Tax Administration:

Sole Proprietor Identification Numbers Can Be Improved

GGD-95-160: Published: Sep 18, 1995. Publicly Released: Sep 18, 1995.

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Pursuant to a congressional request, GAO reviewed whether the Internal Revenue Service (IRS): (1) accurately cross references the two identification numbers that self-employed individuals report on their tax returns; and (2) needs to take any actions to improve the accuracy of its cross-reference files.

GAO found that IRS: (1) uses information from different computer files to identify sole proprietors that may have tax compliance problems; (2) requires certain taxpayers to have a valid social security number (SSN) and employer identification number (EIN) so that it can cross-reference the taxpayers' accounts from one file to another; and (3) records a sole proprietor's identification numbers on three computer files and uses the SSN to establish an account on the Individual Master File. In addition, GAO found that: (1) the identification numbers that IRS records for cross-referencing purposes are not always reliable and cause IRS to generate false underreporter leads; (2) the IRS computerized screening process limits the number of false underreporter leads created by the Cross-Reference Entity File; and (3) if IRS and the Social Security Administration eliminate sole proprietors' EIN, they will have to modify their computer programs to accept SSN instead of EIN.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: IRS stated that this corrective action calls for management to initiate a multi-functional study to determine the extent and impact of erroneous cross-references on the Master files and recommend appropriate corrective actions. To perform this study, Submission Processing would need to validate/perfect the Sole Proprietor Identification Numbers. For this action to occur, it would need to prepare a Request for Information Services (RIS) to request the needed programming changes and develop the related procedural changes for field personnel. Submission Processing has indicated that: (1) Information Services would not accept this RIS because it is not associated with tax law change or year 2000 change, or budget/resource related; and (2) funding would have to be provided to address the additional workload generated by this study. Because of the tight budget for Compliance organizations, financial resources to fund Submission Process for this study are not available.

    Recommendation: The Commissioner of Internal Revenue should establish returns-processing and compliance-screening procedures to help remove erroneous cross-referenced taxpayer identification numbers from sole proprietors' tax records.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: IRS stated that this corrective action calls for management to evaluate the feasibility of eliminating the requirement that sole proprietors use Employer Identification Numbers for filing business returns. Without performing the study discussed under the previous recommendation, no recommendation regarding the feasibility of eliminating the requirement that sole proprietors use Employer Identification Numbers can be made.

    Recommendation: The Commissioner of Internal Revenue should evaluate the feasibility of eliminating the requirement that sole proprietors use EIN for filing business returns.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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