The new IRS approach to nonfilers and nonpayers. (Federal Taxation)by Dalton, Tom
According to IRS estimates, as many as 10 million people nationwide fail to file their required annual tax returns. Lost revenue from these unfiled returns amounts to over $7 billion each year. Additionally, back taxes resulting from returns that are filed without the required tax payments are about $110 billion. Of these amounts, the IRS estimates that approximately $29 billion is uncollectible. Clearly, the problem is immense.
The Nonfiler Initiative
Two years ago, the IRS began reviewing and revising its policies toward non-filers in the hopes of enticing people to "get right with their government." The nonfiler initiative is an important element of the IRS's overall strategy to improve voluntary compliance. Rather than prosecute nonfilers, the IRS is offering assistance to all taxpayers with delinquent returns who voluntarily file before receiving notification from the IRS. Special assistance includes providing copies of old tax forms and records of prior years' income reported to the IRS. The nonfiler initiative also contains assurances that the IRS will not seek criminal prosecution of nonfilers provided that the income involved is from legal sources and that the taxpayer initiates contact with the IRS.
So far the approach appears to be working. In the first six months of the IRS program, more than 155,000 people called the IRS about filing back tax returns. During fiscal 1993, the first full year of the program, the number of individual back tax returns filed increased by over 10%. Many find that the experience is not always unpleasant since it is estimated that nearly 45% of people filing back returns receive refunds.
Can't Pay the Tax?
Under the terms of the initiative, the IRS will also provide taxpayers with assistance in negotiating installment agreements, penalty abatements, and offers in compromise. This policy change stems from the realization that collecting even a part of the tax owed, or collecting the tax over a longer period of time, is better than collecting nothing and driving an otherwise honest taxpayer into the underground economy.
The IRS has allowed taxpayers to make installment payments of back taxes for many years. However, the IRS recently streamlined its procedure for entering into installment agreements. The old policy required taxpayers to provide personal financial statements to obtain approval of an installment agreement. Placing liens on property to secure a tax debt was also common. Now, for debts under $10,000, financial statements and tax liens are not required. The IRS estimates that 97% of tax debts are trader $10,000, and, therefore, both the IRS and taxpayers should benefit from this policy change.
IRS Form 9465 can now be used to request an installment plan either by submitting it in response to a tax bill or by attaching it to the front of a tax return. Earlier this year, the IRS encouraged tax practitioners to keep a supply of Form 9465 for clients who are unable to pay the tax due when their return is filed. Since the initiative, the use of installment plans appears to be on the rise. During the first six months of fiscal year 1993, the average installment agreement amount was $4,625, up 14% from the same period in the previous year.
During 1992, the IRS also changed its policy toward offers in compromise. The IRS has always entertained penalty abatements and compromise offers from taxpayers who wanted to settle for less than the full amount of their debt. However, until recently, it maintained a relatively conservative stance with regard to any reductions in tax debts. All offers had to be approved by the IRS chief council and agreements nearly always required that a percentage of the taxpayer's future income be remitted to the government over a period of years.
The IRS's new policy is "to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government." To implement the new policy, authority to approve compromise offers now rests with individual collections officers. Their instructions are to ". . .accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential." The approach is intended to be more business-like and to settle tax debts when it is unlikely that enforcement actions such as levies or property seizures would collect any more than the settlement offered by the taxpayer.
The taxpayer is always expected to make the first offer in a compromise. The viability of the offer is evaluated from the standpoint of the taxpayer's ability to pay. This evaluation is made by considering the amount the taxpayer would receive in a quick-sale of available assets and the individual's realistic income earning potential. The IRS will also consider a portion of the assets accessible to the taxpayer but unavailable to the IRS for collection purposes, such as separate property owned by a spouse that could be used to pay the tax debt. Although the IRS may have no legal collection rights on separate property, the acceptance of an offer is completely discretionary and the IRS may not be motivated to compromise when the taxpayer's spouse has a substantial net worth. In the past, if the taxpayer's offer was considered inadequate, it was simply rejected. However, trader the new policy it may be more common for the IRS to make counter offers.
According to the U.S. General Accounting Office (GAO), the IRS's efforts are paying off. In a recent study, the GAO found that the IRS accepted only 23% (1,995 out of 8,711) of the tax reduction offers received from taxpayers in 1991. In contrast, the IRS accepted 36% (approximately 18,000 out of 50,000) of offers in compromise in 1993, the first full year since the policy change. The GAO also found that the IRS recouped about $.16 on the dollar in 1993, down from $.27 on the dollar in 1991.
Speak Softly and Carry a Big Stick
While the nonfiler initiative reflects a softer approach to dealing with nonfilers and nonpayers, recent efforts to catch and prosecute tax evaders indicate the IRS is wielding a big stick in its fight against the underground economy. The IRS intensified its efforts to catch nonfilers last October and has since assigned approximately 10% of its examination staff to the investigation of nonfilers. Additionally, the IRS recently purchased upgraded computer hardware to aid in its campaign. In the first six months of the campaign, the IRS began more than 200 criminal investigations related to nonfiling, and the Justice Department charged more than 100 individuals with failing to file their income tax returns.
Until recently, the IRS was unable to find individuals who failed to file or omitted income unless that income was shown on a 1099 or W-2. Thus, the underground economy had little to fear from the IRS. Now the IRS can search numerous Federal, state, and local government databases and download information to its workstations for analysis.
The IRS's new computers can identify potential nonfilers and nonpayers by searching currency and banking reports; state records indicating ownership of expensive cars, boats, and airplanes: and lists of individuals holding professional licenses. One of the IRS's primary data sources, the Currency & Banking Retrieval System, stores information from banks, businesses, and professionals whenever there is a cash transaction of $10,000 or more.
A More Realistic Approach
Recent policies adopted by the IRS reflect a more realistic approach to nonfilers and nonpayers. They are designed to entice those who want to fulfill their legitimate tax obligations into compliance with the law and to aggressively find and prosecute those who willfully evade tax responsibility. This approach should prove useful in attaining the IRS's overall goal of 90% compliance by the year 2000.
The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.
©2009 The New York State Society of CPAs. Legal Notices
Visit the new cpajournal.com.