The Treasury Inspector General for Tax Administration (TIGTA) issued a report concluding that the IRS’s lax enforcement of backup withholding requirements is potentially causing billions of dollars in lost revenue (TIGTA Rep’t No. 2016-40-078).
The report goes on to say that which says that, although the majority of information returns are submitted by payers with valid taxpayer identification numbers (TINs), nearly $9 billion in backup withholding tax was not withheld by payers submitting Tax Year (TY) 2013 information returns with missing or incorrect TINs.
Under IRC §3406, a payor of any reportable payment, most payments for which information returns are required, such as an interest or dividend paymenst must withhold 28% of the payment if:
- (1) The payee has failed to furnish his TIN to the payor (Code Sec. 3406(a)(1)(A)) or furnishes an “obviously incorrect number” (Code Sec. 3406(h)(1)), i.e., one without nine digits or which includes letters of the alphabet.
- (2) IRS or a broker has notified (the “B-notice”) the payor that the TIN furnished by the payee is incorrect. (Code Sec. 3406(a)(1), Code Sec. 3406(d)(2))
- (3) There has been a notified payee underreporting with respect to interest and dividends. (Code Sec. 3406(a)(1)(C)) or
- (4) The payee has failed to make the exemption certification (on Form W-9, Request for Taxpayer Identification Number and Certification) with respect to interest and dividends. (Code Sec. 3406(a)(1)(D)).
In 2015, TIGTA did a preliminary investigation of the IRS’s enforcement of backup withholding for Form 1099-K, Payment Card and Third Party Network Transactions, and made recommendations for improvements.
In the latest review (which did not involve Forms 1099-K because of the earlier investigation), TIGTA identified 13,647 payers that submitted 27,576 information returns with the same missing payee TIN two years in a row, 2012 and 2013, reporting payments of about $14.3 billion. The backup withholding rules required payers to immediately withhold nearly $4 billion from these payees, but just a little more than $1 million was withheld.
In addition, 62,714 payers submitted 203,751 information returns for which the payee TIN was incorrect in four consecutive years, reporting payments of almost $17 billion, which should have resulted in nearly $5 billion in backup withholding. Yet, only $1 million was withheld. TIGTA’s review also found that 43% of noncomplying payers were not notified of their failure to comply because of incorrect criteria the IRS was using.
Two other problems TIGTA identified were the lack of IRS enforcement of withholding on Form 1099-G, Certain Government Payments, which is also subject to backup withholding, and payers’ continued use of deceased taxpayers’ Social Security numbers for more than two years after the payees died.
TIGTA made five recommendations, all of which the IRS agreed to follow:
- To establish an agency-wide backup withholding enforcement strategy, with specific time frames and actions that will be taken to enforce backup withholding compliance.
- To evaluate and document the criteria used to determine which payers did not receive notices about missing or incorrect TINs.
- To update payer identification and notification processes to include Forms 1099-G with missing or incorrect payee TINs.
- To update all applicable publications, instructions, and website information regarding backup withholding provisions to include Forms 1099-G.
- To include specific actions in its information return compliance strategy that will be taken to address information return reporting of income under a deceased individual’s TIN.
The IRS agreed to the fifth recommendation but questioned its usefulness because the payments are presumably reported by surviving spouses or estates. TIGTA stated that the IRS had provided no evidence to support this statement, noting that, of the 1.6 million deceased payee TINs shown on information returns in 2013, only 482 of those TINs were used to file a 2013 tax return.