Tax Administration

Computer Matching Could Identify Overstated Business Deductions Gao ID: GGD-93-133 August 13, 1993

The Internal Revenue Service (IRS) can reap substantial benefits by instituting computer matching for the more than 1 billion information returns that businesses file each year. Matching involves comparing expenses, or payments, that businesses deduct on their tax returns with the same expenses they report in information returns, such as wages on Form W-2. Currently, IRS audits very few businesses, allowing billions of dollars in overstated deductions and unfiled returns to go undetected. In GAO's view, reverse matching wages is feasible and could generate large tax revenues. Reverse matching for other deductions has potential but is less feasible because of limitations, such as the gap in information reporting. However, GAO believes that Tax Systems Modernization, IRS' major automation effort, and other proposed changes can overcome many of these problems. For example, reverse matching for bad debts should be feasible if Congress requires businesses to file information returns on bad debts.

GAO found that: (1) IRS could generate significant tax revenues and derive major benefits if it developed a reverse matching program to identify businesses that underreport income or fail to file tax returns; (2) small businesses often overstate their wage, pension plan, contribution, and bad debt deductions and fail to file the required information returns on payments to individual taxpayers because IRS audits very few business' deductions; (3) although reverse matching can identify the majority of businesses that overstate wage deductions and fail to report all wages, it is not feasible for other types of deductions because of insufficient employer information; (4) IRS could reduce its information limitations by modernizing its computer operations; and (5) IRS needs to initiate limited testing of reverse matching programs and address potential program limitations.

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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