Skip to Highlights
Highlights

The California Department of Industrial Relations, Division of Labor Standards Enforcement (DLSE), requires applicants for California business licenses in three industries--farm labor contracting, garment manufacturing, and car washing and polishing--to be in compliance with federal employment tax obligations to qualify. Based on questions about whether the Internal Revenue Service (IRS) is fully using data from state and local governments to reduce the tax gap, GAO was asked to analyze (1) the extent to which requiring a demonstration of federal tax compliance to qualify for a state business license has the potential to improve federal tax compliance and (2) what opportunities exist for increasing arrangements that require federal tax compliance to qualify for state business licensing. To address these objectives, GAO analyzed IRS administrative and tax data. GAO identified California as a case study. GAO interviewed IRS and state officials and contacted revenue officials in the 50 states and the District of Columbia.

Skip to Recommendations

Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Internal Revenue Service The Commissioner of Internal Revenue should collect and retain the cost and revenue data needed to develop ROI estimates for programs requiring businesses to demonstrate federal tax compliance to obtain state business licenses.
Closed - Not Implemented
In October 2011, IRS reported they would not implement this recommendation based on research indicating an inability to develop return on investment (ROI) criteria for programs requiring businesses to demonstrate federal tax compliance to obtain state business licenses. Based on IRS research, the agency noted that a lack of data hindered its ability to develop criteria and acquiring the data needed was unlikely in an economy where states were laying off workers. The agency also noted the difficulty in developing criteria that could be applied across different industries when industry and statement enforcement programs varied from state to state.
Internal Revenue Service The Commissioner of Internal Revenue should evaluate the ROI of existing arrangements where states require federal tax compliance to qualify for state business licenses to determine whether the ROI of these programs is sufficient to merit their expansion.
Closed - Not Implemented
In October 2011, IRS reported they would not implement this recommendation based on research indicating an inability to develop return on investment (ROI) criteria for programs requiring businesses to demonstrate federal tax compliance to obtain state business licenses. Based on IRS research, the agency noted that a lack of data hindered its ability to develop criteria and acquiring the data needed was unlikely in an economy where states were laying off workers. The agency also noted the difficulty in developing criteria that could be applied across different industries when industry and statement enforcement programs varied from state to state.
Internal Revenue Service The Commissioner of Internal Revenue should, to the extent that existing data-sharing arrangements have a sufficiently high ROI, coordinate with states to expand requirements to comply with federal taxes to qualify for state business licenses and monitor the ROI of these expansions to gauge their success.
Closed - Not Implemented
In October 2011, IRS reported they would not implement this recommendation based on research indicating an inability to develop return on investment (ROI) criteria for programs requiring businesses to demonstrate federal tax compliance to obtain state business licenses. Based on IRS research, the agency noted that a lack of data hindered its ability to develop criteria and acquiring the data needed was unlikely in an economy where states were laying off workers. The agency also noted the difficulty in developing criteria that could be applied across different industries when industry and statement enforcement programs varied from state to state.

Full Report