Those Noncompliant Gigsters

The report has a lot to it, but we are going to focus on the high points.  The IRS computes something called the Tax Gap.  That is the difference between what is actually collected if we were all a bunch of Dudley Dorights who report the exact amount due and pay it timely.  I leave it to statisticians and the like to critique the IRS computation.  You and I both know, based on anecdotal evidence that it must be what we call a number.

The most recent computation is for 2008-2010 (It takes a while to figure this out) is a gross tax gap of $458 billion.  It is expected that enforcement action and voluntary compliance will cut that by $52 billion.  All in, the estimate is that actual collections were a bit over 80% of what they would be in an ideal world.

The report notes that things have changed since then.

The IRS last estimated the self-employment portion of the annual Tax Gap at $69 billion.  The gig economy has since emerged and grown considerably, with thousands of new taxpayers each year being responsible for self‑employment taxes.

TIGTA looked at how the IRS has been handling discrepancies between Form 1099-K and the returns of recipients such as Uber drivers (They looked at nine commonly recognized gig economy payer companies).  It covered the years 2012-2015.

One of the things that TIGTA noted is that compliance in reporting income is very high when there is withholding, pretty high when there is reporting and pretty low when there is neither.  1099-K is something new.  It is just reporting and it has a much higher threshold than 1099-MISC – $20,000 as opposed to $600.

1099-K filings have exploded going from 147,732 in 2012 to 1,981,483 in 2016.  Compliance has apparently gone down.   For 2012 89% of the recipients filed Form 1040. For 2016 it was down to 83%,

Filing 1040 is one thing.  Actually reporting the 1099-K income is another. In 2012 81% of the recipients had a Schedule C.  In 2016 it was 69%.  You can move a few of the non-compliant into the at least they are trying category by including income reported on Line 21.

For 2012 there were 21,032 returns with no schedule C and an associated 1099-K.  For 2016 there were 449,634.

What Does IRS Do About It?

According to the TIGTA report, IRS does not do much about the discrepancies.

due to resource constraints and the large number of returns that the IRDM CISA system identifies, the AUR program cannot review every discrepancy. For TY 2012 through TY 2015, the AUR program selected and worked an average of 15 percent of the cases identified by the IRDM CISA system as having potential discrepancies (Emphasis added)

There is a lot of detail in the report, but here is the takeaway I find most dramatic.

For TYs 2012 through 2015, the IRS did not work cases involving approximately $12 billion of payments reported on Forms 1099-K by the nine gig economy companies, but the gig economy workers had potentially not reported these payments on their tax returns. As the gig economy grows and there is less reliance on traditional employer tax withholding responsibilities, a strategic and effective plan to address tax compliance in this sector is essential to keep the IRS from falling even further behind

Note TIGTA’s pessimism.  They are trying to come up with a plan to not fall further behind.  They make a number of suggestions, some of which IRS agrees with and some of which are disputed.  Basically, though they are rearranging the deck chairs on the Titanic.

Unless you are going to blindly blitz out computer notices, you need actual people to investigate discrepancies.  TIGTA has some suggestions for sharpening the skills of the people doing it, but it can’t do anything about this painful reality.  The IRS headcount in 2000 was 96,092.  At the end of 2010, there were 94,346.  Last count in 2017 was 72,803.  If IRS staffing had grown at the same rate as the population since 2000, it would be at 111,000 rather than 73,000.

Cracking Up The Code

This relates to an argument that I have been having with Peter Hendrickson author of Cracking the Code, who maintains the Lost Horizons website.  I can never explain Pete’s arguments to his satisfaction so I will refer you to his website for more background.  Basically, though Pete and his wife Doreen believe that the income tax applies to a pretty narrow class of income.

In order for something to be taxable income, it has to be from the exercise of a federal privilege.  A salary from the federal government is an example, but it could be something else.  Pete is dead certain that he is right.  Doreen did time in federal prison rather than file an amended return that contradicted that position, making her a political prisoner in the eyes of Rudy Davis.

It has to do with the Supreme Court in Pollock citing how Adam Smith (the Wealth of Nations guy) defines capitation.  Regardless, Pete is upset with me, because I don’t understand it, but when it comes to the Tax Court, don’t get him started.  Judge Buch took on Cracking The Code and got it all wrong.

LITTLE MORE NEED BE SAID TO MAKE CLEAR THAT BUCH IS EITHER A MORON OR A SCOUNDREL, and nothing he has to say should be taken seriously

There are a number of other decisions that Pete takes apart in the same piece.  Appellate judges and Tax Court judges don’t get what the Supreme Court wrote in the Brushaber decision in 1916.  There is really strong proof, though that Pete is right.

It Is Enforcement That Is Cracked

Hendrickson’s followers send him copies of the refund checks that they get from their “CtC educated” filings.  If you think your W-2 is wrong and you can’t convince your employer to change it you can send in Form 4852 to correct it.  That is what “CtC” educated filers do.  Since they are private sector employees, they correct the wage amount to zero and ask for all the withholding back.

And it works. Check out The Lost Horizons Bulletin Board.

THE LONG STACK OF LINKS BELOW connect to more than a thousand examples of the hundreds of thousands of complete income tax refunds and zero liability admissions being continuously secured from the federal and 38 state and local governments since 2003 by readers of ‘Cracking the Code- The Fascinating Truth About Taxation In America‘– Social security and Medicare taxes included. These victories for the rule of law range in size from very small amounts to individual refunds or retentions worth hundreds of thousands of dollars.

I tend to think that here we have another, more disturbing, instance of the IRS not being able to actually look at what it is doing. Pete, of course, sees it differently, he wrote me

Apparently due to not doing that research you failed to acknowledge this undeniable level of tax agency awareness of refunds being made to CtC-educated Americans over all those years. And yet, this kind of goes to the heart of things, doesn’t it?

It’s pretty hard to make the argument that 250,000+ complete refunds over 15 years are just a big, sustained bumbling , understaffed agency screw-up rather than an indicator of something much more significant when you have to admit that this has in no way been a “slip-through-the-cracks”

Based on what is going on with 1099-K, ten to twenty thousand “CtC educated” refund claims flying through every year doesn’t seem that surprising, but Peter Hendrickson and I will have to continue to agree to disagree on that.

I really wish that the Supreme Court would take one of his appeals and tell us what it really meant back in 1916.

Other TIGTA Examples

I also covered a TIGTA report on alimony mismatches.  When somebody deducts alimony they give the social security number of the former lover of their life, who is supposed to pick up the income.  So if you added up all the alimony deductions claimed, it should be pretty close to the alimony income reported.  For 2010 the difference was $2.3 billion (Guess which way).

There were discrepancies on over 250,000 returns.  Over 120,000 had no alimony income at all.  The IRS opened cases on 10,870 of them – less than 4%,

And then there are all those bank reports that tell the IRS and other agencies about people depositing lots of cash.  TIGTA looked at what the IRS does with those.

The IRS still makes no systemic use of CTR data in examinations. Although IRS management agreed with TIGTA’s recommendation in a September 2010 report and cited steps taken to develop examination referrals from the CTRs, the IRS is still not systemically using the CTRs to identify and pursue potentially noncompliant individuals.

The Next Crack In The Code?

One of the interesting things about the great thinkers who are not what I would call conventionally tax compliant is that they each have found the real secret sauce.  The others have glimpsed partial truth, but they have nailed it.  When I ask Pete Hendrickson about the late Irwin Schiff, or Agent for Truth Joe Banister, or Kent Hovind, I get answers like this.

On Schiff

Regarding Irwin Schiff, I think he was a sincere though deeply misled man. He was, if nothing else, a victim of the near impossibility of productively digging in to 7,000,000 words of tax law prior to the material all being digitized and computer-searchable.

Consequently, Irwin ended up with incorrect conclusions about the nature of the tax, essentially finding it to fall just on corporate profits.

On Banister

Probably a sincere-enough guy, but doesn’t understand the real nature of the tax or how it is administered. Long-time advocate of the crazy, “There is no law…” nonsense (which I debunk at http://losthorizons.com/comment/TIAL.pdf).

On Kent Hovind

Taxable conduct was alleged. Hovind then stood there agreeing with that allegation by his silence, even while imagining himself to be vigorously protesting the contrary by writing letters, asking questions of IRS agents, and doing every other thing than the only one of which the tax agency can (and must) take cognizance in that situation– filing a 1040.

I have heard from somebody else who after deep study has written a new book, which he sent me.  He was inspired by Hendrickson but concluded that Hendrickson did not quite get it.

I stumbled upon your article about Peter Hendrickson the other day and I found it interesting.  I read his book and it inspired me to do my own research.  I “corrected” my returns and got a full refund, but I believe his book has numerous errors

This fellow does not want my help making himself famous, so I am withholding further information on him, but I did check him out and he is for real.

Why We Don’t See This?

The more I look at this, the more I conclude that I was part of a kind of conventionally tax compliant cult.  Everything I read made me conclude that the tax protesters and other sorts of non-compliant people were not only wrong, but also taking foolish unwarranted risks.  Whenever they ended up in court they were hit with sanctions and sometimes prison time.

Litigation, though, is always the result of enforcement work that happened years, sometimes many years ago.  The people we read about who face consequences are a few drops of water on the tip of the iceberg.

Other Coverage

Nelson Suit has TIGTA Discovers Tax Reporting Black Hole in the Gig Economy

Both in the case of the sharing economy and changes brought about by cryptocurrencies and blockchain, technology has outstripped the regulatory framework that had been developed for more traditional businesses and assets. The TIGTA report in the end provides us a peek at a sort of black hole that is created when this happens and the impact: confused filers and taxpayers, low compliance rates and a widening tax gap for the fisc.

Accounting Today has IRS to focus more on tax compliance for gig economy workers behind a paywall.  But that headline?? Just like the way the IRS jumped on those currency reports after TIGTA criticized them in 2010. Oh wait.

Jonathan C of Rideshare Central has IRS Paying Closer Attention to Gig Economy Workers Than Ever.

All of this means that the IRS is absolutely going to pay closer attention to gig economy workers over the next few years in particular.

I don’t think Jonathan has read as many TIGTA reports as I have.

A Cautionary Note

People do still go to prison for these sorts of shenanigans.  When tax defiance is blatant enough to attract the attention of the Department of Justice, there are severe consequences.  After all “justice is the one thing you should always find”.  When they do saddle up their horses and draw a hard line, the results are dramatic as Irwin Schiff or Kent Hovind’s families will tell you.

A possibly apocryphal tale I heard from an IRS criminal investigator was about an old timer who was criticized for not keeping up his firearms proficiency.  His answer was that he had put away a lot more guys with his pencil.  The technology is different, but what will convince people to be compliant is a lot more actual action dosing out painful but moderate consequences, not the occasional dramatic arrests that attract media attention.

Regardless of all that, pay your taxes. It is the right thing to do.

Update – Peter Hendrickson Responds

I asked Peter Hendrickson for a response.  Here is what he wrote me.

Peter, I just want to respond to a couple of things…

First, I want to be clear that no one is more “compliance”-oriented than I am. Indeed, the title of my second book is ‘Upholding the Law‘…

I believe everyone should pay any and every tax for which they have become validly liable.

But I also believe that governments should be equally compliant with the law, and never attempt to collect where liability doesn’t actually exist. Nor should those governments, however hungry for money, attempt to conceal from the American public the actual nature and limits of any tax.

Unfortunately, governmental violations of both of these prescriptions are routine. See the examples revealed in this paper.

Regarding the notion that CtC-educated 100% refunds are just an endless series of identical, unprecedented bizarre mistakes made simultaneously by more than three dozen state and federal tax agencies, I think the best proof to the contrary is the intense scrutiny and outcome documented here, which took place even while the feds were in the middle of multiple efforts to enjoin CtC from publication. See this paper for that whole story.

Other clear documentation of close agency attention to educated filings before surrendering to them can be seen here, here and here, to pick just a few examples.

I will let those examples of tested correctness (and the 250,000 or so others they represent— all as thoroughly vetted) also be the answer to the skepticism suggested of your “everyone thinks he is only one who really “gets it”” thing.

Borrowing from your metaphor, the proof of who “found the real secret sauce” can be found in the number of times each one’s “sauce” has passed the taste test. I feel pretty good about my chances in that contest.