Posted by: Steven Toscher | June 8, 2019

IRS to Strengthen Its Taxpayer Fraud Referral Procedures by Steve Toscher

The Treasury Inspector General for Tax Administration Issued a report to the IRS Commissioner on  May 23, 2019 pointing the way to increasing the efficacy of its Information Referral  Program to increase tax compliance and raise revenue.

The IRS has long had a program where the public could report  to the IRS alleged non-compliance with the tax laws. IRS received almost 300,000 Information Referrals in the last four fiscal years.  These Information  Referrals, filed on Form 3949-A, can range from claims of false exemptions or deductions, unreported income or failure to withhold tax — employment or otherwise. These forms are processed at a central Service Center and reviewed by technicians or examiners depending on the complexity and if the information seems promising, the information is sent out to the appropriate business unit of the IRS for further review and action. These business units could include the Small Business Self Employed, the Wage and Investment Division or even the Criminal Investigation Division. Some of course – those that are not so promising — end up in “retention” for future possible use.

These are not informants’ claims for rewards (although there may be some duplication) but just individuals and businesses providing the IRS information on a confidential basis, such as a disgruntled employee or a competitor who believes it is at a disadvantage.

Figure 1, below, from the TIGTA Report reflects the number of Information Referrals received over the last four fiscal years.

Figure 1: Forms 3949-A Received in FYs 2015 Through 2018

FY Total Receipts
2015 89,213
2016 72,593
2017 67,046
2018 61,890
Total 290,742

Source: Form 3949-A Inventory Reports, as of September 29, 2018.

What is really interesting is the amount of tax assessments made based on these Information Referrals — more than $246 million in additional tax for the fiscal years 2016-2018. Moreover, examinations emanating from Information Referrals produce almost twice as much revenue per examination as other sources of examinations.  This suggests that random public information reporting may be one of the most effective mechanisms of finding non- compliance.

See Figure 4 c, below, from the TIGTA Report.

Figure 4: Form 3949-A Examinations vs Other Sources for Examinations for FYs 2016 Through 2018 

  SB/SE Division W&I Division
  Form 3949-A Other Sources of Examinations Form 3949-A Other Sources of Examination
Total Examinations 6,636 1,214,048 6,750 1,406,448
Total Assessments $200,571,550 $22,329,977,944 $46,425,181 $6,521,042,199
Average Assessment Per Examination $30,225 $18,393 $6,878 $4,637

Source: Accounts Information Management System – Centralized Information System Reports for W&I and SB/SE Informant Examination Closures and Other Examination Closures.

The TIGTA Report has some very good suggestions that the IRS has agreed to implement. These include an online Information Referral portal for taxpayers to use, better communication to the public through its website, and up to date computer tracking — it’s presently largely manual — of the processing and use of these forms.  One might also assume with the computerization of the process, the IRS will be utilizing data analytics to help further develop the program.

Some advice to taxpayers-keep your tax positions to yourself. Many people out there would love to share your secrets with the IRS — even if they aren’t looking for a reward.

STEVEN TOSCHER – For more information please contact Steven Toscher – toscher@taxlitigator.com Mr. Toscher is a principal at Hochman Salkin Toscher Perez, P.C., specializing in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at www.taxlitigator.com.


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