Tax Administration
More Can Be Done to Ensure Federal Agencies File Accurate Information Returns Gao ID: GAO-04-74 December 5, 2003The Internal Revenue Service (IRS) matches information returns filed by third parties, including federal agencies, with taxpayers' income tax returns to determine whether taxpayers have filed a return and/or reported all of their income. A correct taxpayer identification number (TIN) is necessary to enable IRS to match these returns. Prior GAO reviews have shown that federal agency payment records often include invalid TINs, particularly for vendors. GAO was asked to study federal agencies' compliance with filing information returns for service payments made to vendors, IRS's efforts to improve agencies' compliance, and whether additional measures could improve their compliance.
Federal agencies do not always adhere to information return reporting requirements. About $5 billion in payments to 152,000 payees made during 2000 and 2001 by agencies within three federal departments were not reported to IRS. About 8,800 of these payees had received $421 million in payments, yet had failed to file a tax return for these years. In addition, about $20 billion in payments that were reported to IRS on 170,000 information returns for 2000 and 2001 included invalid vendor TINs. This was due in part to the fact that few federal agencies use IRS's TIN-matching program, as use of this program is optional. IRS has acted to aid federal agencies in complying with annual information return filing requirements. In August 2003, IRS notified federal agencies about information returns filed for 2001 that included invalid vendor TINs and the need for agencies to withhold a portion of future payments if the vendors fail to provide a valid TIN. IRS is also in the process of making the TIN-matching program available online. IRS does not currently have a program to identify and follow up with federal agencies that fail to file required annual information returns for vendor payments. Improvements to IRS's Payer Master File, which contains general information on all payers who file information returns, would be necessary for such a program. In addition, although the Central Contractor Registration is intended for use as a central source of valid vendor information by all federal agencies, it contains some invalid TINs. Due to statutory restrictions, all vendor TINs in this database cannot currently be validated through the IRS TIN-matching program, but options exist to address this problem.
RecommendationsOur 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.
Director: Team: Phone:GAO-04-74, Tax Administration: More Can Be Done to Ensure Federal Agencies File Accurate Information Returns
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Report to Congressional Requesters:
December 2003:
TAX ADMINISTRATION:
More Can Be Done to Ensure Federal Agencies File Accurate Information
Returns:
GAO-04-74:
GAO Highlights:
Highlights of GAO-04-74, a report to congressional requesters
Why GAO Did This Study:
The Internal Revenue Service (IRS) matches information returns filed
by third parties, including federal agencies, with taxpayers‘ income
tax returns to determine whether taxpayers have filed a return and/or
reported all of their income. A correct taxpayer identification number
(TIN) is necessary to enable IRS to match these returns. Prior GAO
reviews have shown that federal agency payment records often include
invalid TINs, particularly for vendors. GAO was asked to study federal
agencies‘ compliance with filing information returns for service
payments made to vendors, IRS‘s efforts to improve agencies‘
compliance, and whether additional measures could improve their
compliance.
What GAO Found:
Federal agencies do not always adhere to information return reporting
requirements. About $5 billion in payments to 152,000 payees made
during 2000 and 2001 by agencies within three federal departments were
not reported to IRS. About 8,800 of these payees had received $421
million in payments, yet had failed to file a tax return for these
years. In addition, about $20 billion in payments that were reported
to IRS on 170,000 information returns for 2000 and 2001 included
invalid vendor TINs. This was due in part to the fact that few federal
agencies use IRS‘s TIN-matching program, as use of this program is
optional.
IRS has acted to aid federal agencies in complying with annual
information return filing requirements. In August 2003, IRS notified
federal agencies about information returns filed for 2001 that
included invalid vendor TINs and the need for agencies to withhold a
portion of future payments if the vendors fail to provide a valid TIN.
IRS is also in the process of making the TIN-matching program
available online.
IRS does not currently have a program to identify and follow up with
federal agencies that fail to file required annual information returns
for vendor payments. Improvements to IRS‘s Payer Master File, which
contains general information on all payers who file information
returns, would be necessary for such a program. In addition, although
the Central Contractor Registration is intended for use as a central
source of valid vendor information by all federal agencies, it
contains some invalid TINs. Due to statutory restrictions, all vendor
TINs in this database cannot currently be validated through the IRS
TIN-matching program, but options exist to address this problem.
What GAO Recommends:
To improve federal agency compliance with annual information reporting
requirements for vendor payments, GAO is making recommendations to
ensure that (1) IRS identifies and follows up with federal agencies
that fail to file annual information returns for vendor service
payments and (2) IRS and the Office of Management and Budget (OMB)
ensure that vendor TINs are validated using IRS‘s online TIN-matching
program.
IRS and OMB agreed to implement our recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-04-74.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Michael Brostek at
(202) 512-9110 or brostekm@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Not All Federal Agencies File Required Information Returns or Take
Steps to Ensure That Information Provided Is Valid:
IRS Has Acted to Improve Form 1099 MISC Reporting Compliance:
IRS Has No Program to Identify Federal Agencies That Fail to File Forms
1099 MISC and the CCR Does Not Now Serve as a Central Source of Valid
TINs:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Forms 1099 MISC Filed by 14 Federal Departments for Tax
Years 2000 and 2001:
Appendix III: Forms 1099 MISC Filed with IRS with Invalid TINs for Tax
Years 2000 and 2001:
Appendix IV: Comments from the Internal Revenue Service:
Appendix V: Comments from the Department of Defense:
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Tables:
Table 1: Number and Dollar Value of Forms 1099 MISC Filed with IRS for
Tax Years 2000 and 2001:
Table 2: Number and Percent of Forms 1099 MISC Filed with Invalid TINs
for Tax Years 2000 and 2001:
Figure:
Figure 1: Forms 1099 MISC Submitted to IRS by Federal Agencies for
Vendor Payments, Including Those with Invalid Vendor TINs That IRS Was
Unable to Correct - Tax Years 2000 and 2001 Combined:
Letter December 5, 2003:
The Honorable Bill Thomas:
Chairman, Committee on Ways and Means:
House of Representatives:
The Honorable Amo Houghton:
Chairman, Subcommittee on Oversight:
Committee on Ways and Means:
House of Representatives:
Federal agencies pay billions of dollars each year to vendors for
services, such as compensation paid to individuals that are not
employees and medical and health care payments. At the same time, some
vendors fail to pay their taxes and have accrued billions of dollars in
delinquent federal taxes. The Internal Revenue Service's (IRS) ability
to ensure vendors are properly paying their taxes hinges on having
complete and accurate reports from federal agencies on their vendor
payments.
The Internal Revenue Code requires any service recipient, including
federal agencies, to report service payments to IRS if the services
total $600 or more during a calendar year. An IRS Form 1099 MISC
(Miscellaneous Income) information return is used to report service
payments to IRS and must include the vendor's name, address, and
taxpayer identification number (TIN).[Footnote 1]
IRS matches information returns with income tax returns to determine
whether taxpayers have filed a return and/or reported all of their
income. For fiscal year 2002, IRS used information returns to detect
about 1.5 million taxpayers that underreported their income by about
$2.5 billion and also identified about 2 million taxpayers with tax
liabilities of $2.4 billion that failed to file tax returns. However,
when the TIN on an information return is invalid[Footnote 2] and IRS
cannot ascertain the correct TIN, IRS is unable to match the
information return data with tax return data and is thus unable to
detect either whether a taxpayer underreported income or failed to file
a tax return.
To help federal agencies identify whether vendor TINs are valid, in
1997 IRS initiated a TIN-matching program that agencies can use, prior
to filing their information returns, to determine whether vendors have
provided a correct TIN/name combination. If a vendor either fails to
provide a TIN or provides a TIN/name combination that does not match
information in IRS's records, and the vendor subsequently fails to
provide a correct TIN/name combination upon request, the federal agency
is required to initiate backup withholding[Footnote 3]of future
payments for services.
Despite these efforts, our reviews of IRS's Federal Payment Levy
Program[Footnote 4] showed that federal agency payment records often
contained invalid or missing TINs and, therefore, could not be used to
levy vendors' federal payments to recover delinquent federal
taxes.[Footnote 5] As a result, you asked us to assess whether federal
agencies in general have been submitting complete and accurate annual
information returns to IRS for service payments to vendors.
Specifically, our objectives were to determine (1) the extent to which
federal agencies file required Forms 1099 MISC, take steps to ensure
that information on the returns, particularly TINs, are valid, and
initiate backup withholding if vendors provide invalid TINs; (2) recent
actions IRS has taken to help improve federal agency Form 1099 MISC
filing compliance; and (3) whether any additional measures could
further improve federal agency compliance with Form 1099 MISC filing
requirements.
To meet our objectives, we requested and obtained vendor payment
information for service payments made by the agencies and bureaus
within the 14 federal departments[Footnote 6] for calendar years 2000
and 2001 and compared this information to vendor payment information
included in IRS's Payer Master File and Information Returns Master File
for the same 2-year period. We also surveyed the 14 federal departments
on their policies and practices for obtaining vendor TINs and filing
required Forms 1099 MISC. In addition, we discussed with IRS officials
actions recently taken or pending for assisting federal agencies in
filing complete and accurate Forms 1099 MISC for service payments to
vendors. Finally, we discussed with both IRS and Office of Management
and Budget (OMB) officials additional measures that could further
improve federal agency compliance with Form 1099 MISC filing
requirements. Our work was done from June 2002 through September 2003
in accordance with generally accepted government auditing standards.
(App. I describes our overall objectives, scope, and methodology.):
Results in Brief:
Federal agencies are not always filing required Forms 1099 MISC or
taking steps to ensure that information on the returns is valid. For
example, we found that about $5 billion in payments to about 152,000
payees made by agencies within three federal departments during 2000
and 2001 were not reported to IRS on Forms 1099 MISC, and about 8,800
of the payees failed to file an income tax return for these years. In
addition, about $20 billion in service payments on almost 170,000 Forms
1099 MISC--13 percent of the information returns filed by agencies
within the 14 federal departments for 2000 and 2001 combined--included
invalid TINs. IRS was unable to correct the TINs on about 116,000 of
these returns (68 percent) valued at almost $9 billion, thus rendering
them unusable for determining whether the vendors had reported this
income. In response to our survey, only two federal departments
indicated that their agencies were either using IRS's TIN-matching
program to validate vendor TINs or initiating backup withholding if
vendors failed to provide valid TINs departmentwide. While officials
from some federal departments said they were unaware of IRS's TIN-
matching program, others thought the program was currently unavailable.
The main reason cited for not initiating backup withholding was the
lack of a process in place within their respective financial management
systems for accomplishing backup withholding of vendor payments if
vendors failed to provide valid TINs.
IRS has taken recent action and has other actions planned to assist
federal agencies in complying with Form 1099 MISC filing requirements.
For example, in August 2003 IRS sent a specific notice to federal
agencies for the first time, identifying Forms 1099 MISC filed by the
agencies for 2001 that included invalid vendor TINs and reminding the
agencies of their responsibility to ensure that valid vendor TINs are
provided and to initiate backup withholding of subsequent payments for
vendors who fail to provide a valid TIN. Also, in late 2003 IRS plans
to expand its TIN-matching program to enable federal agencies to submit
online up to 100,000 TIN/name combinations at one time and to receive a
response from IRS within 24 hours concerning whether these combinations
match the TIN/name combinations in IRS's records.
IRS does not identify agencies that fail to file Forms 1099 MISC and
IRS and OMB have not taken steps to realize the potential of the
Central Contractor Registration (CCR)--a Department of Defense (DOD)
database of vendors that have registered to do business with DOD--to
better ensure that agencies include accurate TINs on their Forms 1099
MISC for federal vendors. IRS does not currently have a program to
identify and follow up with federal agencies that fail to file Forms
1099 MISC. Although such a program would be beneficial, it would
require that IRS's Payer Master File, which IRS could use to identify
federal agencies that do not file Forms 1099 MISC, be complete,
accurate, and up to date. We found that 96 out of 147 federal agencies
for which we had requested information from IRS were not specifically
identified as federal payers in the Payer Master File. Further,
although IRS's online TIN-matching program has the potential to assist
federal agencies in reducing the number of Forms 1099 MISC submitted to
IRS with invalid TINs, as of October 2003 OMB began requiring all
federal agencies to use the CCR as the single validated source of
information about vendors doing business with the federal government.
However, TINs recorded in the CCR are not validated via IRS's TIN-
matching program, there are no current plans to require such
validation, and our work has raised concerns about the validity of TINs
contained in the CCR. Having DOD validate vendor TINs recorded in the
CCR through IRS's TIN-matching program would eliminate the need for
each individual federal agency to do so and would further OMB's goal of
having the CCR be a central source of valid vendor data. DOD cannot
validate all vendor TINs under current law, but could if vendors gave
it permission to do so or if the law was changed.
We are making recommendations to ensure that IRS identify and follow up
with federal agencies that fail to file annual information returns for
vendor service payments and that IRS and OMB ensure that vendor TINs
are validated using IRS's TIN-matching program. Both IRS and OMB
generally agreed with our recommendations. DOD also indicated that
actions were underway that should eventually enable vendor TINs in the
CCR to be validated via IRS's TIN-matching program.
Background:
Section 6041A of the Internal Revenue Code requires any service
recipient, including federal agencies, to file an annual information
return with IRS for payments made to any person for services totaling
$600 or more during a calendar year. Payments to corporations for
certain services provided must also be reported, such as attorneys'
fees and medical and health care payments. In addition, federal
executive agencies must report all payments for services provided by
vendors, including payments made to corporations. Specific information
required on the annual information return--an IRS Form 1099 MISC--
includes the name, address, and TIN of both the payer and payee, as
well as the total amounts paid during the year for the various types of
services provided. The purpose of the Form 1099 MISC filing requirement
is to enable IRS to identify taxpayers who fail to file an income tax
return as well as those who fail to report all of their income on their
tax return for the related year.
IRS enters Form 1099 MISC information in both a Payer Master File (PMF)
and an Information Returns Master File (IRMF). The PMF is a database
that includes all entities that make payments subject to information
return reporting. The PMF includes general information on the total
number and dollar value of information returns, including Forms 1099
MISC, filed by each payer for each year. The IRMF is a database that
includes specific information on the type and amount of payments made
to each payee, including whether the payee TIN was valid upon receipt
of the information return and if the TIN was invalid, whether it was
subsequently corrected by IRS. Both the PMF and IRMF include the
payer's TIN.
Upon receipt of a Form 1099 MISC, basic information is entered into a
temporary IRS database. IRS compares the payee TIN/name combination
with TIN/name combinations in its records to determine if there is a
match. If there is a match, the information is entered in the IRMF
without the need for additional action. If there is not a match, IRS
will try to validate the TIN/name combination via a TIN "validation"
process, which entails matching the TIN and name control--the first
four characters of an individual's last name or the first four
characters of a business name--on the Form 1099 MISC with (1) a file
which contains all social security numbers ever issued and all name
controls ever associated with them and (2) a file that contains all
employer identification numbers ever issued and all name controls ever
associated with them. If IRS is able to match the TIN and name control
through this process, the information is entered in the IRMF with a
code indicating that the TIN was corrected and is valid. If IRS is
unable to match the TIN and name control, the information is entered in
the IRMF with a code indicating that the TIN is invalid.
If the vendor TIN included on the Form 1099 MISC is initially valid or
subsequently corrected by IRS, and the vendor files a tax return for
the corresponding year, IRS can electronically match the TIN, name
control, and amount entered in the IRMF with the amount reported on the
vendor's tax return via the Document Matching Program.[Footnote 7] This
enables IRS to determine whether the vendor has reported all of the
income on the tax return. Alternatively, if there is no corresponding
return with the same TIN and name control as that entered in the IRMF,
IRS can determine that the vendor is a potential nonfiler. However, if
the TIN entered in the IRMF is invalid, IRS is unable to use the
information to detect either underreporting or nonfiling on the part of
a vendor.
Since 1997, IRS has had a TIN-matching program that federal agencies
can use to verify the accuracy of TIN/name combinations furnished by
federal payees. This program was intended to reduce the number of
notices of incorrect TIN/name combinations issued for backup
withholding by allowing agencies the opportunity to identify TIN and
name discrepancies and to contact payees for corrected information
before issuing an annual information return, such as a Form 1099 MISC.
Monthly, federal agencies can submit a batch of TIN/name combinations
to IRS for verification. IRS then matches each record submitted and
informs the agency whether the TIN and name combination submitted
matches its records.[Footnote 8]
In order to encourage vendors to provide a valid TIN and to ensure that
taxes are paid when they do not, Internal Revenue Code Section 3406
requires payers, including federal agencies, to initiate backup
withholding of a federal payment if a payee, including a vendor, fails
to provide a TIN or provides an invalid TIN, and upon notice fails to
provide a correct TIN. IRS considers a TIN to be missing if it is not
provided, has more or less than nine numbers, or has an alpha character
in one of the nine positions. IRS considers the TIN to be invalid if it
is in the proper format, but the TIN/name combination doesn't match or
cannot be found in IRS or Social Security Administration files.
Payments subject to backup withholding include various types of income
reportable on a Form 1099 MISC, including compensation paid to
individuals that are not employees. The current rate for backup
withholding is 30 percent of the payment.
Not All Federal Agencies File Required Information Returns or Take
Steps to Ensure That Information Provided Is Valid:
Federal agencies are not always adhering to Form 1099 MISC filing
requirements. For 2000 and 2001, about 152,000 information returns for
federal payments totaling about $5 billion were not filed with IRS,
while about 170,000 information returns, including $20 billion in
federal payments that were filed, included invalid TINs. Few agencies
are taking advantage of IRS's TIN-matching program to validate vendor
TINs prior to submitting information returns to IRS. Similarly, few
agencies are initiating backup withholding on payments made to vendors
that have provided invalid TINs.
With Some Exceptions, Federal Agencies File Forms 1099 MISC:
While most federal agencies filed information returns for vendors, some
did not. For both 2000 and 2001, the 14 federal departments
collectively filed over 600,000 Forms 1099 MISC in which they reported
over $100 billion in payments each year. (See app. II for the number
and dollar value of Forms 1099 MISC filed individually by the 14
federal departments.):
Although the 14 federal departments collectively filed a substantial
number of Forms 1099 MISC over this 2-year period, we found some
significant exceptions, as the following examples illustrate.
* About $5 billion in payments to about 152,000 payees made
collectively by the Departments of Agriculture, Commerce, and Justice
for 2000 and 2001 combined were not reported to IRS on Forms 1099 MISC.
About 8,800 of these payees who collectively received payments totaling
about $421 million dollars--an average of about 48,000 each--failed to
file an income tax return for these 2 years, according to IRS's
records. If information returns had been filed and IRS had this
information, it would have provided a basis for IRS to assess the
appropriate taxes against these payees.
* Almost $3.0 billion in payments made via purchase cards by DOD
between 2000 and 2001 had not been reported to IRS due to incorrect or
missing vendor TINs. DOD officials indicated that obtaining vendor
information needed for Forms 1099 MISC from payment card companies has
been a long-standing problem. They estimated that they could have filed
as many as 40,000 additional Forms 1099 MISC for 2000 and 2001 if they
had received the necessary vendor information from payment card
companies.
* According to the Department of Transportation, Forms 1099 MISC were
not filed for services if the vendor was a corporation that provided
both goods and services, as their vendor payment system cannot
distinguish between the two for the purpose of issuing Forms 1099 MISC.
As a result, only about $8 million of $92 million in service payments
for tax years 2000 and 2001 were reported to IRS on Forms 1099 MISC.
* One Department of Housing and Urban Development agency that made
payments to vendors for services totaling over $73 million for 2000 and
2001, failed to file any Forms 1099 MISC for these 2 years. According
to a Department of Housing and Urban Development official, because the
agency is a wholly owned corporation within HUD and is therefore quasi-
federal, agency officials were not aware that they were required to
file Forms 1099 MISC. They further indicated that the agency had
subsequently issued Forms 1099 MISC to its vendors for payments made
for 2002.
In response to our survey of departmental policies and practices for
filing Forms 1099 MISC, department officials cited various reasons for
not filing a Form 1099 MISC for vendor payments. Not having a valid
vendor TIN was the foremost reason cited. Other reasons included the
inability to distinguish between goods and services provided by a
vendor,[Footnote 9] as cited above, and problems obtaining necessary
vendor information, namely TINs, from payment card companies for
vendors that are paid via government purchase cards.
Forms 1099 MISC Often Include Missing or Incorrect TINs:
Even when federal agencies do file Forms 1099 MISC, they often include
an invalid vendor TIN. As a result, IRS has to expend resources in an
attempt to identify a correct TIN via its TIN validation process and,
in most cases, IRS is unable to use the information returns to
determine whether vendors had either underreported their income or
failed to file a tax return. As shown in figure 1, the 14 federal
departments filed almost 170,000 Forms 1099 MISC with invalid vendor
TINs for tax years 2000 and 2001 combined. Almost $20 billion in vendor
payments were included on these information returns. Overall, for the 2
years combined, about 13 percent of all Forms 1099 MISC filed by the 14
federal departments included an invalid TIN when they were submitted to
IRS. (See app. III for the number and percentage of Forms 1099 MISC
filed individually by the 14 federal departments with invalid TINs.):
Figure 1: Forms 1099 MISC Submitted to IRS by Federal Agencies for
Vendor Payments, Including Those with Invalid Vendor TINs That IRS Was
Unable to Correct - Tax Years 2000 and 2001 Combined:
[See PDF for image]
Note: GAO analysis of IRS data.
[End of figure]
As also shown in figure 1, IRS was subsequently able to correct about
32 percent of the invalid vendor TINs through its TIN validation
process. However, IRS was unable to correct the invalid TINS included
on about 116,000 of the Forms 1099 MISC filed by the 14 departments,
which were valued at almost $9 billion, an average of about $77,000 per
return. As a result, IRS would be unable to match this income with
income reported on income tax returns for the same period to determine
whether these vendors had either underreported the income or failed to
file a tax return.
One reason cited by department officials for filing Forms 1099 MISC
with invalid TINs was the lack of a means for validating vendor TINs.
This was cited, in particular, by those departments whose agencies were
not using IRS's existing TIN-matching program.
In addition to negatively affecting IRS's ability to ensure that
vendors report all required income on their tax returns, invalid vendor
TINs also impede the Department of the Treasury's ability to offset
federal tax debts through the Federal Payment Levy Program, as well as
its ability to offset other debts through the Treasury Offset
Program.[Footnote 10] Each program requires a match of the payee's TIN
and name control on both the payment record submitted to the Financial
Management Service (FMS) and the debt information included in the FMS
database, in order for the payment to be offset against the debt.
Federal Agencies Do Not Consistently Use IRS's TIN-Matching Program:
Although the TIN-matching program is available, most federal agencies
do not consistently use this program to ensure that the TINs included
on information returns are valid. From our survey of federal department
policies and practices for obtaining vendor TINs and filing required
Forms 1099 MISC we found the following.
* Officials from only 2 of the 14 federal departments--Labor and
Housing and Urban Development--said their agencies were currently using
IRS's TIN-matching program departmentwide. Even so, we noted that
according to IRS's records, agencies within both departments had filed
some Forms 1099 MISC for tax years 2000 and 2001 with invalid vendor
TINs.
* Three other federal departments--Health and Human Services, Interior,
and Justice--indicated that IRS's TIN--matching program is used, but
only by some of the agencies or bureaus within the respective
departments.
While officials from some federal departments said they were unaware of
the TIN-matching program, others thought the program was currently
unavailable. DOD officials stated that they rely on the CCR for
validating vendor TINs and thus do not use the IRS TIN-matching
program. A Department of the Interior official indicated that it is in
the process of implementing use of the CCR by its bureaus and agencies
as of October 2003 at the direction of OMB.
In General, Federal Agencies Do Not Initiate BackupWithholding as
Required:
Although backup withholding is required if vendors fail to provide a
valid TIN to a federal payer, most federal agencies do not initiate
backup withholding. From our survey of federal department policies and
practices for obtaining vendor TINs and filing required Forms 1099 MISC
we found the following.
* Officials from only 2 of the 14 federal departments--Energy and
Transportation--said that their agencies initiate backup withholding
departmentwide.
* Three other federal departments--Health and Human Services, Interior,
and Justice--indicated that backup withholding is initiated only by
some of the agencies or bureaus within the respective departments.
The main reason cited by officials from several of the federal
departments for not initiating backup withholding was the lack of a
process in place within their respective financial management systems
for accomplishing backup withholding of vendor payments.[Footnote 11]
Some department officials also indicated that they had no way of
knowing when a vendor's TIN is invalid and therefore subject to backup
withholding. An official with one of the agencies within the Department
of Health and Human Services indicated that they deny payment to
vendors who fail to provide a valid TIN in lieu of backup withholding.
IRS Has Acted to Improve Form 1099 MISC Reporting Compliance:
IRS has taken some recent actions and has other actions planned to
assist federal agencies in complying with Forms 1099 MISC filing
requirements, as the following examples illustrate.
* In August 2003, for the first time, IRS sent a specific notice
(Notice 1313) to federal agencies identifying Forms 1099 MISC filed for
2001 in which the vendor's TIN was invalid and reminding the agencies
of their responsibility to ensure that TINs are valid and to initiate
backup withholding for any vendors who subsequently fail to provide the
agency with a correct TIN upon notification by the agency. Sending
these notices annually may address agency concerns about not having a
way to determine that a vendor's TIN is invalid and that backup
withholding should be initiated.
* By the end of 2003, IRS plans to expand its TIN-matching program to
enable federal agencies to submit online up to 100,000 TIN/name
combinations at a time and to receive a response from IRS within 24
hours concerning whether the TIN/name combinations submitted match the
TIN/name combinations in IRS's records. As an interim step, IRS plans
to have an interactive computer application available that will allow
federal agencies to submit up to 25 TIN/name combinations and receive
feedback within 5 seconds on whether these match the TIN/name
combinations in IRS's records. As with the existing TIN-matching
program, IRS will not be able to provide an agency with the correct TIN
or name if they do not match IRS's records due to the disclosure laws.
Instead, the agencies will continue to be responsible for contacting a
vendor for the correct TIN/name combination. However, the online TIN-
matching program should make it easier for federal agencies to identify
vendors that are to be contacted to obtain a valid TIN and thus prevent
the agencies from filing Forms 1099 MISC that include invalid TINs.
* In February 2003 IRS issued a proposed revenue procedure that would
enable payment card companies to act on behalf of cardholders/payers,
such as federal agencies, in soliciting, collecting, and validating
vendor information, including TINs. This procedure would enable payment
card companies to use IRS's TIN-matching program to validate the TIN/
name combinations provided by vendors for which a Form 1099 MISC is to
be filed. Once adopted, this procedure may help to eliminate some of
the problems agencies have experienced in getting necessary vendor
information related to purchase card payments.
In addition, IRS has initiated meetings with various federal agencies,
including the Departments of Defense and Agriculture, to identify
specific problems associated with obtaining valid vendor TINs and
filing accurate Forms 1099 MISC, particularly problems related to
purchase card payments. In November 2003, IRS plans to present a
federal agency seminar covering various topics related to filing Forms
1099 MISC, including use of the TIN-matching program, information
reporting requirements, and the previously mentioned proposed revenue
procedure.
IRS Has No Program to Identify Federal Agencies That Fail to File Forms
1099 MISC and the CCR Does Not Now Serve as a Central Source of Valid
TINs:
Although IRS can identify whether Forms 1099 MISC filed by federal
agencies include a valid TIN, IRS does not have a program to identify
and follow up with agencies that fail to file Forms 1099 MISC. In
addition, the CCR does not, as OMB intends, serve as a central source
of valid TIN data that federal agencies can use.
At Present, IRS Has No Program to Detect Federal Agencies That Do Not
File Forms 1099 MISC:
IRS does not have a program to periodically identify and follow up with
federal agencies that fail to file Forms 1099 MISC for vendor payments.
IRS officials indicated that their emphasis has been on identifying
Forms 1099 MISC filed with invalid TINs by nonfederal payers. This is
because Internal Revenue Code section 6721 authorizes IRS to assess a
penalty of $50 against a nonfederal payer for each information return
filed with an invalid TIN, up to a maximum penalty of $250,000 per
calendar year. IRS proposed just over $204 million in penalties against
nonfederal payers for information returns with invalid TINs for tax
years 2000 and 2001 combined. IRS estimated that an additional $6.9
million in penalties could have been proposed against federal agencies
for filing information returns with invalid TINs, if IRS had the
authority to do so.[Footnote 12]
A complete and accurate Payer Master File, which includes general payer
information, such as the payer name and TIN, as well as the total
number and dollar value of various types of Forms 1099 filed by each
payer, would enable IRS to identify federal agencies that fail to file
Forms 1099 MISC. IRS could then contact these agencies to ascertain why
these returns were not filed. IRS initially indicated to us that
federal payers are specifically coded as such in the Payer Master File
to distinguish them from nonfederal payers. However, we found that 96
of 147 federal agencies and bureaus for which we needed information
concerning Forms 1099 MISC they filed with IRS for 2000 and 2001 were
not coded as federal payers in the Payer Master File. IRS officials
agreed that there is a need to update the Payer Master File to ensure
that all federal payers are properly coded as federal. Conducting a
survey of all payers included in this file would be a way for IRS to
update this information, thus ensuring that all federal payers are
correctly coded as federal in the Payer Master File.
TINs in the CCR Are Not Validated:
OMB has instructed federal agencies to begin using the CCR as of
October 2003, as the single validated source of information about
vendors doing business with the federal government, but CCR vendor TINs
are not validated with IRS's TIN-matching program. The CCR, which is
maintained by DOD, includes information on over 234,000 vendors that
have registered to do business with DOD, including the vendors' TIN and
name. The accuracy and completeness of information listed in this
database is the responsibility of the individual vendors and must be
updated annually. According to CCR officials, vendor TINs are not
validated via IRS's TIN-matching program. Instead, CCR does an edit
check to ensure that a vendor's TIN is in the correct format, namely
that it contains nine numbers.
At the time of our review and resulting July 2001 report[Footnote 13]
mentioned earlier, we found that there were a substantial number of
invalid vendor TINs in the CCR. In addition, during our current review,
we found that the CCR included about 7,000 vendor employer
identification numbers that were not included in IRS's Business Master
File.[Footnote 14]
Due to the lack of validated TINs in the CCR, agencies' use of this
centralized database as a source of TINs for vendors in and of itself
would not ensure that the agencies include valid TINs on Forms 1099
MISC submitted to IRS. As noted earlier, in line with OMB's
expectations, DOD relies on the CCR as a source of valid TINs and
therefore does not use IRS's TIN-matching program; Interior officials
say they also plan to use the CCR.
If the name and TIN of vendors recorded in the CCR were validated by
DOD initially and then periodically thereafter through IRS's TIN-
matching program, the CCR could become a central source of valid vendor
TINs for all agencies to use for their Forms 1099 MISC submitted to
IRS. However, because agencies are restricted to using the TIN-matching
program only for validating TINs for which an information return is
required, DOD would not be able to validate all vendor TINs included in
the CCR because not all vendors in the CCR actually receive DOD
contracts to provide services. This restriction could be addressed
through a change to the disclosure laws, thus authorizing DOD to use
the TIN-matching program for all vendors that have registered with the
CCR. Alternatively, individual vendors could be asked to agree to have
their TIN and name matched to IRS data when they apply to do business
with the government. Section 6103 of the Internal Revenue Code protects
taxpayer information, including TINs, from disclosure. However,
taxpayers can waive this protection. This would enable IRS to provide
more information than can currently be provided under the TIN-matching
program, such as the correct TIN/name combination.
Given that the CCR is not currently a valid source of vendor TINs,
agencies cannot rely on the CCR as OMB intends. Therefore, each agency
would need to use IRS's online TIN-matching program as the only way to
independently verify vendor TINs necessary to include on their Forms
1099 MISC. However, at the present time agency use of the TIN-matching
program is optional.
Conclusions:
Some federal agencies' failure to file required annual Forms 1099 MISC
and other agencies' failure to file returns with valid vendor TINs
adversely affects IRS's efforts to detect unreported vendor income and
vendors that fail to file income tax returns. In addition, invalid TINs
in federal agency payment records negatively affect Department of the
Treasury efforts to offset federal tax debts through the Federal
Payment Levy Program and other federal debts through the Treasury
Offset Program.
Although IRS has taken some positive actions to improve federal agency
compliance with Form 1099 MISC filing requirements, additional steps
could be taken. IRS could identify and follow up with federal agencies
that fail to file required Forms 1099 MISC if it had a complete and
accurate Payer Master File. In addition, the CCR could become, as OMB
intends, a central source for valid vendor information, including TINs.
Currently, CCR TIN data are not always accurate. Except for current
statutory restrictions on the use of IRS's TIN-matching program, the
CCR's administrator, DOD, could use IRS's new online TIN-matching
program to routinely verify the TINs of all vendors as they are added
to the CCR and then periodically thereafter. This would carry out OMB's
desire for the CCR to be a central source of valid vendor information
and would thereby avoid each agency independently verifying TINs for
some of the same vendors. Asking vendors to permit DOD to routinely
verify their TINs when they register to do business with the federal
government would be one option to enable DOD to verify TINs in the CCR
against IRS's records. Alternatively, OMB and IRS could determine
whether an exception to section 6103 of the Internal Revenue Code
should be requested.
In the absence of the CCR as a valid source of TINs, agencies must
individually and voluntarily use IRS's TIN-matching program to validate
vendor TINs. Agencies have not consistently used the TIN-matching
program in large part because they say they were unaware of it. IRS's
new online TIN-matching program and publicity IRS plans as it launches
the new system later this year may make officials more aware of the
program and increase their use of it. However, until OMB is able to
realize its intent of having the CCR be a valid source of information
for federal vendors, additional assurance could be gained that agencies
would use the matching program if OMB required them to do so. Because
IRS has made the system available online, fulfilling such a requirement
should now be easier than in the past.
Recommendations for Executive Action:
To ensure that federal agencies file Forms 1099 MISC for payments to
vendors for services provided, we recommend that the Commissioner of
Internal Revenue:
* ensure the accuracy of identification information concerning federal
payers in IRS's Payer Master File and:
* develop a program to periodically identify federal agencies that fail
to file Forms 1099 MISC and follow up to determine why the forms were
not filed.
To minimize duplicate agency effort in validating vendors' TINs and to
reinforce the anticipated role of the Central Contractor Registration
as the single validated source of vendors doing business with the
federal government, we also recommend that the Commissioner of Internal
Revenue and the Director of the Office of Management and Budget
consider options to routinely validate all vendor TINs in the CCR and
to then require all agencies to use vendor and TIN information from the
CCR for their Forms 1099 MISC. If this proves to be infeasible, OMB
should require each agency to validate TINs for vendors who provide
services through IRS's TIN-matching program.
Agency Comments and Our Evaluation:
We received written comments on a draft of this report from the
Commissioner of Internal Revenue (see app. IV) and the Under Secretary
of Defense (Comptroller) (see app. V).
The Commissioner agreed with our recommendations. However, he also
emphasized that agencies may not wish to spend the resources to
effectively use IRS's TIN-matching program and that IRS cannot compel
agencies to meet their Form 1099 MISC reporting responsibilities.
To ensure the accuracy of identification information concerning federal
payers included in IRS's Payer Master File, the Commissioner agreed to
perform periodic reviews of the database to ensure its accuracy. In
addition, as part of an education-compliance program geared to federal
agencies that IRS is in the process of developing, the Commissioner
stated that IRS plans to contact federal agencies to identify and
verify that all TINs used by each agency have been properly identified,
thus compiling an accurate list of all federal agency payer TINs.
To identify federal agencies that fail to file Forms 1099 MISC and the
reasons why the forms were not filed, the Commissioner agreed to
compare the above mentioned list of federal agency payer TINs to the
Payer Master File to identify agencies that did not file Forms 1099
MISC and to then contact the agencies to determine if Forms 1099 MISC
were required.
To minimize duplicate agency effort in validating vendors' TINs and to
reinforce the role of the CCR as the single validated source of vendors
doing business with the federal government, the Commissioner agreed
that IRS will work with DOD to ensure that vendor TINs on the CCR are
accurate, to include exploring the expanded use of the TIN-matching
program to validate all TINs included in the CCR.
In addition to commenting on the report recommendations, the
Commissioner pointed out that IRS Policy Statement P-2-4, which
provides that federal agencies are not subject to penalties and
interest for failure to comply with Form 1099 MISC filing requirements,
is based on a 1978 GAO Comptroller General Decision (B-161457). This
decision states that agency appropriations are not available for
payment of interest and penalties. The Commissioner noted that if an
agency does not wish or is unable to comply with its Form 1099 MISC
reporting responsibilities, there is nothing that IRS can do but rely
on voluntary compliance on the part of the agency.
Although we agree that IRS cannot compel agencies to meet their Form
1099 MISC reporting responsibilities, we believe implementing our
recommendations will better ensure that agencies do so. For instance,
by bringing to agencies' attention that they are not filing the
required information returns, IRS can help educate agencies about their
reporting responsibilities. Further, by improving the validity of TINs
in the CCR, IRS, working with OMB, can make it easier for agencies to
comply.
The Commissioner also stated that a number of federal agencies
indicated that they have been unable to use IRS's TIN-matching program
because their financial reporting systems were incompatible with the
TIN-matching program and that the cost to make agency systems
compatible would be prohibitive. If IRS and DOD are able to arrange
validation of TINs included in the CCR via the TIN-matching program as
we recommend, this would eliminate the need for individual agencies to
use the TIN-matching program. In the event that IRS and DOD are unable
to work out such an arrangement, IRS's online TIN-matching program,
which can be accessed via the Internet using a desk-top workstation,
may be an effective alternative to agencies making substantial changes
to their financial accounting systems.
The Under Secretary of Defense (Comptroller) did not directly say he
agreed with our recommendation, but indicated that efforts currently
underway to improve the accuracy of TINs in the CCR for both DOD and
all other federal agencies mirror our recommendation for IRS and OMB to
consider options to routinely validate all vendor TINs in the CCR and
to require all agencies to use vendor and TIN information from the CCR
for their Forms 1099. The Under Secretary pointed out that the mandated
use of the CCR throughout the federal government coupled with IRS's
online TIN-matching program should enable DOD to establish a basic
level of validation in the near term, perhaps as soon as the second
quarter of fiscal year 2004.
The Under Secretary also pointed out that the Defense Finance and
Accounting Service has been working with payment card companies, such
as VISA and Master Card, to improve the process for reporting payments
made via payment cards. As a result, DFAS expects a significant
increase in the number and dollars reported for the card programs on
Forms 1099 for calendar year 2003. We commend these efforts to address
the long-standing problem of obtaining necessary vendor information
from payment card companies. Coupled with IRS's proposal to enable
payment card companies to act on behalf of cardholder/payers in
soliciting, collecting, and validating vendor information, including
TINs, these efforts should go a long way in addressing this problem.
On November 26, 2003, we also received oral comments from
representatives of OMB's Offices of Federal Procurement Policy and
Federal Financial Management. OMB generally agreed with our
recommendation. Accordingly, OMB agreed to develop and issue a
memorandum to federal agencies directing them to validate TINs by using
the TIN-matching program or the CCR. In addition, OMB agreed to work
with IRS and the CCR to ensure agencies are provided the necessary
information to use either of the methods recommended. Although we
believe that either using IRS's TIN-matching program or validating TINs
in the CCR can be effective means for ensuring that agencies include
valid TINs on their Forms 1099 MISC, using the CCR as the primary
source of valid TINs would reinforce OMB's intention that the CCR
become the government's central source of contractor data and would
minimize duplicate effort among agencies in validating TINs. Therefore,
we encourage OMB to pursue use of the CCR as the primary option for
agencies to obtain valid TINs.
:
We are sending copies of this report to the Ranking Minority Member,
House Committee on Ways and Means; Ranking Minority Member,
Subcommittee on Oversight, House Committee on Ways and Means; and the
Chairman and Ranking Minority Member, Senate Committee on Finance. We
will also send copies to the Commissioner of Internal Revenue, the
Director of the Office of Management and Budget, the Secretary of
Defense, and other interested parties. Copies of this report will also
be made available to others upon request. The report will also be
available at no charge on GAO's Web site at [Hyperlink, http://
www.gao.gov] http://www.gao.gov.
If you have any questions concerning this report, please contact me at
(202) 512-9110 or Ralph Block at (415) 904-2150. Key contributors to
this report are listed in appendix VI.
Signed by:
Michael Brostek:
Director, Tax Issues:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Our objectives were to determine (1) the extent to which federal
agencies file required Forms 1099 MISC, take steps to ensure that
information on the returns, particularly Taxpayer Identification
Numbers (TIN), are valid, and initiate backup withholding if vendors
provide invalid TINs; (2) recent actions the Internal Revenue Service
(IRS) has taken to help improve federal agency Form 1099 MISC
(Miscellaneous Income) filing compliance; and (3) whether any
additional measures could further improve federal agency compliance
with Form 1099 MISC filing requirements.
Scope and Methodology:
To determine whether federal agencies annually file required Forms 1099
MISC with IRS, we requested and obtained vendor service payment
information from the 14 federal departments for calendar year 2000 and
2001. We specifically asked for the vendor name, TIN, and total dollar
value of all payments made by the various agencies and bureaus within
these departments for services provided during calendar years 2000 and
2001. However, we were unable to verify whether they fully complied
with our request, such as only providing payments for services and not
for goods. We compared the information we obtained from the 14 federal
departments with vendor payment information included in IRS's Payer
Master File (PMF) and Information Returns Master File (IRMF) for the
same 2-year period. On the basis of our review of IRS's procedures for
processing information returns and our testing of database extracts
obtained from IRS's Payer Master File and Information Returns Master
File, we determined that the data were sufficiently reliable to enable
us to determine whether Forms 1099 MISC had been filed by the agencies
and bureaus within the 14 federal departments and, if so, whether they
included valid vendor TINs.
We obtained vendor payment information from the following federal
departments:[Footnote 15]
Agriculture Commerce Defense Education Energy Health and Human Services
Housing and Urban Development Interior Justice Labor State
Transportation Treasury Veterans Affairs:
In an effort to gauge the potential result of not filing Forms 1099
MISC, we selected payment information provided to us by the agencies
within 3 of the 14 federal departments for 2000 and 2001 and identified
the amounts paid to individual payees that were not included on IRS's
IRMF, thus indicating that a Form 1099 MISC had not been filed. We then
compared the payee information to an IRS file of nonfilers to determine
whether the individual payees had filed federal income tax returns for
the comparable years.
To determine whether Forms 1099 MISC filed with IRS by federal agencies
include valid vendor TINs, we analyzed IRS's IRMF for calendar years
2000 and 2001. We identified the number and dollar value of Forms 1099
MISC filed by the 14 federal departments that, according to the IRMF,
contained invalid TINs. Of these, we further identified the number and
dollar value associated with invalid TINs that IRS was able to correct
via its TIN validation program, as well as those that remained invalid
because IRS was unsuccessful in correcting them.
To determine whether federal agencies take steps to ensure that
information on the returns, particularly TINs, is valid, by using IRS's
TIN-matching program to validate vendor TINs or initiate backup
withholding on future payments to vendors that have submitted invalid
TINs, we sent a survey to the 14 federal departments about their
policies and practices for obtaining vendor TINs and filing Forms 1099
MISC. We asked whether they validate vendor TINs through IRS's TIN-
matching program and if not, why not. We also asked whether they
initiate backup withholding if it is determined that a vendor has
provided an invalid TIN. We then summarized the overall department
responses.
To identify recent actions IRS has taken to help improve federal agency
Form 1099 MISC filing compliance, we discussed with IRS officials any
actions that were either recently implemented or pending. We also
tracked the progress of IRS's pending on-line TIN-matching program,
which is expected to be available to federal agencies in the latter
part of 2003.
To identify any additional measures that could further improve federal
agency compliance with Form 1099 MISC reporting requirements, we
discussed this issue with IRS and the Office of Management and Budget
(OMB) officials and analyzed both recent and pending actions that would
affect such compliance.
We did our work at IRS and OMB headquarters in Washington, D.C., from
June 2002 through September 2003 in accordance with generally accepted
government auditing standards.
We obtained written comments on a draft of this report from the
Commissioner of Internal Revenue (see app. IV) and the Secretary of
Defense (see app. V). We also obtained oral comments from
representatives of the Office of Management and Budget.
[End of section]
Appendix II: Forms 1099 MISC Filed by 14 Federal Departments for Tax
Years 2000 and 2001:
This appendix provides details concerning the specific number and
dollar value of Forms 1099 MISC filed by each of the 14 federal
departments for tax years 2000 and 2001.
As table 1 shows, the Department of Defense filed the greatest number
and dollar value of Forms 1099 MISC each year, while the Department of
Transportation filed the least. With a few exceptions, most departments
filed more Forms 1099 MISC in 2001 than in 2000.
Table 1: Number and Dollar Value of Forms 1099 MISC Filed with IRS for
Tax Years 2000 and 2001:
Dollars in millions (rounded):
Agriculture;
Number filed for 2000: 32,617;
Amount filed for 2000: 1,183.1;
Number filed for 2001: 42,440;
Amount filed for 2001: 1,579.0.
Commerce;
Number filed for 2000: 7,369;
Amount filed for 2000: 1,370.6;
Number filed for 2001: 7,601;
Amount filed for 2001: 962.2.
Defense;
Number filed for 2000: 245,917;
Amount filed for 2000: 49,944.3;
Number filed for 2001: 257,382;
Amount filed for 2001: 60,974.1.
Education;
Number filed for 2000: 2,428;
Amount filed for 2000: 906.1;
Number filed for 2001: 2,686;
Amount filed for 2001: 1,068.4.
Energy;
Number filed for 2000: 3,587;
Amount filed for 2000: 6,066.4;
Number filed for 2001: 3,381;
Amount filed for 2001: 7,250.0.
Health & Human Services;
Number filed for 2000: 8,464;
Amount filed for 2000: 41,735.4;
Number filed for 2001: 8,859;
Amount filed for 2001: 40,312.8.
Housing & Urban Development;
Number filed for 2000: 17,347;
Amount filed for 2000: 1,118.5;
Number filed for 2001: 15,522;
Amount filed for 2001: 1,065.9.
Interior;
Number filed for 2000: 23,394;
Amount filed for 2000: 1,292.5;
Number filed for 2001: 26,197;
Amount filed for 2001: 1,549.3.
Justice;
Number filed for 2000: 21,241;
Amount filed for 2000: 1,705.5;
Number filed for 2001: 22,868;
Amount filed for 2001: 2,146.6.
Labor;
Number filed for 2000: 66,285;
Amount filed for 2000: 965.4;
Number filed for 2001: 66,245;
Amount filed for 2001: 1,126.5.
State;
Number filed for 2000: 6,345;
Amount filed for 2000: 1,195.6;
Number filed for 2001: 6,411;
Amount filed for 2001: 1,552.2.
Transportation;
Number filed for 2000: 93;
Amount filed for 2000: 7.7;
Number filed for 2001: 4;
Amount filed for 2001: [A].
Treasury;
Number filed for 2000: 5,846;
Amount filed for 2000: 1,537.1;
Number filed for 2001: 7,481;
Amount filed for 2001: 1,767.7.
Veterans Affairs;
Number filed for 2000: 173,988;
Amount filed for 2000: 6,301.1;
Number filed for 2001: 186,309;
Amount filed for 2001: 6,953.1.
Total;
Number filed for 2000: 614,921;
Amount filed for 2000: 115,329.3;
Number filed for 2001: 653,386;
Amount filed for 2001: 128,307.8.
Source: GAO analysis of IRS's Information Returns Master File.
[A] Less than $1 million rounded.
[End of table]
[End of section]
Appendix III: Forms 1099 MISC Filed with IRS with Invalid TINs for Tax
Years 2000 and 2001:
This appendix provides details concerning the specific number and
percentage of Forms 1099 MISC filed by each of the 14 federal
departments for tax years 2000 and 2001 that included invalid TINs when
received by IRS.
As table 2 shows, the Departments of Defense and Veterans Affairs filed
the greatest number of Forms 1099 MISC with invalid TINs each year,
while the Departments of Transportation and Education filed the least.
The Departments of Transportation and Agriculture filed the greatest
percentage of Forms 1099 MISC with invalid TINs each year, while the
Department of Health and Human Services filed the least.
Table 2: Number and Percent of Forms 1099 MISC Filed with Invalid TINs
for Tax Years 2000 and 2001:
Department: Agriculture; Number of invalid TINs 2000: 6,820; Percent of
invalid TINs 2000: 20.9; Number of invalid TINs 2001: 9,518; Percent of
invalid TINs 2001: 22.4.
Department: Commerce; Number of invalid TINs 2000: 510; Percent of
invalid TINs 2000: 6.9; Number of invalid TINs 2001: 788; Percent of
invalid TINs 2001: 10.4.
Department: Defense; Number of invalid TINs 2000: 27,246; Percent of
invalid TINs 2000: 11.1; Number of invalid TINs 2001: 26,006; Percent
of invalid TINs 2001: 10.1.
Department: Education; Number of invalid TINs 2000: 352; Percent of
invalid TINs 2000: 14.5; Number of invalid TINs 2001: 313; Percent of
invalid TINs 2001: 11.7.
Department: Energy; Number of invalid TINs 2000: 469; Percent of
invalid TINs 2000: 13.1; Number of invalid TINs 2001: 531; Percent of
invalid TINs 2001: 15.7.
Department: Health & Human Services; Number of invalid TINs 2000: 503;
Percent of invalid TINs 2000: 5.9; Number of invalid TINs 2001: 493;
Percent of invalid TINs 2001: 5.6.
Department: Housing & Urban; Development; Number of invalid TINs 2000:
3,397; Percent of invalid TINs 2000: 19.6; Number of invalid TINs 2001:
2,916; Percent of invalid TINs 2001: 18.8.
Department: Interior; Number of invalid TINs 2000: 2,986; Percent of
invalid TINs 2000: 12.8; Number of invalid TINs 2001: 3,319; Percent of
invalid TINs 2001: 12.7.
Department: Justice; Number of invalid TINs 2000: 3,949; Percent of
invalid TINs 2000: 18.6; Number of invalid TINs 2001: 4,005; Percent of
invalid TINs 2001: 17.5.
Department: Labor; Number of invalid TINs 2000: 9,086; Percent of
invalid TINs 2000: 13.7; Number of invalid TINs 2001: 9,555; Percent of
invalid TINs 2001: 14.4.
Department: State; Number of invalid TINs 2000: 1,021; Percent of
invalid TINs 2000: 16.1; Number of invalid TINs 2001: 1,053; Percent of
invalid TINs 2001: 16.4.
Department: Transportation; Number of invalid TINs 2000: 20; Percent of
invalid TINs 2000: 21.5; Number of invalid TINs 2001: 1; Percent of
invalid TINs 2001: 25.0.
Department: Treasury; Number of invalid TINs 2000: 999; Percent of
invalid TINs 2000: 17.1; Number of invalid TINs 2001: 1,132; Percent of
invalid TINs 2001: 15.1.
Department: Veterans Affairs; Number of invalid TINs 2000: 25,781;
Percent of invalid TINs 2000: 14.8; Number of invalid TINs 2001:
26,609; Percent of invalid TINs 2001: 14.3.
Department: Totals; Number of invalid TINs 2000: 83,139; Percent of
invalid TINs 2000: 13.5; Number of invalid TINs 2001: 86,239; Percent
of invalid TINs 2001: 13.2.
Source: GAO analysis of IRS's Information Returns Master file.
[End of table]
[End of section]
Appendix IV: Comments from the Internal Revenue Service:
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224:
COMMISSIONER:
November 25, 2003:
Mr. Michael Brostek:
Director, SI/Tax Issues:
United States General Accounting Office:
Washington DC 20548:
Dear Mr. Brostek:
We appreciate the opportunity to review and provide comments on the
draft report, titled "Tax Administration - More Can Be Done to Ensure
Federal Agencies File Accurate Information Returns." We value the input
of the General Accounting Office on the information return reporting
issues affecting federal agencies. As you know, we are working to
improve compliance by federal agencies. However, as noted below, we
lack the means to enforce effectively these provisions due to a lack of
compliance tools. Along with the general comments we provided your
staff, we would like to address your recommendations.
Under "Recommendations for Executive Action," you suggest that the IRS
take the following steps to ensure that federal agencies file
appropriate informational returns for payments to vendors who provide
services to the respective agency:
RECOMMENDATION: Ensure the accuracy of identification information
concerning federal payers in the IRS's Payer Master File (PMF).
We agree that the entity coding in the PMF needs to be accurate, and we
will make every effort to ensure its accuracy by performing periodic
reviews of the database. Prior to your recommendation, we were in the
process of developing an education-compliance program to address
specifically federal agencies as taxpayers. As part of this initiative,
we will contact federal agencies to identify and verify that all
Taxpayer Identification Numbers (TINs), used by each agency, have been
properly identified. This list of TINs will be used to identify federal
agencies that do not file Forms 1099-MISC, as described below.
RECOMMENDATION: Develop a program to identify periodically federal
agencies that fail to file Forms 1099-MISC and follow up to determine
why the forms were not filed.
Currently, there is an annual extract of the PMF to identify those
taxpayers who have filed incorrect Forms 1099-MISC. As mentioned in
your report, starting in August 2003, federal agencies are now notified
of any erroneous TINs and are requested to get the correct TINs for
their vendors. We will also compare the list of TINs obtained from the
federal agencies to the PMF and identify agency TINs that did not file
Forms 1099-MISC. We will then contact the federal agency to determine
if Forms 1099-MISC were required for those TINs with no reported Forms
1099-MISC filings.
RECOMMENDATION: Consider using the Department of Defense (DOD) Central
Contractor Registry (CCR) as the central depositary for all vendor
Taxpayer Identification Numbers (TIN) and require all federal agencies
to use vendor and TIN information from the CCR for Forms 1099-MISC. The
IRS and Office of Management and Budget (OMB) should annually validate
all vendor TINs on the CCR. Alternatively, OMB should require that all
federal agencies use the IRS TIN matching program to validate vendor
TINs.
We will work with the DOD to ensure that the vendor TINs on the CCR are
accurate. If the DOD agrees, we will explore expanding use of our TIN
matching program to validate all of the TINs on the CCR, and notify the
DOD when a vendor TIN is invalid. As you mentioned in your report, we
can only notify the DOD that a vendor TIN is invalid, and cannot give
them the correct TIN without violating tax disclosure laws. We will
also explore expanding the TIN matching program in connection with the
CCR to cover all vendors in the database and not just those who are
currently receiving payments.
Two additional items mentioned in your report need to be emphasized.
First, a number of federal agencies have told us that they cannot
identify all the taxpayers that should receive Forms 1099-MISC. They
are also unable to use the IRS TIN matching program because their
financial reporting systems are incompatible with the TIN matching
program. The cost and resources involved in making the agencies'
financial accounting systems compatible with the TIN matching program
could run into the tens of millions of dollars. Even though our TIN
matching program seems to be a reasonable solution to the problem of
incorrect TINs, the agencies may not wish to spend the resources
necessary to accomplish this work.
Finally, IRS Policy Statement P-2-4 provides that federal agencies are
not subject to interest and penalties if they fail to file Forms 1099-
MISC. This policy statement is based on Comptroller General's Opinion
Federal Agency Payment of Penalties and Interest on Federal Employment
Taxes, B-161,457,1978 WL 9910 that provides that federal agencies do
not have the authority to assess penalties or interest against one
another. If an agency does not wish to or is unable to comply with its
tax responsibilities, including Forms 1099-MISC reporting
responsibilities, there is nothing the IRS can do. Voluntary compliance
is the only way to get federal agencies to file Forms 1099-MISC for
vendors who provide services to the agencies.
If you need any additional information, please contact me or a member
of your staff may contact Floyd Williams, Director, Office of
Legislative Affairs, at (202) 622-3720.
Sincerely,
Signed for:
Mark W. Everson:
[End of section]
Appendix V: Comments from the Department of Defense:
UNDER SECRETARY OF DEFENSE 1 100 DEFENSE PENTAGON WASHINGTON, OC 20301-
1100:
COMPTROLLER:
Mr. Michael Brostek:
Director, Tax Issues:
U.S. General Accounting Office:
Washington, DC 20548:
Dear Mr. Brostek:
This is the Department of Defense (DoD) response to the General
Accounting Office (GAO) Draft Report (04-74), "TAX ADMINISTRATION: More
Can be Done to Ensure Federal Agencies File Accurate Information
Returns," dated November 3, 2003, (GAO:
Code 440132). Our comments are at the enclosure.
The Department appreciates the opportunity to comment on the subject
report.
Mr. Summers will be available to help resolve the issue outlined in
this report. He may be contacted by e-mail: tom.summers@osd.mil or by
telephone at (703) 697-3193.
Sincerely,
Signed by: Dov S. Zakheim:
Enclosure: As stated:
GAO DRAFT REPORT DATED NOVEMBER 7, 2003, GAO-04-74 (GAO CODE 440132):
"TAX ADMINISTRATION: MORE CAN BE DONE TO ENSURE FEDERAL AGENCIES FILE
ACCURATE INFORMATION RETURNS":
DEPARTMENT OF DEFENSE COMMENTS:
Since its operational implementation in 1998, the Central Contractor
Registration (CCR) program office has endeavored to work with the
Internal Revenue Service (IRS) to accomplish an automated validation of
the Taxpayer Identification Numbers (TINS) for vendors that register in
the database. However, the IRS has not allowed any type of validation
to be performed, as it would not accept that the CCR could act as an
authorized system to perform this function on behalf of the Department.
Additionally, the IRS has not been able to support, until very
recently, the automation necessary to accomplish these validations
without manual intervention.
The effort to validate TINS was revived as a part of the Federal eGov
Integrated Acquisition Environment (IAE) initiative, under which the
CCR program now is mandated for use throughout the federal government.
The Office of Management and Budget (OMB) and the IAE program office
were able to facilitate CCR becoming an authorized system to perform
these validations with IRS. As IRS' on-line TIN matching program now
appears robust enough to handle the automation necessary, the two
programs are working to establish a basic level of validation in the
very near term (anticipated in the second quarter of fiscal year 2004).
This will improve the accuracy of TINS not only for DoD, but all
Federal Agencies, as they now incorporate the use of CCR information
for their contract vendor payment activities. These efforts mirror the
GAO's recommendation that the IRS and the OMB consider options to
validate all vendor TINs in the CCR routinely, and for the OMB to then
require all agencies to use the CCR vendor and TIN information for
their Form 1099s.
The obligation to obtain TINs from card accepting merchants resides
with the banks that accept and process the merchants' transactions.
VISA has a relationship with these banks and the processor of the
transactions as does MasterCard. Working with these organizations, the
Defense Finance and Accounting Service (DFAS) has improved the card
program reporting process. Further, the DFAS' efforts have resulted in
a better mutual understanding of data file formats which, in turn, has
assisted the Department in helping to locate the data needed to comply
with the IRS reporting requirements. While the DFAS expects a
significant increase in both the number of Form 1099s produced and the
related dollars for the card programs, the actual impact will not be
known until the Form 1099s for calendar year 2003 are produced in
January 2004.
Enclosure:
[End of section]
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Michael Brostek, (202) 512-9119 Ralph T. Block, (415) 904-2150:
Acknowledgments:
In addition to those named above, Tom Bloom, Janet Eackloff, Evan
Gilman, Shirley Jones, Bob McKay, and James Ungvarsky made key
contributions to this report.
(440132):
FOOTNOTES
[1] The TIN is a unique nine-digit number, usually a social security
number (SSN) for an individual, an employer identification number (EIN)
assigned by IRS for a partnership or corporation, and either an SSN or
EIN if the vendor is a sole proprietor.
[2] In this report, an invalid TIN refers to a missing TIN, a TIN with
more or less than nine numeric characters, a TIN that includes an alpha
character, or a TIN/name combination that does not match or cannot be
found in IRS's records.
[3] Section 3406 of the Internal Revenue Code requires that payers
withhold and forward to IRS a predetermined percentage of certain
payments if a payee fails to provide the payer with a correct TIN; this
is known as backup withholding.
[4] The Federal Payment Levy Program, authorized by the Taxpayer Relief
Act of 1997 and conducted jointly by IRS and the Department of the
Treasury's Financial Management Service, enables IRS to levy up to 15
percent of certain federal payments to collect delinquent federal
taxes, including payments made to vendors.
[5] U.S. General Accounting Office, Tax Administration: IRS' Levy of
Federal Payments Could Generate Millions of Dollars, GAO/GGD-00-65
(Washington, D.C.: Apr. 7, 2000) and Tax Administration: Millions of
Dollars Could Be Collected If IRS Levied More Federal Payments, GAO-01-
711 (Washington D.C.: July 20, 2001).
[6] The Department of Homeland Security had not been established at the
time this review began.
[7] The Document Matching Program matches information on selected tax
issues (usually income) reported on tax returns by individual taxpayers
and reported on information returns by third parties, such as
employers, banks, and other payers of income.
[8] IRS cannot tell an agency what the correct TIN, name, or both TIN
and name should be if the records do not match, as to do so would
violate tax disclosure laws.
[9] We did not review the capabilities of individual agency and
department vendor payment systems to distinguish between goods and
services, as this was beyond the scope of our review.
[10] The Debt Collection Improvement Act of 1996 requires federal
agencies to obtain a valid TIN from federal payees, including vendors,
to facilitate federal debt collection via the Treasury Offset Program.
The Treasury Offset Program involves a centralized database of
delinquent federal nontax debts that have been referred by federal
agencies for offset against federal payments processed by the
Department of the Treasury's Financial Management Service.
[11] As indicated earlier, we did not review the capabilities of
individual agency and department vendor payment systems, as this was
beyond the scope of our review.
[12] IRS Policy Statement P-2-4 states "penalties and interest will not
be assessed against agencies or instrumentalities of the United
States."
[13] GAO-01-711.
[14] The Business Master File is an IRS database that contains tax
return filing histories for business entities.
[15] The Department of Homeland Security had not been established at
the time this review began.
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