IRS will be firing questions to more taxpayers this year
Roscoe L. Egger Jr. is probably the only man in America who each year asks to have his tax return audited by the Internal Revenue Service. Mr. Egger, commissioner of the IRS, undergoes the annual audit ''so that if there are any questions, they will be exposed immediately,'' he said in an interview with the Monitor.
The IRS is in the midst of developing advanced computer programs that will let the service pose tough questions about specific items to all taxpayers, not just the tiny fraction of citizens who get full-scale audits.
Work on the computerized questioning system comes as US taxpayers - both individuals and corporations - are reacting to the recession by holding back on money they owe the taxman. ''We don't have hard numbers to quantify it, but delinquencies did rise,'' Mr. Egger said. ''It has now peaked.''
With some $24.5 billion in back taxes to collect, the IRS has recently added 3,000 new collection agents. In March the army of tax collectors will begin using a new computerized system that automatically calls delinquent taxpayers, recalls them if the line is busy, and keeps track of their promises to pay.
Not all of the commissioner's time is spent dunning taxpayers for their hard-earned dollars. The IRS plays a key role in government economic policy and will take whatever measures result from the tax simplification study President Reagan mentioned Tuesday in his State of the Union message.
In its response to the President's address, the Democratic Party called for a so-called ''fair tax,'' a modified version of a flat tax. In a flat tax, most deductions are eliminated and income is taxed at a single rate. The ''fair tax'' would still tax the well-to-do on a somewhat higher proportion of their income than those with smaller incomes.
A flat-tax system would make life easier for the IRS, Mr. Egger said. ''It would simplify administration. If you eliminate deductions, you eliminate an entire area of (potential noncompliance) which has to be monitored. But we would continue to have problems of noncompliance in the form of underreporting and nonreporting of income.''
Underreporting and nonreporting of income is now a much riskier game for taxpayers as a result of the Tax Equity and Fiscal Responsibility Act of 1982. Starting this year the IRS will receive reports on tip income, state and local tax refunds, and all security and commodity transactions.
''We will double the information returns we get,'' Mr. Egger said.
Of course, the IRS will attempt to match the information with what citizens report on their tax returns. Because it can now require organizations to furnish reports in machine-readable form, it will be easier to do computerized matching of information reports with individual tax returns.
''I think within a year or year and a half we will be in good shape'' in a campaign to match 100 percent of the information returns with individual taxpayer reports, Egger predicts.
Stepped-up matching is expected to improve compliance with the tax code. ''We expect a significant improvement,'' he figures.
According to IRS data, in areas where income is withheld people ''voluntarily'' pay between 97 and 99 percent of the tax they owe. On income which a third party also reports to the IRS but where there is no withholding, people pay 90 percent of the tax they owe. But in areas where there is neither information reporting nor withholding, compliance drops to between 60 and 80 percent.
Already the IRS is sending computerized letters to taxpayers asking about discrepancies between the interest income they report and what a bank or money fund has told the IRS.
''A major research effort is under way right now,'' Mr. Egger says, aimed at developing computer programs that identify errors in returns more effectively. Such software will let the IRS ''deal directly with the taxpayer on a single issue on the taxpayer's return without necessarily pulling the return (for audit) in the same fashion as we do for information returns (on interest income).''
In the current filing season, for example, the IRS is using a computer program to look for individuals who set themselves up as mail order ministers so as to claim improper charitable deductions. ''And tax shelters offer quite an opportunity'' for computer-aided pinpoint questioning, Mr. Egger said.
While computers will be selecting more taxpayers for questioning on specific issues, the number of citizens subjected to a full audit is not likely to rise.
''I don't see us dramatically increasing audit coverage,'' Egger said. ''It won't jump to 5 percent.'' During fiscal year 1983, the IRS will audit roughly 1 .4 million of the 95.5 million returns that individuals file, down from the 1.5 million audits in fiscal year 1982.
Even this relatively low audit rate can apparently be effective in changing taxpayer behavior, however. The IRS commissioner notes ''some improvement'' in tax law compliance in two areas that have received special IRS attention. ''We aren't experiencing the difficulty with filing false W-4s that we had last year, '' he says. ''We have gone very aggressively into imposing a penalty of $500 on false statements.'' Employees use the W-4 form to claim withholding allowances.
Based on comments from tax lawyers and accountants, ''I think we are making some inroads in the tax-shelter area,'' he said.
According to IRS documents, auditors this year will continue to pay specific attention to abusive tax shelters and W-4 forms, as well as focusing on illegal tax protesters and searching for unreported income.
Once the audit is completed, the IRS has to collect the tax due. Individuals who send in returns without the tax may get to talk to one of the IRS's collection agents.
And to speed identification of companies that are tardy sending in the payroll taxes withheld from their workers' pay, the IRS is developing a new computer system. The system, to be in place within two years, ''can easily accelerate by 100'' the three months or so it now takes to spot a late corporate taxpayer, Mr. Egger said.