Tax Administration

IRS Can Improve Its Program to Find Taxpayers Who Underreport Their Income Gao ID: GGD-91-49 March 13, 1991

Pursuant to a congressional request, GAO analyzed the productivity of the Internal Revenue Service's (IRS) program for detecting and pursuing individuals who underreported their income on required tax returns.

GAO found that: (1) IRS opened potential underreporter cases when tax returns failed to computer-match information returns and only pursued these cases through its service centers when the case's potential was high enough based on the projected taxes and collection costs; (2) the underreporter program was a cost-effective method for detecting unreported income in spite of the increasing number of unproductive cases caused by computer matching problems; (3) IRS continued to send many unproductive cases to service centers for manual screening; (4) over half of all underreporter cases for tax years 1982 to 1988 were unproductive; (5) about 32,000 of 61,000 unproductive underreporter cases for 1987 at the Fresno Service Center occurred because of computer matching problems; (6) the other cases were difficult to screen out by computer matching and required manual reviews by service center staff; (7) after the 1987 match, IRS changed its computer matching to avoid some problems that had led to unproductive cases; (8) the IRS management information system did not show the specific reasons for unproductive cases, and IRS relied on periodic studies of the underreporter program to obtain this information; (9) IRS did not notify the Social Security Administration (SSA) after finding errors in wage data employers previously reported to SSA; and (10) such overstatements could result in SSA paying excessive benefits.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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