Businesses that failed to file employment tax returns got away with billions of dollars in unpaid taxes because the Internal Revenue Service was forced to redirect its staff to other priorities, according to a new report.
The report, from the Treasury Inspector General for Tax Administration, examined the IRS’s ability to assess tax liabilities against employers who don’t file employment tax returns. When a taxpayer fails to file a tax return, the IRS is authorized under Section 6020(b) of the Tax Code to determine and assess a tax liability. For some businesses with missing employment tax returns, the IRS can prepare its own substitute return for them using what’s known as the Automated 6020(b), or A6020(b), program.
The nonfiler case creation process for business returns has been on the decline since fiscal year 2011 and virtually stopped in October 2016 because of significant reductions in staffing at the IRS. The creation of fewer nonfiler cases led to a reduction of work selected for the A6020(b) program. Thanks to resource limitations at the IRS, new case starts in the program have been declining since fiscal year 2014 and came to a halt in November 2016. That meant the program flagged fewer returns and collected less revenue on employment tax nonfiler cases because the IRS wasn’t initiating any new cases.
Today, high-dollar nonfiler employment tax cases have to be manually assigned to the A6020(b) program in order for the IRS to work on them because there’s a low dollar threshold for them to be assigned automatically. TIGTA suggested that if the IRS removed the dollar threshold associated with systemic and manual case selection, hundreds of thousands of high-dollar cases could be flagged by the program.
The IRS has the potential to collect billions of dollars from the cases. TIGTA identified 243,210 standalone nonfiler employment tax modules (that is, taxpayers with unfiled tax returns but no balances due) that were assigned to other IRS collection functions as of January 2019. “If the IRS assigned the top 86,554 modules to the program, based on the highest dollar proposed assessments, the IRS could potentially assess more than $10.2 billion and potentially collect more than $3.3 billion,” said the report.
From those cases closed between fiscal years 2011 and 2017, TIGTA also spotted 6,784 cases for which the program didn’t post a tax assessment when it should have. That prompted a loss of proposed assessments of $19.7 million and potentially $6.4 million of revenue.
TIGTA made six recommendations in the report, saying the IRS should consider allocating more resources to the A6020(b) program for fiscal year 2020. TIGTA also suggested the IRS should update the systemic and manual case selection criteria to work on high-dollar cases, as well as transfer the highest dollar standalone nonfiler inventory from other collection functions so they can be worked on by the program. The IRS should also do system fixes to ensure that A6020(b) default assessments post as they should.
In response to the report, IRS officials agreed with three of the six recommendations and plan to take action. The IRS also partly agreed with the other three recommendations, but said a research project is needed first to improve inventory and resource allocation across the business nonfiler programs before it can make any case selection changes.
“In recent years, resource constraints have forced us to make difficult decisions with respect to some of our programs even though they provide clear benefits to tax administration,” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “New case starts for the Automated 6020(b) program were halted in November 2016 as resources were redirected from nonfiler programs to other priority work such as balance due notices and installment agreement requests.”
However, she added that the IRS recognized the importance of nonfiler programs in promoting taxpayer compliance so it established a nonfiler strategic plan in 2018 and is in the process of transitioning the Automated 6020(b) program to a new location. It plans to allocate more resources to the program next fiscal year. Murphy also pointed out that the A6020(b) program only assesses tax liabilities, but doesn’t collect them. Other IRS programs affect collection, so the A6020(b) program shouldn’t be viewed in isolation, she argued, but instead should be viewed as part of a balanced approach between the IRS’s balance due and nonfiler programs.