Closing the Tax Gap
The Internal Revenue Service (IRS) estimates that in any given year there is a tax gap of between $300 and $350 billion a year of uncollected taxes. The tax gap is the difference between the amount of taxes the IRS should have collected and the taxes the IRS actually collected. Therefore, based on the IRS’s own estimate over $300 billion of taxes go uncollected every year. These are taxes are that would be paid if every taxpayer filed returns and those returns accurately reflected correct income and deductions.
The Tax Gap consists of three main categories:
Category I Those who do not file returns and taxes are owed on these returns.
Category II Those who do file returns yet fail to report all of their taxable income or overstate their deductions.
Category III Those who file and owe tax but do not pay the tax with the filing of the return.
In Category I, individuals and companies that do not file tax returns could owe as much as $30 billion per the IRS. In Category II, those who file but fail to report accurately their correct income and/or deductions could owe as much as $ 292 billion. Remember, this is on an annual basis.
To address this situation, the IRS has focused its enforcement efforts, specifically audits and criminal investigations, in the following areas:
1. Unreported Income
2. Abusive Schemes
3. High Income – high risk taxpayers
4. High Income non-filers
5. Employment taxes
The IRS’s is focused on detecting unreported income for any business that generates a large amount of cash as part of their total gross income. These are typically small businesses with 5 or fewer owners that have the ability to control the amount of cash that is deposited into the business’ bank accounts. The business entity could be a sole proprietorship, partnership or corporation. The important element is that the business is of a type that falls within a typical cash industry.
These are schemes that generally are devised by promoters who have found the ultimate tax shelter that they promote will result in a taxpayer paying little or no tax to the government. These schemes generally sound too good to be true and are too good to be true. They are not valid tax shelter vehicles. They can range from setting up offshore trusts to hide personal assets to setting up a corporation to pay personal expenses under the guise they are business expenses.
High Income – high risk taxpayers
Many taxpayers who make substantial amount of income – over $ 250,000 a year – are usually involved in partnerships, trusts and corporations that are “pass-through” entities. By layering their financial dealing with these entities it is difficult for the IRS to trace income being earned by a taxpayer or to verify a loss generated by one of these entities and claimed on a taxpayer’s return. Generally, a pass through entities generate a Form K-1 in the name of the taxpayer who is the investor or partner of the entity; however, the IRS has traditionally had problems matching these Form K-1s with the individual’s personal income tax return. In effect, taxpayers who claim large losses from an entity that they have an interest in have not been subject to close scrutiny by the IRS in the past. The IRS is determined to bring these taxpayers under closer scrutiny.
High Income Non-Filers
The IRS estimates that some High Income taxpayers – those who making more than $ 250,000 a year – simply don’t file returns. They are known by the IRS as High Income Non-Filers. The IRS is determined to identify and possibly prosecute these individuals. These taxpayers typically have escaped detection as they are part of the underground cash economy and there is no traditional paper trail.
When a company withholds employment taxes, income and social security taxes from an employee’s pay, these tax withholdings are called trust funds. These trust fund taxes along with the employer obligation are to be sent to the IRS on a regular and timely basis depending on the amount of money withheld.
It is not uncommon for a company to fail to pay these funds to the IRS by their due date. Instead a company facing a cash crunch will use the money on current operating costs, with the intent to submit these funds to the IRS – after the mandatory deadline – when and if financial conditions improve.
The IRS is very aggressive in pursuing any officer, shareholder of a company or any “responsible person” for the payment of these trust fund taxes. As noted above, this remains a top priority of the IRS enforcement program.
The IRS Whistleblower Program
Recent changes in the law requires the IRS to pay a reward on information provided to the IRS that results in collected proceeds (additional taxes, penalties and interest). The reward can range from 15% to 30% of the collected proceeds. The information provided needs to present the details of the noncompliance in a clear and organized manner. It has to be relevant and the person submitting the information should have firsthand knowledge.
As a result of these recent changes, if you happened to provide the IRS specific information that resulted in the collection of one year’s estimated tax gap or $ 300,000,000,000, your reward could range between $45,000,000,000 to $90,000,000,000.
Keeping in mind that the IRS is concentrating on the areas of non-compliance listed above, a potential whistleblower should be aware that the IRS is looking for these schemes arising in abusive and egregious situations. The IRS is not looking for one spouse reporting another, or the next door neighbor who heard someone down the block is not paying their taxes. The IRS prefers substantive, specific violations of the tax code. As noted, the failure to report substantial taxable income or deducting personal expenses under the guise of a corporate business expense are prime areas that should be reported to the IRS under the whistleblower program. Also, promoter schemes that are advertised as legitimate tax savings vehicles that, following some due diligence, are exposed as patently fraudulent would constitute a solid IRS whistleblower claim.
If you are in a position where these types of scenarios are evident and you have information that would result in a tax recovery of more than $2,000,000, then you are a prime candidate to benefit from the revised IRS Whistleblower law.
This entry was posted on Friday, February 25th, 2011 at 2:25 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.