Fictitious Tax Deposit Claims Plague IRS

Gao ID: GGD-81-45 April 28, 1981

As a result of the current interest in cash management and the timely collection of tax revenues, GAO undertook a review of the procedures used by the Internal Revenue Service (IRS) to collect withheld taxes from employers who do not deposit the taxes, yet claim on their tax return that they made the deposits.

In its review, GAO found that withheld income and social security taxes accounted for $298 billion of the $460 billion that IRS collected in fiscal year 1979. An estimated 31 percent of the employers' accounts involved fictitious deposit claims, and these fictitious deposit claims delayed IRS collection action by an average of 64 days. Although IRS has tried to prosecute employers who fictitiously claimed deposits for filing fraudulent tax returns, IRS abandoned the prosecution program because it was necessary to prove criminal willfulness, and this had become too difficult. Under present procedures, IRS has tried to identify employers who repeatedly claim fictitious deposits. If IRS identifies such a repeater, it notes on the employer's tax file that speedier collection action should be taken on subsequent returns when the claimed deposits do not match those posted at the bank. The identification procedure lacks definitive criteria, however, so there is no assurance that all such employers are identified. Thus, present and proposed procedures are insufficient to resolve the problem.


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