Gregory J. Cook, EA, CPA

Accredited Tax Advisor

IRS Letter Program Conclusion

AUTHOR COMMENTS: Now you may say, "that report was issued nine years ago"! My response, "The wheels of big government do turn slow". Trust me, this report started the ball rolling and as long as the IRS collects additional revenues from sending out these letters, they will continue to do so (like a snowball rolling downhill).

The IRS likes to talk about the "Tax Gap", the term they use to describe the amount of taxes that go uncollected each year because our tax system relies somewhat on "voluntary reporting". They never talk about what I like to refer to as "IRS Donations", the money that people send the government in the form of taxes that they really don't owe.

If the IRS collected $3,300,000 by sending letters to taxpayers that had more than $1,000 but less than $2,000 in miscellaneous income reported on their tax returns, I conclude the following: Average Dollar Amount of Miscellaneous Income = $1,500 (may not be the mean, but I'm using it) x .9235 x .153 = $211.94 in Self-Employment Tax, plus $52.99 in interest and penalties = $264.93 Average Collected from each Taxpayer. $3,300,000 divided by $264.93 = 12,456 Affected Taxpayers.

I further conclude that it was less expensive to these 12,456 people to just send the government a check for $264.93 than fight it! Some people will fight, just as a matter of principle, but the majority won't. It's the same reason that frivolous lawsuits are settled all the time, economics and aggravation factor. Would you rather quietly write a check for $264.93 from the comfort of your home or office, or hire an attorney, CPA or Enrolled Agent and pay them more money, spend hours of your time, incur additional out-of-pocket expense and possibly suffer public humiliation and embarrassment?

The one thing this report failed to tell us was, how many letters were sent. I would be willing to bet that many of those people that received the IRS letters had won a prize or award, i.e., from a radio station, charity give away, etc. and did not really owe the money.

I even speculate that many taxpayers had reported an item as miscellaneous income that they really weren't required to report, therefore, they didn't even owe income tax to begin with, much less self-employment tax. The really sad part of this story is this. The IRS did not dedicate the resources to have a human being follow up with these taxpayers to ascertain if they really owed the $264.93. If a taxpayer got an IRS letter and sent in a check to the IRS, the IRS cashed the check and in most cases didn't even send any computer generated thank you note or acknowledgement!

In conclusion, the IRS should become simply IR. Drop the word "Service" from their name because it just don't apply. If they want to keep the word "Service" in the name, then dedicate the resources to be fair to the citizens when you undertake a project like this and don't measure the success of such a project by how much it cost versus how much money you collect. The true measure of success should be whether they collect the correct amount of tax.

Of course, "doing the right thing" often costs more. Training IRS personnel to know when self-employment tax should be collected and not requires, well, training (time and money). Assigning those personnel to look at each of these 12,456 cases is more expensive than just letting the computer spew letters and forget about it.

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I will tell you with confidence, why the IRS conducted this program with their computer instead of people; 1) they would not have collected $3.3 million if they did it the right way, 2) it would have cost the government more money than they would have collected if they did it fair (man hours, telephone, follow-up postage, etc) and 3) Finally and Most Importantly, they choose the "easy way" to conduct their tests (it's less costly), then use the bogus results of their test to further pursue an incorrect conclusion in the future.

Just because the computer generated a certain number of threatening, scary letters and the government collected $3.3 million dollars, they conclude taxpayers are under-reporting and underpaying self-employment tax. Want to make this system really fair? Make the IRS pay for the taxpayers representation and associated expense when the IRS loses a case. If they had to weigh that possible expense in these testing programs they would not undertake such frivolous projects.

This program won't get much if any national attention. Why? Because it affects too few people. After all, what are 12,456 casualties? In the two cases that brought this to my attention, the first taxpayer had prepared his own return. My firm actually prepared the return in case #2, one letter out of approximately 3,000 returns we prepared that year.

I have to make one final statement about the "implementation of the SET National Strategy program".

The federal government could send a threatening, scary IRS letter to taxpayers informing them of a "problem with line 77 of their Form 1040" (note, the Form 1040 only has 76 lines), give the taxpayer the option of fighting or paying less than $300 for this problem to go away, and guess what? That's right, the IRS will collect millions of dollars, which will prove that there in fact was a problem with line 77 of the 1040 and that their new program entitled "Line 77 Slot Machine Jackpot" was a huge success and should be expanded to include Line 78 next year!

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