IRS To Increase Enforcement of Delinquent Payroll Taxes
Exempt Organizations
It is estimated that over a three year period delinquent payroll taxes from tax-exempt organizations have amounted to approximately $1 billion. In the Report, TIGTA noted that 3.8%, or more than 64,200 tax-exempt organizations, were delinquent in payroll tax filings, remittances and submissions. In the Report, TIGTA analyzed twenty-five of those tax-exempt organizations whom they considered to be the worst examples involving unpaid Federal taxes. The Report concluded that, although these twenty-five organizations had unpaid Federal tax obligations, they had received government payments during the three year period which was analyzed by TIGTA. The government payments received included Medicare, Medicaid and other government grants. Per TIGTA, “While attempting to collect the delinquent tax, the IRS was sometimes faced with the dilemma of seizing property or serving levy action for the organization’s fund intended to support the tax-exempt organizations that, if seized, could potentially result in closing the entity and its services to the community.”
TIGTA noted that one of the issues is that the IRS’ Exempt Organizations Division (“EO”) was unaware of the noncompliance due to these situations being handled by the IRS Small Business/Self-Employed Division (“SB/SE”) as opposed to EO. TIGTA recommended that (1) EO coordinate with SB/SE in order that the two divisions communicate regarding relevant collection information, (2) EO work with the IRS to identify those tax-exempt organizations that potentially abuse their tax-exempt status and (3) the IRS work with Treasury to come to the conclusion of whether a legislative fix to the issue is necessary. According to TIGTA, the IRS disagreed with the first two recommendations, but did agree to consult with Treasury on the third recommendation.
For Profit Organizations
According to TIGTA this is not an issue that is exclusive to tax-exempt organizations. Earlier in the year, on May 23, 2014, TIGTA released a separate report entitled, Trust Fund Recovery Penalty Actions Were Not Always Timely or Adequate (“May Report”). This May Report notes that it is currently estimated that there are approximately $14.1 billion in delinquent payroll taxes owed to the IRS as of June 30, 2012. The May Report comments that the IRS’ actions against employers delinquent in remitting payroll taxes are neither consistently applied nor timely and often times inadequate. As noted in the May Report, “When a business does not remit trust fund taxes withheld from its employees, the IRS can collect the unpaid taxes from the individuals responsible by assessing the Trust Fund Recovery Penalty (“TFRP”) when appropriate.”
In preparation of the May Report TIGTA reviewed a valid sample of 265 cases. TIGTA found that, in 99 of the 265 instances reviewed, the IRS’ actions were neither timely nor adequate. Additionally, in 59 of these instances, it took the IRS approximately 500 days to review and process the penalty assessment. Overall, TIGTA noted untimely TFRP actions, expired assessment statutes, unsupported collectability determinations and incomplete TFRP investigations associated with installment agreement and currently not collectible cases. The May Report noted that when the IRS delays in assessing penalties against taxpayers in a timely manner, there is a direct correlation in the amount of tax recoveries. In large part, the funding of Medicare and Social Security is satisfied through payroll taxes. When employers fail to remit payroll taxes these funds suffer. Additionally, if potential tax assessments are overlooked, the government’s interest is not protected.
In recent years TIGTA has acknowledged the untimeliness of this process so the IRS has introduced new and improved internal controls to better monitor the TFRP process. This increased internal control has seen some success in the average time taken to complete investigations and to assess the TFRP; however, unfortunately, significant delinquency still exists.
Improvements
TIGTA recommended that IRS group managers take the time necessary to monitor TFRP cases and revenue officers take the necessary time to implement actions. In addition to improving TIGTA communication and training, the IRS also needs to ensure that the completion and adequacy of reviewing the tax and to take appropriate actions to implement the changes. TIGTA recommended that the IRS revise its TFRP guidance with respect to the accuracy of the collectability, determination, support and control the completion of TFRP investigations when installment agreements or currently not collectible closures are approved.
After receiving the May Report, IRS officials agreed with all of TIGTA’s recommendations for improving its accuracy and timeliness and plan to take corrective actions.
Conclusion
The IRS has noted that reductions in the budget have challenged resources, including collection efforts. In an emailed statement, the IRS noted “We take delinquent issues seriously, and the IRS takes steps to help ensure that everyone pays their employment taxes”. Per Karen Schiller, Commissioner of IRS’ SB/SE, “[The IRS] remains committed to continued improvement and recognizes the opportunity for additional systematic enhancements to increase [its] case processing efficiency and accuracy.
All taxpayers should perform periodic reviews of their Federal tax filings, including all payroll obligations, to ensure timeliness and accuracy.
RESOURCES
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
- Trust Fund Recovery Penalty Actions Were Not Always Timely or Adequate
- Some Tax-Exempt Organizations Have Substantial Delinquent Payroll Taxes
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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.
