Tax Administration:

Federal Agencies Should Report Service Payments Made to Corporations

GGD-92-130: Published: Sep 22, 1992. Publicly Released: Sep 22, 1992.

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GAO identified actions that the Office of Management and Budget (OMB) and other federal agencies could take to improve corporate tax compliance.

GAO found that: (1) Internal Revenue Service (IRS) random audits of 19,000 small corporations showed a 20-percent decrease in small corporate tax compliance between 1980 and 1987, and that small corporations had paid only 61 percent of their 1987 federal income tax; (2) IRS estimates that corporations will not pay about $31 billion in 1992 federal income taxes; (3) although federal agencies report service contract awards exceeding $25,000, neither tax law nor regulations require federal agencies to inform IRS of payments they make under those service contracts; and (4) such reporting could foster voluntary corporate tax compliance and help IRS detect unreported income and unfiled tax returns. GAO also found that, to improve reporting and corporate tax compliance, federal agencies could: (1) expand their reporting to IRS to include actual payments under service contract awards exceeding $25,000 or report all service payments, regardless of total contract costs; and (2) withhold a percentage of future payments until contractors correctly report and validate their tax identification numbers (TIN).

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Taxpayer Relief Act of 1997 was signed into law on August 5, 1997. Section 1022 of the act requires federal agencies to file information returns on payment of $600 or more to corporations performing services.

    Recommendation: The Director, OMB, should require agencies to issue information returns on payments to corporations providing services.

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

  2. Status: Closed - Implemented

    Comments: IRS is implementing a TIN matching program for federal agencies. The program, which is voluntary, will allow federal agencies to request that IRS match the name and TIN of vendors to whom the agencies make payments prior to filing a return.

    Recommendation: The Director, OMB, should require agencies to validate TIN for those contractors receiving federal contracts for services before making the first payment.

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

  3. Status: Closed - Implemented

    Comments: In late 1993, IRS and OMB changed the regulations to require this withholding on contracts. The rate, allowable under law, will be 31 percent instead of 20 percent.

    Recommendation: The Director, OMB, should require agencies to withhold 20 percent of contract payments, under the terms of the contract, to contractors providing invalid TIN until such TIN are validated.

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

  4. Status: Closed - Implemented

    Comments: OMB now requires chief financial officers to annually certify agency compliance. The first certification is due in March 1995.

    Recommendation: The Director, OMB, should require agencies to have their chief financial officers certify annually that the required information returns on payments have been issued.

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

  5. Status: Closed - Implemented

    Comments: IRS is receiving and processing information returns from federal agencies, as required by the Taxpayer Relief Act of 1997. IRS is using this information in its computer matching to identify sole proprietors who have not filed a tax return and by its auditors, as needed, to verify the related income being reported by the taxpayer.

    Recommendation: If OMB implements the above recommendations, the Commissioner of Internal Revenue should actively use the information returns in IRS enforcement programs.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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