Better Management Needed in Exchanging Federal and State Tax Information

The Internal Revenue Service (IRS) and the states routinely exchange large amounts of tax information. IRS provides the states with federal audit report abstracts, computer tapes, and tax returns containing confidential information on millions of taxpayers; the states in turn make their tax returns and audit reports available to IRS. This exchange should increase tax revenues, reduce duplicate audits, and increase taxpayer compliance.

IRS has no formal program for exchanging information with states and devotes relatively little effort to exchange activities. Because of the low priority which IRS has historically given to tax information exchange activities, it and the states have not defined their mutual information needs specifically enough. As a result, states receive much information they do not need or use, while IRS does not make available much information that the states could use. IRS has not taken advantage of much state tax information which could be used to identify nonfilers. Much of the information the states need could be provided on computer tapes on a cost-reimbursable basis, but IRS has been reluctant to do this.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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