1,168 IRS Contractors Owe Taxes

In high school if you hang out with the “wrong crowd” you can acquire an unwanted label and perhaps an unwarranted reputation.  It’s funny how many high school parallels we find in the adult world.  Associating with the wrong business partners can also cause serious damage to your reputation and credibility.  If you continue to do business with unethical people, then it is not too much of a stretch to assume that you are guilty of similar unethical practices.

The IRS knows a little about this.  According to a recent TIGTA audit report, 1,168 IRS vendors owed back taxes totaling $589 million as of July 2012.  Now to be fair, the IRS screens the companies it intends to award contracts to, and the IRS will not work with them if they owe taxes.  However, they do not have a system in place for continued monitoring after the contract has been awarded.  Also, to be fair to these vendors, owing back taxes is not necessarily dishonest or unethical.  In fact, in my experience, most people that owe taxes are good citizens and businesses that have made honest mistakes, procrastinated, and/or that have fallen on hard times.

The statistics aren’t really as bad as they appear because there is one contractor who is responsible for a whopping $525 million.  Still, this is something that the IRS really needs to monitor closely.  We know how increasingly important public trust has become at the nation’s most troubled agency.

EIN Tax Return Fraud

Tax Refund Fraud.  We’ve seen this happening across the nation in a variety of communities.  The fraudster demographic is also quite diverse: some perpetrators are operating from within experienced fraud rings, some are regular street criminals (or inmates), some are even IRS insiders.

Most people are probably aware of individual refund fraud, which involves the filing of a false tax return using a stolen Social Security Number in hopes of obtaining a refund.  Many of these schemes are built upon the idea that the IRS doesn’t bat an eye if the requested refund is small enough.  And fraudsters can get pretty rich if they file in bulk.

But did you know that the same thing is happening with EIN numbers?  An Employer Identification Number is used to identify business accounts.  People steal them and obtain them fraudulently just like they do with social security numbers.  The statistics are staggering: “277,624 stolen EINs used to report false income and withholding on 752,656 tax returns with potentially fraudulent refunds issued totaling more than $2.2 billion” (2011 numbers).  The Treasury Inspector General for Tax Administration (TIGTA) released a report this week asking the IRS to do more to prevent EIN refund fraud.

IRS Not Prepared for New ACA Fraud Opportunities

The Treasury Inspector General for Tax Administration (TIGTA) is concerned that the IRS is not prepared to combat the onslaught of tax fraud that is anticipated once the IRS begins paying premium tax credits associated with the Affordable Care Act (ACA).  TIGTA recognizes that the IRS has systems in place to combat fraud in general; it has always been one of their top priorities.  But specific ACA fraud is another story.  The IRS is not prepared for this new responsibility which is bound to reveal unforeseen nuances.  The IRS has tested its systems that compute subsidies under ACA and the testing revealed flaws that could result in the IRS being unable to identify fraud prior to the issuance of credits.  In plain English, what this means is there is a significant risk that the IRS will inadvertently pay out credits to people who don’t really qualify.  According to the IRS, they have already made system corrections prior to the issuance of today’s report and they will be prepared.

Cindy Thomas Defends "Low-Level" IRS Employees in Sharp Email to Lois Lerner

At the height of the IRS Tea Party targeting scandal, high-level IRS employee Lois Lerner blamed low-level IRS employees in a Cincinnati office for flagging tax-exempt applications that contained words such as “tea party” or “patriot.”  Lerner had said that “line people . . . didn’t have the appropriate level of sensitivity about how this might appear to others.”

But one of these underlings in Cincinnati showed plenty of sensitivity in a May 10th email to Lerner that was made public this week by investigators on the House Ways and Means Committee.  Her name is Cindy Thomas, then-director of that office.  She took offense to Lerner’s labeling of her and others as “low level employees,” noticing right away that the Cincinnati tax-exempt division was being blamed in order to protect high-level IRS management.  Tax law and IRS news can be dull at times, but Thomas’ email reads like a juicy piece of gossip:

As you can imagine, employees and managers [in the Cincinnati tax-exempt division] are furious…How am I supposed to keep the low-level workers motivated when the public believes they are nothing more than low-level and now will have no respect for how they are working cases?  The attitude/morale of employees is at the lowest it has ever been…the previous 1½ years inside the determinations unit has been miserable enough because of the division’s workload and lack of help with strategic planning from Washington…Now our leader is publicly referring to employees who are the ones producing all of this work with fewer resources than ever as low-level workers!

This is obviously more than a defensive response from a manager with a bruised ego.  I respect the way she stood up for her employees.  And because I know first-hand the condition the IRS is in (and the condition it has been in for several months now), I don’t doubt anything she said.  This email, though emotionally-charged as it is, goes to the heart of the scandal in a way that is more raw and sincere than anything we have seen to date.

IRS Hesitates to Enforce Erroneous Refund/Credit Penalty

If you file a tax return and claim a refund, but it turns out that you should not have claimed a refund (or if you claimed an excessive refund), you could be liable for payment of penalties.  Similarly, if you made an erroneous or excessive claim for a tax credit, the IRS has authority to assess penalties.  The penalty could be as much as 20 percent of the erroneous refund or credit claim, and it may be assessed without regard to the taxpayer’s good intentions.  Innocent mistakes are equally subject to penalty.

The IRS hasn’t been very diligent in enforcing this penalty in the past several years, but the Treasury Inspector General for Tax Administration (TIGTA) hopes that will change.  In a recent audit report, TIGTA discovered that the IRS had initially misinterpreted the law allowing assessment of penalties, and then even after modifying their official interpretation, still failed to adequately enforce it.

It seems hard to believe that there would be a tax penalty statute on the books that the IRS wasn’t interested in enforcing, but it’s true.  Between May 2007 and May 2012, the IRS assessed only 84 erroneous refund penalties totaling $19 million.  That’s only about 17 per year, although the average assessment was upwards of a quarter million each.  It looks like the IRS had been targeting only the most egregious high-dollar cases.

In May 2012 the IRS admitted the tax law interpretation error and published an updated memorandum, but still has not put into place processes and procedures to guide front-line IRS personnel who make the day-to-day decisions of whether or not to pull the trigger on penalties.  Consequently, between June 2012 and May 2013, the IRS had allowed over 700,000 erroneous tax credits to slide by un-penalized to the tune of $1.5 billion in lost revenue.  And it is not just about lost revenue; it is about training the American taxpayer to be careful with the claims made on tax returns, because errors and false claims impose a big burden on the IRS in terms of both time and money.

What Kind of a Watchdog is TIGTA?

It seems like about once a month the IRS finds itself in the news headlines, and it is never anything positive.  Often the problem is that they have mismanaged funds one way or another.  This time, ironically, they have been criticized by the Treasury Inspector General for Tax Administration (TIGTA) for failing to account for some of their Obamacare spending.  I say “ironically” because these people are BEAN COUNTERS for Pete’s sake! Shouldn’t bean counters be able to keep records and track spending?  What do they do all day?  The IRS, and the government in general, needs to handle its finances like a responsible, hard-working individual might handle his personal finances.  And I’m pretty sure that would include carefully tracking where the dollars are being spent.

I know it is easy (and fun) to oversimplify IRS mistakes and problems.  But even if we don’t understand the complexity of the issues at the IRS, the sheer number of problems leaves no doubt that this is an agency in serious trouble.

We could say that it’s up to TIGTA to deal with the details, but there’s only so much TIGTA can do.  They do a great job writing reports and describing in agonizing detail the problems they find during IRS audits.  They even go so far as to make thoughtful recommendations.  But recommendations can be ignored.  I’ve always thought TIGTA should be given real power to drive change.

The media often refers to TIGTA as a government “watchdog” group.  Well, if TIGTA is a watchdog, it’s not a very good one.  An effective watchdog is mean when it has to be.  TIGTA is dedicated and vigilant, but fails to strike when a threat is detected.

IRS Collecting Less Revenue "By Force" . . . For Now

According to the latest TIGTA report, enforcement revenue is down at the IRS.  Enforcement revenue is the money collected through enforced collection activities rather than through voluntary compliance.  Enforcement revenue is down because the IRS has decreased the overall number of enforced collection actions (i.e., lien, wage garnishment, bank levy, property seizure).  The number of enforced collection actions is down because the number of IRS enforcement personnel is down.  And the number of enforcement personnel is down because the funding that the IRS used to receive for these positions is down as well.  According to TIGTA:

The 13 percent reduction in enforcement revenue correlates to the 14 percent reduction in the number of enforcement personnel … since Fiscal Year 2010, approximately 8,000 full-time IRS positions have been lost—about 5,000 from front-line enforcement personnel.

But who are considered enforcement personnel?  Auditors?  Revenue Officers?  Call center personnel?  All of the above?  One news source suggests that these 5,000 lost “enforcement” positions are auditor positions, but I would take it to mean something broader than that.  The TIGTA report does not specify.  I think it matters, because 5,000 lost auditor or revenue officer positions is rather significant, and could realistically be responsible for the 13 percent drop in enforcement income.  However, 5,000 fewer Automated Collection Department phone operators would result in extended hold times, but probably not a drastic drop in enforcement revenue.

Maybe 13 percent is not enough to make an appreciable difference from the perspective of a tax practitioner.  The IRS is supposedly issuing fewer liens and levies, but I sure haven’t seen this to be the case.  And it is certainly not something we can count on continuing for too long.

TIGTA Questions Tax Gap Stats

The most current “tax gap” figure is $450 billion — a little too nicely rounded, isn’t it? Seems like a wild guess, right?

Every year Americans collectively owe hundreds of billions of dollars in taxes.  But the IRS is successful in collecting only part of that.  The “tax gap” is the difference between these two figures.  It is the difference between taxes owed and taxes paid without resorting to enforced collections.  Of course it is much more than a “gap” these days; it is more like a chasm.  Tax gap data is some of the most important data there is for an agency whose primary duty is to figure out who isn’t paying and get them to pay.

As important as this information is, the IRS calculates and reports the tax gap only once every 5 years.  The most recent tax gap analysis was completed in January 2012, which provided tax gap data for tax year 2006 ($450 billion).  If you see a problem with this delay in information, you’re not the only one.  Recently the Treasury Inspector General for Tax Administration (TIGTA) issued an audit report criticizing the IRS’ tax gap analysis procedures.

One of the criticisms was related to the turnaround time on these reports.   Granted, tax gap figures are not easy to come by.  We’re talking about some very difficult calculations that are based on pretty convoluted data.  Indeed, part of the reason why the IRS only does this report every 5 years is because it takes nearly that long to gather and report on the data.  However, TIGTA would like to see tax gap reports churned out more regularly.  The more current the data, the more likely it is to assist with tax policy and administration.

As you can imagine, there are probably a thousand different versions of the tax gap (a thousand different ways to calculate it).  That’s what I mean by “convoluted data.”  But, as if it weren’t complicated enough already, TIGTA also recommended that the IRS include separate estimates for revenues lost in the “informal economy” (i.e., drug deals and small cash transactions) and offshore tax evasion.  Also, the IRS has been asked to change the way it calculates the corporate tax gap.

So, really it’s the same old story with the IRS: they’re being asked to do more, do it more quickly, and do it with less money.  Poor guys.

IRS Violating Software License Terms

The IRS is using some computer software that it hasn’t paid for, and is paying for other programs its employees aren’t even using, according to a new TIGTA audit released Tuesday that said the tax agency could be violating copyright laws.

The Treasury Inspector General for Tax Administration found serious problems with IRS software license management practices, many of which could be remedied if they would simply keep better records.  Read the full report here.

Software licenses are typically written in such a way that the software may be shared only on a certain number of computers.  The IRS appears to be doing what so many other private parties tend to do: sharing software on more systems than is allowed by a license.  And then they have also been doing what few people in their right mind would do: paying for licenses that they aren’t using.  This is a signature IRS move if I have ever seen one!

Fixing the IRS: Where do we Start?

It’s no secret that the IRS makes mistakes, sometimes serious mistakes.  It may have been secret before (at least for the average taxpaying citizen) regardless of the Treasury Inspector General for Tax Administration (TIGTA) reports that highlight the agency’s deficiencies.  But in recent months the IRS has been under intense media scrutiny, bringing these reports out into the open in mainstream media outlets.

The problems at the IRS are the result of:

  • ineffective training
  • weak leadership
  • poor judgment
  • inexperienced employees
  • an overly-complex tax code
  • simple human error
  • insufficient funding

This is by no means a comprehensive list.  And it’s easy to lump them all together and imagine one comprehensive solution.  There are some who think all the problems can be fixed by increasing funding to the IRS.  They see this as the root of all employee development, training, and managerial issues.  This is perhaps the primary argument of IRS sympathizers; however, I’m not so sure there is an all-in-one solution for cleaning up at the IRS.

To use a recent example, why don’t IRS Revenue Officers (RO) always follow legal guidelines when seizing taxpayer property to cover unpaid taxes?  This is probably the most serious collection action that the IRS can take.  And besides going to prison, this is what taxpayers fear more than anything.  So, why do they get it wrong sometimes?  We can probably rule out “complex tax code” because the procedures for seizure of property are clearly laid out in the Internal Revenue Manual (IRM) so an RO has only to follow the steps.  But any of the other listed reasons could realistically apply.

Although I think it is impossible to narrow it down to one root problem, it is clear that there is quite a bit of overlap.  For example, an inexperienced employee is more likely to make simple human errors and use poor judgment in his work.  And lack of/ineffective training is a symptom of poor leadership.  This overlap is a good thing when contemplating solutions because it means that addressing one issue will automatically improve another.  It also means that once we get started on the task of fixing the IRS, we’ll already be closer to our goal than we think.