Wrong IDs cost IRS billions

Why does the IRS insist on not making its employees work?

First there was the debt collection issue. Instead of sending IRS agents after taxpayers who aren't paying their bills, the agency -- over much opposition and probably for not much longer -- opted to outsource the job to private collectors.

Now the IRS doesn't want its folks spending time tracking down wrong tax ID numbers that show up on copies of W-2 and 1099-MISC forms that the agency receives from employers. That decision, according to a recent tax watchdog report, is costing the U.S. Treasury big bucks.

An investigation by the Treasury Inspector General for Tax Administration (TIGTA) found that in 2004, the IRS received around 3.8 million miscellaneous income statements reporting some $150 billion in earnings. Taxes on that money, however, went uncollected because the IRS computers couldn't match the Social Security numbers on the forms to tax returns already in the system.

TIGTA was curious as to whether any tax money on those form with mismatched names and ID numbers could be recovered. So investigators looked a little more closely at 620 of the statements, the ones that reported income of more than $60,000.

By using info in the IRS' automated data systems, TIGTA said it manually matched half of those forms to existing taxpayer accounts. And that meant the taxes then could be collected.

The IRS acknowledges that it could do the same thing. But agency officials say the cost of manually tracking down mismatched names and IDs might exceed any tax money the effort would produce.

That's a stupid argument.

OK, I know the IRS has budget issues (who doesn't?) and is looking for cost effective ways to operate (who isn't?). But just letting people off the tax hook because it's not easy to get the money from them turns our tax system into a completely arbitrary system.

Everybody who owes any amount should pay that amount. And one of the IRS' jobs is making sure they do just that.

Same old excuse: This isn't the first time IRS has tried to weasel out of something that's not easy to accomplish.

Back in July, TIGTA questioned the accuracy of Free File tax software (blogged about here). Doing the tests that TIGTA recommended then, said the IRS, would be a "monumental task."

Now we have the "not worth the effort" argument, which is what the agency also used when it farmed out collection duties to private collectors. (My series of posts on the collection debacle can be found here).

What is this? All the whining about how hard things are. Is the IRS being run by 5-year-olds?

TIGTA also is not amused.

"This audit clearly shows that increased examination of statements with erroneous or mismatched numbers more than pays for itself in additional revenue," said Inspector General J. Russell George of his agency's matching effort. "The IRS's opposition to this recommendation is confounding."

Will Congress now weigh in on the issue? The White House already has lent its support to the TIGTA recommendation that legislation be enacted to require employers to verify the accuracy of ID numbers for the employees they hire.

And the IRS should at least consider the TIGTA suggestion that the agency focus on income and wage statements with mismatched names and IDs that report higher incomes.

Since our federal budget deficit keeps growing right along with the estimated $345 billion annual tax gap -- money the IRS says it is owed but which isn't paid -- shifting some employees to ID-matching duty is a no-brainer.

When the IRS does check: If we put in the wrong tax ID for ourself, our spouse or any dependents, you can be sure that the IRS will notice.

And when our nine-digit identifier is missing or incorrect, even because of an innocent mistake,  any associated tax breaks we claim -- such as a personal exemption or child or dependent tax credit -- will be promptly disallowed.

So when you do file, whether it's your 2006 return in a few weeks at the Oct. 15 extension deadline or your 2007 Form 1040 next year, be sure you get all the ID numbers on your form and on there correctly.

Comments

[Kay]

You're right that in the case of W-2s some taxes are withheld and remitted to the IRS. But in most cases, that amount alone is not sufficient to cover a person's tax bill. Also, the study looked at 1099 income, in which there is no withholding. So combined, large amounts of taxes that should have been paid on income reported on 1040 forms by the recipients of the W-2s and 1099s was not collected.

[Bob]

" Taxes on that money, however, went uncollected because the IRS computers couldn't match the Social Security numbers on the forms to tax returns already in the system."

How can the above statement be true? Along with millions of others, my employer deducts withholding and FICA taxes from my paycheck and forwards it to the IRS.