IRS Prepares for Tax-Enforcement Action Following Audit

The Internal Revenue Service (IRS) has announced plans for a tax-enforcement crackdown. This follows an audit by the Treasury Inspector General for Tax Administration (TIGTA) which revealed that over $1.4 billion in taxes may have been left uncollected from individuals who won large amounts through gambling.

Details of the Audit

TIGTA's audit report, released on September 30, discovered that almost 150,000 Americans who won more than $15,000 from gambling between 2018 and 2020, did not file tax returns. This has potentially resulted in significant amounts of unpaid taxes. The audit identified over $13.2 billion in gambling winnings during the specified period and estimated that the IRS could potentially increase tax revenue by approximately $1.4 billion by addressing the 139,045 individual non-filers with gambling winnings.

Limited Tax Enforcement on Nonfilers

The audit revealed that tax enforcement on non-filers with gambling winnings has been limited. TIGTA noted that 103,000 individuals from this group have not received notices or faced other enforcement actions to bring them into compliance. The watchdog recommended that the agency "begin appropriate enforcement actions" to collect the unpaid taxes.

IRS Response to the Audit

In response to the report, the IRS agreed with the recommendation and promised to initiate enforcement actions. The IRS plans to identify high-income non-filers with gambling winnings where no enforcement actions have been taken, including the top 100 non-filer cases identified by TIGTA. The IRS will begin enforcement by issuing the first return delinquency notices to select non-filers with gambling winnings.

Further Concerns Raised by the Audit

The audit raised additional concerns beyond income-tax compliance. Hundreds of W-2G forms, used to report gambling winnings, were filed without the required taxpayer identification numbers (TINs). This makes it challenging for the IRS to track the winnings and enforce tax compliance. The IRS has few processes in place to identify noncompliance with excise taxes by gambling operators, particularly in the rapidly growing online sports-betting market.

Disputes Over W-2G Forms and Early Retirement Withdrawals

While the IRS agreed with most of the watchdog’s recommendations, it disputed the significance of the W-2G forms missing TINs. In response, TIGTA argued that the amount of backup withholding that should have been withheld is significant and that the IRS should investigate payers who filed W-2G forms with missing TINs. In a separate report, TIGTA found potential unpaid taxes and penalties resulting from early retirement withdrawals. The watchdog estimated that about 2.8 million taxpayers who took early retirement distributions between 2018 and 2022 might owe some $1.6 billion in additional taxes and failure-to-pay penalties. However, the IRS disputed these findings, stating that a "very high" percentage of these taxpayers qualify for exemptions and that the actual amount of unpaid taxes would likely be much less.

Bottom Line

The TIGTA’s audits, which highlight gaps in compliance and enforcement, suggest that more aggressive tax-collection efforts may be on the horizon, as the IRS faces pressure to reduce the “tax gap,” which is the difference between taxes owed and taxes paid. What are your thoughts on this matter? Do you think the IRS's planned crackdown is justified? Share your thoughts with your friends and consider signing up for the Daily Briefing, available every day at 6pm.