Tax Administration:

Missing Independent Contractors' Information Returns Not Always Detected

GGD-89-110: Published: Sep 8, 1989. Publicly Released: Oct 12, 1989.

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Pursuant to a congressional request, GAO reviewed whether Internal Revenue Service (IRS) examinations effectively identified businesses that failed to file information returns for payments made to independent contractors.

GAO found that: (1) IRS examinations of business tax returns did not effectively identify businesses that failed to file required information returns on contractor payments; (2) revenue agents did not identify an estimated 1,261 information returns that businesses should have filed, involving $6.2 million in payments; (3) IRS revenue agents examined only about 2 percent of the 11 million business income tax returns filed annually; (4) the limited examinations and ineffective compliance checks could result in extensive business noncompliance with information return requirements; (5) IRS did not stress the importance of these checks because such other issues as overstated deductions and unreported income took higher priority during examinations; (6) because IRS managers did not enforce workpaper standards that required agents to document the scope and depth of the checks, they did not know the extent of the revenue agent's checks; (7) current IRS compliance check procedures were specific; (8) agents did not use available data to do better compliance checks; and (9) data were not always generated in time to assist revenue agents because of competing priorities for computer processing time.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS issued a guide designed to aid in meeting audit requirements and standards.

    Recommendation: To improve IRS compliance checks of information return reporting requirements, the Commissioner of Internal Revenue should require that field managers and quality reviewers stress the importance of doing compliance checks, enforce workpaper standards, and assess the effectiveness of the checks.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS issued a guide for examiners that reinforces the need for package audits and serves as a desk reference for audit requirements.

    Recommendation: To improve IRS compliance checks of information return reporting requirements, the Commissioner of Internal Revenue should establish minimum requirements for revenue agents to follow in doing compliance checks.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: Payor Master File transcripts are provided with case files. Internal Revenue Manual changes were made instructing Revenue agents to use the Business Information Return data when doing compliance checks.

    Recommendation: To improve IRS compliance checks of information return reporting requirements, the Commissioner of Internal Revenue should require that the payor master file data summarizing businesses' information return filings be made available to, and be used by, revenue agents when doing compliance checks.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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