Tax Administration:

IRS Can Improve Its Program to Find Taxpayers Who Underreport Their Income

GGD-91-49: Published: Mar 13, 1991. Publicly Released: Mar 18, 1991.

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Pursuant to a congressional request, GAO analyzed the productivity of the Internal Revenue Service's (IRS) program for detecting and pursuing individuals who underreported their income on required tax returns.

GAO found that: (1) IRS opened potential underreporter cases when tax returns failed to computer-match information returns and only pursued these cases through its service centers when the case's potential was high enough based on the projected taxes and collection costs; (2) the underreporter program was a cost-effective method for detecting unreported income in spite of the increasing number of unproductive cases caused by computer matching problems; (3) IRS continued to send many unproductive cases to service centers for manual screening; (4) over half of all underreporter cases for tax years 1982 to 1988 were unproductive; (5) about 32,000 of 61,000 unproductive underreporter cases for 1987 at the Fresno Service Center occurred because of computer matching problems; (6) the other cases were difficult to screen out by computer matching and required manual reviews by service center staff; (7) after the 1987 match, IRS changed its computer matching to avoid some problems that had led to unproductive cases; (8) the IRS management information system did not show the specific reasons for unproductive cases, and IRS relied on periodic studies of the underreporter program to obtain this information; (9) IRS did not notify the Social Security Administration (SSA) after finding errors in wage data employers previously reported to SSA; and (10) such overstatements could result in SSA paying excessive benefits.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS implemented the first part of the recommendation in 1992 by sending a notice to taxpayers. Implementation of the second part of the recommendation depended on system changes under Tax Systems Modernization, which IRS is replacing with a different approach to modernizing its systems. According to IRS, a variety of demands sidetracked initial steps to develop the reason codes. Given continued resource limitations, IRS has no plans to develop the codes.

    Recommendation: The Commissioner of Internal Revenue should: (1) notify taxpayers who provide their social security numbers to payers of business income to begin providing their business's tax identification numbers; and (2) modify the management information system for the underreporter program to provide specific reasons why cases were unproductive. This information, when available, should be used to monitor results and further improve the matching process.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: IRS believes that the additional cost of processing forms 1040X, redesigned as suggested, would exceed any savings from elimination of erroneous discrepancy cases.

    Recommendation: To reduce the number of unproductive underreporter cases, the Commissioner of Internal Revenue should modify the computer match to count changes to specific amounts of income that taxpayers report on amended tax returns.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS modified the computer match to identify when employers submit multiple information returns for the same taxpayer. The computer modification became operational on June 1, 1991.

    Recommendation: To reduce the number of unproductive underreporter cases, the Commissioner of Internal Revenue should modify the computer match to use SSA corrected wage data to identify when employers submit multiple information returns for the same taxpayer.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: IRS identified additional matching requirements and has enhanced computer screening of wage discrepancies to search for income without inadvertently screening out productive cases.

    Recommendation: To reduce the number of unproductive underreporter cases, the Commissioner of Internal Revenue should modify the computer match to search for income on as many tax return lines as possible without inadvertently screening out productive cases.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: IRS updated its proposal in June 1992 to require reporting wage data to SSA.

    Recommendation: The Commissioner of Internal Revenue should provide SSA with corrected wage data for taxpayers found to have wages that were incorrectly reported to the SSA.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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