How’s that IRS private debt collection agency program going? Let’s ask the National Taxpayer Advocate:
It is not meeting revenue projections. It is not more successful than the IRS at finding hard-to-locate taxpayers. It is significantly less successful than IRS employees at fully resolving taxpayer past due accounts.
The I.R.S. had expected private companies to collect $88 million but has now lowered that to as little as $23 million. The collectors are paid almost a fourth of the money they bring in. When the costs of government oversight are added in, [National Taxpayer Advocate Nina E. Olson] said, the program may even lose money.
Significantly, and contrary to projections made as recently as in , the expenses of the program to date exceed the revenue the program has generated.
Some other highlights from the Advocate’s annual report:
- “The cash economy is growing. The percentage of all income subject to third party information reporting fell from 91.3 percent in to 81.6 percent in . Moreover, the IRS expects the number of individual returns from small business or self-employed taxpayers to grow by about 33 percent , while the number of individual returns from other taxpayers is expected to decline by about 2 percent over the same period.”
- , the IRS assessed $10 million in penalties against professional tax preparers for various forms of preparer misconduct. But the agency only managed to collect $2 million of this $10 million. It seems that tax preparers know the difference between a dog bark and a dog bite.
- For tax year , the IRS identified more than 1.2 million cases in which someone failed to file a tax return even though they had taxable income.
In cases like these, the IRS creates a substitute tax return for the person, which (usually) results in a “default assessment.”
But, “the IRS collected just under two percent of the taxes assessed through the automated process, a sign that this method is not increasing filing and payment compliance.”
The IRS responds: “We… do not agree with the suggestion that dollars collected is the best measure of the effectiveness of these assessments.
Each assessment abated or adjusted reflects the submission of a return or other response by the taxpayer after the ASFR default assessment has been made — a clear indication
<voice="darth vader">the taxpayer has been successfully brought into compliance
- “A disregarded entity is a single member Limited Liability Company (LLC) that has not elected to be classified as a corporation. It is called a disregarded entity because the owner reports business activity as if the entity did not exist. For example, if the single member is an individual taxpayer, (LLC transactions are reported on the owner’s Form 1040 as if it is a sole proprietorship. The compliance detection issue results from the owner of a disregarded entity using the tax identification number of an entity that does not have a filing requirement. The IRS document matching program cannot match the disregarded entity income with the true owner and the income may go unreported.)”
- “The earnings of an S corporation are taxed as ordinary income to its shareholders. Unlike partnership or sole proprietor earnings, however, S corporation earnings are not subject to self-employment tax. This difference in treatment gave rise to a tax planning strategy that treats shareholder compensation payments as distributions of profit to avoid payroll taxes. Under this approach, officer/shareholders take no salary or a nominal salary and receive the remaining compensation as tax-free distributions. The corporation saves payroll taxes and the shareholder ultimately pays only income taxes on his or her share of the corporate profits and avoids paying Social Security and Medicare taxes.” However… “the IRS has repeatedly challenged and won the shareholder wage issue in court, [but] it is still used as a tax planning strategy.”
- The IRS reported 18% more “Taxpayer Delinquent Accounts” in than in . 81% of these accounts involved tax years before , and many are “inactive.”
- The Taxpayer Advocate purports to believe the following:
This “unspoken agreement,” says the Taxpayer Advocate, is overdue to be spoken — in the form of “a formal Taxpayer Bill of Rights” (which, since “a tax system that embeds rights also expects its taxpayers to conduct themselves in such a manner as to ensure those rights are not abused,” will also be “a statement of taxpayer obligations.”)
The United States tax system is based on a social contract between the government and its taxpayers — taxpayers agree to report and pay the taxes they owe and the government agrees to provide the service and oversight necessary to ensure that taxpayers can and will do so. Without that unspoken agreement, tax administration in a modern democratic society could not function. Thus, the government’s ability to raise revenue through voluntary tax compliance — the most efficient and economical form of tax compliance — rests on taxpayers’ belief that the government will honor its end of the social contract.