By George L. Yaksick, Jr., Staff Writer
At the same time the IRS is trying to close a $300 billion tax gap, it is potentially losing hundreds of millions of dollars in revenue because of mismatched names and Social Security or other identification numbers on information returns and tax returns, according to the Treasury Inspector General for Tax Administration (TIGTA).
More than 48 million miscellaneous income and wage statements--reflecting $900 billion in income--could not be used because of missing or erroneous identification numbers in recent years, TIGTA reported in Mismatched Names and Identification Numbers on Information Documents Could Undermine Strategies for Reducing the Tax Gap. Acting IRS Commissioner Kevin Brown told TIGTA that the cost of improving the system "may outweigh the monetary benefits."
To help remedy this, the IRS cautions employers not to accept an Individual Taxpayer Identification Number (ITIN) in place of a Social Security number for employee identification or for work. An ITIN is only available to resident and nonresident aliens who are not eligible for U.S. employment and need identification for other tax purposes, the IRS advises on its website. However, an IRS official recently indicated that the Service appears to be processing Forms W-2 with ITINs.
Information Reporting
"Information reporting is central to the success of our nation's voluntary tax system and reducing the tax gap," TIGTA emphasized. Individuals voluntarily report 99 percent of the income that is reported on wage statements. However, when third-party information returns are not prepared, the voluntary compliance rate falls to approximately 80 percent, TIGTA observed. An IRS spokesperson said that the agency receives "billions" of information returns every year.
The IRS matches the income reported on information returns to the income reported on tax returns. When the information does not match, a potential underreporter case may be developed so the IRS can determine if further investigation is needed. If a match shows income but no return, the IRS may initiate a nonfiler case.
Matching Problems
TIGTA discovered that the IRS received approximately 48 million miscellaneous income and wage statements for FY 2001 through FY 2004 that the Service was unable to use in determining if the recipients filed tax returns and/or underreported income. These 48 million information returns reported more than $900 billion of income. "In FY 2004 alone, the IRS received about 3.8 million miscellaneous income statements that could not be computer-matched to a filed tax return because of missing or erroneous identification numbers," TIGTA reported.
The problem is especially acute with independent contractors, according to TIGTA. "The absence of withholding and full information reporting creates opportunities to underreport income on tax returns and avoid detection by the IRS."
IRS Response
In his response to TIGTA, Brown indicated that improving information and return matching might not be cost-beneficial. "Due to the vigorous systematic perfection already performed on these documents, the cost of an additional labor intensive process may outweigh the monetary benefits." Brown also noted that the income tax owed might not be "substantial."
Brown reminded TIGTA that the Treasury Department has recommended legislation to require payors to verify the accuracy of identification numbers for independent contractors. Payors not in compliance would be subject to backup withholding procedures.
Sen. Max Baucus (D-Mont.), chair of the Senate Finance Committee, urged the IRS in a statement to take "some common-sense steps to tighten up its processes and stop the willful violation of tax laws." Baucus also noted he has proposed giving employers the ability to use IRS databases to validate Social Security numbers given by job applicants.
- Related items:
- Feds Unveil Comprehensive Plan to Close $300 Billion Tax Gap; More Audits for Small Business Owners
- Are Small Businesses a 'Tax Gap' Target?
- IRS Continues Work on Reducing Tax Gap
- IRS Begins Tax Season With Important Issues Unresolved
- Gov't Can't Audit Its Way Out of Tax Gap: IRS Official
- IRS Outlines Taxpayer Protections in Private Debt Collection Program
- IRS Outsources Some Debt Collection Activity
- IRS Releases First Fact Sheet To Address Business Income Tax Gap; More To Come
- IRS Reports $345 Billion in Taxes Went Unpaid for 2001 Tax Year
Added to the news October 4, 2007.
|
