The IRS’ legacy tech is effective at flagging high-income taxpayers who skip filing, but a lack of staff and low prioritization is leaving billions on the table.
The IRS isn’t typically considered a tech-savvy or advanced organization. Some of its core IT systems, like the Individual Master File, measure their age in decades, and other applications still rely on the COBOL programming language. However, when it comes to tracking and flagging high-income earners who fail to file tax returns, it’s not technology that’s limiting enforcement -- it’s a lack of people and priorities.
Every year, more than eight million Americans skip out on their filing obligations, resulting in approximately $39 billion in lost revenue every tax season -- part of a yearly $441 billion “tax gap” between the dollars IRS could collect and what it actually does. According to a new report from Department of Treasury auditors, the IRS has failed to prioritize a program that uses existing software and staff to pursue high-income earners, and during some years the agency put a “pause” on the work entirely.
Traditionally, the IRS has been able to leverage the Individual Master File -- its primary system for storing and processing tax returns -- to identify and prioritize those with the highest incomes. A team of analysts examine the database twice a year, score each case for likelihood of getting a return and send out delinquency notices to those who haven’t filed.
Targeting non-filers in this way is “one of the most efficient enforcement strategies,” auditors wrote, because the IRS can inexpensively automate sending notices. Internal research has demonstrated that simply sending a notification to delinquent taxpayers can convince a significant number to follow up and settle their outstanding obligations. Additionally, surveys have shown that more substantive treatment can result in 90% of delinquent taxpayers filing their returns the next year.
Because of this return on investment, the agency has aggressively pursued non-filers for decades, relying primarily on the use of existing tech like the Individual Master File. However, auditors wrote “that no longer appears to be the case” as staffing shortages within the Small Business/Self Employed Division and other parts of IRS has led to a marked decrease in the program’s use over the past decade. In some cases, for example in tax years 2013 and 2015, the agency temporarily halted its use entirely as officials looked to realign their remaining personnel in the wake of years of budget cuts.
Such stoppages make it effectively impossible for IRS to identify and prioritize enforcement activities for the small group of high-income earners who make up the lion’s share of uncollected, non-filer tax revenue.
“We believe that it is imperative that the IRS not pause the [program] for high-income non-filers to ensure that at a minimum, delinquency notices are issued,” auditors wrote.
The report makes clear the agency is leaving tens of billions of dollars on the table. Between 2014 and 2016, Treasury auditors identified more than 879,000 high-income non-filers who failed to pay as much as $45.7 billion in taxes. About 41% of those cases (369,180) totaling $20.8 billion were never reviewed by IRS officials, and most weren’t even placed in the queue. The remaining 510,235 cases totaling an additional $24.9 billion are “sitting in one of the … inventory streams and will likely not be pursued as resources decline.” Over that same time period, the top 100 high-income non-filers alone accounted for $9.9 billion of uncollected tax revenue, and many are repeat offenders.
IRS officials rolled out an updated strategy for dealing with non-filers, but according to auditors the document does not lay out a specific strategy for addressing high-income earners. Among the auditors’ recommendations are that IRS prioritize resources to prevent future “pauses” for its Individual Master File Case Creation Nonfiler Identification Process, implement new controls to better identify high-income earners and repeat offenders, designate a senior official who will coordinate the issue, focus on the problem and revisit old cases, emphasizing the top 100 earners.
In an attached response, Eric C. Hylton, commissioner for the Small Business/Self-Employed Division at the IRS, said the dropoff in non-filer enforcement is “reflective of the resource challenges the IRS has faced in recent years.” While the agency has dedicated more staff to the effort over the past two years, it will take time to build back up.
“We appreciate the support from Congress and the Administration, and recent budget increases enabled the IRS to hire enforcement personnel in [fiscal year] 2019,” Hylton wrote. “However, we have an aging workforce, and retirements and attribution mean we’ve only had a net gain of about 1% to our compliance employee staffing.”