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IRS Fails To Enforce Backup Withholding Tax

by Leroy Baker,, Washington

28 October 2016

The Treasury Inspector General for Tax Administration (TIGTA) has released a further report on the Internal Revenue Service's (IRS's) progress with enforcing US backup withholding tax provisions, and found that a substantial amount of tax is not being withheld as required.

TIGTA noted that the purpose of backup withholding is to make sure that the Government is able to collect taxes on all appropriate income, particularly reportable payments that are not usually subject to withholding tax.

In September 2015, TIGTA issued a report that identified deficiencies with backup withholding and other reporting requirements related to payment cards. A payment settlement entity, such as a bank or other organization making payments to payees in settlement of transactions using payment cards (such as debit or credit cards), must report these payments for each calendar year. Payees are required to provide valid taxpayer identification numbers (TINs) or be subject to a 28 percent tax deduction.

TIGTA's current audit continued its assessment of the IRS's actions to ensure compliance with all backup withholding provisions, including, for example, certain gambling winnings and miscellaneous income such as rents and commissions, nonemployee compensation for services, and royalties.

TIGTA found that, although payers submitted the majority of information returns with valid TINs, they did not withhold nearly USD9bn in backup withholding tax when they submitted 2013 tax year (TY) information returns with missing or incorrect TINs.

TIGTA also identified 13,647 payers who submitted 27,576 information returns with the same missing payee TIN for two years in a row (TY2012 and TY2013). These returns reported payments of about USD14.3bn. Payers were required to immediately withhold nearly USD4bn from these payees, but just more than USD1m was withheld.

In addition, TIGTA identified 62,714 payers who submitted 203,751 information returns for which the payee TIN was incorrect in four consecutive years. These returns reported payments totaling nearly USD17bn. Payers were required to withhold nearly USD5bn from these payees, but only USD1m was withheld.

TIGTA also found that there was no justification for the IRS criteria used to exclude payers from receiving backup withholding notices that include missing or incorrect TINs. For example, the IRS notified payers of the missing or incorrect TINs associated with only 10.8m returns out of the 18.9m that were identified.

"While the legal requirements for backup withholding have been in effect for over 30 years, a substantial amount of tax is not being withheld as required," said Russell George, the Inspector General. "The IRS's enforcement of backup withholding requirements is essential to help ensure that taxes are paid."

TAGS: compliance | tax | tax compliance | royalties | law | banking | Internal Revenue Service (IRS) | enforcement | tax authority | gambling | withholding tax | United States | services | Tax

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