TIGTA Audit Highlights Gaps in IRS Withholding Controls

The Treasury Inspector General for Tax Administration (TIGTA) reported results of a recent audit of the IRS internal controls in place to ensure that the withholding reported on information returns (i.e., Forms 1099) is accurately reflected on Form 945, Annual Return of Withheld Federal Income Tax, and that those amounts were paid to the IRS.

The results indicate that TIGTA found additional control issues with related backup withholding processes. In this sample of payers audited, TIGTA found:

• Payers did not report Form 945 but reported withholding of $760 million on the Forms 1099 or W-2G to the recipients.  
• Payers reported $243 million in withholding on Form 1096, Annual Summary and Transmittal of U.S. Information Returns but did not report accompanying Forms 1099 or W-2G forms to the IRS. These payers also did not report Form 945 and did not have any payments posted to their tax accounts.
• Payers filed a Form 945 reporting withholding of more than $241 million but did not file any Forms 1099 or W-2G with the IRS.

The result is thousands of payers that either did not report or reported less backup and federal income tax withholding than they reported on 1099 information returns or Form 1096, totaling more than $1.9 billion. It is worthwhile to note that the IRS disagreed with the estimates, indicating, “The dollar value of this non-compliance is not determinable through data analysis alone.”

Recently, the IRS announced a new enforcement campaign launching from the Cincinnati office and aimed at backup withholding compliance. In its response to this TIGTA audit, the IRS confirmed that it had organized a team in 2016 to review backup withholding processes from start to finish, which has identified compliance gaps and proposed several recommendations to address them.

Best practice recommendations

Payers should consider adopting best practices to ensure that:

• Forms 1099 and/or W-2G withholding amounts balance to the amounts reported on Form 945.  
  Note that Form 1099-R amounts are also reflected on Form 945, so those amounts should balance as well.
• Withholding tax amounts reported on the transmittal Form 1096 balance to the withholding tax amounts reported on Form 945.
• They invest in a modern tax solution that can organize the withholding liabilities and withholding amounts reported on Forms 1099–automating the complex process of reconciling and withholding–at both the federal and state level.