On April 16, 2019, the Large Business and International (LB&I) Division of the Internal Revenue…
Increased IRS Enforcement Expected Against High-Income Taxpayers
The US Treasury Inspector General for Tax Administration (TIGTA), in two recent reports, said that the IRS collected more tax revenue in 2019 than in any other previous year but, at the same time, overlooked high-income delinquent taxpayers and so missed out on billions more. TIGTA is a government watchdog agency that often makes recommendations to the IRS.
In the first report, concerning IRS compliance trends and enforcement activities, TIGTA said that the IRS collected $3.6 trillion in total revenue, more than any year previous and $99.1 billion more than what the agency collected in 2018. This was despite diminishing IRS resources and a government shutdown. Of this, $57.5 billion came from enforcement activities, less than the all-time high of $59.4 which was set in 2018. 74 percent of this enforcement revenue was collected via automated notices.
At the same time, the other TIGTA report says that the IRS did not prioritize high-net-worth individuals who owe back taxes. TIGTA identified 685,555 delinquent taxpayers with a reported adjusted gross income (AGI) of $200,000 or more who owed a combined total of $38.5 billion. Meanwhile, TIGTA pointed to a separate IRS analysis of 64,317 delinquent cases, which showed that the agency collected less than 50 percent of tax debt owed by these high-income taxpayers within 52 weeks of assignment to Field Collection. It gets worse with even higher incomes: of delinquent taxpayers with an average AGI of $1.5 million, the IRA collected about 39 percent of what it was owed.
“While 39 percent is more than what the IRS predicted it would collect, these high-income taxpayers still owed over $2 billion,” said the report.
TIGTA said that the IRS generally does not consider high-net-worth individuals a priority, and there is no strategy in place to address delinquents among them. The report noted that this is despite the fact that, unlike some other delinquent tax cases, these people have the ability to pay. This also means that group managers assign delinquent accounts without regard for income levels, which is another major issue.
The IRS countered against TIGTA saying that high income is already considered as a high priority in the case routing and selection process. “TIGTA makes the assumption that high income should be the primary factor without regard to the amount of tax owed, collection priorities, or IRS’ custodial responsibility for addressing major compliance issues including pyramiding of employment tax liabilities. TIGTA’s recommendation suggests IRS should assign a higher priority to low dollar cases simply because the taxpayer has shown higher income in previous years,” said the IRS response.
In the end, we believe that the TIGTA report will likely lead to increased enforcement against wealthy taxpayers including non-filers. A “non-filer” is a taxpayer who either does not timely file a required tax return and timely pay a tax due for the delinquent return.
If contacted by the IRS, the taxpayer should consult with an appropriate tax advisor to consider filing their delinquent tax returns and begin to enter into installment agreements or offer in compromises as applicable. The taxpayer should seek representation to assist with any reasonable cause arguments or first-time penalty abatement arguments. Taxpayers who have not yet been contacted by the IRS should consider the IRS’s voluntary disclosure practice where there is a criminal potential.
Whether the IRS gets to the taxpayer first or the taxpayer takes corrective actions in advance of IRS contact there are opportunities to become tax-compliant and avoid the serious consequences. The IRS has been increasing its focus on high-income non-filers and the TIGTA report will likely lead to increased enforcement.