfilers (especially those without withholding) and taxpayers who do not file a return after they have requested an extension of time to file.  The IRS has restarted it’s delinquent return investigation compliance efforts in 2018 as well as hired more field resources to chase nonfilers.   In the future, we should see the IRS pursue the more egregious nonfilers.

#5: High tax debtors

The big problem for the IRS:  from 2010 to 2018, the IRS has lost almost half of its field collection personnel (revenue officers).  Many high tax debt taxpayers were put on hold because the IRS simply did not have the resources to chase them.

IRS compliance efforts:  in 2019, the IRS has significantly increased the number of its field collection personnel (revenue officers).  The marching orders for these new ROs are to let tax debtors know that they are present.  In 2020, these ROs will be visiting higher debt taxpayers and repeat file/owe taxpayers to get them back into compliance.

#6: High-income taxpayers

The big problem for the IRS:   the IRS has been under some heat for auditing low income taxpayers at the same rate as higher income taxpayers (income of $1 million or more).  In response, Treasury and the IRS said it would like to audit more higher-wealth taxpayers in the future.

IRS compliance efforts:  more IRS revenue agents will mean more audits on higher wealth taxpayers –  especially taxpayers who enter into certain transactions like conservation easements or hold interests in foreign financial accounts and entities. In the past, high-income taxpayers have experienced audit rates as high as 12% (2011) – in 2018, the audit rate of high wealth taxpayers is 3.4%.   Expect more high income audits due to IRS political pressure and good return on investment – the average amount owed on a high income audit in 2018 was $115,259.

#7: Taxpayers with refundable credits

The big problem for the IRS:  it is estimated that 24% of all earned income tax credit payments – over $16 billion a year –  are erroneous.    

IRS compliance efforts:  EITC and additional child tax credit refund hold audits continue to be the #1 IRS audit target.  These are easy IRS audits as they are done by mail and taxpayers rarely contest the IRS’ findings.   However, the IRS has been under some scrutiny for using their limited audit resources on lower-income taxpayers who claim EITC.    But, the IRS is still focused on reducing the 24% error rate – and IRS mail audit resources will continue to flag and audit these returns in the future.

What is not an enforcement target

More resources for the IRS will not be able to solve all the big areas of noncompliance.   The IRS will still be limited in what they can do.  Two targets that are not currently on the IRS’ radar for compliance enforcement are:

Employers who misclassify workers:  with the lack of experienced IRS field audit resources (i.e. revenue agents), this important issue is not on the IRS radar.  The IRS only audits 0.14% of employment tax returns, and reserves complex worker status (employee or independent contractor) audits as a part of its small business audits. The growing gig economy and incentives to classify workers as independent contractors is a concern for the IRS – but there is little the IRS can do about it until they train more auditors to specialize in complex employment tax issues.

S corporations and partnerships:  back to IRS resources – the IRS does not have the revenue agents and support personnel  to conduct these complex examinations.  The audit rate for S corps and partnerships is 0.2% – and it appears that it will stay that way for the next few years until the IRS can ramp up and train its auditors to examine these entities.

The target:  all taxpayers – with notices

The IRS has figured out how to enforce compliance without compliance enforcement.

Since 2001, the IRS has understood that the most cost effective manner to enforce compliance is to let taxpayer’s know that they are there – after they file. The IRS cannot audit or enforce collection on all taxpayers – but they can let the taxpayer know that they may be subject to further scrutiny by sending them a notice.   In 2018, the IRS sent over 219 million notices to taxpayers.  

The compliance by notice strategy is here to stay – and it lets all taxpayers know that the IRS is still there- even though they may not be a target in 2020."

[Edsel]

Thank you CBSLEE.  Very helpful post and greatly needed.

Edsel

[Terry D EA]

This is ridiculous in my opinion. That's over 16 billion in handouts. Here I am working as a teacher, preparing taxes year round, and processing payroll every week. I'm going to be retiring from my teaching position next year, looking at my pension and SS and wondering if we will be ok financially to live close to the life style we have. The sad part is, once you retire and draw SS and want to finally live, the IRS has you on the downward slope. Start taking RMD's driving up the SS funds included in gross income, making you pay for Medicare that you have paid for all of your life at double the premium deducted from the SS. Yes, I keep my state benefits but they quickly become secondary, but got to pay for them too. All I got left is to hope my health doesn't go south for at least five more years. I know too many guys who have worked like I have, retire and then die. Sounds like a rant but its not. Its just fact. Just in case anyone is wondering, I will soon be 65 and will have worked 51 years of my life. Yes, I started working when I was 14 cleaning dirty dishes from tables for a grand .50 per hour. Again, don't take this the wrong way, I am not complaining just stating fact. I am proud to have what I have and that I earned every bit of it. 

 

#7: Taxpayers with refundable credits

The big problem for the IRS:  it is estimated that 24% of all earned income tax credit payments – over $16 billion a year –  are erroneous.    

IRS compliance efforts:  EITC and additional child tax credit refund hold audits continue to be the #1 IRS audit target.  These are easy IRS audits as they are done by mail and taxpayers rarely contest the IRS’ findings.   However, the IRS has been under some scrutiny for using their limited audit resources on lower-income taxpayers who claim EITC.    But, the IRS is still focused on reducing the 24% error rate – and IRS mail audit resources will continue to flag and audit these returns in the future.