Tax Notes logo

Pursuing Non-Filers

Posted on Nov. 8, 2016

We regularly write about non-filers in the blog because non-filing often pairs with non-payment and other issues involving tax procedure.  Today, I write about non-filers from the perspective of the IRS as portrayed in a recent report  prepared by the Treasury Inspector General for Tax Administration (TIGTA).  The unflattering report exposes some of the dysfunction of the IRS and how that dysfunction, in this case, benefits high income non-filers.  Essentially, the TIGTA report finds that in 2012 the IRS modified its program for identifying non-filers and in doing so excluded individuals who requested an extension and then failed to follow up by filing a return.

Individuals who file an extension generally have higher income than the average taxpayer.  The TIGTA report goes into this somewhat but it also seems intuitive that persons requesting an extension would generally have higher income and, often, more sophisticated returns needing additional time.  That fact has nothing to do with why the IRS program for 2012 failed to pick up non-filers requesting an extension.  It does, however, impact the decision on whether to go back and fix the problem.  The IRS resists the suggestion in the report that it should go back and pursue this target rich group because of resource issues.  TIGTA rightly takes the IRS to task for this decision.

I note as an aside that Congress has required the IRS to turn over to private debt collectors accounts it cannot collect.  While I think this is a bad idea for reasons discussed in a prior post, these private debt collectors will supplement the strained collection resources of the IRS.  If the IRS does not use its automated resources to make an assessment, however, these accounts never go into the collection stream for the IRS or private collectors to work.

The problem started in 2012 return cycle when the IRS created the computer code to use for going after non-files for that cycle.  The code somehow left off non-filers who requested an extension before failing to file.  Apparently, the IRS normally does a check on the code to see if any anomalies exist.  At the time that it would have run its check, Congress had shut down the Government and the people who would have run the check never got back to it.  So, for the cycle of 2012 returns, filing an extension got you a pass from the non-filer correspondence normally sent.  Many of these non-filers may have received a nudge to file the late return from a state taxing authority, from bankruptcy court or from other sources but they never received one from the IRS.  The TIGTA report shows the amount of relatively easy dollars to assess that the IRS lost as a result of this programming error.

In 2013 the IRS duplicated the error in 2013.  Between the two years, TIGTA estimated that the IRS failed to identify 1.9 million returns.  Because these non-filers typically produce a much higher rate of return than non-filers who never requested an extension, TIGTA estimated that the IRS lost $2-3 billion each year.  By not pursuing these individuals even though it has the computer capability to easily identify them and target them with correspondence requiring almost no human effort, the IRS promotes these individuals failing to file again the following year and makes collection of the late taxes more difficult to achieve.

I will not relay all of the findings and all of the excuses provided by the IRS for not fixing the problem now but one excuse has popped up before and demonstrates the dysfunction happening there at this point.  Since non-filing creates an unlimited statute of limitations for the IRS to assess, nothing legally stops the IRS from pursuing these taxpayers today.  TIGTA writes in the report about how little time and effort it would take for the IRS to generate the correspondence to these individuals that should spur compliance in a healthy percentage.  The IRS concern in response takes the focus away from the work it would take to send the notices and moves it to the work it would take to handle the phone calls and the downstream work for the IRS that these notices would present.

The IRS has raised this issue before with respect to levies.  It slowed down its process of sending levies because of concerns about handling the downstream work levy notices present.  The concern raised by the IRS with respect to the downstream work is legitimate and goes right to the core of problem with cutting its funding for six years.  At the same time, not pursuing high dollar non-filers shows that the wheels have come off of its compliance function if it cannot even proceed with enforcement against easily identifiable cheaply pursued tax scofflaws.  Going after these individuals would seem about as essential to compliance as any work the IRS might do yet it is reluctant or unwilling to do so.  This especially hurts those of us who represent low income taxpayers when we try to address or mitigate problems our clients have with the IRS collection machinery which can grind down a person because we know that the IRS has decided not to bother even attempting to collect returns and taxes from high income individuals who decided not even to file a return.

Subject Areas / Tax Topics
Copy RID