Compliance by Federal Agencies With the Requirements To File 1099 Information Returns

The Internal Revenue Code requires that Federal agencies must file form 1099 MISC information documents with the Internal Revenue Service (IRS) each calendar year for nonemployee compensation. The extent of noncompliance by Federal agencies in this area, the reasons for noncompliance, and IRS compliance efforts in this area were reviewed. None of the agencies reviewed was in full compliance with the requirements for filing 1099 documents with IRS for nonemployee compensation. Confusion existed as to the need to file, and there was a reluctance to comply because of the perceived complexities associated with the requirement. IRS has given little attention to enforcing this requirement and has not addressed some important issues associated with filing. Although it appeared that IRS was substantially complying with its own regulations, IRS officials said that they could not be sure that all of its payments for nonemployee compensation that should be covered by a 1099 information document were being identified. Most of the agencies reviewed could not readily determine the amount of payments that were subject to 1099 reporting because their information systems were not designed to do so. Payment documents did not contain the information needed to alert the accounting function about the filing requirement. Some information documents did not contain the taxpayer's identification number needed in the IRS document matching program. Except for health services, payments to corporations are exempted from the filing requirements. IRS acknowledged this inconsistency, but was not fully aware of the extent of the problem. Auditing a taxpayer's records is the IRS tool for enforcing compliance, a technique not ordinarily applied to Federal agencies. Action is needed to clarify Federal agencies' responsibility to file information returns for nonemployee compensation, provide for the accumulation of the necessary information in the agencies' management systems, clarify the distinction between product and service, and enforce the Internal Revenue laws with regard to Federal agencies. Department heads of all Federal agencies need to be alerted that a serious noncompliance problem may exist in their respective agencies. Reporting requirements and procedures should be included in the Treasury Fiscal Manual for Guidance of Federal Agencies.