Tax Administration

GAO reviewed the Federal/State Tax Information Exchange Program to determine how well the Internal Revenue Service (IRS) and the states use this program in their efforts to increase the level of voluntary compliance with the tax laws.

GAO found that: (1) IRS and the states were using some but not all of the tax data that they were exchanging; (2) in about 22 percent of the adjustment cases which IRS received from the states, the agency either assessed additional federal taxes or was working on the cases; (3) in about 48 percent of the adjustment cases which the states received from IRS, they had either assessed additional taxes or were working on the cases; (4) in six of the seven states which GAO sampled, officers had not conducted periodic usage reviews; (5) at the time of the review, IRS had not systematically inventoried state tax agencies' data files to identify the information available and assess its usefulness; (6) state tax agencies were using 167 data files in their compliance activities; (7) increased automation of tax records in a format compatible with both IRS and the states could possibly enhance program effectiveness; (8) the program could be improved by increased program oversight; (9) the findings of a task force on IRS use of state data agreed with GAO findings, and IRS plans to take action to address the problems; and (10) the National Association of Tax Administration has been instrumental in improving the exchange program by sponsoring joint taxpayer compliance workshops.