Dec 31, 2008

Breakdown of People who have tax problems in the U.S.

Want to know if you are the only person having a problem with your taxes? Chances are great that many others have a similar problem.

Here is the data:

Tax Return Filings:

Tax returns are filed for income, employment, corporate, partnership, estate and gift taxes. Individual income taxes represent 51% of the taxes paid to the IRS. Employment taxes (i.e. your Social Security taxes withheld and paid by your employer) represent 31.6% of the taxes paid to the IRS.

235 million tax returns were filed in 2007- of which 138 million were individual income tax returns

9.5% owe a balance after filing (Forms 1040 only- 1.31 million)

Unfiled Tax Returns:

There are many conflicting sources of data on how many tax returns go unfiled each year. In short, this is one major measurement of "voluntary compliance": filing and self reporting your tax liability. However, this data differs somewhat from the data that the IRS is pursuing on "non-filers." The IRS investigation of non-filers are called Taxpayer Delinquency Investigations or "TDI"s.

According to the IRS "Tax Gap" study- these unfiled returns Accounts for $25 billion in lost revenue (2001 study)

Also, the IRS is aware of 10.5 % of GDP is in “Shadow Economy”- i.e. unreported and outside the system. This equates to a 14% non-compliance rate- i.e. 86% voluntary compliance.

Taxpayer Delinquency Investigations (TDIs) are opened for non-response to a notice to file letter.

2007 IRS TDI data shows that there was 6.5 million TDIs being worked by IRS- these are investigations by the IRS into unfiled tax returns. In 2007, there were 2.6 million new TDIs (2.4 million new in 2006). TDI assessments for 2007 amounted to and additional $30.3 billion in taxes ($4 billion it was actually collected). Hence, $26.3 billion of the TDI assessments went into IRS collection enforcement.

The IRS can also file a return for you: i.e. a Substitute for Return (“SFR”). The IRS can complete a SFR based on your wage and income information that it has on file your SSN - Forms W-2 and 1099.

In 2007, the IRS filed 1.36 million SFRs (this represents 1% of all “filed” individual returns as the IRS considers an SFR as a "filed" return for compliance purposes). The IRS total assessments for SFRs in 2006 amounted to $10.9 billion.

IRS Audits:

IRS Examinations are conducted by Field Agents (Revenue Agents) or by mail (Correspondence Examiners). Revenue Agents require face to face representation and they exam the taxpayer’s assets, equities and lifestyle to determine if a tax return is subject to adjustment/other enforcement. Correspondence audits are generally limited to 2-3 issues on a return or discrepancies with IRS wage and income transcripts (CP 2000s). These audits are far more common (83%). Rule of thumb: if you are being examined by a Revenue Agent- seek professional assistance immediately- Revenue Agents do not examine tax returns- they examine TAXPAYERS- i.e. their lifestyle/assets/income/wealth matches their tax returns (in 2007, the average field audit assessed over $77,000 in additional taxes! - over $20,000 in added assessed taxes for individuals). So I will provide you the data on the correspondence exams:

Here is the data on Correspondence Exams:

  • Number of IRS Examinations on individuals(2007): 1.38 million

  • Percentage of IRS Individual income tax Examinations that are Correspondence Exams: 83% (2007) or 1.1 million (1 out of every 118 returns are examined by correspondence)
  • Average Correspondence Audit adjustment is almost $9,000 in additional taxes per year examined

  • Under-reporter Audits:
    CP 2000 Audits in 2007: 3.4 million (2.53% of all individual filed returns)
    CP 2000 assessments in 2006: $4.1 billion

None of this data includes the over 3.8 million people who annually have errors on their tax returns that they have to reconcile with the IRS.

IRS Collection Activity:

This is where most people have issues with the IRS- they owe the IRS back tax debt. IRS collects on unpaid tax balances via Taxpayer Delinquency Accounts (“TDAs”). TDAs are active IRS inquiries into payment of delinquent tax liabilities owed. The IRS can collect these amounts with its available computerized methods (the “Automated Collection System” or “ACS”) or by Revenue Officers (“RO”s). Data on the people who owe are as follows:

Amount of uncollected taxes in IRS Inventory: $290 billion (2007)
$47 billion is in the IRS “queue” for collection enforcement
866,777 taxpayers awaiting Enforcement (the IRS may or may not go after these people depending on their resources)

Taxpayer Delinquency Accounts Data:
New TDAs in 2007: 7.15 million
Active TDAs on 9/30/07: 8.24 million
Balance owed of TDAs on 9/30/07: $83.5 billion
Percentage of IRS TDA closures that are full-payment of tax liability: 27%
Average account balance owed: $10,133 per the TDA data (however 87% of individuals owe less than $10,000 according to the IRS)

So, you are not alone: you are one of 6.5 million that the IRS is chasing for an unfiled tax return, one of 3.8 million the IRS is chasing for a return error, one of 4.8 million that have an audit ongoing with the IRS, or one of 7.15 million that have a pending collection issue with the IRS. That is over 23 million tax problems in 2007.

Need some help? If you feel comfortable contacting the IRS yourself- do so. If you have a complex problem that you need to solve, hire a competent tax professional who has experience in resolving your issues. More to come in future blogs.

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