Records show amount of tax debt allowed to expire each year is growing.
By: Emily Featherston and Sandra Jones, InvestigateTV
Originally Published: April 12, 2021
(InvestigateTV) – Every year, Marsha Edwards says she cringes as she watches the days tick by, inching closer to tax day.
As the owner of Rise Above hair salon in Richmond, Virginia she deals with the regular stress of running a small business — managing employees, inventory, and the required licenses — but she’s also dealing with the added weight of paying her annual taxes.
But while Edwards and millions of others work hard to make their payments on time, thousands of other individuals and companies skip out — not paying or underpaying what they owe.
In some cases, the Internal Revenue Service ultimately walks away from the debt: InvestigateTV found the agency writes off billions of dollars in tax debt every year that it can no longer collect because the agency waited too long.
“I don’t understand,” Edwards said. “This is America, the land of the free. How some people can get away with it and some don’t, it makes no sense.”
Edwards is especially frustrated because she has even taken out loans to keep up.
“It’s a big bill,” she said. “I have to figure out how to break that down and make it work and keep my business going . . . it’s a struggle.”
The pandemic hasn’t made the process any easier.
“When they closed me down, I had to go get a job, another job, and I had to work two jobs just to cover my tax bills,” she said.
Federal law requires that, generally, the IRS stop pursuing tax debt 10 years after the debt was assessed.
Every tax assessment is given a Collection Statute Expiration Date (CSED). The assessment date may or may not be the year the income being taxed was earned, and certain actions on the part of the taxpayer – such as entering into a payment plan or filing for bankruptcy – can extend the amount of time the agency has to collect the money.
Still, data obtained by InvestigateTV from the IRS shows the amount the agency is writing off its books each year has grown steadily over the last decade.
In 2010, the IRS wrote off roughly $14.6 billion in expired tax debt.
That number grew to more than $37.5 billion in fiscal year 2020.
In response to a Freedom of Information Act request, the IRS provided a breakdown of the 2020 amount by the type of taxpayer.
The majority of funds written off, roughly $26.4 billion, were for individual taxes.
Within that portion, the largest group were taxpayers who had more than half of their income coming from interest and dividends. Those individuals saw more than $10.1 billion written off in 2020, compared to just $1.58 billion written off for those who earned only wages.
Individuals with the majority of their income coming from investments made up just less than a quarter of the accounts written off but accounted for nearly 40% of the money the IRS failed to collect.
On the business side, more than $11.1 billion was written off for all types of businesses. Corporations, which are defined by the IRS as “separate and distinct” from any owners, led the way with $7.1 billion expiring, far more than the $1.2 billion written off from sole-proprietorships, where an individual owns an unincorporated business by themselves.
In response to InvestigateTV’s initial questions about the write-offs, an IRS spokesperson said it should be noted the agency brought in more than $3.5 trillion in tax collections in 2019, compared to writing $34.2 billion off the books.
While the agency provided the information from 2020 by type of income, the IRS would not say how much is written off by income level — making it difficult to identify how much of the debt belonged to high- verses low-income taxpayers.
However, for the overall tax gap — the difference between the amount of taxes the IRS determines it is owed and the amount paid voluntarily — high income taxpayers are generally more responsible for the portion linked to underreporting, according to a 2010 study by Andrew Johns and Joel Slemrod for the National Tax Journal.
The study attributes this to high income taxpayers receiving income in categories that are not as easily tracked as wages — such as interest and dividends. Wages are usually automatically reported to the IRS by way of W-4, 1099 or other documents submitted by an employer, where income from other sources must be reported by the taxpayer.
“I think the biggest thing, right now, the IRS is failing to collect the $600 billion dollars a year,” said Seth Hanlon, senior fellow at the Center for American Progress, referring to the center’s estimate of the 2020 tax gap. “And a disproportionate share of that is from high income Americans and corporation who aren’t paying the taxes that they owe.”
Additionally, a 2020 audit by the office of the Treasury Inspector General for Tax Administration (TIGTA) found thousands of cases where high-income individuals didn’t file a tax return at all were not worked by the IRS each year — meaning collections staff didn’t investigate and send delinquency notices to the taxpayers, despite agency procedures saying “high-income nonfiler cases present a high compliance risk.”
“The agency, I think, should be doing a much better job in a lot of different areas,” Hanlon said. “There are some things that they are just failing to do.”
In its official response to the TIGTA audit, the IRS noted a continued decline in employees due to budget cuts at the agency, as a primary cause for the growing backlog.
“Since Fiscal Year (FY) 2010, the IRS has lost nearly a third of its enforcement personnel, including more than half of its revenue officers (the collection employees who work the most complex cases),” commissioner for the small business and self-employed division Eric Hylton wrote in the response.
But the Inspector General’s office said the resource decline is all the more reason to focus on high-income taxpayers.
“Because of this decline in resources, it is imperative for the IRS to maximize the effect of its resources and work cases that not only bring in highest tax dollars but also pose the greatest compliance risk,” the TIGTA recommendation says.
Since 2017, the IRS has attempted to use private agencies to boost its debt collection, but another TIGTA audit found that over the first two years of the program, around 54% of cases sent to private collections were considered “low-income,” and who may be unlikely to pay their full tax debt before it expires.
George Diversiev, founder of the Tax Debt America Project and an analyst with a national firm that helps individuals struggling with tax debt, said part of the reason is likely that lower-income cases are usually simpler.
“Realistically a wealthy persons’ tax return is a lot more complicated than someone who’s claiming the Earned Income [Tax] Credit,” he said.
In response to questions about these trends in collection and the handling of expiring tax debt, an IRS spokesperson emailed InvestigateTV a link to an IRS publication showing the agency lost nearly 7,000 full time employees in key enforcement areas from 2008 to 2018.
“I think ultimately we need to rebuild the IRS,” said Hanlon, from the American Center for Progress. “The IRS is actually the accounts receivable department of the federal government, and you know any, I think, any business [that] slashes its accounts receivable department is going to see a decline of revenue. And I think that’s what we’ve seen with the government.”
The pandemic also has exacerbated the staffing issue, both due to the need to adhere to social distancing guidelines, and the fact that COVID-19 relief efforts are being processed by the IRS at the same time the agency is still working through the Tax Cuts and Jobs Act, passed during President Donald Trump’s administration, that made significant changes to the tax code.
“All of these new things are forced onto the IRS as new projects, almost immediately or for immediate implementation,” Diversiev said. “The IRS has to put everything, has to douse that fire before they can implement anything, [then] go back to the work that they were doing originally.”
Don’t count on debt expiring
But high- and low-income taxpayers shouldn’t count on inefficiencies to delay the IRS until the 10 year mark, Diversiev said, because the agency has many ways of ensuring compliance, including fines, fees and garnishing wages.
The best plan, he said, is to try to work with the IRS to set up a payment plan or agree to another settlement.
He also said he thinks the agency will eventually catch up with a lot of the high-income taxpayers that look like they’re getting off the hook.
“Tax collection is somewhat of a pendulum and it swings to one side too forcefully and then eventually comes back to the other side and people will start complaining about collections again. And then, eventually we’ll reach a mean,” he said.
But back at Rise Above Hair Studio, Marsha Edwards says it’s still frustrating.
“As a small local business, if I did not pay my taxes, they will put a lien on my house, and they would auction off my home,” she said. “I understand they’re short staff, but every organization has checks and balances even the federal government is supposed to have some type of system of checks and balances.”