Tax AdministrationData on the Tax Compliance of Sweatshops Gao ID: GGD-94-210FS September 23, 1994
The problem of sweatshops in the garment industry has not improved in recent years, largely due to weaknesses in labor laws, fewer enforcement resources, and an increase in the number of employers. Further, sweatshops often fail to comply with federal and state tax laws. This report focuses on the tax issue. GAO identifies (1) the extent to which sweatshops in these industries complied with federal and state tax laws and (2) the efforts and resources that the Internal Revenue Service and states used to correct sweatshop noncompliance.
GAO found that: (1) many sweatshops do not comply with one or more elements of federal or state tax laws; (2) of the 94 garment and restaurant sweatshops reviewed, 84 were penalized for filing returns or paying taxes late in one or more tax years between 1990 and 1993; (3) as of mid-1994, 30 sweatshops still owed tax liabilities of $492,000; (4) comparable tax data do not exist to determine whether other types of businesses have better compliance records; (5) although IRS identifies most sweatshops' tax liabilities and noncompliance through audits, it increasingly relies on computer matching because of limited resources; (6) IRS and the two states lack accurate tax data on sweatshops to focus their enforcement efforts on pursuing unpaid income taxes; (7) IRS and the two states stated that they apply their limited enforcement resources to industries that have larger tax debts; (8) the two states have focused their enforcement efforts on labor law violations rather than tax law violations; (9) IRS enforcement efforts included developing a national audit program for the garment industry, hiring a garment manufacturing specialist to coordinate its enforcement efforts, and organizing industry groups to address tax noncompliance; (10) the Department of Labor and the two states favor working with IRS on joint compliance projects; and (11) although joint efforts have the potential for improving compliance with all laws, the federal tax code restricts IRS ability to share tax data in joint efforts.