Written on behalf of Feigenbaum Consulting
A recently released report from the United States’ Treasury Inspector General for Tax Administration (TIGTA) raised a flag concerning the Internal Revenue Service’s failure to pursue high-income earners who fail to file their taxes. Just how rampant is non-filing amongst high-income earners? The results of the study may be enough to raise eyebrows.
How much money is lost due to non-filing?
The report states that non-filing, which is a crime when done intentionally, is responsible for $39 billion of the $441 billion tax gap (the difference between what is owed and what is voluntarily paid on time) between the years 2011 and 2013. As a result of this gap, the TIGTA conducted an audit to determine whether the IRS was effectively addressing high-income non-filers. The report states that the IRS attributes the majority of the non-filer tax gap to high-income earners.
How is ‘high-income earner’ defined?
The IRS considers anyone who earns over $100,000 per year to be a high-income earner. Between the years 2014 and 2016, TIGTA calculated there were 879,415 high-income earning non-filers, owing a total of $45.7 billion. Of this, 24% owed between $10,000 and $50,000, 17% owed between $50,000 and $100,000, 22% owed between $100,000 and $500,000, 5% owed between $500,000 and $100,000,000, and a staggering 29% owed over $1 million.
How many are the IRS missing?
The report states that the IRS did not work 369,180 high-income non-filers, responsible for an estimated tax due of $20.8 billion. The vast majority of those non-filers, 326,579 were not placed in an inventory of cases selected to be worked on, while an additional 42,601 were closed out altogether. The report goes on to state that as IRS resources continue to decline, the likelihood of these cases being worked on becomes less likely year after year. The report states that since 2010, the IRS has lost nearly one-third of its enforcement personnel. Of this, over half of the offices that perform collection duties for the IRS have been lost.
What can the IRS do to non-filers?
There are several potential complications for people who fail to file their annual taxes in the United States. A failure to file will oftentimes trigger a process with the IRS and ultimately lead to potential fallout for a taxpayer who neglects their obligations. First, the taxpayer would normally receive a notice from the IRS indicating that their filing is missing. Prior to taking any action against a taxpayer, the IRS will send a notice requiring a response, usually within 30 to 60 days of receiving the notice. The longer a person waits to respond, generally the more severe penalty they may face. Potential penalties for failing to file, and pay, taxes include:
- Forfeiture of tax refund – if a taxpayer failed to file taxes for two years and owed outstanding fees, and then filed for the present year, in which they were owed a refund, the IRS would generally hold on to that refund until any arrears from previous years are paid in full.
- Tax lien – when a person is in arrears with the IRS, the organization retains the right to file a lien against that person’s property, including their home, cars, and accounts. This means that the taxpayer will not be able to sell, dispose of or mortgage the property until the lien is satisfied.
- Wage garnishment – this is a process by which the IRS can claim a portion of a person’s earnings until any arrears are satisfied. In a garnishment situation, a percentage of the taxpayer’s income will be diverted automatically to the IRS until the debt is paid in full.
- Criminal repercussions – in rare cases, taxpayers may be found guilty of fraud and ordered to serve time in prison as punishment. Generally, in order for this to occur, the amounts involved will be significant, and the prosecution will be obligated to demonstrate a pattern of willful misconduct or wrongdoing on the part of the taxpayer.
TIGTA made seven recommendations to better follow up with non-filers, particular those considered to be ‘high-income’. These include:
- Designating a senior management official to address non-filers
- Ensuring high-income non-filers are subject to enforcement action
- Issue notices to non-filers
- Ensuring the non-filer program is not paused
- Working cases over multiple tax years
- Not removing high-income non-filer cases from the inventory without resolution
- Implement controls to identify and prioritize high-income non-filers.
Contact the experienced tax team at Feigenbaum Law us for a custom solution to your personal tax planning needs within Canada or the United States. We have unparalleled knowledge of US and Canadian tax laws, making us leaders in this field and enabling us to ensure our clients remain compliant with tax regulations in both jurisdictions. If you require assistance in remedial compliance, we can assist with that and even represent you in communications with the Internal Revenue Service or the Canada Revenue Agency. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll-free at (877) 275-4792.