IRS needs to improve withholding compliance program

The IRS needs to make improvements to the withholding compliance program, according to a report by the Treasury Inspector General for Tax Administration (TIGTA). According to TIGTA, a review of a sample of 79 cases involving taxpayers who were issued lock-in letters in tax year (TY) 2014 based on their TY 2013 Form W-2 wages and withholding, showed that 26 (33%) of them continued to have insufficient withholding based on the rate stated on the lock-in letter, and the employer did not adjust the withholding as instructed. Further, in fiscal year 2016, 41% of all lock-in letters were issued to Federal Employee/Retiree Delinquency Initiative (FERDI) employees despite the fact that FERDI employees represented only three percent of all taxpayers who were identified as having underwithheld taxes. In addition, in TY 2016, 87% of the cases identified for lock-in letters were nonfilers, but tests of a sample of 60 cases showed that only 13 ultimately filed a balance due return. Moreover, TIGTA found that the IRS had not issued lock-in letters to its employees since TY 2013 due to a management oversight.

Recommendations

TIGTA recommended that the Service: (1) determine the feasibility of providing revenue officers, and potentially other IRS functions, with the ability to issue lock-in letters when an underwithholding issue is identified; (2) identify noncompliant employers and hold employers liable for failing to comply with the lock-in letter; (3) work with federal government agencies that are not complying with the lock-in letters; (4) assess the most effective use of resources for issuing lock-in letters and analyze the current selection criteria; and (5) update the Internal Revenue Manual to include that IRS employees will now be part of the review process. The IRS agreed with all the recommendations. (TIGTA Report: Improvements Are Needed in the Withholding Compliance Program, Reference Number: 2018-30-072, September 20, 2018; TIGTA Audit Highlights of Reference Number: 2018-30-072, September 20, 2018.)

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