Taxpayers Are Avoiding Billions of Dollars in Backup Withholding Because of Lack of IRS Enforcement

WASHINGTON — The Treasury Inspector General for Tax Administration (TIGTA) today publicly released its audit report of the Internal Revenue Service’s (IRS) progress with enforcing backup withholding requirements.

The purpose of backup withholding is to make sure that the Government is able to collect taxes on all appropriate income, particularly income that is not usually subject to withholding.  In September 2015, TIGTA issued a report that identified deficiencies with backup withholding and other reporting requirements related to payment cards.  TIGTA’s current audit continues an assessment of the IRS’s actions to ensure compliance with backup withholding provisions.

TIGTA found that, although payers submitted the majority of information returns with valid Taxpayer Identification Numbers (TINs), they did not withhold nearly $9 billion in backup withholding tax when they submitted Tax Year (TY) 2013 information returns with missing or incorrect TINs.  TIGTA also identified 13,647 payers who submitted 27,576 information returns with the same missing payee TIN for two years in a row (TYs 2012 and 2013).  These returns reported payments of about $14.3 billion.  Payers were required to immediately withhold nearly $4 billion from these payees, but just more than $1 million was withheld.

In addition, TIGTA identified 62,714 payers who submitted 203,751 information returns for which the payee TIN was incorrect in four consecutive years.  These returns reported payments totaling nearly $17 billion, and payers were required to withhold nearly $5 billion from these payees, but only $1 million was withheld.

TIGTA also found that there is no justification for criteria used to exclude payers from receiving backup withholding notices that include missing or incorrect TINs.  For example, the IRS notified payers of the missing or incorrect TINs associated with only 10.8 million (57 percent) returns of the 18.9 million that were identified.  Finally, TIGTA’s review of TY 2013 information returns identified 2.3 million returns were submitted for 1.6 million individuals with reportable payments totaling more than $4 billion for which the payee TIN was that of a deceased individual.

“While the legal requirements for backup withholding have been in effect for over 30 years, a substantial amount of tax is not being withheld as required,” said J. Russell George, the Treasury Inspector General for Tax Administration.  “The IRS’s enforcement of backup withholding requirements is essential to help ensure that taxes are paid,” he added.

The IRS agreed with TIGTA’s audit recommendations and will use the report’s findings and recommendations when finalizing and implementing its backup withholding strategy.

Read the report.