The Internal Revenue Service recently rolled out the newest weapon in its fight against tax cheats, a computerized process that will automatically create returns and assess taxes on some of the 3 million people who refuse to file.
"We're talking about a hard-core group of folks who have made the decision to drop out of the system," Assistant Commissioner William Wauben said. "We think this is going a long way to forcing these people back into the system."
Those people, he added, fail to file and then ignore a series of notices from the IRS. In many cases, Wauben said, non-filers even ignore letters telling them that their paychecks are being seized to pay back taxes; they jump to new jobs and leave no forwarding addresses.
The IRS tested the new program last year at service centers in Ogden, Utah, and Brookhaven, N.Y., and came up with 55,000 non-filers.
Now that the program is operating in all 10 service centers, Wauben said, the IRS expects to contact more than 400,000 people this year and to assess about 300,000 of them at least $2 billion in taxes plus penalties and interest. A year from now, he added, the totals could climb to 500,000 people and $3.25 billion.
Who are these hard-core cheats?
"They're all over," Wauben said. "The income levels typically are in the $18,000 (to) perhaps $40,000 level. Income typically consists of wages. They're in a variety of occupations. . . . Very few of them come back and say, 'Hey, I'm married and got nine kids and the way you tax me is excessive.' We don't get much of that."
Many people, Wauben added, have filed false W-4 forms with their employers, claiming 30 or 40 allowances and have nothing withheld from their paychecks. Thus, they have no tax refund coming.
For many years the IRS has had authority to prepare substitute returns for non-filers, finding about 100,000 each year, but the old method consumed a considerable amount of staff time. The program has been expanded considerably through the use of computers, which cut down on paper work and the amount of time required to catch a cheat.
The IRS estimates that about 3 million people who are required to file returns do not file each year. Most of them are uncovered when the agency checks W-2 wage reports from employers and Form 1099s from interest and dividend payers. About 2 million pay up after the IRS sends them notices.
The new computerized effort is designed to find some of the remaining 1 million.
If the increasingly tougher notifications are ignored, the computer takes over and delinquents are sent a "last-chance" letter, explaining that the IRS is preparing to issue an assessment, spelling out the tax due and listing the penalties for failing to respond. The recipient has 30 days to pay up, file a correct return or explain why the assessment on the IRS-generated return is wrong.
"People who have been ignoring our notices and letters are going to be in for an unpleasant surprise," Wauben said.
If that final letter is ignored, the assessment is issued. Unless the recipient makes peace with the IRS or files suit in Tax Court within 90 days, the next step is for the agency to seize bank accounts and wages.
The program will make it considerably more difficult to avoid paying taxes. "If we get information reporting (W-2s and 1099s) on a taxpayer and we find that taxpayer's assets, the likelihood is well in excess of 90% that we will compute tax and collect that tax from that person," Wauben said.