Historically, the Internal Revenue Service (IRS) has identified several million businesses each year that may have failed to file tax returnsmore than it can thoroughly investigate. IRS has had difficulty determining if these businesses that IRS identified are still active and thus required to file a tax return. As a result, IRS has pursued many inactive businesses, which has not been a productive use of its resources. In addition, IRS has had no estimate of the nonfiler population. Given the lack of data, IRS has neither a clear estimate of the revenue loss from businesses not filing required tax returns nor a clear basis for allocating resources to addressing this type of noncompliance.
Recently, IRS has begun to use third-party information about payments between businesses and other available data as indicators of business activity. The intent is to prioritize cases with the most revenue potential, using just the third-party information that IRS already possesses.
IRS has the potential to increase the revenue it collects from noncompliant taxpayers by increasing the effectiveness of its business nonfiler program, but the efficiency and productivity of IRS's efforts to ensure compliance by business nonfilers have been hampered by a lack of data. IRS cannot develop a comprehensive estimate of the business nonfiling rate and associated revenue loss because it lacks sufficient data on the population of businesses. Absent such an estimate, IRS will have no basis to know what priority to give its business nonfiler program and whether resources should be reallocated from other enforcement efforts.
IRS has not used private sector data that it could obtain to verify taxpayer statements about whether a business is active and a tax return should have been filed. A number of private companies maintain business activity data, such as data on a business's gross sales and number of employees, which could aid IRS in making these determinations. Dun and Bradstreet is one provider of such data. Its databases include information on business name, address, amount of sales, and number of employees. GAO's analysis of Dun and Bradstreet data showed they could be used to identify business activity that IRS was not aware of. For two states, GAO analyzed 2007 data on the businesses that IRS initially identified as potential nonfilers but later determined were not liable to file returns. Of these, GAO found 7,688 businesses where IRS data indicated little or no business activity, but Dun and Bradstreet data showed business activity as measured by sales totaling $4.1 billion.
GAO also performed a similar analysis using data on federal contractors. GAO found 13,852 businesses listed on the federal contractor registryindicating likely business activityeven though IRS had determined they had no filing obligation. GAO did not determine which non-IRS data would be most useful nor did it examine the capacity of IRS's systems to use such data on a large scale.
Until recently IRS also has not had a way to prioritize cases in its inventory. IRS modernized its business nonfiler program in 2009 by incorporating income and other data in its records indicating business activity. Active businesses, for example those with sales or employees, generally have an obligation to file a return. IRS's Business Master File Case Creation Nonfiler Identification Process now assigns each case a code based on these data. IRS uses the code to select cases to work with the goal of securing tax returns from nonfilers and collecting additional revenue. This is a significant modernization, but IRS lacks a formal plan to evaluate how well the codes are working. Absent evaluation, IRS will not know to what extent the initiative is successful and whether it has resulted in a better allocation of enforcement resources.
While potentially significant, the revenue gains that may be available through IRS actions to identify and pursue more business nonfilers cannot be quantified due to the lack of data on the size of the business nonfiler problem and the effectiveness of IRS's new process. As GAO recommended in its August 2010 report, to better allocate and use its enforcement resources, IRS should develop at least a partial estimate for the business nonfiler rate based on its existing inventory of cases. In addition, IRS should
IRS has agreed to start reviewing or implementing these actions. As of December 2010, IRS has laid out planned implementation steps up through January 2013. The scope of GAO's recent work did not extend to analyzing IRS's capability to meet these implementation plans. The potential revenue significance merits GAO tracking of IRS's progress over the next few years.
The information contained in this analysis is based on the related GAO product under the "Related GAO Products" tab.
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The Internal Revenue Service (IRS) does not know how many businesses failed to file required returns, nor does it have an estimate of the associated lost tax revenue--the business nonfiling tax gap. Many cases it does investigate are unproductive because the business does not owe the return IRS expects. GAO was asked to assess (1) the data challenges of estimating the business nonfiler tax gap, (2...
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