By Richard M. Schickel, Enrolled Agent
The IRS mostly deals with people who file and pay their taxes in a system supposedly okbased on voluntary compliance, but it always seemed to me like all the wage earner (W-2) employees are caught in a box, with the IRS frequently sticking a hot poker to stir up fear. The fear of the IRS coming and putting you in jail or taking your house, car or bank accounts is enough to keep most people in this system of enforced compliance.
While millions of self-employed people avoid and underreport their taxes, millions more do not file or pay any taxes at all. The IRS knows about it, but is limited in its ability to try to collect from those people, so it picks on the poor wage earner.
My job as an IRS Senior Revenue Officer (tax collector) for thirty-three years required me to make cold calls to individuals and businesses that had not filed tax returns or paid income or employment. The IRS sends you a lot of letters, but eventually an IRS Officer will show up at your door. Just out of the blue, just show up. It is never at a convenient time. There is a reason for that. The IRS wants to see how you really live. To see what you have, that they can take.
The IRS tax collector will always look for your Achilles heel, your weak spot. When you do not do what you committed to do or lie, they will attack that asset or your situation. If you are most afraid of a levy on your paycheck, then that is sure to be the first thing that they do. Effective revenue officers are always thinking about their next action and assume that whatever the taxpayer says is not going to happen and that they will have to take enforced collection actions.
The IRS is too large, too powerful and can be abusive to the taxpaying public and its own employees. Too few laws govern how they can collect taxes, or about what information they can collect and use for what purpose. No other government agency has as much access to your personal information and the power to seize and sell everything that you own, without a court order. There is very little oversight of IRS Senior Management, which sets up all the programs and decides how they will be carried out.
“Absolute Power Corrupts Absolutely.”
The IRS is much insulated from the real world and pretty much does whatever it wants with little resistance and offering no explanations. The Internal Revenue Code prohibits the IRS from commenting on specific cases. Technically you have the right to Due Process Appeals and your 1st Amendment rights but to get those through the IRS requires so much money in lawyers and court costs that it rarely occurs.
My thirty-three years with the IRS have shown me that most citizens are satisfied to pay what they regard as their fair share of the burden for those in society who are unable to work, are ill or elderly, or living in poverty. Income taxes also support the government, our military and every program the Federal government has. Taxes, when they are regarded as fair, make people proud that they are taxpayers, but most people want all of us to feel the same burden that they feel. They want fairness, and defining fairness is what causes so many problems.
The IRS knows about this but is so short-staffed and overburdened with the identity fraud claims and the new Obama health care program administration and other unfunded mandates that it can do nothing about it. So they just keep picking on the people who have filed and reported income in the past. New estimates of overseas U.S. currency holdings, the Underground economy and the “Tax Gap” are from a report by Edgar L. Feige, University of Wisconsin-Madison.
This is like a government secret and the reason that we know about it is that the IRS is under the Treasury Department and so is the Bureau of the Mint. The Mint prints the money and it is tracked by the Federal Reserve Bank, which knows what people have deposited. It also knows how much has left the United States.
Congress does not like the IRS, because when the IRS knocks on doors it usually includes the doors of people who are friends or supporters of the elected officials who expect special treatment from the IRS. They usually get it, too. The IRS is very afraid of inquiries received from the White House and Congress.
The IRS is all about fear and intimidation. Owing the IRS is different than owing a private creditor. With taxes you have already taken the money. It’s kind of like you have loaned it to yourself by not paying the taxes. This is why you can never truthfully claim that you did not have the money. Income tax is based on the fact that you received the money and had it in your hands at some point. The fact that you chose to do something other than pay the Government the taxes you accrued was your choice. I always remembered that the taxes were based on income. It made everything clearer for me.
When the IRS catches up with you, you must provide a financial statement to decide how much you can immediately pay the Government and how much you can come up with by borrowing or liquidating your assets, or how much you can pay over time. It’s a little backwards. It’s as if you went for a loan at a bank and, going over to the tellers’ window, you opened the cash drawer and took out as much money as you wanted. Then later, sometimes years later, you filled out a financial statement and provided credit reports showing how much you would be able to borrow.
Yes, I said you must provide a financial statement, because if you are under a summons for financial information and you refuse to provide it, you can be jailed until you do produce the information. As I write this people are being held in prisons by Federal judges on contempt of court charges for this very reason.
What the IRS Does Well
The best thing about the IRS is that it is efficient and collected $2.9 Trillion dollars in revenue to fund almost every part of the Federal Government. The IRS spends forty-one cents to collect $100 in revenues (.0041 percent) and this is cheap. Cuts to IRS staffing and budget cuts for the last four years combined with a graying employee population show that one third of the IRS can retire in the next five years.
IRS has twenty-five percent (29,699) fewer employees than it had in 1992 and has not hired in four years. It has less employees now than it had in 1980, although the population of the United States has risen by twenty-seven percent since 1980. The armed forces in 1980 were at 515,408 and are now at 1,458,697, an increase of thirty-five percent. One third of all IRS employees can retire in the next five years. The IRS budget has been cut four years in a row, and in addition, inflation has reduced the value of the remaining dollars in their budget. Every dollar that is not being budgeted to the IRS results in thousands of dollars that may never be collected from delinquent taxpayers.
There are ten percent less revenue officers and revenue agents than five years ago, and they are the front-line field enforcement employees. The IRS has lost 10,000 just since 2010 alone.
IRS Employees – Abuse and Stress
When employees of the Internal Revenue Service walk into their offices they see a poster on the wall that says:
UNAX – Don’t Go There! 2,320 IRS employees have been terminated, suspended, resigned, fined or jailed. Stop. Be smart. Keep your job. Don’t commit UNAX. (Document 12800 Rev. 32013)
UNAX is the unauthorized viewing of tax records on the Master IRS Computer (Integrated Data Retrieval System-IDRS). Not exactly a warm greeting when they walk in the door.
Perhaps this will give you some idea about why the IRS agent that you speak with is in a bad mood. IRS employees are audited every year and can be fired for not filing or paying income tax returns.
Over the years, I have seen at least ten employees who were handcuffed, arrested and escorted out of the building by armed Treasury Inspector General Special Agents. (TIGTA) One man was put into leg irons as well. In most of these cases the IRS believed that they had done something wrong or illegal and pursued and harassed them, forcing them to resign or be charged with some crime. Employees who did not cooperate in the process were arrested. One man was dragged from the building kicking and screaming.
Many tax returns are still manually input into the IDRS system by data entry operators. Just like in the 1970s. They are not scanned like in modern businesses. The IRS does not use other modern techniques either, like email to resolve correspondence or audits or collection. It only started using e-fax about a year ago.
Some IRS employees, who are unable to keep up with production quotas, destroy tax returns. Putting them in the garbage or in backpacks to throw away later or one person flushed them down the toilet. Another hid them in a suspended ceiling which worked for a while until the weight of the paper caused the ceiling to collapse. Service center jobs are all about production statistics.
Many tax returns are still manually input into the IDRS system by data entry operators. Just like in the 1970’s. They are not scanned like in modern businesses. IRS does not use other modern techniques either- like email to resolve correspondence or audits or collection. It only starting using e-fax about a year ago.
There is much information on business tax returns and audit papers that is very valuable to a business’s competitors. This includes business plans, business strategies, asset and inventory lists, future business plans, financial resources and customer names and details. This makes the IRS ripe for industrial espionage attack. But the IRS has no audit control on the closed paper files.
Physical and Verbal Threats and Assaults on IRS Employees
Many jobs in the IRS involve making contacts with taxpayers at their homes and businesses, and there is a high risk of assault. They have to drive into sections of cities that are dangerous or hostile to government agents. They are verbally assaulted and sometimes physically assaulted – some have even been killed in the line of duty. But most of the time, the IRS does not know exactly where these employees are. There is no systematic or electronic tracking of their whereabouts.
IRS employees have the general public, delinquent taxpayers, and IRS management at all levels on their backs all the time. Management is always criticizing and documenting their job actions with the goal of disciplining employees.
Audits and Collections
If your income is under $200,000, there is only a one percent chance that you will be audited. Incomes above $200,000 have an audit chance of three percent. This has made some people reckless with the information that they put on tax returns. In 2013, the IRS did the fewest audits since the 1980s. Audits are a way of to bring fear into the equation. The audit is where you have to bring in your actual books and receipts and prove what you claimed on the tax return. Unlike the IRS of the old days, when the auditors had more discretionary power, now there is very little reasonableness during an audit. You either have the records or you lose that deduction. During an audit, you will be asked dozens of questions that are designed to make you disclose income or gifts that you may have forgotten to list on the tax return. In that forum, you are presumed guilty until you can prove yourself innocent.
There will be 100,000 fewer audits in 2014. There will be no collection on 190,000 cases in collection this year, due to a reduced numbers of employees. This means that $3 billion dollars will not even attempt to be collected. In fact, three Automated Collection Sites were closed and the employees were reassigned to work on identity fraud cases instead. These do not yield any tax money to the government.
The odds are against being selected for an audit, if the taxpayer puts down reasonable expenses in relation to their income. The IRS tracks this and building accounting models. So they know the percentage that people would normally have for housing/mortgage interest, real estate taxes, medical expenses and charitable contributions.
Or for businesses they also have models by industry and by market. The IRS knows that a dentist, for instance, would have certain expenses in a statistical range. They look for deviations from the norm. It works pretty well at locating audit targets.
In IRS Collection between 2012 and 2013:
- Notice of Levies were down sixty-three percent
- Notice of Federal Tax Liens were down fifteen percent
- Property Seizures were down twenty-five percent
- Acceptance rate of Offers in Compromise 2013 were up to forty-one percent from thirty percent the year before.
There are areas throughout the United States that are known internally as “tax free zones.” Often these are rural or areas of low population. The IRS has greatly reduced its enforcement presence in these areas and the local people know it and prove it every day when they stop filing and paying taxes and get away with it.
The IRS has hold files known as Queues, and all cases are classified as to dollar amount and potential collectability. The taxpaying public does not believe that the IRS can hurt them, so they tell their friends and neighbors and the noncompliance grows exponentially especially with self-employed people.
It has become more acceptable to not file your taxes or to owe taxes, just like filing bankruptcy seems to carry no stigma anymore either. Like it is morally acceptable to take what is not yours and then not make amends. I say it this way, because income taxes are taxes on income that you earned and held in your hand at one point.
Non-Compliance Rate – Who Files and Pays
- Ninety-nine percent of W-2 earners report their income
- Forty-four percent of self-employed people report their income
- Eleven percent of people who operate on a cash-only basis report their income
- Both collection and audit use fear-based enforcement. It works.
Taxpayer Service is the department that answers your phone inquiries. But there is not much service left over there. Last year they only answered sixty percent of the incoming phone calls. So taxpayers who were trying to comply with the law and respond to IRS demands and requests for information routinely waited over one hour and then heard the dial tone again – forty percent of the time. That is wrong. It is frustrating and hurts tax compliance.
Fraud –Show Me the Money
Alimony fraud is when a person claims to pay alimony which they can deduct off their income, and then the person receiving it reports it as taxable income. The IRS computer has no way of matching that, but TIGTA did a study that showed the fraud of claiming alimony payments that were never actually paid costs that Government $2.3 billion a year.
Earned Income Fraud
The Earned Income Credit is a credit that working people with low incomes receive. It is like a welfare payment. It is to encourage people to work and not rely on government assistance. The idea is: if you work and do not make enough money, the government will reward you by giving you extra income. Earned Income Credit fraud has a twenty-two percent fraud rate and costs $15.6 billion a year.
Education Credit Fraud
Many taxpayers deduct money they claim was paid for education to claim education tax credits, but the money was never paid to a school. Education credits are also not tracked by the IRS, so the government loses $3.2 billion in lost tax income.
Retirement Contributions Fraud
There is no automatic computer program that monitors and matches retirement account transactions. Like Simplified Employee Plan accounts, this is costing the Government untold millions of dollars in lost tax revenue.
Government Employees as Delinquent Taxpayers
Then there are IRS employees who owe tax money to the government. In 2013, they received over $1 million in cash awards, 10,000 hours of paid time off and in sixty-nine cases, they received step increases, which promoted their pay and will cause them to get pay raises every year in the future. Actually many Federal employees owe money in taxes. According to an article in Forbes dated May 23, 2014, a total of 318,000 Federal employees and Federal retirees owe tax delinquent balances of $3 billion.
IRS Employees Who Are Now Convicted Criminals
There are IRS employees who have illegally accessed social security numbers -in bulk – providing them with names and addresses of inactive accounts of people who do not need to file or pay because their income is too low or they are retired. Employees have been convicted for criminal tax identity fraud in Kentucky, Georgia, Missouri, Pennsylvania and California.
There are many kinds of refund fraud. It basically means that a person files a fake tax return claiming a refund is due, and the IRS pays it. The IRS does not check out and compare the information claimed on the tax returns for at least six months to a year later. They just assume that the return is legitimate, so they pay the refund. The IRS is required to pay three percent interest on refunds that are not issued within forty-five days of receiving the return.
The IRS is paranoid about this, so it pays first and asks questions later. Often, they are too late. There are many cases of identity fraud.
As a trained investigator with experience in forensic accounting, I wonder how so many cases of identify fraud involve people who are deceased or have little income and do not need to file tax returns. Their social security numbers and the fact that they are inactive makes me question where the identity thieves would have gotten the information, because in many cases, people in that position are not applying for credit cards, or mortgages. They live on disability or social security and pension checks, so basically their social security numbers are inactive. It makes me wonder how the identity thieves could locate social security numbers that are useful to get money out of the government through these fraud schemes. Then I remember that the IRS has access to all the social security numbers and financial information. From what I have seen in my work and from what I have read, identity fraud is usually committed against people who have little or no income. The IRS and its employees have access to all this information. There were 1.1 million cases. Who is watching the IRS? Tens of thousands of IRS employees have unlimited access to this data. Who is watching the IRS?
After learning that the IRS had paid out over $5.2 billion in 2011 and $3.6 billion in 2012 in fraudulent refunds, I was outraged. People stole billions from the IRS, right under its very nose and no one went to prison. A total of $4.5 billion was paid out of the $5.2 billion by direct deposit. One address in Bulgaria received $490,000. The Treasury Inspector General that monitors the IRS reports that the IRS will pay out $26 billion over the next five years. This is just unacceptable.
I thought, “Why go to work? Why not just go to a foreign country and buy a computer and file false refund claims?” It is a very lucrative situation.
As reported above, IRS employees already have unrestricted access to the entire name, address, social security number, income information and credit information; some have been convicted for abusing that. The IRS does have a system for detecting that. But even a first line employee could access hundreds of thousands of accounts before it would even be detected. That could take anywhere from a month to several years. There simply are no online audit controls to stop this.
The movies Oceans 11, 12, and 13 were all exciting stories about high-profile robberies. The robberies required huge amounts of planning and strategy in order to gain large amounts of money. But cash and gold all takes a lot of room to pick up and move and then clean up through elaborate money laundering schemes. Direct deposit straight from the U.S. Treasury into your foreign bank account is so much quicker and cleaner.
The biggest part of this is that the government knows why it is happening. It is because of the antique IRS Master Computer – the 40-year old Integrated Data Retrieval System (IDRS). It is incapable of preventing these refunds. In my last year of working for the IRS, given this information, I wrote a letter as a private citizen to Warren Buffett, the billionaire, asking him to invest in a new and comprehensive computer for the IRS, telling him that this would change everything for the next forty years. There is so much more data available now. I am still waiting for his response.
The IRS master computer is located in a cave in Parkersburg, West Virginia, to protect it from nuclear attack. The ten IRS service centers do indirect data entry over the week and then on Friday the IBM 370 large, antiquated magnetic disks are shipped via a private delivery service to the Master Computer for uploading. Then the update information is downloaded and shipped back to the regional service centers. The IRS is very proud of how secure the system is. I am just questioning the security of the data disks. Just one disk contains the private financial information of millions of people who pay or have paid taxes. It would be the best source of information to be used in false refund claims.
The IDRS system connects into 200 different software systems in the IRS and there is no one system that does it all. Years ago, I heard that IRS uses over 680 programs that tie into the IDRS computer.
It is estimated that there is a $2 trillion underground economy that is not filing tax returns or reporting income. This includes illegal income from drugs, crime and prostitution as well as people who earn money that is not being reported or taxed.
The tax gap in the United States was estimated to be $600-$700 billion in 2010. It was estimated to be $450 billion in 2006, attributed to tax evasion, tax fraud, and unintentional taxpayer errors. This was made possible because of the complexity of the tax code and under- reporting of income. People are figuring out how to get around paying taxes. Cash businesses make this easy.
The truth is that the IRS acknowledges that the voluntary compliance rate is 83.7 percent. But that means that 16.3 percent of all people who have taxable income, do not file or pay their taxes when due. There is even a larger problem of corporations and individuals who never file or pay income taxes on legal or illegal income earned and hidden in foreign countries, and not reported in the United States. The international tax gap is estimated to be $40 to $133 billion a year.
Giant, multinational corporations owe over $700 billion in taxes on $2 trillion dollars that they hold in cash in other countries. Source: NationofChange.org, article titled “Should Giant Corps Pay Taxes They Owe?”
You Do Not Want to Be a Member of this Club!
As mentioned, there are people who do not want to pay taxes at all. One such group of people advocates bringing down the government through passive and violent methods. This group is classified by the IRS as Illegal Tax Protesters. Technically the IRS was required to stop using that term after 1998, but you can believe that it still vigorously tracks such illegal activity. The former IRS Historian Shelly L. Davis stated that the IRS kept lists of citizens “for no other reason than their political activities might have offended someone at the IRS.” She charged that “anyone who offers even legitimate criticism of the tax collector is labeled as a tax protester.”
These are people who are either protesting the use of the tax money, saying they do not wish to pay for war or atomic weapons, or they are people who are challenging the legality of the tax laws. Protesting is not against the law. But regardless of why they are protesting, these people are still being tracked by the IRS. You can protest but still pay or you can stop filing and paying. This is against the law and will get you into trouble eventually. Now the IRS may classify these people as PDT – Potentially Dangerous Taxpayers – or as Frivolous Return Filers, or Non-Filers. So this is kind of like being found guilty of something but without any legal hearing. No 1st Amendment rights or due process rights are in force here.
In the past, there were illegal tax protestor designations, high profile cases, sensitive cases, highly sensitive cases, or project cases, all giving the IRS employees special directions on how to deal with that case. Then there were High Risk Assault Areas, which were urban areas the government officially recognized as too dangerous to send unarmed tax collectors and auditors into. All of these make for special classes of taxpayers, who may have done nothing to warrant this designation. Still, the IRS fails to protect its employees in public contact positions. I do not remember how many times I have knocked on the door and later found out that the person answering it had a criminal record for one of more of these offenses: drugs, drunk driving, assault, bank robbery, battery, or assaulting a police officer. Not knowing this made for an unstable and potentially hazardous situation for me. I was physically assaulted 5 times over 33 years by taxpayers.
I think that these are all methods of disparate treatment to the taxpayers. I think it is illegal and unconstitutional to create special classes of taxpayers and then allow different standards as to how they are treated.
As of August 29, 2013, the IRS designated eighty-four taxpayer representatives and Potentially Dangerous Taxpayer (PDT) or Caution on Contact (CAU). Although this number is a small percentage of the 2.3 million tax representatives, the IRS employees have no access to this information when they make contact with these representatives. In part because the IDRS system is unable to mark every case in a way that would warn the employees that the representative is dangerous. From 2010 to 20132 there were four cases of IRS employees being physically assaulted by taxpayer representatives. This is just another sign that the IRS does not take care of their employees.
Where the IRS Gets Free Money
Lost Refunds Due to Non-filing
If a person does not file a return within three years of its April 15 due date, they lose their refund completely and forever. On April 16, 2014, the IRS took $760 million dollars in potential refunds from hardworking taxpayers from the 2010 tax year which should have been filed by April 15, 2011.
Tax Adjustment Letter Errors
The IRS sends out letters that will increase your taxes. These are called CP 2000 letters. These are issued when the information that you reported on your tax return does not match up to the IRS records. Many times they are correct, but there are many cases where the IRS information is not complete or accurate. So the IRS sends you a letter that looks like a bill, before any tax is actually legally assessed. About ninety-eight percent of these notices go unchallenged, not because they are accurate but because taxpayers are afraid to challenge the IRS. So they just send a check to fully pay the proposed assessment. I have heard stories that up to twenty percent of the notices are incorrect, but the government makes billions of dollars from this program. The letters are all computer-generated, so no employees have to review the cases. They only need to post the checks to the IRS bank account.
IRS Hearings in 1998
In 1998 IRS Collection and Exam were attacked by a few individuals and the media drummed up circumstances based on half facts. Congress held hearings that sickened me, because in every single case the IRS was asked to comment on the cases in question. But the IRS can only comment when the taxpayer gives them approval to speak. So it was very biased and one sided. The IRS was vilified for doing what they were supposed to do, which is to audit tax returns and collect taxes. Laws were changed that practically prohibited the IRS from doing their job. No one reported that the accusations were all unfounded, or that all the charges were investigated and found to be false and contrived for the news media.
Because the IRS cannot respond publicly on cases, it quietly exacts retribution on a case- by-case basis. In the case of the Tea Party Scandal, this was based on the intent and purpose of the organization. The amount of press that resulted from the Tea Party situation also hurt the IRS employees and the compliance effort. Delinquent taxpayers have said things questioning the employee’s personal integrity and whether or not they could be trusted with the information that they are being given by the taxpayer. The negative publicity has caused great emotional and mental fatigue to IRS employees and it is not fair.
IRS employees who try to do the right thing for both the government and the taxpayers often face harassment, reprisals, suspension or firing.
I am sure there were some employees who did things that stretched or exceeded their legal authority. Look at the current IRS vs. The Tea Party Scandal. If someone did something wrong it would have come down from a higher level. IRS employees are very good at following orders. Most employees follow directions. They are expected to do what the law says or what policy statements or orders of protocol dictate that they do. That is how it is set up.
Tax practitioners are lawyers who do tax work, Certified Public Accountants (CPA’s) and Enrolled Agents- these are retired IRS employees or individuals who pass special tests to be able to practice before the IRS. I am an Enrolled Agent and practice through my company RMS Consulting LLC. Tax practitioners can be very useful in dealing with the complexities of the Internal Revenue Code. Often they know the secrets of the audit and collections systems and can save you time, frustration, anxiety and a lot of money. But they can also be incompetent or overzealous and cause problems with what they say and promise to the IRS, and then fail to do. Many businesses that advertise heavily on radio and television and on the internet are using unethical means to drum up business. They make up stories to frighten their potential client, feeding on the fear of the IRS that already exists. They make claims and promises but cannot deliver on them, because what they promise is illegal. When determining what to charge in my tax consulting business, I called several of the big tax processing mills. I said that I owed $10,000. The IRS grants an automatic installment agreement if you owe $10,000 or less. All you have to do is ask for it and it is given to you. The firms were all determined to “help me out.” Help me out of my money that is. They all wanted a retainer of $995 and then said that they expected another $2,000 along the way as the case was being worked out with the IRS. I was shocked. Then when I did not sign up, they badgered me with phone calls and emails that were increasingly abusive and fear-filled. This went on over three months.
The reason that I decided to become an Enrolled Agent in the first place was because I had a delinquent taxpayer who owed $17,000 and had paid $7,000 to a firm that later went out of business. I showed up at the man’s door and he got physically sick from the fear of dealing with the IRS. He also qualified for an installment agreement. The whole process took about a half hour. I was outraged at what that company had done that to him, and wondered how many tens of thousands of other people had been treated like that.
The IRS is afraid to control or regulate or censure these practitioners, even though many in the IRS are strongly in favor of it. The IRS is afraid that it would give the appearance that they were trying to deny taxpayers their rights to representation.
Informants and Whistleblowers
Informants are people who turn in information to the IRS on spouses, neighbors, family, friends and small businesses that they believe violated the tax laws. Whistleblowers are people who are reporting on government agencies and on large businesses. Last year they got $53 million in rewards but the IRS collected $367 Million more in taxes because of it. There is a formal network used to collect information from people who want to turn in their neighbor or boss. The IRS pays out great rewards for such information. An informant/whistleblower can get fifteen to thirty percent of what taxes are collected, based on the information provided.
A few years ago, the IRS paid one informant $104 million after he provided foreign banking secrets.
The IRS also has done “cold canvassing.” This might involve targeting a six-block neighborhood of residences and businesses, knocking on every door and demanding social security numbers and tax identifying information, to see if people were in compliance or not. It is amazing how people will turn in their neighbor. I have heard of cases where certain industries were targeted, such as CPAs, attorneys, real estate agents or certain types of businesses. The formulas for figuring out who will be audited and on what issues may be secret, but the process is very apparent every new tax year.
The IRS is a great place to make both legal and illegal claims and get big money, with little effort.
Where Did the Money Go?
In my tax collector work, I spent most of the time trying to figure out where the tax money had gone and tried to see if I could get it back. Employment/payroll taxes are where I concentrated my efforts. These are the income tax, social security, Medicare taxes and the unemployment taxes. This is the money that your employer takes out of your check. In the case of social security, you pay 7.65 percent and the employer pays 7.65 percent. For Medicare, you pay 1.45 percent and your employer pays 1.45 percent. This all adds up to 15.3 percent, plus whatever else you have withheld to cover your income tax. (Usually ten to twenty percent). Most of the time, this system works well. The government gives the employees credit for the amount of withholdings claimed, even though the money may never have been collected by the Treasury. So this is an area where some business owners commit the perfect white collar crime. They take the money out of your paycheck and then they keep it. This would not work, if the government did not give you credit for your withholdings. If people applied for social security or unemployment or a tax refund and the government told them that their old boss had kept the money, I believe that there would be lynch mobs of angry employees. Many employers who took tax money could be hanging from trees in their front yards.
When the IRS gets around to sending someone out in the field to figure out what is going on in a situation, it will be at least 6 months to two years after the fact. If a business has tax liabilities of $50,000 a quarter, this could mean that $100,000 to $400,000 is gone – probably lost forever. If the IRS just had adequate staffing, it could make contact early on while it may still be resolvable. When you have a business that owes taxes for over two years, it is probably going to end up being forced out of business or in bankruptcy.
I was not able to find more recent statistics, but in November, 2004 there were 128,000 people who owed $12 billion in employment taxes. There was an additional $58 billion in unpaid payroll taxes that had not been worked yet. In addition to that, an additional 318,882 individuals had already been assessed the Trust Fund Recovery Penalty (TFRP).
To give you an example of this: a business might owe $100,000 plus penalties and interest. Of this, the IRS will look to responsible officers of the business to assess the TFRP for about $70,000, and assess it against them personally. The other $30,000, plus penalties and interest, will be written off if the business closes. Usually there is a lot of IRS paperwork needed to establish the penalty, but mostly the tax balances are never collected. The people who took the money have spent it or hidden it. So they have figured out how to commit a white collar crime and will never have to spend a day in jail. Over a three-year period, only 112 people were charged with criminal activities for failing to pay the payroll taxes. Eighty-six percent of them were convicted and served an average of seventeen months in jail. Only 112 people charged out of 318,882 cases, proving incredible odds in favor of walking away from the situation a rich person.
The IRS never uses words such as “theft”, “thief” or “stealing” when describing employers who have taken this money for their own purposes. Yet I was a witness once to an Afro American man who stole two cases of beer and four cartons of cigarettes from a convenience store. He was sentenced to county jail for three months. Justice is hard to find on a consistent basis in the United States.
Chronic Delinquent Taxpayers and Serial Non-Payers
Many business people apparently go into business with the intention of never paying the taxes incurred by the business. These can be corporate income taxes or excise taxes or employment (payroll) taxes. They do this because they can operate their businesses for thirty to forty percent less than a business that complies with the tax laws. Not paying the income tax withholding of twenty percent, the social security taxes/Medicare of 15.3 percent, or the unemployment insurance tax one to six percent, allows them to underbid jobs. Since they never pay the taxes or sometimes don’t even file the returns, they can run this scam for years without being detected by the IRS computers.
These are either service businesses or they lease most of their equipment. When the IRS comes in and tries to collect from the company, it finds no assets or equity in anything. So it turns to the responsible officers of the corporation or LLC. The officer/member has already set his/her lifestyle up where they also lease everything. So the IRS or the responsible officer closes the corporation/LLC that has the balance due.
Then, the responsible person opens another corporation/LLC and runs up tax liabilities. I have seen some do this four, five, even six times. Each time, they are hiding money and staying one step in front of the IRS. In fact, some of these delinquent taxpayers are more familiar with IRS Collection than new Revenue Officers.
The IRS can transfer the taxes over to the person who is really behind these tax delinquencies, but it is an administrative and judicial nightmare and rarely done. Congress has the power to simplify this process.
Loans to Shareholder
This is a deduction that is used to hide cash income. When a business closes, the IRS has no systemic follow up to monitor this. The money that was a loan should be reported as income if the loan is never repaid. But it is not and many people get away with this tax dodge. This also applies to businesses that start up and then buy assets and inventory which are deducted as an expense against other income. Then they fold those companies after one or two years. The IRS does nothing about this scenario, either. The law says that those assets should revert to becoming income to the person receiving them.
In the case of illegal immigrants, they pay into the social security system, they have income taxes withheld, and they pay for Medicare. Unemployment is paid for them also. But they ill never be able to legally collect a dime. Hundreds of millions of dollars are paid into systems that they can never legally collect one nickel from. The government plans on this money to fund the social security deficit.
The failure to pay penalty is applied even when a person is in an installment agreement. It can be applied at the rate of five percent per month up to a maximum of twenty-five percent. Congress can change this but has not. So a delinquent taxpayer faces penalties for failure to file in an amount as high as twenty-five percent, penalties for failure to pay in an amount as much as twenty-five percent, plus an estimated tax payment penalty of approximately one percent, with the potential for other penalties for accuracy errors, or fraud and interest.
The Internal Revenue Service advertises that the tax system is “voluntary” but if you do not file or pay taxes, you should expect the IRS to come after you. Technically, it is possible to never pay taxes and get away with it. I met people who did this, but you can never own anything in your name, or stay at jobs for very long, or have bank accounts or any assets. It is like living on the run all the time and it must get very tiring. Actually almost forty-seven percent of people in the United States do not pay any Federal income taxes at all, because they do not make enough money, or qualify for credits that make them have no tax liability. But every worker does have to pay the social security tax or self-employment tax. That provides for them when they qualify for retirement. It sets a sort of minimum income level. (Source: Heritage Foundation).
If the IRS is given a regular budget outside of the main budget, with scheduled increases, the resulting increased number of audits and collections could result in more revenue being assessed and collected, which could be used to pay off the deficit and pay down the national debt. The IRS is capable of doing excellent tax administration if it is allowed to do what it is supposed to do. The IRS deserves credit for being able to operate at all, given its antiquated computer system, its aging employee population, the increasingly complex tax laws and the budget cuts it has suffered for the last four years. It is remarkable – like watching a tired, old three-legged dog go for a run.
The best source for all this information is: The Treasury Inspector General for Tax Administration (TIGTA) Semi-Annual Reports to Congress. This data is from the report for the period October 1, 2013 to March 31, 2014 and prior. TIGTA is very effective as an external auditor of the IRS processes. It shows through its reports where the IRS is most vulnerable and then people reading those reports can determine how best to play the system and steal money from it.
Source: Journal of Accountancy, Nov, 2004: Avoid the Payroll Tax Trap. Source: IRS Chief Financial Officer’s Office if Unpaid Assessment Analysis