Tax Administration:

Computer Matching Could Identify Overstated Business Deductions

GGD-93-133: Published: Aug 13, 1993. Publicly Released: Sep 16, 1993.

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Pursuant to a congressional request, GAO provided information on small corporations' deduction reporting and the potential benefits the Internal Revenue Service (IRS) could achieve if it implemented a reverse matching program.

GAO found that: (1) IRS could generate significant tax revenues and derive major benefits if it developed a reverse matching program to identify businesses that underreport income or fail to file tax returns; (2) small businesses often overstate their wage, pension plan, contribution, and bad debt deductions and fail to file the required information returns on payments to individual taxpayers because IRS audits very few business' deductions; (3) although reverse matching can identify the majority of businesses that overstate wage deductions and fail to report all wages, it is not feasible for other types of deductions because of insufficient employer information; (4) IRS could reduce its information limitations by modernizing its computer operations; and (5) IRS needs to initiate limited testing of reverse matching programs and address potential program limitations.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: IRS has been trying to test reverse matching for wages. However, the testing is a low priority and IRS is completely revising its approach for modernizing its computer systems. Given a number of high priorities and resource limitations, IRS will not be acting on this recommendation in the near future. As a result, in combination with the age of the recommendation, GAO is closing it.

    Recommendation: The Commissioner of Internal Revenue should do a limited test of a reverse matching program for wages. If the test proves cost-effective, a full-scale program should be developed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: Information reporting for service payments made to corporations has not been implemented. It is unlikely to be implemented in the current environment. IRS has recently implemented information reporting for bad debts, but has no plans to test reverse matching for bad debts. As a result, GAO is closing this recommendation.

    Recommendation: If businesses are required to begin filing information returns on service payments to corporations or on bad debts, the Commissioner of Internal Revenue should do a limited test of reverse matching programs for these deductions. If they prove cost-effective, full-scale programs should be developed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Not Implemented

    Comments: Given that IRS has changed its approach for modernizing the tax systems and has no plans for using this form of reverse matching for these deductions, GAO does not plan to continue tracking this recommendation.

    Recommendation: The Commissioner of Internal Revenue should, when implementing Tax Systems Modernization, consider what actions are necessary to overcome the limitations to reverse matching programs for other deductions, such as pensions, rents, and interest.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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