IRS Targets Those Who Fail to File : Agency Reassigns 2,000 Auditors to Track Down 10 Million Delinquent Taxpayers

In its biggest effort yet to crack down on the 10 million individuals and businesses that fail to file tax returns, the Internal Revenue Service said Tuesday that it will redeploy more than 2,000 agents from tax auditing duties in order to pursue non-filers.

The IRS, which estimates that non-filers cost the government about $7 billion annually, said it will also offer limited amnesty to those who turn themselves in. Although the agency makes no guarantees, it said it will waive tax penalties against individuals and business owners who are deemed to have a legitimate excuse, such as illness, injury or annual income below the threshold for filing.

It will also provide specialized assistance and education to those who want to comply voluntarily. And the government agency said it will be more willing than in the past to set up payment programs for those who cannot afford to pay all the taxes due in one lump sum.

However, those who fail to turn themselves in will be actively pursued starting Thursday, said Robert Giannangeli, an IRS spokesman in Los Angeles.

Never before has the IRS been so willing and able to find non-filers.

“We have never devoted these kind of resources to non-filers, and we have never been better able to find them,” Giannangeli said.

However, the IRS acknowledged that its stepped-up effort to find non-filers will mean fewer regular audits. Usually, about nine out of every 1,000 tax returns are audited by hand. Over the next two years--the expected period of the new non-filer crackdown--that number will drop somewhat, the agency said.

“When we assign resources of this magnitude, we have no choice but to take away from some other program that also is worthwhile,” IRS Commissioner Shirley D. Peterson told the Associated Press in an interview.

The 2,000 agents who will be redirected to the non-filer effort represent about 10% of the IRS’ examining force, the IRS said.

Additionally, over the last several years, the IRS has developed a sophisticated computer system that collects information from employers, banks, brokers and state agencies about interest and dividend payments, stock and real estate sales, gambling, pension and Social Security income, as well as state tax refunds and mortgage interest payments. That information is then matched against actual returns to find disparities.

In essence, it creates a computerized audit that picks up unreported income and automatically detects non-filers.

“The better their computers get, the easier it is to find people who try to subvert the system,” said Gregg Ritchie, partner at the national accounting firm of KPMG Peat Marwick. “There are very few things that are not subject to reporting these days.”

IRS Commissioner Peterson said the agency wants to do more than just collect past-due returns. It also wants to increase tax compliance across the board.

Non-filers have become a priority because IRS research has found that once someone fails to file for the first time, they’re more likely to drop out of the system for good. The IRS said the number of delinquent tax returns rose by an estimated 30% in 1991.

A pilot program to bring in these non-filers found that 64% of them were self-employed individuals who received significant cash income and independent contractors who had very little tax withheld.

Typically, they dropped out of the system as the result of a catastrophic event, such as divorce, death of a family member, business failure or job loss. But then they were reluctant to return to voluntary compliance--even though some were due refunds for subsequent tax years--because they feared detection and government retribution.

For that reason, the IRS said it will review each case to determine whether to waive tax penalties, which can amount to more than 25% of the tax owed each year. Even if penalties are waived, taxpayers are usually still liable for accrued interest on the unpaid balance, however.

Criminal charges can also be leveled against those who fail to file, tax experts said. Willful failure to file can be punished with a $25,000 fine plus a year in jail, Ritchie noted. But it is rare for the IRS to go after anyone but flagrant scofflaws.