Tax Administration:

More Can Be Done to Ensure Federal Agencies File Accurate Information Returns

GAO-04-74: Published: Dec 5, 2003. Publicly Released: Dec 5, 2003.

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The Internal Revenue Service (IRS) matches information returns filed by third parties, including federal agencies, with taxpayers' income tax returns to determine whether taxpayers have filed a return and/or reported all of their income. A correct taxpayer identification number (TIN) is necessary to enable IRS to match these returns. Prior GAO reviews have shown that federal agency payment records often include invalid TINs, particularly for vendors. GAO was asked to study federal agencies' compliance with filing information returns for service payments made to vendors, IRS's efforts to improve agencies' compliance, and whether additional measures could improve their compliance.

Federal agencies do not always adhere to information return reporting requirements. About $5 billion in payments to 152,000 payees made during 2000 and 2001 by agencies within three federal departments were not reported to IRS. About 8,800 of these payees had received $421 million in payments, yet had failed to file a tax return for these years. In addition, about $20 billion in payments that were reported to IRS on 170,000 information returns for 2000 and 2001 included invalid vendor TINs. This was due in part to the fact that few federal agencies use IRS's TIN-matching program, as use of this program is optional. IRS has acted to aid federal agencies in complying with annual information return filing requirements. In August 2003, IRS notified federal agencies about information returns filed for 2001 that included invalid vendor TINs and the need for agencies to withhold a portion of future payments if the vendors fail to provide a valid TIN. IRS is also in the process of making the TIN-matching program available online. IRS does not currently have a program to identify and follow up with federal agencies that fail to file required annual information returns for vendor payments. Improvements to IRS's Payer Master File, which contains general information on all payers who file information returns, would be necessary for such a program. In addition, although the Central Contractor Registration is intended for use as a central source of valid vendor information by all federal agencies, it contains some invalid TINs. Due to statutory restrictions, all vendor TINs in this database cannot currently be validated through the IRS TIN-matching program, but options exist to address this problem.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to the recommendation, OMB agreed to develop and issue a directive requiring validation of taxpayer identification numbers (TIN) using either the central contractor registration (CCR) or IRS's TIN verification program. September 2007: See accomplishment report GAO-07-1837A.

    Recommendation: To minimize duplicate agency effort in validating vendors' TINs and to reinforce the anticipated role of the Central Contractor Registration as the single validated source of vendors doing business with the federal government, the Commissioner of Internal Revenue and the Director of the Office of Management and Budget should consider options to routinely validate all vendor TINs in the CCR and to then require all agencies to use vendor and TIN information from the CCR for their Forms 1099 MISC. If this proves to be infeasible, OMB should require each agency to validate TINs for vendors who provide services through IRS's TIN-matching program.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  2. Status: Closed - Implemented

    Comments: Through an IRS Request for Information Services (GOE4-0050A00), the IRS plans to (1) develop an automated process to compare the taxpayer identification number (TIN) of federal agencies that file Form 1099 MISC annual information returns with federal agency TINs recorded in the IRS's Business Master File, (2) identify federal agency TINs for which no annual information returns were filed, and (3) contact the agencies via notice to determine whether they have a filing requirement. Status as of September 2007: In August 2007 for Tax Year 2005, IRS sent out 62 form 1313 notices to federal agencies which are not filing information returns. This shows no improvement from a similar mailing sent in August 2005. The IRS official responsible for this program stated that in the past year, IRS has initiated an employment tax compliance program for federal agencies which includes independent contractor and form 1099-MISC compliance.

    Recommendation: To ensure that federal agencies file Forms 1099 MISC for payments to vendors for services provided, the Commissioner of Internal Revenue should develop a program to periodically identify federal agencies that fail to file Forms 1099 MISC and follow up to determine why the forms were not filed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: Through an IRS Request for Information Services (GOE4-0050A00), the IRS plans to (1) develop an automated process to compare the taxpayer identification number (TIN) of federal agencies that file Form 1099 MISC annual information returns with federal agency TINs recorded in the IRS's Business Master File, (2) identify federal agency TINs for which no annual information returns were filed, and (3) contact the agencies via notice to determine whether they have a filing requirement. Status as of September 2007: In October 2005, the Central Contractor Registration system began requiring potential federal contractors to provide a TIN that can be matched against IRS records. As of August 2007, there were 526 notices sent out to federal agencies for inaccurate contractor Form 1099 TINs for TY 2005. This shows little improvement over a similar mailing 2 years earlier. According to the IRS official responsible for the federal contractor TIN matching program, by Summer 2008 there should be a noticeable improvement in Form 1099 TIN accuracy since effect of the improved contractor registration requirements had not fully taken effect by the end of Calendar Year 2005. IRS has taken actions consistent with our recommendation to ensure the accuracy of TINs from federal agencies, although accuracy has not yet demonstratively improved. As such, we are closing this recommendation as implemented.

    Recommendation: To ensure that federal agencies file Forms 1099 MISC for payments to vendors for services provided, the Commissioner of Internal Revenue should ensure the accuracy of identification information concerning federal payers in IRS's Payer Master File.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: As of October 30, 2005, to qualify as a registrant to bid for all federal government contracts or apply for federal assistant awards, the registrant must have a Taxpayer Identification Number(TIN) that can be validated by the Internal Revenue Service. The TIN and the registrant's name provided to GSA's Central Contractor Registration (CCR) system must match exactly to the TIN and Taxpayer Name used in federal tax matters. Since November 2005, IRS has reviewed the TIN and name validity of over 770,000 CCR registrants. About 19 percent or over 147,000 potential registrants did not pass the TIN validation process and were not allowed to register on CCR system.

    Recommendation: To minimize duplicate agency effort in validating vendors' TINs and to reinforce the anticipated role of the Central Contractor Registration as the single validated source of vendors doing business with the federal government, the Commissioner of Internal Revenue and the Director of the Office of Management and Budget should consider options to routinely validate all vendor TINs in the CCR and to then require all agencies to use vendor and TIN information from the CCR for their Forms 1099 MISC. If this proves to be infeasible, OMB should require each agency to validate TINs for vendors who provide services through IRS's TIN-matching program.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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