Tax Administration:

State and Local Compliance With IRS' Information Reporting Requirements

GGD-89-63: Published: May 4, 1989. Publicly Released: May 22, 1989.

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In response to a congressional request, GAO reviewed state and local governments' compliance with Internal Revenue Service (IRS) reporting requirements for payments made to independent contractors.

GAO found that: (1) most state and local governments' policies and procedures were not in full compliance with IRS requirements because they did not fully understand the requirements; (2) although the governments usually reported payments for such professional services as attorneys and consultants, they did not report payments for such services as construction, auto repairs, and janitorial services because they did not consider those services professional; (3) state and local governments only reported about 10 percent of the $9 million in payments that they should have during 1985 and 1986; (4) IRS examined businesses' income tax returns, but did not monitor state and local governments' compliance with the reporting requirements; (5) IRS contracted with the National Association of State Auditors, Comptrollers and Treasurers (NASACT) in 1988 to review information return procedures and compliance levels in six states; (6) the review showed that states' accounting systems that were not tailored to information reporting hampered compliance; (7) IRS reviewed local governments in California as part of a special project; and (8) IRS planned to provide all 50 states with a consolidated report on the NASACT reviews, along with a model review plan, and encourage them to do compliance reviews.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS examination officials have established a focal point in IRS district offices for state and local government officials to get help.

    Recommendation: The Commissioner of Internal Revenue should establish an IRS focal point to provide assistance to those state and local government officials needing further clarification or elaboration on their reporting requirements.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS issued a revised state agency review plan that recommends regular, ongoing compliance check requirements in state audit procedures.

    Recommendation: The Commissioner of Internal Revenue should encourage state and local audit agencies to routinely check the agencies they audit for information returns compliance.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS plans to visit and coordinate with state officers responsible for information return compliance and to selectively examine certain states to assess and improve compliance. IRS held Payor Compliance Information Returns training and conducted back-up withholding compliance checks in several states to improve and assess compliance in 1990 through fiscal year 1991.

    Recommendation: The Commissioner of Internal Revenue should use the NASACT study of six states and the IRS reviews of California local governments to aid in the development of an IRS program for monitoring and enforcing state and local governments' information returns compliance.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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