The Merits of Establishing a Business Information Returns Program

GAO discussed the feasibility of the Internal Revenue Service (IRS) implementing a business information returns program similar to the one it operates to assess the extent of individual taxpayers' noncompliance. GAO noted that: (1) under the program for individual returns, IRS conducts computer matches between information returns from various sources with filed tax returns to determine cases of income underreporting; (2) IRS considers the program a valuable enforcement tool and, in the most recent year for which program data were available, the program yielded an extremely high rate of additional tax assessments; and (3) existing IRS data and GAO audit work show that business noncompliance is significant and increasing. GAO identified a number of impediments to the establishment of such a program for businesses, including the fact that: (1) many businesses file tax returns on a fiscal year basis, while IRS receives information returns on a calendar year basis; (2) many businesses use the accrual method of accounting, while information returns reflect payments on a cash basis; (3) business names on information returns are not always identical to business names in the IRS master file, making computer matching difficult; (4) IRS receives information returns on subsidiaries that file returns with their parent companies; (5) IRS does not receive all of the information returns on businesses that it would need to conduct a full-scale program; and (6) information returns do not distinguish between businesses' employee pension plan income and other third-party income.