The IRS Document Matching Program

The Internal Revenue Service (IRS) has made considerable progress toward achieving a full document matching program, but many problems still need to be resolved. The document matching program is a powerful tool for detecting, on a mass scale, taxpayers who under-report or do not report their income. In addition, the document matching program provides the auditors with another means for detecting unreported income at the time a return is audited. One of the continuing problems with the document matching program is that taxpayers do not submit all required information documents and IRS has not yet developed the means to ensure compliance with submission requirements. Many documents filed by taxpayers are not matched against tax returns. IRS has sufficient computer resources to process all the returns, but says it would need additional staff and funds to transcribe the paper returns and to work the increased number of cases which would occur. IRS also needs to mimimize the many information documents which are submitted without a taxpayer identification number or with an incorrect number. IRS must expend considerable effort in obtaining the correct number but generally does not assess penalties on taxpayers who submit documents lacking the taxpayer's identification number. Although it can audit only a limited number of returns, IRS has opportunities to improve the computerizing processing of information returns and its overall computer productivity. The scope and effectiveness of the document matching program could be increased without budgetary independence. Use of optical character recognition equipment and a magnetic media promotion program would get more documents matched at less cost. A vigorous penalty assessment program on taxpayers who do not submit documents properly, and a program to get Federal agencies to submit all of them would help. Tight internal control over computer programs which select underreported cases would help. Additional funds, which IRS has not sought, would be necessary to achieve a 100 percent matching goal. Congress could act to establish withholding on interest, dividends, and independent contractors and to increase the penalties for failure to file information returns.