Budget constraints have caused the IRS to cut back on an important category of employees: the people who actually collect tax from delinquent individuals and businesses.
The number of these “revenue officers” fell to 3,028 in 2018 from 5,922 in 2010—an approximate 49% decrease—according to the agency’s Data Book for fiscal year 2018. This drop has a real effect on the Internal Revenue Service’s ability to crack down on businesses that are cheating the system by pocketing the money they withhold from employees’ paychecks. Historically, that has been one of the agency’s first collection priorities and one of the easiest to monitor.
“A significant decline in revenue officers can damage the service’s ability to keep up with employment taxes, which has always been job number one,” said Mark Everson, who was IRS commissioner from 2003 to 2007.
Businesses that are dodging their employment tax obligations should eventually receive a visit from an IRS revenue officer.
But staffing shortages have made it difficult for the agency to get to all of those cases, despite the high priority placed on them, said Robert E. McKenzie, a former revenue officer who now works as a partner at Saul Ewing Arnstein & Lehr LLP.
“It’s gotten so tough—because there are so few employees—that they can’t pursue all of those even,” said McKenzie, who has talked with current IRS employees about this issue.
The IRS told Bloomberg Tax in an email that it doesn’t maintain data specifically on the number of employment tax cases closed by the agency’s collection division.
However, it does keep data on the number of business tax cases closed, which includes employment tax cases. The collection division has closed 37,440 business cases since Oct. 1, 2018, the IRS said. That number has declined by 36% since fiscal year 2013, the agency added.
Waiting in a Queue
Employers are legally responsible for collecting and paying the IRS the taxes withheld from their employees’ wages. This includes federal income tax, in addition to an employee’s share of Social Security and Medicare taxes.
Amounts withheld from employee wages represent nearly 70% of all revenue collected by the IRS, according to information on the Department of Justice Tax Division’s website updated in May 2018.
The agency for years 2008 to 2010—the most recent for which data is available—estimated that employment tax violations comprised $91 billion of the IRS’s annual gross tax gap of $458 billion. The tax gap is the difference between total taxes owed and taxes paid on time.
Because of declining resources, many collection cases—not just those dealing with employment taxes—sit in a queue at the IRS but are never assigned to a person in the field who can go directly to the taxpayer and demand the money that is owed, McKenzie said.
There currently are about 1.3 million cases in the collection division’s queue, according to the IRS. Field collection anticipates addressing just over 175,000 cases with current resources, the agency said in its email.
The IRS—because it has fewer revenue officers—has to be more strategic about how it deploys its resources, Treasury Assistant Secretary for Tax Policy David Kautter said May 20 at a conference in Washington. Trying to decide the best place to put limited collection resources is always on officials’ minds, he said.
“But yet you can’t completely ignore some areas because if it turns out there’s no enforcement or no collection with respect to certain types of taxes, it sends the wrong message,” he said. “So you have to have some level of activity across the board and then you try to identify those areas where you think you could have the greatest impact and deploy more resources there.”
‘Racing to the Bottom’
If the decline in revenue officers continues at its current pace, more businesses may attempt to exploit the employment tax system.
“If word gets out among the less-compliant people who only comply out of fear and there’s no fear of the IRS, then there will be other people racing to the bottom,” McKenzie said.
The IRS has taken steps to prevent fraud and abuse in this area.
The agency is hiring several revenue officers, according to its careers webpage.
It has also over the last several years tried to be more proactive with these cases, using alerts to identity some of the largest taxpayers that are behind in making their employment tax payments before their quarterly tax returns are due. This allows the agency to try to resolve an underpayment before it becomes unmanageable.
Reversing the overall decline in enforcement is dependent in large part on congressional funding.
President Donald Trump’s 2020 funding request proposes increasing the agency’s base budget to $11.5 billion from the current congressional appropriation of $11.3 billion. But lawmakers have yet to agree to a boost and the agency’s budget is still far below a 2010 peak, which would equal about $14 billion in today’s dollars.
If a business fails to pay its employment taxes, the employee doesn’t get credit for the money that was withheld from his or her paycheck, said Everson, now vice chairman of Alliantgroup LLP.
The cases are “certainly much more serious” than situations where a person fails to pay tax on his or her own income, McKenzie said.
IRS Commissioner Charles Rettig said May 11 at a conference in Washington that employment tax cases are one of the agency’s highest priorities, warning that employers shouldn’t come to the IRS with an excuse for why the taxes weren’t paid unless they truly believe their story.
Businesses that fail to pay employment taxes can face serious consequences, including civil penalties and even criminal penalties, said Michael Raanan, a former IRS revenue officer and the founder and president of Landmark Tax Group.
While the IRS’s collection division is closing fewer cases than it has in the past, the number of cases—especially employment tax cases—it refers to the agency’s criminal investigation division has increased in recent years, according to Michael Batdorf, deputy director of operations for CI. The IRS has been placing greater emphasis on using data to identify potential investigations, he said.
“So we’re finding better cases and a better intersection between collection and criminal investigation,” Batdorf told Bloomberg Tax May 10 at the conference in Washington.
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