IRS too lax on US employers flouting payroll tax laws

But the country’s tax gap is now believed to stand at more than $450 billion per year as a result.

The Internal Revenue Service (IRS) is routinely failing to crack down on US employers suspected of hiding wages and failing to report billions of dollars in federal payroll taxes, according to a government watchdog.

A new report by the Treasury Inspector General for Tax Administration revealed that of the 137,272 cases from fiscal year 2103 in which there were glaring discrepancies between employee wages and withholding information reported to the IRS and Social Security Administration, the IRS intervened in only 23,184, or 17% of the total. This was despite the fact that the remaining 83% had a “potential underreported difference” of more than $7 billion.

The situation was attributed to tax enforcement operations that have been hamstrung for years by deep cuts to their operating budgets – even though Treasury officials estimate that for every $1 invested in such enforcement, an additional $6 in tax revenues are generated.

The report said: “Management’s continual reduction in resources allocated to working discrepancy cases directly contributes to IRS’s inability to reduce the billions of dollars it reports each year as being lost as a result of the Tax Gap.” Between the years 2008 and 2010, this tax gap is believed to have stood at more than $450 billion per year.

But President Trump’s first budget blueprint in March called for a further $239 million to be cut from the agency’s fiscal 2017 budget, a reduction of 4.1%. Congressional Republicans have since said they intend to freeze total IRS spending at $11.2 billion, which would hold its funding at below 2008 levels.

The Treasury Interest Group, on the other hand, estimates that it needs to hire another 55 full time employees at an additional cost of $2.7 million to address the current underreporting problem.