There is not a yes or no answer to this question. Based on a recent estimate, 17 percent of taxes went unpaid, totaling $450 billion according to a recent IRS study released. This data actually dates back to 2006, but I doubt it has changed much since then. This amount exceeded the federal deficit at that time. And you and I were concerned that time we forgot to mail a check.
There are calls for lawmakers to reform the tax code and calls to recover these overdue funds. Neither of these challenges is simple for sure. While this is only a one year figure, the IRS estimates that they were owed $2.7 trillion as of 2006.
The W2 program works fairly well with compliance high. The IRS estimates the bulk of this shortfall comes from small businesses, renters, and businesses selling property. Conversely, the 1099 program does not function as effectively as many do not know who to issue them to or just do not do it. If a homeowner has someone do work on their yard, do they really understand how to issue a 1099? Apparently not. “Offer and Compromise” is designed for taxpayers to short pay their obligation with an agreement to stay current on taxes for the next seven years or risk having the compromised taxes being added back to the taxpayers account. This program does not seem to have a high success rate and there are several reasons for this. There are complex rules for how much the IRS will accept and many factors are taken into account. There are IRS programs to deal with this, the primary one being the offer and compromise program.
One significant reason is likely untrained taxpayers trying to submit offers that do not qualify per their guidelines. This makes choosing the right CPA to evaluate your financial books so crucial. It can cost several thousand dollars for a tax attorney to determine what the minimum offer should be. The submission process can take multiple times with no guarantee of acceptance. The translation is IRS does not have to accept an offer that meets their guidelines. Comparatively, would any of us accept less than 100 percent on a deal if you were not absolutely sure you could get more? Likely not, so the IRS is no different. Age, prior earnings history, health, and industry trends are all taken into account. Additionally, net assets in place at the time are also added to expected future cash flows from earnings. If you own an asset that can be sold for $100, they want this added to the equation for the minimum offer. Now we know there is much disparity between FMV and a quick sale, and this is some of the work an experienced person will assist with.
We utilize a tax attorney for our clients considering this direction, as this is all he does and has the experience needed and his knowledge increases the chance for success. Better to be old and destitute, versus young and able to create earnings over a long time period for this task. For a business, payroll taxes are also eligible for this, so virtually all taxes are game for this.
I have seen certain scenarios that seem to lead towards owing the IRS large sums. A taxpayer that has an unusually large year ends up having more income taxed at higher rates and the event does not repeat. With this windfall, the owner normally wants to build an infrastructure to allow future earnings to occur. There may be a home to purchase, which also may not leave room to fully pay all taxes. The intent to catch up is normally there, but this may never occur. The other scenario is the business that is not profitable and does not have access to credit. The unpaid payroll taxes become the credit line that has unlimited capacity to increase with no current payments needing to be made. An IRS audit over several years may also result in a large tax balance all at once, and income now may not be the same as when the audit adjustments occurred resulting in not having enough to pay the IRS. While they are flexible on payments if the balance is large enough, catching up can be daunting with interest and penalties mounting.
Once large tax balances occur, many taxpayers get good in becoming elusive to the IRS by working under the table, having relatives or friends own assets, and not showing any noticeable wealth. Many taxpayers who live in a cash world never report all income, thus substantially understating taxes due. Taxes seem to bring the worst out in many people and cause extreme actions. Just a little glance into the unpaid tax world. Final advice, seek help as fighting the IRS is tough without the right team.