Since time immemorial humanity has confronted two inescapable fates: death, and taxes. The latter is particularly unavoidable for IRS employees like me who are required to pay their taxes by the due date (generally April 15th) or be terminated. Yes…it it both sadly ironic and perversely true that the very same people who make a living putting taxpayers on installment agreements (payment plans) must be separated from their employment with the IRS if they are unwilling or unable to pay their taxes by the due date. In addition to that employment perk, every IRS worker is audited back three tax filing years prior to being extended an offer of employment. Obviously, Congress did not exaggerate when they justified freezing the wages of federal employees for the third year in a row to prevent a government shutdown during sequestration by citing out of control federal pay and benefits. As I spend 40 hours a week listening to taxpayers conjure up every conceivable (and inconceivable!) deduction, or claim to a credit using every imaginable (and unimaginable!) justification, I frequently wonder if our country wouldn’t be more fiscally sound if every taxpayer were audited, or at least held to the same standards (professional, legal, and financial) as IRS employees.
Incredibly, many
of America’s business owners have found a way to cheat taxation, if not death,
by exploiting the attention that IRS employees place on customer service (like
yours truly) rather than enforcing the tax laws that were written to fund the
country. For instance, the IRS estimates that the annual net tax gap—the amount
of taxes that go unidentified and uncollected each year—amounts to nearly $300
billion, a sum almost equal to 14 % of the entire amount of taxes IRS is
required by law to collect. The Government Accountability Office (GAO), home to
the federal government’s bean counters, so to speak, reported that federal
contractors routinely abuse the tax system with little consequence by not
remitting to the IRS payroll taxes that were withheld from salaries. The GAO
audit discovered that more than 1.6 million businesses owed over $58 billion in
unpaid federal payroll taxes, including interest and penalties. In addition,
over 1,500 individuals were responsible for nonpayment of payroll taxes at three
or more businesses, and 18 were responsible for not remitting payroll taxes for
a dozen different businesses. In at least one of the GAO case study businesses,
the IRS determined that the non-compliant business obtained contracts through
its ability to undercut competitors due in part to the business’s reduced costs
associated with its non-payment of payroll taxes. In other words, if left to
accumulate unpaid payroll taxes, businesses gain an unfair business advantage
over their competitors at the expense of taxpayers.
As of September
30, 2007, the latest year for which accurate figures are available, the IRS’s
master file database of taxpayer accounts reflected about $282 billion in
outstanding taxes owed by businesses and individuals. Additionally, the amount
of unpaid taxes is understated because many tax debts go unidentified and
unrecorded on IRS’s tax records due to non-filing or underreporting of tax
liabilities. Therefore, the true cumulative amount of unpaid taxes would be far
higher than $282 billion. Although IRS has powerful tools at its disposal to
prevent the further accumulation of unpaid payroll taxes and to collect the
taxes that are owed, IRS's current approach does not provide for their full,
effective use. IRS's overall approach to collection focuses primarily on gaining
voluntary compliance—even for egregious payroll tax offenders—a practice that
can result in minimal or no actual collections for these offenders.
Additionally, IRS has not always promptly filed liens against businesses to
protect the government's interests and has not always taken timely action to
hold responsible parties personally liable for unpaid payroll taxes. IRS is also
not timely in assessing penalties to individuals responsible for not remitting
business’s payroll tax debts.
The GAO audit also
uncovered just what businesses are doing with all those unpaid payroll taxes:
business owners or officers have diverted payroll tax funds for their own
benefit or to help fund business operations. One example cited by the GAO was a
dentist who had accumulated more than $500,000 over 10 years in unpaid payroll
taxes. The dentist/owner put property in his spouse's name, and then sold
property to his children for less than market value. Another example cited was
that of a healthcare business that had accumulated over $8 million in unpaid
payroll taxes for almost 30 quarters. Despite living in a multimillion dollar
home, the taxpayer claimed inability to pay taxes due to financial hardship, and
evaded IRS levies by using check cashing businesses and writing checks to
himself, even paying himself a salary while incarcerated. Although other
creditors seized and sold property to settle debts, the GAO found no evidence of
the IRS taking such actions. Another example the GAO cited was that of an owner
of a business that owed almost $2.5 million in taxes from under-reporting his
personal income. Additionally, the owner was the subject of at least 10 lawsuits
either pending or settled and was involved in possible check kiting and money
laundering, and made large cash withdrawals prior to filing bankruptcy multiple
times.
Unpaid payroll
taxes include amounts owed for Social Security and Medicare and failing to pay
those taxes creates a gap in the federal budget that requires the federal
government to dip into the General Fund (the overall pool of tax dollars we pay)
to cover the missing Social Security and Medicare taxes that businesses are
failing to remit. The IRS estimates that the amount of unpaid taxes and interest
attributable to Social Security and hospital insurance taxes is approximately
$44 billion. Businesses with more than twenty quarters of tax debt (five years
of unpaid payroll tax debt) more than doubled between 1998 and 2007. To add
insult to injury, IRS is statutorily limited in the length of time it has to
collect unpaid taxes—generally ten years from the date the tax debt is assessed,
so the federal government will lose its right to collect billions of dollars in
payroll taxes each year if IRS does not obtain payment from tax debtors before
the statutory period for collection expires.
GAO also found
that even though the IRS’s enforcement workload—measured by the number of tax
returns filed—has continually increased, the number of staff dedicated to
collections has not. In other words, if the IRS doesn’t hire more workers to go
after deadbeat business owners and tax cheats, the government loses money and
the compliant taxpayer bears an increased burden to fund the nation’s
commitments. All federal employees have been under a pay freeze for two years
and recent budget negotiations aimed at preventing a government shutdown
resulted in legislation that froze the pay of IRS employees for a third straight
year, in addition to mandating a hiring freeze and mandatory furloughs imposed
by sequestration. Congress has apparently concluded that perpetual pay and
hiring freezes, coupled with heavier workloads, is a recruiting incentive for
those staffing government agencies like the IRS, which is responsible for
collecting the taxes required to fund the government’s operations.
The failure of the
IRS to collect the nation’s much needed revenue is not for want of legal
resources to compel compliance. The GAO found that the IRS routinely fails to
use certain collection tools like liens and levies against deadbeat companies,
yet the IRS goes after grandmothers and seizes family homes to satisfy personal
tax debts. The GAO’s audit of businesses found that IRS revenue officers
continued to work with businesses to gain voluntary compliance while the
business continued to accumulate unpaid payroll taxes. In its 2000 study, the
law enforcement arm of IRS, TIGTA (Treasury Inspector General for Tax
Administration), found that revenue officers were entirely focused on the IRS’s
customer service goals and therefore were reluctant to take enforcement actions.
As a result, they continued to work with tax debtors to gain voluntary payment
rather than using more aggressive enforcement tools such as levies or seizures.
TIGTA also reported that as a result of IRS not taking effective collection
actions, the cases accrued more unpaid taxes while assigned to revenue officers
than the revenue officers were able to collect. IRS officials admitted to the
GAO that finding an account with money in it is often a “hit or miss”
proposition since they are one-time levies and a levy is served against an
account, a tax debtor will often close the account and open an account in a
different financial institution. For example, one business had tax debt from
2000, but IRS did not assess a penalty against the business’s owner until the
end of 2004. In the meantime, the owner was drawing an annual salary of about
$300,000 and had sold property valued at over $800,000. Within 1 month of IRS
assessing the penalty, the owner closed the business, which by then had
accumulated about $3 million in unpaid taxes.
The GAO concluded
its audit of IRS collection procedures by observing that allowing businesses to
continually fail to remit payroll taxes negatively impacts the general public’s
perception regarding the fairness of the tax system, and found that IRS’s
failure to punish businesses that continually accumulate unpaid payroll taxes
has the effect of subsidizing their business operations, thus enriching tax
abusers or prolonging the demise of a failing business. Perhaps this is why so
many Americans believe that paying taxes is a discretionary matter that can be
easily bypassed using an exception (i.e. deduction, exemption, or credit)
granted by Congress. If so, my salary and benefits are well justified, but only
at the expense of American taxpayers who bear a growing share of the tax
responsibilities of businesses and citizens who enjoy all the privileges of
membership in Club Citizenship but shrink from the duty of paying their
membership dues.
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