IRS Will Continue to Emphasize High-Income Taxpayers In the Collection of Delinquent Taxes by STEVEN TOSCHER, DENNIS PEREZ and TENZING TUNDEN
The Internal Revenue Service will continue its focus on collecting delinquent taxes from the wealthiest taxpayers. The Treasury Inspector General for Tax Administration (TIGTA) recently published a report on the IRS efforts to collect delinquent taxes from wealthy taxpayers.
This is the second report by TIGTA on the IRS attempts to increase compliance of this group of the taxpayer population.[i] In response to this earlier report, the IRS agreed to make changes to its non-filer strategy and issue delinquency notices to all high-income non-filers identified.[ii]
The following chart shows that delinquent taxpayers having an average AGI of over $1.5 million paid the IRS an average of 39 percent of what they owed. These high-income taxpayers still owed over $2 billion.
TIGTA Report – Audit and Conclusions
TIGTA found that the IRS generally prioritizes these cases by the amount of the tax liability rather than the income level of the taxpayer.[iii] The report suggests that the emphasis by the IRS on the amount of the tax liability as opposed to income of the taxpayer adds credibility to the belief that the U.S. tax system favors the wealthy.
In the audit conducted by the TIGTA, they identified 685,555 taxpayers who reported an AGI of $200,000 or more, on at least one Form 1040 for tax years 2013 through 2017, who owe a combined total of $38.5 billion in delinquent tax payments.[iv] The amount owed represents 22 percent of the total amount owed by all taxpayers with at least one Form 1040 balance due on May 14, 2019.[v] These high-income taxpayers account for 6 percent of the total taxpayers identified with delinquent tax liabilities.
TIGTA concluded based on their audit that high-income taxpayers are not a sufficient collection priority. TIGTA concluded that the failure to address this subgroup is problematic because these high-income taxpayers have the ability to pay their debt and that not addressing this group can lead to this debt being uncollected.[vi] The two concepts of ability to pay and early collection activity are both highly important for successful revenue collection. The probability of collecting unpaid tax debt falls dramatically in the first three years as the accounts age. A majority of IRS Revenue Officers agreed and emphasized the importance of collection activities at the time taxpayers are earning a high income.
In the response to the TIGTA report, Eric Hylton, Commissioner of the IRS SB/SE division, assured TIGTA that high-income taxpayers are a high priority for the IRS collection function and that they have made significant efforts to collect on this group of taxpayers.[vii] He further stated that high-income taxpayers are more likely to resolve their liabilities while in the notice phase of the collection process, and for those who do not, the IRS Automated Collection System is well suited to resolve lower balances owed by high-income taxpayers.[viii] He also reported that IRS Collection was working or had worked 87 percent of the high-income taxpayers who had a tax liability as of May 2019.[ix]
The IRS focus on the collection from high income taxpayers is a continuation of its efforts relating to high income non- filers. A “non-filer” is a taxpayer who either does not timely file a required tax return and timely pay a tax due for the delinquent return. This group can encompass foreign legal entities or individuals that have invested and earned income in the U.S. without knowing that their activity consists of being engaged in a U.S. trade or business and thus having a U.S. tax filing obligation.[x] Other members of this group could be uncooperative non-filers, tax protestors, or individuals that did not have a chance to file a return due to health conditions or other extraneous factors.
The IRS has several enforcement initiatives targeting high-income non-filers. The first is the High-Income Delinquent Filer (HiDeF) Sweeps. The HiDef Sweeps target taxpayers with three years of unfiled returns and large tax balances. They are assigned to experienced revenue officers and may result in unannounced field visits.
Another initiative is Operation Surround Sound. This is the successor effort to HiDef but only targets cases with egregious noncompliance with indicators of potential fraud. Operation Surround Sound is a collaboration effort between the Office of Fraud Enforcement (OFE), IRS Examinations Operations, and Collections. This operation involves significant use of data analytics that compare numerous data sets for the OFE to make appropriate recommendations. This can lead to referrals to the IRS Criminal Investigation function, examination referral, or collection for a IRS Substitute Return for the non-filing taxpayer.
Options for High-Income Non-Filers
If contacted by the IRS, the taxpayer should consult with an appropriate tax advisor to consider filing their delinquent tax returns and begin to enter into installment agreements or offer in compromises as applicable. The taxpayer should seek representation to assist with any reasonable cause arguments or first time penalty abatement arguments. Taxpayers with criminal exposure – yes the willful failure to file a tax return is a criminal offense- should consult with experienced criminal tax counsel. The OFE is involved with these cases for a reason.
Taxpayers who have not yet been contacted by the IRS should consider the IRS’s voluntary disclosure practice where there is a criminal potential. The IRS voluntary disclosure practice is discussed in Sandra Brown’s article in March 2021 edition of the Los Angeles Lawyer.
Whether the IRS gets to the taxpayer first or the taxpayer takes corrective actions in advance of IRS contact- the preferred approach— there are opportunities to get straight with Uncle Sam and avoid the serious consequences- both civil and criminal if not filing your tax return and not timely paying your income tax. The IRS has been increasing its focus on high income non- filers and the TIGTA report will insure the focus continues and even increase.
Steven Toscher is a Principal at Hochman Salkin Toscher & Perez P.C., and specializes in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation.
Dennis Perez is a Principal at Hochman Salkin Toscher & Perez P.C., and is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization. He represents clients throughout the United States involving federal and state, civil and criminal tax controversies and tax litigation.
Tenzing Tunden is a Tax Associate at Hochman Salkin Toscher Perez P.C.
[i] Treasury Inspector General for Tax Administration, High-Income Taxpayers Who Owe Delinquent Taxes Could Be More Effectively Prioritized, Report Number 2021-30-015, (March 10, 2021), available at https://www.treasury.gov/tigta/auditreports/2021reports/202130015fr.pdf.
[ii] See Treasury Inspector General for Tax Administration, High-Income Non-filers owing Billions of Dollars Are Not Being Worked by the IRS, Report Number 2020-30-015, 34-38, (May 29, 2020), available at https://www.treasury.gov/tigta/auditreports/2020reports/202030015fr.pdf.
[iii] Id. at 1.
[iv] Id. at 4.
[vi] Id. at 7-8.
[vii] Id. at 26.
[viii] Id. at 29.
[x] IRC §882(a)(1) and §11(a). IRC §871(b)(1) and §1.