Has the IRS lost its appetite for collecting payroll tax?
Evidence suggests that many businesses are no longer taking their obligation to pay and remit payroll tax seriously. According to recent GAO report, as of last September 30, 1.6 million businesses owe the IRS in excess of $58 billion in payroll taxes, interest, and penalties. That is the amount accumulated over a period of ten years. Taxes that have been owed for longer than ten years may have been permanently lost, due to a statute of limitations.
That amounts to about 20 percent of the total delinquent taxes ($288 billion) for the same period. Spot audits by the GAO and the IRS reveal that most of the missing tax money is money that was withheld from employee salaries. Some of the unpaid tax money has been used by business owners for their own purposes - an example from the report is that of a business owner who diverted $2.5 million in payroll taxes, while purchasing luxury cars and other personal property - or to fund operations, which gives them an unfair advantage over honest business owners who properly meet their payroll tax obligations.
Who is Failing to Pay Taxes?
The majority of offenders are from three industries: construction ($8.6 billion), professional services ($4.4 billion), and healthcare ($4 billion).
Seventy percent of all unpaid payroll taxes is owed by companies with more than four quarters of unpaid federal taxes. More than 25 percent of the delinquent payroll taxes is owed by businesses with more than 12 quarters of unpaid taxes. Some of the unpaid taxes are from business owners with multiple operations (as many as a dozen different entities all with unremitted payroll taxes). Since much of the unpaid tax money represents Social Security taxes and Hospital Insurance, the federal government may be forced to transfer money from the General Fund to cover the shortfall. As of last November, the government had already transferred $44 billion more than it took in.
In the decade beginning October 1, 1998 and ending September 30,2007, the number of businesses with more than 20 quarters of delinquent taxes grew by 174 percent. Businesses with more than 40 quarters of delinquent taxes grew by 470 percent.
The IRS states that it doesn't have sufficient resources to begin collection action against all of its high-priority cases. They estimate that about 52 percent of the delinquent funds, or $30 billion, is currently collectible. Others are deemed uncollectible for various reasons, including that the debtor business is defunct, insolvent after bankruptcy, or experiencing financial hardship.
The GAO's Summary of the Problem
The General Accounting Office report included a review of IRS procedures for achieving compliance and found many problems. The tax authority acknowledges that it has powerful tools available for tax collection, but that they are not always used effectively. They also acknowledge that their delinquent tax rolls include many repeat offenders who refuse to come into compliance. Here are some of the major issues the GAO found with IRS enforcement.
- The agency strives for voluntary compliance, rather than compulsory, which tends to let offenders ride for years before the tax is collected.
- Though liens can be used to enforce compliance, they often are not filed on a timely basis. Over one third of the cases that had gone to collection did not have liens filed.
- In addition, penalties are not assessed promptly on those responsible for failing to remit taxes, sometimes resulting in lost opportunities to assess penalties at all. The GAO found that the average time it takes to pursue collection is 40 weeks, and another 40 weeks to assess the Trust Fund Recovery Penalty.
- The tax agency often places a higher priority on collecting from delinquent businesses rather than from the individuals responsible for remitting taxes.
- Offenders are not always barred from continuing to rack up more payroll tax debt.
- The IRS doesn't have a plan in place to improve this problem area.
The GAO noted that in many cases, states do a better job of enforcing compliance and preventing accumulation of unpaid payroll taxes. They also have systems established in coordination with financial institutions that allow them to identify and act on levy sources.
After much criticism from the U.S. Senate, Deputy IRS Commissioner Linda Stiff told them that though the numbers look dismal, IRS collection activities have shown much greater results in recent years. In the year ended September 30, 2007, for example, 5.2 million delinquent cases were settled, as opposed to 3 million in 2002.
At a time when so many Americans are straining to make financial ends meet, this kind of behavior is stirring outrage, said Norm Coleman the Republican Senator from Minnesota who requested the GAO study.
Disagree
All I can do is repeat what I have heard another say - and which I believe to be true:
"Last week the Ninth Circuit upheld a criminal conviction under Sec. 7202 (Jack Easterday) for the failure to pay over withheld taxes, presumably in addition to assessment against Mr. Easterday of the Sec. 6672 100% penalty.
I've said before, this is not your IRS of the past dozen years. I suspect will see IRS bring criminal charges far more often than in the past for failure to pay over trust funds to the government."
UNITED STATES OF AMERICA, Plaintiff-Appellee, v. JACK E. EASTERDAY, Defendant-Appellant.
No. 07-10347 D.C. No. CR-05-00150-CRB
Appeal from the United States District Courtfor the Northern District of CaliforniaCharles R. Breyer, District Judge, Presiding
Irs looses appetite for collecting payroll tax
If the IRS would act sooner it wouldn't have such a huge problem. They know who should be filing 941, 940 and making tax deposits. If letters went out monthly when there was no activity in an account that has previously filed and deposited 941,940 tax,notifying them that a call was mandatory as to why no deposit had occured, with follow up's if they don't call; it might spur action. I currently have 3 clients who haven't paid for years, that the IRS is now trying to collect. It's hard to defend your clients rights when in all reality the IRS is correct, they have "stolen" that money from their employees over a period of years. With the added penalty and interest it is an insurmountable number to pay off now. Why should the IRS cut them any breaks now? If the IRS had acted with the first missed payment, it might not have gone on and on and on. In my practice I impress on new business owners that not paying your 941 taxes is something that you do not do. I explain what will happen if you don't pay them. I'm currently trying to get these 3 clients straightened out, but find myself agreeing with the Revenue Officer in principle. It's very hard to argue with him that he should reduce the penalties when this went on for years. And of course the clients don't understand why he is so hard core about it now when they got away without paying for years. Anedra M Lewis, E.A. Michigan
IRS IS NOT DOING IT'S JOB
During the Bush years much effort has been expended by the administration to destroy the IRS as an effective organization. They have been diverted from their primary task and have been made to spend a lot of effort pursicuting the working stiff and the small businessman. Millions of demand letters have been sent out, demanding money from those who filed and paid their taxes in a timely manner. Many of the best, brightest and most experienced employees that IRS had have quit and went on to greener pastures. Last year I got a letter demanding money from 2004 for employer taxes that I had filed and paid in a timely manner. I had to spend the time and effort to dig out all those old records and send them in. I finally got a letter stating Oh yes I guess you did pay those. One month ago I got a letter demanding money for 2005 employer taxes that I had filed and paid in a timely manner. Now I have to go though the whole process again. This uses up a lot of valuble time and effort that I need to devote to my business. I would like to know how much of this aleged unpaid money is not real, but due to the IRS not being able to know who paid and who did not pay. I also think that IRS is using "mobster tactics" of demanding money from those who do not owe it, hoping to collect due to the fear factor. I also wonder if the IRS is not being kept too busy harrassing the little taxpayers so they won't have time to pursue the big multi billionare evader with the off shore accounts.A lot of folks have noticed the amazing deteriation of the USA during the Bush administration, but I think that only we in the income tax accounting business are fully aware of the destruction of the IRS as an effective organization. When we have destroyed the IRS, who is going to collect the taxes to pay the bills that the Bush administration have run up? The stimulus payments are another massive failure. Bush is the first president to do this one and now he has done it twice and threatens a third round. Did anyone give the IRS more money or manpower to handle those boondoogles? I think not. There goes some more time and energy they can not devote to collecting the taxes that we need to pay the stimulus payments.What a mess. God please save our country. I love it and I fear for it.Larry Dennis
Fraud?
If IRS defaults on its responsibility to collect the taxes, they should at least be required to publicize the theives - the employees who paid in the taxes should then file criminal charges for fraud.
As much as I dislike class action suits, this seems like a perfect opportunity and who knows, maybe even RICO for those "business owners with multiple operations (as many as a dozen different entities all with unremitted payroll taxes)".
It should not then make any difference whether they's "defunct, insolvent after bankruptcy, or experiencing financial hardship."