Tax Gap
IRS Could Do More to Promote Compliance by Third Parties with Miscellaneous Income Reporting Requirements Gao ID: GAO-09-238 January 28, 2009Third party payers, often businesses, reported $6 trillion in miscellaneous income payments to IRS in tax year 2006 on Form 1099- MISC information returns. Payees are to report this income on their tax returns. Even a small share of payers failing to submit 1099-MISCs could result in billions of dollars of unreported payments. IRS data suggest that payees are more likely to report income on their tax returns if IRS receives payers' information returns. GAO was asked to examine 1099- MISC reporting including the extent to which payers fail to submit 1099-MISCs; impediments to payers to submitting1099-MISCs; and whether IRS could better use the 1099-MISCs it currently receives. GAO reviewed IRS documents and compliance data and interviewed officials from IRS, its advisory groups, and others who advise 1099-MISC payers.
The Internal Revenue Service (IRS) does not know to what extent payers fail to submit required 1099-MISCs, but various sources point to the possibility of a significant problem. For tax year 2005, 8 percent of the approximately 50 million small businesses with assets under $10 million submitted 1099-MISCs, but IRS does not know how many of the other 92 percent were required to report payments but did not. Many business payments, such as payments to corporations, are not subject to 1099-MISC reporting. If even a small share of the businesses that did not submit a 1099-MISC should have, millions of 1099- MISCs could be missing with significant amounts of unpaid taxes by payees. GAO's prior work in 2003 found significant 1099-MISC payer noncompliance by some federal agencies. IRS could mitigate costs for research on payer noncompliance by building on its existing research programs. Payers face a variety of impediments that may contribute to 1099-MISC noncompliance, including complex reporting requirements and an inconvenient submission process. For example, certain payments to unincorporated persons or businesses are subject to 1099-MISC reporting, but payments to corporations generally are not, requiring payers to determine the status of their payees. GAO in the past determined that the benefits in terms of increased tax revenue and improved taxpayer compliance justify eliminating this distinction. IRS agrees, and the Bush Administration's proposal to do so would have required legislative action. Other options to remind payers about their reporting obligations include adding a tax return checkbox asking if payers submitted required 1099-MISCs and adding a chart to help payers navigate the detailed instructions for the Form 1099-MISC. IRS matches what the payees report on their tax returns to what payers report on 1099-MISCs to detect payees underreporting income and taxes. But IRS does not pursue all mismatches its computers detect. If IRS were to increase payer compliance with 1099-MISC requirements, the number of mismatches would likely increase. However, IRS does not systematically collect information on the causes of mismatches or whether they could be prevented.
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Report to the Committee on Finance, U.S. Senate:
United States Government Accountability Office:
GAO:
January 2009:
Tax Gap:
IRS Could Do More to Promote Compliance by Third Parties with
Miscellaneous Income Reporting Requirements:
GAO-09-238:
GAO Highlights:
Highlights of GAO-09-238, a report to the Committee on Finance, U.S.
Senate.
Why GAO Did This Study:
Third party payers, often businesses, reported $6 trillion in
miscellaneous income payments to IRS in tax year 2006 on Form 1099-MISC
information returns. Payees are to report this income on their tax
returns. Even a small share of payers failing to submit 1099-MISCs
could result in billions of dollars of unreported payments. IRS data
suggest that payees are more likely to report income on their tax
returns if IRS receives payers‘ information returns.
GAO was asked to examine 1099-MISC reporting including the extent to
which payers fail to submit 1099-MISCs; impediments to payers to
submitting1099-MISCs; and whether IRS could better use the 1099-MISCs
it currently receives. GAO reviewed IRS documents and compliance data
and interviewed officials from IRS, its advisory groups, and others who
advise 1099-MISC payers.
What GAO Found:
he Internal Revenue Service (IRS) does not know to what extent payers
fail to submit required 1099-MISCs, but various sources point to the
possibility of a significant problem. For tax year 2005, 8 percent of
the approximately 50 million small businesses with assets under $10
million submitted 1099-MISCs, but IRS does not know how many of the
other 92 percent were required to report payments but did not. Many
business payments, such as payments to corporations, are not subject to
1099-MISC reporting. If even a small share of the businesses that did
not submit a 1099-MISC should have, millions of 1099-MISCs could be
missing with significant amounts of unpaid taxes by payees. GAO‘s prior
work in 2003 found significant 1099-MISC payer noncompliance by some
federal agencies.IRS could mitigate costs for research on payer
noncompliance by building on its existing research programs.
Figure: Numbers of Small Businesses Filing Tax Returns and 1099-MISCs,
Tax Years 2002 to 2005 (in thousands):
[Refer to PDF for image: vertical bar graph]
Tax year: 2002:
Small businesses filing tax returns: 44,571;
Small businesses submitting 1099-MISCs: 3,873.
Tax year: 2003:
Small businesses filing tax returns: 46,095;
Small businesses submitting 1099-MISCs: 3,966.
Tax year: 2004:
Small businesses filing tax returns: 48,501;
Small businesses submitting 1099-MISCs: 4,088.
Tax year: 2005:
Small businesses filing tax returns: 50,075;
Small businesses submitting 1099-MISCs: 4,198.
Source: GAO analysis of IRS data.
[End of figure]
Payers face a variety of impediments that may contribute to 1099-MISC
noncompliance, including complex reporting requirements and an
inconvenient submission process. For example, certain payments to
unincorporated persons or businesses are subject to 1099-MISC
reporting, but payments to corporations generally are not, requiring
payers to determine the status of their payees. GAO in the past
determined that the benefits in terms of increased tax revenue and
improved taxpayer compliance justify eliminating this distinction.
IRS agrees, and the Bush Administration‘s proposal to do so would have
required legislative action. Other options to remind payers about their
reporting obligations include adding a tax return checkbox asking if
payers submitted required 1099-MISCs and adding a chart to help payers
navigate the detailed instructions for the Form 1099-MISC.
IRS matches what the payees report on their tax returns to what payers
report on 1099-MISCs to detect payees underreporting income and taxes.
But IRS does not pursue all mismatches its computers detect. If IRS
were to increase payer compliance with 1099-MISC requirements, the
number of mismatches would likely increase. However, IRS does not
systematically collect information on the causes of mismatches or
whether they could be prevented.
What GAO Recommends:
Congress should consider requiring payers to report payments to
corporations on the Form 1099-MISC. GAO also makes eight
recommendations to IRS, including researching the extent of and reasons
for payer noncompliance; identifying common reporting errors; and
providing more guidance about 1099-MISC requirements. IRS agreed with
six of GAO‘s recommendations but disagreed with evaluating the checkbox
option and adding a chart to the 1099-MISC instructions. GAO maintains
its support for all recommendations.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/products/GAO-09-238]. For more
information, contact James R. White at (202) 512-9110 or
whitej@gao.gov.
[End of figure]
Contents:
Letter:
Results in Brief:
Background:
IRS Has Little Information about 1099-MISC Reporting Compliance, but
Available Evidence Points to the Possibility of a Significant Problem:
IRS Efforts to Detect Payers That Fail to Submit 1099-MISC Forms Are
Uneven:
Payers Face Impediments in Preparing and Submitting 1099-MISCs, and
Some Options Could Help Promote Voluntary Reporting Compliance by
Payers:
IRS Aims to Improve AUR Efficiency but Lacks a Systematic Process for
Learning about the Causes of Mismatches:
Conclusions:
Matter for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Internal Revenue Service:
Appendix III: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Impediments to 1099-MISC Payer Reporting Compliance and
Options for Increasing Voluntary 1099-MISC Compliance:
Table 2: 1099-MISC-Related Cases Represent a Significant Share of the
Cases Selected for AUR Review and Taxes Assessed, Tax Year 2004:
Figures:
Figure 1: Form 1099-MISC, 2007:
Figure 2: Numbers of 1099-MISC Payments by Type and Total Amounts
Reported by Payers to IRS, Tax Year 2006:
Figure 3: Paper and Electronic Submissions by Payer Categories, Tax
Year 2006:
Figure 4: Matching 1099-MISC Reportable Nonemployee Compensation
Information with Individual Tax Returns:
Figure 5: Aggregate Comparison of the Number of Small Businesses Filing
Tax Returns and Number of Small Businesses Submitting 1099-MISCs, Tax
Years 2002 to 2005:
Figure 6: California State Tax Forms for Corporations and S
Corporations, Tax Year 2007:
Abbreviations:
AUR: Automated Underreporter Program:
EIN: employer identification number:
ETAAC: Electronic Tax Administration Advisory Committee:
FIRE: Filing Information Returns Electronically:
IRPAC: Information Reporting Program Advisory Committee:
IRS: Internal Revenue Service:
IRSAC: Internal Revenue Service Advisory Council:
LMSB: Large and Mid-Size Business Division:
NRP: National Research Program:
PMF: Payer Master File:
SB/SE: Small Business and Self-Employed Division:
SOI: Statistics of Income:
SCRIPS: Service Center Recognition Image Processing System:
SSN: Social Security Number:
TE/GE: Tax Exempt and Government Entities Division:
TIGTA: Treasury Inspector General for Tax Administration:
TIN: taxpayer identification number:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
January 28, 2009:
The Honorable Max Baucus:
Chairman:
The Honorable Charles Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
For tax year 2006, third parties submitted more than 82 million
miscellaneous income information forms (Form 1099-MISC) to the Internal
Revenue Service (IRS) reporting more than $6 trillion in payments.
Third party payers are businesses, governmental units, and other
organizations that make payments to other businesses or individuals.
Payers must submit payment information on 1099-MISCs to IRS when they
make a variety of payments labeled miscellaneous income.[Footnote 1]
Payees, or those being compensated, are required to report the payments
on their income tax returns. By matching 1099-MISCs received from
payers with what payees report on their tax returns, IRS can detect
underreporting of income including failure to file a tax return.
Payer noncompliance with 1099-MISC reporting requirements undercuts
IRS's ability to detect underreporting of income by payees and, as a
consequence, contributes to the tax gap. This contribution may be
large.[Footnote 2] IRS has long recognized that if payments made to
businesses are not reported on 1099-MISCs, it is less likely that they
will be reported on payee tax returns. Based on IRS's most recent tax
gap estimates, we reported that for tax year 2001 sole proprietors
(individual owners of unincorporated businesses) understated their
taxes by an estimated $68 billion because of underreporting their net
income.[Footnote 3] An unknown proportion of this income could have
been reported to IRS on 1099-MISCs but was not.
Other limited evidence also shows payer noncompliance with 1099-MISC
reporting requirements. In 2003, we reported that some federal agencies
failed to submit required 1099-MISCs covering billions of dollars of
payments.[Footnote 4] A 2007 report by the Treasury Inspector General
for Tax Administration (TIGTA) suggests that some state and local
governments may also not be submitting required 1099-MISCs.[Footnote 5]
Because of your concern about the tax gap, you asked us to study 1099-
MISC reporting and whether IRS can make more use of 1099-MISC
information that it already receives. Specifically, our objectives were
to determine (1) what IRS knows about 1099-MISC reporting noncompliance
by payers; (2) how IRS detects and pursues 1099-MISC reporting
noncompliance by payers; (3) what impediments payers encounter in
preparing and submitting accurate 1099-MISC forms, and what options
could help IRS address these issues; and (4) what opportunities exist
to enhance IRS's use of 1099-MISC information to detect payee
noncompliance and promote voluntary taxpayer compliance.
To address these objectives, we reviewed IRS data, IRS documents,
including advisory group reports; past GAO and TIGTA reports on 1099-
MISC reporting compliance; IRS's procedures for checking compliance;
and plans and proposals to expand 1099-MISC reporting. We also
interviewed IRS officials and members of IRS advisory groups, tax
professionals, and tax software and information return filing vendors
to identify impediments facing payers in preparing and submitting 1099-
MISCs. We interviewed IRS officials on the operations of the Automated
Underreporter Program (AUR) which matches the payee's tax return
against 1099-MISCs submitted by payers so that IRS can detect taxpayer
underreporting; we reviewed AUR program data for tax year 2004 (the
last full year available). We also analyzed data from the IRS's Payer
Master File (PMF) and information reporting program data about 1099-
MISCs submitted for tax year 2006. To obtain perspective on the
potential magnitude of payer noncompliance, we compared the aggregate
numbers of small businesses filing tax returns with the numbers
submitting 1099-MISCs for tax years 2002 to 2005.[Footnote 6] Using
IRS's Statistics of Income data for tax year 2006, we estimated the
1099-MISC submission rate for a sample of Schedule C small businesses.
We assessed the IRS data and found they were sufficiently reliable for
the purposes of this report. We conducted this performance audit from
June 2007 through January 2009 in accordance with generally accepted
government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide
a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.
(See appendix I for more information on our scope and methodology.)
Results in Brief:
IRS does not know the magnitude of 1099-MISC payer noncompliance or the
characteristics of payers that fail to comply with the reporting
requirements. Without an estimate of payer noncompliance, IRS has no
way of determining to what extent 1099-MISC payer noncompliance creates
a window of opportunity for payees to underreport their business income
and go undetected by IRS. Available evidence points to the possibility
of a significant problem with 1099-MISC payer noncompliance. Among
small businesses (sole proprietors, and partnerships and corporations
with assets under $10 million), 8 percent of those filing tax returns
also submitted 1099-MISCs for tax year 2005. For Schedule C small
businesses that reported $600 or more in contract labor expenses in
2006, we estimated that about 29 percent submitted 1099-MISCs, but we
could not determine whether the other 71 percent were noncompliant
given current reporting exemptions. The relatively small percentages
submitting 1099-MISCs do not indicate that payers are not complying
with 1099-MISCs reporting requirements, given the many exceptions that
exempt payers from having to submit 1099-MISCs. However, IRS does not
know how much of it may be because of payer noncompliance. Research
about the extent of payer noncompliance could help IRS target outreach
to payer groups and develop strategies to increase 1099-MISC reporting
compliance. To mitigate costs, IRS could build on its existing research
tools to study whether small businesses submitted their 1099-MISCs as
required or identify reporting patterns using its payer history data.
IRS does not have an agencywide approach for detecting 1099-MISC payer
noncompliance. For federal, state, and local government payers,
examiners scrutinize information reporting compliance and identified
over 30,000 missing 1099-MISCs totaling over $522 million in payments
for tax years 2005 through 2007. In response to our recommendation in
2003, IRS developed an automated "stop filer" program to notify federal
agencies that submitted 1099-MISC one year but not the next. At this
time, IRS does not generate notices for state and local entities that
stop submitting 1099-MISCs and is working to update its payer history
files for state and local governments. For business payers, examiners
focus on income and employment tax liabilities that are likely to
produce larger tax assessments than the penalties they would apply for
missing 1099-MISCs. Further, examinations are costly and cover
relatively few businesses each year, and thus would not be cost-
effective as the sole means to address 1099-MISC reporting compliance.
Yet, IRS does not have a systematic program in place to identify payers
with gaps in their 1099-MISC reporting history or those that never
submit the 1099-MISC forms. For example, IRS does not have any program
for businesses similar to its federal stop filer program. Options for
testing how to design a cost-effective stop filer notice program for
businesses could include first checking to see whether a business filed
a tax return before inquiring about 1099-MISCs or targeting notices to
businesses reporting large contract labor expenses.
According to IRS, advisory group members, and others we interviewed,
payers are confronted with a variety of impediments to preparing and
submitting 1099-MISC forms, and some options could help promote
voluntary reporting compliance by payers. Some payers that do not
submit their 1099-MISCs as required may be unaware of their 1099-MISC
reporting responsibilities. Other payers may be confused about whether
payments are reportable because of different dollar reporting
thresholds and the general exemption for payments to corporations. For
the large number of payers each submitting a few 1099-MISCs, IRS does
not offer a fillable form on its Web site and requires payers to submit
scannable red ink forms, but some payers submit black and white 1099-
MISCs anyway. Addressing payers' concerns and making it easier to
comply with 1099-MISC requirements could promote voluntary information
reporting compliance. IRS could consider options, including those
requiring legislative action, that it determines as cost efficient and
would not impose undue burdens on payers or the agency itself. One
option is removing the general exemption on reporting payments made to
corporations, which would lessen the burden for payers of having to
determine the payee business type and also provide information to help
IRS detect underreported miscellaneous income. Since 1991, we have
reported that the benefits would exceed the cost for this approach.
According to the Department of the Treasury's estimate, the Bush
Administration's fiscal year 2009 proposal for reporting payments to
corporations would generate about $8.2 billion from 2009 through 2018,
in part because of increased voluntary compliance. Other options
involve adding a checkbox on tax returns attesting to the submission of
1099-MISCs as required and adding a chart to business tax instructions
to help payers distinguish reportable from non-reportable payments,
both of which could serve as reminders of 1099-MISC reporting
responsibilities.
For tax year 2004 (the last full year available), the AUR program
assessed $972 million in additional taxes for payee underreporting
detected using 1099-MISC information. The AUR program currently has a
narrow reach and pursues less than half of 1099-MISC-related cases in
the AUR inventory. To improve efficiency of the AUR program, IRS is
rolling out a new "soft notice" contacting additional taxpayers in the
AUR inventory and asking them to amend their returns to fix the
underreporting. Soft notices may be a cost-effective way for IRS to
expand its enforcement presence using 1099-MISC information, but it is
too early to assess this new approach. Another way to free up AUR
resources to work more cases is to reduce the number of unproductive
cases that do not yield any additional tax revenue. In 2004, more than
one-third of 1099-MISC cases selected for AUR review were manually
screened out before taxpayer contact, and nearly one-quarter of those
with taxpayer contact resulted in no tax change. Currently, IRS does
not systematically collect information on the causes of unproductive
AUR cases and had not conducted analyses to identify common 1099-MISC
reporting errors. Such information could help IRS both to refine its
AUR case selection and to target outreach helping payers and payees
report 1099-MISC payments correctly.
We are suggesting that Congress consider amending the Internal Revenue
Code to require third-party payers submit 1099-MISCs for service
payments to corporations to reduce payers' burden to determine which
payments require reporting. We are making several recommendations to
IRS to help it identify the magnitude and characteristics of payers
that do not comply with 1099-MISC reporting requirements and, using
such research, to better detect and pursue payers failing to submit
1099-MISCs. Also, we are recommending ways that IRS can improve payer
compliance with 1099-MISC reporting requirements, such as providing
payers with a chart to identify reportable payments and exploring a new
checkbox on business tax returns for payers to attest whether they
submitted their 1099-MISC as required. We also recommend that IRS
collect AUR case data on recurring reporting errors as a way to improve
guidance and outreach to help payers and payees more accurately report
1099-MISC payments.
In written comments on a draft of this report, IRS's Deputy
Commissioner for Services and Enforcement agreed with six of our eight
recommendations. However, IRS disagreed with our recommendation to
assess whether adding a checkbox to business tax returns would increase
1099-MISC reporting compliance. IRS stated that a similar question was
removed from the corporate tax return after the Paperwork Reduction Act
of 1980 was enacted. We believe that the results from the evaluation we
recommend could be useful to IRS in revisiting its 1981 assessment and
weighing the benefits and burdens associated with the checkbox option.
IRS also disagreed with our recommendation to include a chart in the
1099-MISC instructions and business income tax instructions. IRS stated
that the Form 1099-MISC instructions already list which payments are
reportable and explain the rules for specific payment types. We believe
that a chart would provide taxpayers with a quick guide for navigating
the eight pages of detailed instructions for the Form 1099-MISC. For
this reason, we continue to recommend adding a chart to the 1099-MISC
instructions and business tax instructions. IRS also provided technical
comments that we incorporated as appropriate.
Background:
Payers are required to submit 1099-MISCs for a variety of payments made
in the course of a trade or business. For 1099-MISC reporting, a trade
or business generally includes businesses, non-profit organizations,
and federal, state, and local government agencies.
The types of payments reportable on a 1099-MISC and their reporting
thresholds vary widely. These include payments to nonemployees for
services of at least $600 (called nonemployee compensation), royalty
payments of $10 or more, and medical and health care payments made to
physicians or other suppliers (including payments by insurers) of $600
or more.[Footnote 7] Personal payments, such as a payment by a
homeowner to a contractor to paint his/her personal residence, are not
reportable on a 1099-MISC. Other payments that are not reportable on a
1099-MISC generally include payments to a corporation, payments for
merchandise, and wages paid to employees. Wages paid to employees must
be reported on a form W-2. There are many other types of payments that
must be reported and numerous exceptions to these general rules. IRS
provides eight pages of instructions detailing what payments to whom
are reportable on the 1099-MISC.[Footnote 8] The form--shown in figure
1--consists of 14 boxes for reporting the various types of
miscellaneous payments.[Footnote 9]
Figure 1: Form 1099-MISC, 2007:
[Refer to PDF for image]
Source: IRS.
[End of figure]
The Bush Administration's fiscal years 2008 and 2009 budgets proposed
legislative action further expanding 1099-MISC reporting to include
service payments of $600 or more to corporations by all third-party
payers. According to the Department of the Treasury's estimate, the
Bush Administration's fiscal year 2009 budget proposal would generate
about $8.2 billion over the 10-year budget period from 2009 through
2018, in part because of increased voluntary compliance and IRS's
ability to detect underreported payments received by businesses.
For tax year 2006, more than 5 million payers submitted more than 82
million 1099-MISCs to IRS, reporting over $6 trillion in payments.
Nonemployee compensation payments totaled about $2.3 trillion and
accounted for about 55 percent of all 1099-MISCs submitted.[Footnote
10] Medical and health payments totaled about $1.2 trillion and
accounted for about 25 percent of all 1099-MISCs submitted. Each of the
remaining payment types accounted for less than 10 percent of the
number of 1099-MISCs submitted. Figure 2 shows the distribution of 1099-
MISC payments types and amounts reported for tax year 2006.
Figure 2: Numbers of 1099-MISC Payments by Type and Total Amounts
Reported by Payers to IRS, Tax Year 2006:
[Refer to PDF for image: combined horizontal bar graph]
Payment type: Non-employee compensation[A];
Number of 1099-MISC payments (in thousands): 45,735;
Total amount reported to IRS (in billions): $2,329.
Payment type: Medical payments[A];
Number of 1099-MISC payments (in thousands): 20,193;
Total amount reported to IRS (in billions): $1,186.
Payment type: Rents;
Number of 1099-MISC payments (in thousands): 5,955;
Total amount reported to IRS (in billions): $230.
Payment type: Other income;
Number of 1099-MISC payments (in thousands): 5,933;
Total amount reported to IRS (in billions): $254.
Payment type: Royalties;
Number of 1099-MISC payments (in thousands): 4,509;
Total amount reported to IRS (in billions): $42.
Payment type: Gross attorney fees;
Number of 1099-MISC payments (in thousands): 1,493;
Total amount reported to IRS (in billions): $878.
Payment type: Federal withholding;
Number of 1099-MISC payments (in thousands): 303;
Total amount reported to IRS (in billions): $1.
Payment type: Substitute payment;
Number of 1099-MISC payments (in thousands): 246;
Total amount reported to IRS (in billions): $42.
Payment type: Crop insurance;
Number of 1099-MISC payments (in thousands): 215;
Total amount reported to IRS (in billions): $43.
Payment type: Fishing proceeds;
Number of 1099-MISC payments (in thousands): 79;
Total amount reported to IRS (in billions): $8.
Payment type: Section 409A deferral[B];
Number of 1099-MISC payments (in thousands): 67;
Total amount reported to IRS (in billions): $762.
Payment type: Section 409A income[B];
Number of 1099-MISC payments (in thousands): 15;
Total amount reported to IRS (in billions): $199.
Payment type: Excess golden parachute;
Number of 1099-MISC payments (in thousands): 3.
Total amount reported to IRS (in billions): $38.
Source: IRS.
Note: Data are from IRS's Information Returns Master File. The numbers
of 1099-MISC payments reported do not total to the number of 1099-MISCs
submitted by payers because a single 1099-MISC may report more than one
payment.
[A] Nonemployee compensation and medical payments include payments to
corporations.
[B] Section 409A refers to the section in the Internal Revenue Code
specifying the tax treatment for nonqualified deferred compensation
plans. Qualified deferred compensation plans like pensions, retirement
plans, and stock options are taxed at the time the individual actually
receives the income. The amount reported as Section 409A income is also
reported as nonemployee compensation.
[End of figure]
In addition to the 8 pages of instructions for 1099-MISC reporting, IRS
also has 19 pages of general instructions for third-party information
reporting, detailing how and when payers are to submit 1099-MISCs to
payees and IRS.[Footnote 11] Payers must provide 1099-MISC statements
to payees by the end of January. Payers submitting fewer than 250 1099-
MISCs may submit paper forms, which are due to IRS by the end of
February, along with a Form 1096, Annual Summary and Transmittal of
U.S. Information Returns. Payers submitting paper 1099-MISC are
required to use IRS's official forms or substitute forms with special
red ink readable by IRS's scanning equipment.[Footnote 12] Photocopies
and copies of the 1099-MISC form downloaded from the internet or
generated from software packages in black ink do not conform to IRS
processing specifications.
Payers submitting 250 or more 1099-MISCs are required to submit the
forms magnetically or electronically.[Footnote 13] Electronic
submissions due at the end of March can be submitted through IRS's
Filing Information Returns Electronically (FIRE) system. As shown in
figure 3, most 1099-MISCs for tax year 2006 were submitted
electronically.[Footnote 14] However, most payers submit small numbers
of 1099-MISCs, and most payers submitted paper 1099-MISCs.
Figure 3: Paper and Electronic Submissions by Payer Categories, Tax
Year 2006:
[Refer to PDF for image: combined horizontal bar graph]
1099-MISC forms submitted by each payer: 1 to 4;
Number of payers, paper (in thousands): 2,893;
Number of payers, electronic (in thousands): 389;
Total forms submitted, paper (in thousands): 5,653.
Total forms submitted, electronic (in thousands): 558.
1099-MISC forms submitted by each payer: 5 to 9;
Number of payers, paper (in thousands): 845;
Number of payers, electronic (in thousands): 82;
Total forms submitted, paper (in thousands): 5,522.
Total forms submitted, electronic (in thousands): 540.
1099-MISC forms submitted by each payer: 10 to 49;
Number of payers, paper (in thousands): 694;
Number of payers, electronic (in thousands): 76;
Total forms submitted, paper (in thousands): 12,954.
Total forms submitted, electronic (in thousands): 1,491.
1099-MISC forms submitted by each payer: 50 to 249;
Number of payers, paper (in thousands): 80;
Number of payers, electronic (in thousands): 23;
Total forms submitted, paper (in thousands): 7,338.
Total forms submitted, electronic (in thousands): 2,712.
1099-MISC forms submitted by each payer: 250 or more;
Number of payers, paper (in thousands): 2;
Number of payers, electronic (in thousands): 20;
Total forms submitted, paper (in thousands): 712.
Total forms submitted, electronic (in thousands): 41,625.
Source: IRS.
Note: Payers could submit in more than one media. Numbers have been
rounded and may not total correctly. The threshold mandated for
electronic submissions is 250 forms.
[End of figure]
IRS's four business operating divisions are generally responsible for
ensuring payers comply with their 1099-MISC reporting requirements. The
Wage & Investment Division, Tax Exempt and Government Entities Division
(TE/GE), Large and Mid-Size Business Division (LMSB), and Small
Business and Self-Employed Division (SB/SE), as a part of their duties,
conduct examinations of tax returns and documents to verify compliance
with tax laws. Examinations can include checking payer compliance with
1099-MISC reporting requirements.[Footnote 15]
IRS can penalize payers for failing to submit or submitting an
inaccurate 1099-MISC.[Footnote 16] The penalty is generally $50 per
information return, increasing to $100 each for intentional payer
noncompliance of 1099-MISC requirements.[Footnote 17] To encourage
voluntary reporting compliance, the penalty is $15 (up to a maximum of
$75,000 per calendar year or $25,000 for small businesses) if the 1099-
MISC is submitted within 30 days of the due date; $30 (up to a $150,000
maximum per calendar year or $50,000 for small businesses) if submitted
after 30 days but by August 1, and $50 (up to a maximum of $250,000 per
calendar year or $100,000 for small businesses) if submitted after
August 1 or not at all. IRS will waive the penalty if the payer can
show "reasonable cause" or if the error or omission does not prevent or
hinder the IRS from processing the 1099-MISC.[Footnote 18] In IRS's
fiscal year 2009 budget proposal, the Bush Administration proposed
increasing the $50 and $100 penalties to $100 and $250 respectively for
each information return.[Footnote 19] In 2007, we suggested that
Congress consider requiring IRS to periodically adjust penalties for
inflation, and round appropriately, the fixed dollar amounts of civil
tax penalties to account for the decrease in real value over time and
so that penalties for the same infraction are consistent over time.
[Footnote 20]
Payees are responsible for reporting payments they received from payers
on the appropriate lines of their tax returns.[Footnote 21] Payees are
also responsible for paying self-employment taxes if they received
nonemployee compensation. For example, a sole proprietor receiving a
1099-MISC for nonemployee compensation is to report the payments on
Schedule C of the 1040 tax return and file Schedule SE to pay the
associated self-employment taxes. Sole proprietor payees are supposed
to report 1099-MISC payments as gross receipts and separately report
their expenses rather than reporting only net amounts.
Figure 4 shows the automated process IRS uses to detect mismatches
between nonemployee compensation and other payments reported on 1099-
MISCs and payees' income tax returns. The Nonfiler program handles
cases where no income tax return was filed by a 1099-MISC payee. The
Automated Underreporter (AUR) program handles cases where a payee filed
a tax return but underreported 1099-MISC payments. AUR's case inventory
includes payee mismatches over a certain threshold, and IRS has a
methodology using historical data to select cases for review. AUR
reviewers manually screen the selected cases to determine whether the
discrepancy can be resolved without taxpayer contact. For the remaining
cases selected, IRS sends notices asking the payee to explain
discrepancies or pay any additional taxes assessed.
Figure 4: Matching 1099-MISC Reportable Nonemployee Compensation
Information with Individual Tax Returns:
[Refer to PDF for image: illustration]
Central Coast Kite Shop:
Payer pays $600 to payee for services;
Payer submits 1099-MISC to IRS;
Payer sends 1099-MISC copy to payee;
Payee reports income including 1099-MISC payments on applicable tax
forms:
* Form 1040;
* 1040 Schedule SE;
* 1040 Schedule C;
* 1040 Schedule E;
* 1040 Schedule F;
Payee files forms to IRS;
IRS compares information across forms:
* If income discrepancy is detected:
- AUR program;
- IRS send notice to taxpayer;
* If payers 1099-MISC is present, but no tax return was filed by payee:
- non-filer program;
- IRS send notice to taxpayer.
Source: GAO analysis of IRS information.
[End of figure]
According to IRS, third-party information reporting increases voluntary
tax compliance in part because taxpayers know that IRS is aware of
their income. For wages and salaries subject to tax withholding and
substantial third-party information reporting, the percentage of income
that taxpayers misreport has consistently been measured at around 1
percent. In contrast, for non-farm sole proprietor income subject to
little or no third-party reporting, taxpayers misreported more than
half of such income in 2001, according to IRS's most recent tax gap
estimates.
IRS Has Little Information about 1099-MISC Reporting Compliance, but
Available Evidence Points to the Possibility of a Significant Problem:
IRS does not have an estimate of 1099-MISC reporting compliance or know
the characteristics of those payers that fail to comply with the
reporting requirements. Without an estimate of payers' 1099-MISC
noncompliance, IRS does not know to what extent such noncompliance
allows payees to underreport their income without being detected. If a
large number of payers fail to submit required 1099-MISCs, then the
resulting decrease in payee tax compliance and lost revenue could be
large. According to IRS, it is a common misconception among payees that
they are not required to report payments if they have not received a
1099-MISC from payers.[Footnote 22]
IRS has invested significant resources in measuring compliance with
other aspects of the tax laws. For example, the National Research
Program (NRP) estimated the compliance rate for individual taxpayers
for tax year 2001 based on an intensive review of a sample of 46,000
tax returns. IRS is in the process of completing a new study of the
rate of tax compliance by individual taxpayers for tax years 2006 and
2007, and is conducting a similar study of S-corporations.[Footnote 23]
IRS uses such research to understand where compliance problems are
greatest and to understand the sources of noncompliance. Armed with
such understanding, IRS can make better decisions about where and how
to deploy its resources to address noncompliance.
Although IRS Does Not Know the Extent of 1099-MISC Payer Noncompliance,
Available Evidence Points to the Possibility of a Significant Problem:
Our analysis of 1099-MISC submission patterns by small businesses as
well as past studies of federal, state and local government agencies
suggests that payer noncompliance with 1099-MISC reporting requirements
may be potentially significant. Our analysis of IRS's PMF data for tax
year 2005 (the last complete year available) showed that, in aggregate,
8 percent of small businesses (sole proprietorships, and corporations
and partnerships with assets under $10 million) submitted a 1099-
MISC.[Footnote 24] As shown in figure 5, over 4 million small
businesses submitted 1099-MISCs in tax year 2005, and in comparison, 50
million small businesses filed income tax returns with IRS that same
year. Results were similar for the three previous years.
Figure 5: Aggregate Comparison of the Number of Small Businesses Filing
Tax Returns and Number of Small Businesses Submitting 1099-MISCs, Tax
Years 2002 to 2005 (in thousands):
[Refer to PDF for image: vertical bar graph]
Tax year: 2002:
Small businesses filing tax returns: 44,571;
Small businesses submitting 1099-MISCs: 3,873.
Tax year: 2003:
Small businesses filing tax returns: 46,095;
Small businesses submitting 1099-MISCs: 3,966.
Tax year: 2004:
Small businesses filing tax returns: 48,501;
Small businesses submitting 1099-MISCs: 4,088.
Tax year: 2005:
Small businesses filing tax returns: 50,075;
Small businesses submitting 1099-MISCs: 4,198.
Source: GAO analysis of IRS data.
Note: IRS defines small businesses, including sole proprietorships,
partnerships, and corporations, as entities with assets under $10
million. The number of small business entities filing a tax return with
IRS came from IRS's Business Master File and Individual Master File;
the number of small businesses submitting 1099-MISCs came from IRS's
Payer Master File.
[End of figure]
The fact that a relatively low percentage of small businesses submitted
a 1099-MISC does not indicate on its own that there is a significant
payer noncompliance problem.[Footnote 25] The many exceptions to the
general rules for submitting 1099-MISCs along with the payment
thresholds mean that many small businesses may not be required to
submit a 1099-MISC. However, if even a small proportion of the almost
46 million small businesses that did not submit 1099-MISCs in 2005
improperly failed to report as required, there could be millions of
missing 1099-MISC information reports. As a consequence, payees could
have less incentive to voluntarily report that 1099-MISC income on
their own tax returns if they did not receive a 1099-MISC from the
payer, and IRS would be unable to detect payee underreporting through
document matching. Yet, IRS has no idea of the magnitude of payer
noncompliance and thus the amount of missing 1099-MISCs, as discussed
above.
As a proxy for a possible 1099-MISC reporting requirement, we examined
the 1099-MISC submission rate for Schedule C small businesses that
reported amounts of $600 or more in contract labor expenses.[Footnote
26] Based on IRS's Statistics of Income (SOI) data for tax year 2006,
about 29 percent of Schedule C filers reporting contract labor expenses
of $600 or more submitted 1099-MISCs.[Footnote 27] Again, we could not
determine whether the other 71 percent of Schedule C filers reporting
contact labor expenses over the 1099-MISC reporting threshold were
noncompliant. Some payers may have amounts under the reporting
threshold to multiple payees, and other payers may have paid corporate
payees currently exempt from 1099-MISC reporting. However, some payers
may have failed to submit 1099-MISCs as required, and IRS does not have
data to estimate how often this occurs.
Our 2003 assessment of federal agency compliance with 1099-MISC
reporting requirements did find significant payer noncompliance.
[Footnote 28] While most federal agencies in the 14 departments we
studied submitted information returns as required for calendar years
2000 and 2001, there were some significant exceptions. Three federal
departments--Agriculture, Commerce and Justice-- collectively made $5
billion in payments to 152,000 payees in 2000 and 2001 but did not
report the payments to IRS on Form 1099-MISCs. In turn, about 8,800 of
the payees who collectively received payments totaling about $421
million dollars--an average of about $48,000 each--did not file income
tax returns for those 2 years.[Footnote 29]
In June 2007, TIGTA reported that trends in 1099-MISC reporting by
state and local governments demonstrated potential payer noncompliance
for tax years 2003 through 2005. For example, while TIGTA found that
over half of the 81,000 state and local government entities submitted
1099-MISC forms for each of the 3 years, 30 percent did not submit any
1099-MISC forms over the period.[Footnote 30] As of December 2008, IRS
had research planned for fiscal year 2009 to determine whether state
and local governments that did not submit any 1099-MISCs for tax years
2003 through 2005 were noncompliant and reasons why they did not
report.
Research about Payers' Noncompliance with 1099-MISC Reporting
Requirements Could Help IRS Target Efforts to Increase Payer Voluntary
Reporting Compliance:
Research about the extent and causes of payer noncompliance could help
IRS develop more effective strategies to increase 1099-MISC
submissions. Such research would involve costs, but there are options
for mitigating the costs. IRS might be able to build on current
research efforts, such as the NRP, or use existing data from the Payer
Master File.
Because NRP is already collecting detailed information about small
business compliance with the rules for reporting receipts and expenses,
the design of the NRP could be tailored at a relatively low cost to
assess the extent to which these small businesses submitted 1099-MISCs
as required.
In the 2006 and 2007 NRP, IRS is studying whether payers that submitted
1099-MISCs correctly classified the payees as nonemployees. By
misclassifying employees as nonemployees, employers could avoid
withholding taxes as well as paying employment taxes. The 2006 NRP used
a supplemental questionnaire to collect information on 1099-MISC payer
reporting for use in assessing misclassification issues. The 2007 NRP
procedures will direct NRP examiners to more systematically capture
data about whether small business payers in the NRP sample were
required to submit information returns--including 1099-MISCs--but did
not. At this time, IRS has not studied the extent to which payers
failed to submit 1099-MISCs, but the future NRP results could be useful
for this purpose.[Footnote 31]
Another option IRS could explore at a relatively low cost is using PMF
data to identify businesses that stop reporting or never report 1099-
MISCs. The PMF data set was used by TIGTA and us in detecting whether
federal, state, and local governments reported 1099-MISCs. In turn, IRS
used PMF data to select a sample of state and local governments that
did not submit any 1099-MISCs for a compliance research project planned
for fiscal year 2009. To explore small business payer noncompliance,
IRS could use the PMF data to identify those businesses that submitted
1099-MISCs in past years but stopped reporting. IRS also could compare
the PMF population to its master file to identify small businesses that
never submitted 1099-MISCs, and subsequently conduct research to audit
a sample of the population to determine whether those not submitting
1099-MISCs should have. From this type of research, IRS could decide
how to target particular segments of the payer population (e.g.,
Schedule C filers that report contract labor expenses over $600 or more
but do not submit 1099-MISCs) for more education and outreach in order
to reduce payer noncompliance.
Benefits of 1099-MISC payer compliance research could be significant.
For perspective, payers reported $6 trillion in 1099-MISC payments for
tax year 2006, so a one percent increase in reported payments could
result in an additional $60 billion reported to payees and IRS.
IRS Efforts to Detect Payers That Fail to Submit 1099-MISC Forms Are
Uneven:
Within IRS, TE/GE is active in detecting and pursuing 1099-MISC payer
noncompliance among federal, state, and local agencies in part so that
government contractors and vendors cannot evade their tax liabilities.
[Footnote 32] A TE/GE official said that the division's focus is on
employer quarterly returns that governmental entities file, as opposed
to annual income tax returns that the other business divisions examine.
According to IRS officials, as a part of this resource-intensive focus
on quarterly returns, TE/GE examiners also scrutinize information
returns, including 1099-MISCs, that governmental entities file. To
illustrate the impact that TE/GE's efforts had on detecting
noncompliance among government payers, IRS audit specialists identified
and secured over 30,000 additional 1099-MISCs totaling over $522
million in payments that governmental entities made to payees for tax
years 2005 through 2007.
According to IRS officials, TE/GE implemented a "stop filer" program in
response to our 2003 recommendation that IRS develop a mechanism for
identifying and tracking federal agencies that fail to submit Form 1099-
MISCs.[Footnote 33] This automated stop filer notice program, which is
a minimal cost approach compared to other enforcement options for
detecting possible payer noncompliance, was developed for federal
agencies that submitted 1099-MISCs one year but not the next. Using PMF
data, TE/GE issues IRS form 3939 to a federal agency that stops
submitting 1099-MISCs, asking the agency to provide an explanation. TE/
GE officials said they sent over 1,100 stop filer notices for tax year
2006 to federal entities in August 2008. The officials also said the
federal agencies' responses to these notices are useful to TE/GE in
selecting federal agencies for voluntary compliance checks or
examinations. Servicewide, IRS also uses PMF data to identify payers
that submit 1099-MISCs late or with missing tax identification numbers
(TINs). However, IRS does not systematically use the database to
identify payers with gaps in 1099-MISC reporting history or those that
never submit the 1099-MISC forms.
At the time of our review, TE/GE officials stated that numerous
discrepancies exist in the PMF with the coding for state and local
governments, and the division is working to correct them. For fiscal
year 2009, TE/GE plans a 1099-MISC compliance check for a random sample
of 200 state and local governments that did not submit 1099-MISCs for
tax years 2003 through 2005.[Footnote 34] Once they have completed this
activity, they will determine whether sending notices to state and
local governmental agencies to check for payer noncompliance with 1099-
MISC reporting requirements is an option they should pursue.
Another low cost approach that TE/GE officials used is to compile a
listing of common 1099-MISC payer compliance problems drawn from
information obtained through examinations and compliance checks. For
example, government payers sometimes fail to report all payments, or
submit 1099-MISCs late or with missing payee information. According to
TE/GE officials we interviewed, their list of common 1099-MISC
reporting errors is used both to educate examiners on what to look for
during examinations and reach out to government agencies to help them
better comply.
For business taxpayers, IRS policy instructs SB/SE and LMSB examiners
to determine whether all information returns, including 1099-MISCs, are
submitted as required and consider internal controls for information
return reporting. LMSB examiners are to conduct risk analyses of tax
returns to identify potential noncompliance issues as part of the audit
planning process. As a result of the risk analysis and in contrast with
SB/SE practices, LMSB examiners can waive the compliance checks for
LMSB taxpayers to ensure efficient and effective use of resources.
Where an examination identifies that a business failed to comply with
its requirement to submit information returns, including Form 1099-
MISC, the examiner is to secure the missing information returns. IRS
could not provide data on how many business examinations detected
payers that failed to submit 1099-MISCs or how many missing 1099-MISCs
have been secured by LMSB and SB/SE examiners. While examinations
primarily focus on income and employment tax liabilities for business
payers, the examiner also is to consider whether to pursue information
return penalties depending on the facts and circumstances of the case.
Improved voluntary compliance by the payer and its payees may justify
the expenditure of time required to track down the missing 1099-MISCs
and assess the penalties. However, the maximum penalty is $50 for
unintentional payer noncompliance and $100 for intentional
noncompliance for each additional 1099-MISC collected.[Footnote 35] IRS
has proposed increasing information return penalties to $100 and $250,
respectively.
Further, examinations have limitations in that they are costly and
cover relatively few businesses each year, and thus would not
necessarily be cost-effective as the sole means to address 1099-MISC
payer reporting compliance. For example, IRS data show that IRS
examinations covered less than 1 percent of the 2.2 million tax returns
that small corporations filed for fiscal year 2007. As we previously
reported, IRS examined about 3 percent of Schedule C returns in fiscal
year 2006.[Footnote 36]
Beyond conducting examinations, which we have described as having
limitations, IRS does not have an agencywide approach in place to
identify payers that do not submit 1099-MISC forms. More specifically,
IRS does not have a stop filer notice program for businesses, as it
does for federal agencies, to detect 1099-MISC reporting gaps. In
contrast with the relatively small and stable populations of federal,
state, and local government payers, the large and shifting population
of small businesses might challenge IRS in designing a cost-effective
method for isolating and contacting business payers that do not submit
1099-MISCs. Given that new businesses start each year while others stop
operating or merge with other businesses, one approach would be to
first check to see whether a business filed a tax return before sending
any notice inquiring about 1099-MISC reporting. While notices are
likely to provide a more cost-effective approach for pursuing possible
payer noncompliance compared to examinations, it would be important for
IRS to test a stop filer program to determine how to target notices to
businesses. For Schedule C filers for example, a notice program could
target payers that reported large contract labor expenses but did not
submit 1099-MISCs.[Footnote 37] Without testing the viability of a
broader stop filer notice program, IRS could be overlooking a useful
tool that would help increase 1099-MISC payer compliance.
Payers Face Impediments in Preparing and Submitting 1099-MISCs, and
Some Options Could Help Promote Voluntary Reporting Compliance by
Payers:
According to IRS officials, IRS advisory groups, and members of the
1099-MISC community we interviewed, a variety of impediments inhibit
1099-MISC reporting compliance.[Footnote 38] As a result, some payers
report erroneous information or fail to submit all 1099-MISCs as
required. Some payers that do not submit their 1099-MISCs as required
may be unaware of their 1099-MISC reporting responsibilities. Other
payers may be confused by various aspects of the 1099-MISC
requirements. Finally, the inconvenience of submitting 1099-MISCs--
whether on paper forms or electronically--may deter compliance. While
the extent to which these impediments contribute to payer noncompliance
is unknown, interviewees and others identified options for addressing
them to promote voluntary compliance.
Table 1 highlights options based on our analysis and includes options
we previously reported. We note those options that were proposed by
IRS, IRS advisory groups, and the National Taxpayer Advocate.[Footnote
39] Our list of 1099-MISC impediments and options is not exhaustive,
nor is the list of pros and cons associated with the options. Improved
IRS guidance and education are relatively low-cost options, but most
taxpayers use either tax preparers or tax software to prepare their tax
returns, and may not read IRS instructions and guidance. While taxpayer
service options may improve compliance for those that are inadvertently
noncompliant, they are not likely to affect those that are
intentionally noncompliant.[Footnote 40] Some options to change 1099-
MISC reporting requirements require legislative action, and other
options would be costly for IRS to implement. Where the option involves
particular issues, such as cost or taxpayer burden, we note them in our
table.
Table 1: Impediments to 1099-MISC Payer Reporting Compliance and
Options for Increasing Voluntary 1099-MISC Compliance:
Some payers are unaware of their 1099-MISC reporting responsibilities:
Impediments facing 1099-MISC payers:
1. Some payers are unaware of their 1099-MISC reporting
responsibilities;
Options for increasing voluntary compliance and related pros and cons:
* Add general reminder to Publication 535 Business Expenses to
highlight 1099-MISC reporting responsibilities;
* Revise business tax form instructions to remind taxpayers of 1099-
MISC reporting requirements for specific expense types;
- IRS added a 1099-MISC reminder to the 2007 Schedule C instructions
for contract labor expenses, and such reminders can be added for other
1099-MISC reportable expenses such as rent and legal and professional
services;
* Target 1099-MISC related education and outreach activities to
specific payer groups (IRSAC, 2005; IRS Oversight Board, 2008)[A];
- IRS has initiated such outreach to federal, state, local and tribal
governments, but more research is needed to determine which business
payer groups to target;
All of the above may be of limited efficacy if taxpayers rely on paid
preparers and tax preparation software and do not look at IRS
instructions or guidance, or if taxpayers are willfully misreporting.
Providing additional guidance could be helpful if tax return
preparation software is based on the guidance;
* Increase outreach to paid preparers and tax software vendors to
promote awareness of 1099-MISC reporting responsibilities (IRSAC,
2005);
- Providing 1099-MISC training outreach through IRS's phone forums or
Nationwide Tax Forums can reach large numbers of paid preparers;
- Many payers rely on paid preparers and tax software to help them
comply with their reporting responsibilities;
* Add check-the-box question to business tax forms requiring taxpayers
to attest whether they submitted 1099-MISCs related to their reported
expenses (IRSAC, 2005; National Taxpayer Advocate, 2005);
- Would force tax preparers and tax software to query taxpayers about
their expenses, and taxpayers would have to respond to the checkbox
under penalty of perjury;
- According to the National Taxpayer Advocate, the burden associated
with a checkbox asking taxpayers to verify that they have complied with
existing legal requirements is inherently small;
- Impact may be on increasing voluntary compliance, with little utility
as an IRS enforcement tool;
- California has a similar checkbox on state corporation and S-
corporation income tax returns, which serves as a reminder to
taxpayers, as shown below in figure 6. California has not evaluated how
this reporting feature affects payer reporting compliance;
* Add a chart in the business income tax instructions to help payers
determine if they have a potential 1099-MISC reporting requirement and
need to review the 1099-MISC instructions. IRS frequently provides
charts and worksheets to help taxpayers understand their filing
obligations.[B]
Impediments facing 1099-MISC payers:
2. Some payers first learn about 1099-MISC reporting responsibilities
from their tax preparers after 1099-MISC due dates have passed;
Options for increasing voluntary compliance and related pros and cons:
* Add IRS's "Information Returns Processing" hyperlink to its "Starting
a Business" and "Small Business and Self-Employed Tax Center" sites to
make information reporting a more prominent aspect of business
responsibilities;
* Provide a general notice about 1099-MISC reporting responsibilities
to new small business owners when they apply for an employer
identification number (EIN);
- IRS currently encourages online application and provides EINs
immediately after validation which makes this a low cost option;
* Provide a notice about 1099-MISC reporting responsibilities, key
requirements, and due dates to small businesses each fall. Notices
could be sent to some businesses, such as Schedule C filers reporting
contract labor expenses for the first time, or all small businesses;
- Potentially costly mailing. May not be cost-effective if large
numbers of businesses do not have 1099-MISC reportable payments;
* Have single due date for 1099-MISC submission to IRS;
- Change paper submission due date to IRS from February 28 to March 31
to encourage taxpayers and tax preparers to prepare any 1099-MISCs that
may have been overlooked without fear of penalty (IRSAC, 2005);
- Change electronic submission due date to IRS from March 31 to
February 28 to allow IRS more time to process 1099-MISC for computer
matching (Electronic Tax Administration Advisory Committee (ETAAC),
2006);
- Changing due dates for submitting 1099-MISC to IRS affects due dates
for other information return series, but does not change the January
due date to payees;
* Waive late submission penalties for first-time payers;
- Some payers that realize they are late in submitting 1099-MISCs may
choose not to file rather than run the risk of incurring late
penalties. IRS already reduces the late penalty for 1099-MISCs
submitted before August 1 to encourage voluntary submissions;
- Hard for IRS to distinguish first-time payers that may have
reasonable cause for being late from payers that have willfully
neglected submit 1099-MISCs. Thus, this option may require legislative
action to grant IRS authority to automatically waive the late penalty
for 1099-MISC payers reporting for the first time.
Some payers are confused about 1099-MISC requirements:
Impediments facing 1099-MISC payers:
1. Payers must navigate through 8 pages of singled-spaced instructions
to determine what to report in the 14 boxes on the 1099-MISC;
Options for increasing voluntary compliance and related pros and cons:
* Add a chart in the 1099-MISC instructions for distinguishing 1099-
MISC reportable from non-reportable payments and for calculating
whether reportable payments reached reporting threshold. For example,
IRS General Instructions for Forms 1099, 1098, 5498 and W-2g contain a
chart highlighting what payments and amounts to report for various
information returns, including Form 1099-MISC;
* Clarify guidance to address common misreporting errors;
- IRS does not have research identifying the reasons for payer
reporting problems.
Impediments facing 1099-MISC payers:
2. Payers must determine whether payee is a corporation that is exempt
from 1099-MISC reporting;
Options for increasing voluntary compliance and related pros and cons:
* Change legislation to extend reporting requirements to include
payments to corporations. We previously reported that the benefits in
terms of increased revenue and taxpayer compliance exceed costs. In
1991, we suggested that Congress needed to enact legislation to require
reporting on payments to corporations but did not formally recommend
that matter for congressional consideration.[C] IRS agrees that the
benefits of this option in addressing the tax gap outweigh the costs.
The Bush Administration requested legislative action in its fiscal year
2008 and 2009 budgets. According to Treasury estimates, this proposal
would generate $8.2 billion from 2009 through 2018, due in part to
increased voluntary compliance and IRS's ability to detect
underreported payments received by businesses.[D];
- The burden of determining the payee's status would be simplified.
Some payers already submit 1099-MISC for all corporate payees rather
than determine payee status. (IRSAC, 2005). However, other payers fail
to submit 1099-MISCs currently required because they mistake small
business payees as corporations exempt from reporting;
- Payers need to submit more 1099-MISCs (IRPAC, 2007). Various phase-in
options could minimize the burden and disruption for payers, such as
delaying the effective date or initially covering only specific payment
types, such as rent payments to corporations.[E]
Impediments facing 1099-MISC payers:
3. Payers must determine whether payments are reportable due to
different reporting thresholds. Some payers may underreport
miscellaneous income types, such as royalties, with thresholds lower
than $600;
Options for increasing voluntary compliance and related pros and cons:
* Add a chart in the 1099-MISC instructions for distinguishing 1099-
MISC reportable from non-reportable payments and for identifying
whether reportable payments reached reporting threshold. Similarly,
adding a chart in the business income tax instructions could help
payers determine if they have a potential 1099-MISC submission
requirement and need to review the full instructions;
* Standardize or eliminate dollar threshold for reporting payments
(NTA, 2005; IRPAC, 2006)[F];
* Lower uniform amount (National Taxpayer Advocate, 2005);
- Increased payer burden to submit more 1099-MISCs;
- Increased number of 1099-MISCs to IRS for detecting payee income
underreporting;
* Higher uniform amount;
- Decreased payer burden;
- Decreased number of 1099-MISCs to IRS for detecting payee income
underreporting;
* Some options to change the dollar reporting threshold require
legislative action.
Impediments facing 1099-MISC payers:
4. Some payers overlook reporting payments for non-routine or sporadic
one-time transactions;
Options for increasing voluntary compliance and related pros and cons:
* Revise business tax form instructions to remind taxpayers of 1099-
MISC reporting requirements for specific expense types.
Some payers find 1099-MISC submission burdensome/inconvenient:
Impediments facing 1099-MISC payers:
1. Some payers misreport or neglect to report payee taxpayer
identification numbers (TINs) and could be subject to penalty and
required to do backup withholding on 1099-MISC payments to payees with
bad TINS. Some payers misreport 1099-MISCs using the payee's
partnership's name and TIN rather than the individual payee's Social
Security Number (SSN);
Options for increasing voluntary compliance and related pros and cons:
* Provide education and outreach activities to:
- Remind payers to secure TINs from payees for 1099-MISC reporting to
avoid backup withholding for missing or incorrect TINs[G];
- Remind payers of IRS's voluntary TIN Matching program that allows
authorized payers the opportunity to match payee TIN and name with IRS
records free of charge before submitting the 1099-MISC[H];
- Increase awareness of IRS policy on waiving incorrect or missing TIN
information penalties and how a payer can establish reasonable cause;
* Require payers to validate payee TINs (IRS, 2007)[I];
- Increase reporting burden for payers;
- Decrease number of 1099-MISCs unmatchable to payees for IRS's
automated enforcement programs.
Impediments facing 1099-MISC payers:
2. Payers submitting paper 1099-MISCs are required to use forms printed
with special red ink scannable by IRS. IRS does not offer a fillable
form for downloading on its Web site, and forms computer generated from
accounting or tax software are not acceptable formats. Some payers
submit black and white 1099-MISCs anyway;
Options for increasing voluntary compliance and related pros and cons:
* Provide an online portal for electronic submission similar to the
Social Security Administration's portal for W-2s (ETAAC, 2007,
2008)[J];
- Potentially affects a majority of payers as 90 percent of payers used
paper forms and 64 percent of all payers submitted one to four forms in
2006;
- Facilitate more accurate 1099-MISC entry and processing for IRS;
- Implementation has costs, and IRS currently has no plans for a 1099-
MISC portal;
* Allow payers to submit computer generated black and white 1099-MISCs
(IRSAC, 2005);
- IRS currently has no plans to upgrade its scanning technology to
eliminate the special red ink requirement and process computer-
generated black and white 1099-MISCs;
- IRS submission processing officials said some black and white
computer-generated forms are currently scanned but require additional
work to ensure information was correctly scanned. These officials
predicted that relaxing the red ink requirement would overwhelm the
current scanning operation. IRS has not conducted any research to
determine the extent to which computer-generated black and white forms
slows 1099-MISC processing;
- Lowering the 250 threshold for electronic submission would reduce the
total number of paper submissions and might ameliorate such slowdown
(ETAAC, 2007). Lowering the threshold would require legislative action;
* Promote awareness of any offers for free electronic 1099-MISC
submission services available through IRS's authorized e-file partners
(IRS);
- A few vendors in the past offered free online preparation and
submission for small numbers of 1099-MISCs for businesses.[K]
Impediments facing 1099-MISC payers:
3. Payers using IRS's Filing Information Returns System (FIRE) must
register and buy software to format 1099-MISC data transmission, or pay
a vendor to submit their forms electronically;
Options for increasing voluntary compliance and related pros and cons:
Provide an online portal (discussed above); Online portal likely to
require registration with IRS and may be convenient for payers
submitting a few forms, but not likely convenient for payers submitting
250 or more forms.
Source: GAO analysis.
[A] IRSAC, Internal Revenue Service Advisory Council Public Meeting,
November 17, 2005 (Washington, D.C.: Nov. 17, 2005) and IRS, IRS
Oversight Board, Annual Report 2007, (Washington, D.C.: March 2008).
[B] For example, the Form 1040 tax return instructions to help
individuals determine whether they are required to file an income
return. Also, the Schedule SE highlights who must file the schedule for
self-employment tax and includes a chart to help individuals determine
whether to file the short or long Schedule SE.
[C] GAO/GGD-91-118. In 1992, we recommended federal agencies issue
information returns on payments to corporations (GAO/GGD-92-130). In
2004, we reported that revenues from extending reporting requirements
to corporate payments could increase by billions of dollars (GAO-04-
649). See GAO, Tax Administration: Costs and Uses of Third Party
Information Returns, GAO-08-266 (Washington, D.C.: Nov. 20, 2007) for a
list of how the additional costs payers would incur could be mitigated.
[D] Department of the Treasury, General Explanations of the
Administration's Fiscal Year 2009 Revenue Proposals (February 2008).
[E] To minimize burden on small businesses, the National Taxpayer
Advocate recommended expanding 1099-MISC reporting to include
corporations only if IRS's National Research Program (NRP) found
significant levels of noncompliance among small corporations. National
Taxpayer Advocate, 2007 Annual Report to Congress Vol. 1 Section Two-
Key Legislative Recommendations, (Washington, D.C.: Jan. 9, 2008). This
phase-in approach does not simplify the need to track the payee's
status.
[F] In 2005 testimony, the National Taxpayer Advocate recommended
reducing or eliminating the $600 threshold. In 2006, IRPAC recommended
increasing the medical payment threshold to $5,000 to reduce payer
reporting burden.
[G] IRS Form W-9 can be used to obtain and certify the payee's tax
identification number(TIN). IRS uses the combination of the payee name
and TIN to match the information reported on a 1099-MISC with
information reported by the payee on income tax returns.
[H] Currently, TIN matching is only available to authorized payers that
filed information returns with IRS in at least one of the two past tax
years.
[I] Internal Revenue Service, Reducing the Federal Tax Gap: A Report on
Improving Voluntary Compliance, (Washington, D.C.: Aug. 2, 2007).
[J] The Social Security Administration offers free online submission of
W-2s for payers submitting 20 or fewer forms.
[K] In 2007, we reported that ,according to vendors we interviewed,
prices for preparing and submitting 1099-MISCs were relatively low,
ranging from about $10 per form for 5 forms to about $2 per form for
100 forms, with one of them charging about $.80 per form for 100,000
forms. See GAO, Tax Administration: Costs and Uses of Third-Party
Information Returns, GAO-08-266 (Washington, D.C.: Nov. 20, 2007).
[End of table]
Figure 6: California State Tax Forms for Corporations and S
Corporations, Tax Year 2007:
[Refer to PDF for image: illustration]
Two portions of the forms are highlighted:
2007 California Corporation Franchise or Income Tax Return Form 100
(page 2):
Have all required information returns (e.g. federal forms 1099, 5471,
8300, 8865, etc.) been filed with the Franchise Tax Board?
2007 California Corporation Franchise or Income Tax Return Form 100
(page 2):
Have all required information returns (e.g. federal forms 1099, 8300,
and state Forms 592, 592-B, etc.) been filed with the Franchise Tax
Board?
Source: State of California.
[End of figure]
According to our interviewees, multiple approaches could help IRS to
increase payer compliance with 1099-MISC reporting requirements. For
some options, such as eliminating the exemption on reporting corporate
payments, the evidence shows that the benefits outweigh the costs. For
other options, it is not clear whether the benefits outweigh the
associated costs. In those cases, additional research by IRS could help
to evaluate the feasibility of more costly options, such as allowing
black and white paper 1099-MISCs. Action to move forward on options to
target outreach to specific payer groups or clarify guidance to reduce
common reporting mistakes would hinge on IRS first conducting research
to understand the magnitude of and reasons for payer noncompliance.
IRS Aims to Improve AUR Efficiency but Lacks a Systematic Process for
Learning about the Causes of Mismatches:
Adopting strategies, discussed above, to promote voluntary compliance
with 1099-MISC reporting requirements and to better monitor payer
noncompliance would likely increase the number of 1099-MISCs IRS
receives from payers. This in turn would increase the number of
automated mismatches identifying potential underreporting by payees.
However, the AUR program does not pursue all the mismatches from the
1099-MISCs currently received. Given limited resources for the AUR
program, it is important for IRS to find ways to more efficiently
expand AUR coverage and select the best 1099-MISC related cases to
work.
While 1099-MISCs constituted 5 percent of all information returns AUR
used to detect underreporting, a significant portion of the AUR cases
and assessments were based on 1099-MISC information, as shown in table
2.[Footnote 41] For tax year 2004 (the last full year available), 19
percent of 1099-MISC related cases were selected for review, yielding
21 percent of the additional tax dollars assessed by the AUR program.
From the 1.9 million 1099-MISC related cases with identified income
discrepancies, AUR selected a larger proportion (47 percent) for review
than from the AUR inventory as a whole (31 percent). Over three-
quarters of all 1099-MISC related cases selected involved nonemployee
compensation.[Footnote 42] The remaining 1099-MISC related cases
involve other types of 1099-MISC payments, such as those for rent and
medical services. For tax year 2004, 1099-MISC related cases in total
yielded $972 million additional assessments, accounting for 21 percent
of AUR assessments.[Footnote 43]
Table 2: 1099-MISC-Related Cases Represent a Significant Share of the
Cases Selected for AUR Review and Taxes Assessed, Tax Year 2004:
All AUR cases[A];
All Information Returns Submitted (thousands): 1,487,000[B];
AUR Case Inventory (thousands): 14,993;
Cases Selected for AUR review (thousands): 4,645;
Percent of AUR Inventory Selected: 31.0%;
Additional Tax Dollars Assessed (millions): $4,673.
1099-MISC related cases[C];
All Information Returns Submitted (thousands): 79,738;
AUR Case Inventory (thousands): 1,868;
Cases Selected for AUR review (thousands): 873;
Percent of AUR Inventory Selected: 46.7%;
Additional Tax Dollars Assessed (millions): $972.
1099-MISC Share of all AUR Cases;
All Information Returns Submitted (thousands): 5%;
AUR Case Inventory (thousands): 13%;
Cases Selected for AUR review (thousands): 19%;
Additional Tax Dollars Assessed (millions): 21%.
Source: GAO analysis based on IRS data.
[A] Total information returns used in IRS's computer matching to
identify the AUR program's inventory of potential mismatches included
more than 231 million W-2s for employee wages.
[B] The total number of information returns submitted is only
significant to the millions.
[C] The 1099-MISC related cases include nonemployee compensation as
well as other miscellaneous payments such as for fishing, medical
services, and crop insurance.
[End of table]
IRS's New Soft Notice Initiative Could Increase AUR Program Efficiency:
AUR currently has a limited reach, pursuing less than half of 1099-MISC
related cases in its inventory and less than a third of the overall
inventory for tax year 2004. Attempting to increase AUR program
efficiency, IRS has pilot tested an automated "soft notice" program
since 2005. The goal of this program pilot is to increase accurate
reporting compliance with minimal additional expenditures for IRS. For
this program pilot, AUR first selected cases from the inventory that
involved relatively small amounts of money and thus would not have been
selected for review, and then expanded the pilot to include cases with
higher-dollar potential tax assessments. The 2,505 cases in the pilot
test during fiscal years 2005 and 2006 included 550 nonemployee
compensation cases based on 1099-MISC information. AUR sent letters to
these taxpayers asking them to either fix the identified discrepancy by
filing an amended return. However, if the taxpayer's reported income is
correct, IRS encouraged the taxpayer to contact the third party
providing the information to IRS. The soft notice is intended to
educate and promote future compliance, requiring minimal response to
the notice from taxpayers.
Based on the pilot, IRS concluded that the soft notice approach
increased taxpayer compliance, without placing a heavier burden on AUR
resources to respond to taxpayers' queries. In total for the 2 pilot
years, 25 percent of taxpayers receiving AUR soft notices filed amended
tax returns, and 78 percent corrected their reporting behavior in the
next year's AUR inventory. Less than 13 percent called IRS to inquire
about the soft notices. With phased rollout slated to begin in fiscal
year 2009, AUR would be able to achieve a greater coverage over the
balance of cases in the inventory beyond those selected for AUR review.
Accordingly, the soft notice approach may be an innovative, cost-
effective way for IRS to have a greater enforcement presence using 1099-
MISC information. However, it is too early to assess whether the
effectiveness of the soft notice pilot can be generalized to the AUR
program overall. For tax year 2007, IRS plans to send about 30,000 AUR
soft notices across the range of AUR income categories--including about
4,400 1099-MISC related cases. As of October 2008, IRS plans to collect
data on taxpayer responses and develop an analysis plan to determine
which AUR case types are suited for future soft notices.
IRS Could Use Data on Unproductive 1099-MISC Cases to Better Target
Case Selection and Provide Service to Reduce Misreporting:
Some cases AUR selected from its inventory are not productive; that is,
some cases do not yield any additional tax revenue. About 36 percent of
the 1099-MISC related cases selected for tax year 2004 were manually
screened out by AUR reviewers without taxpayer contact. Such cases may
be screened out because the payee erroneously reports a 1099-MISC
payment on the wrong tax return line but paid the correct taxes or
because the discrepancy was because of an IRS error in transcribing a
paper 1099-MISC. Of the 64 percent of the tax year 2004 1099-MISC cases
selected that involve taxpayer contact, about 22 percent yielded no
change in tax assessments. These unproductive cases cost IRS time and
money that could be spent pursuing other taxpayers who owe additional
taxes and burden honest taxpayers who must respond to IRS inquiries. A
case may result in no tax change if a taxpayer responds to the AUR
notice with information explaining the discrepancy. For example, an
unproductive 1099-MISC discrepancy may be because the payer reported
payments made to a partnership under an individual partner's SSN rather
than under the partnership TIN.[Footnote 44]
The screen-out process and handling taxpayer contacts are labor-
intensive for AUR compared with computer processing, so reducing the
number of unproductive cases would free up resources to work more
productive cases. IRS officials told us that in fiscal year 2007, IRS
implemented a new case selection tool using historical data to target
cases with high assessment potential and that this new methodology has
yielded progress in terms of increased AUR assessments during fiscal
year 2008. An additional approach would be to gain insight into the
source of discrepancies between information reported by payers
submitting 1099-MISCs and by payees filing tax returns. An
understanding of the specific causes could help IRS in evaluating its
matching operations and refining the AUR case selection tool for 1099-
MISC related cases. Additionally, the information would be useful to
help IRS target activities to clarify guidance or target outreach to
educate payers or payees to avoid common reporting errors.
Currently, IRS does not systematically collect and analyze information
on the causes of unproductive mismatches that would allow it to
determine how best to reduce or eliminate such mismatches. The AUR
management information system has codes showing whether the case was
closed with or without a tax change, but does not specify how AUR
accounted for the discrepancy. For example, no change closing codes do
not specify whether the discrepancy was because of payer misreporting,
payee misreporting, or IRS error in transcribing paper 1099-MISCs.
Additionally, IRS does not routinely collect data on the screen-out
process, so IRS does not have information on the nature and cause of
recurring 1099-MISC discrepancies. According to AUR officials, the AUR
program periodically does special analyses to identify how to reduce
screen-out rates but has not specifically studied 1099-MISC related
cases. Capturing information on specific reasons why cases were
unproductive is one approach to improve AUR's efficiency. The
information would be useful to the AUR program in making informed
decisions on how to improve the match process and refine its case
selection methodology for 1099-MISC related cases.
Moreover, IRS could draw on AUR data to identify common 1099-MISC
reporting errors and determine how to target service activities to
improve payer and payee reporting. For example, IRS could avoid some
unproductive AUR cases by reminding taxpayers doing business as a
corporation or partnership to provide their business TIN rather than
their SSNs to payers. Insight about productive AUR cases also could
help IRS identify opportunities to educate taxpayers on how to avoid
common mistakes and correctly report 1099-MISC payments.
Conclusions:
The 1099-MISCs are a powerful tool through which IRS can encourage
voluntary compliance by payees and detect underreported income of
payees that do not voluntarily comply. However, IRS has limited
knowledge about the extent of payer noncompliance with 1099-MISC
reporting requirements. If 1099-MISC reporting compliance increased by
even one percent, it could result in an additional $60 billion of
payments reported. Without better information about the extent and
causes of payer noncompliance, IRS has no way of determining if placing
a heavier emphasis or shifting more resources toward addressing 1099-
MISC payer noncompliance could lead to an increase in payee voluntary
compliance and ultimately help reduce the tax gap.
IRS could make better use of existing data to detect some kinds of
payer noncompliance. Extending the stop filer notice program used for
federal payers may be one tool for IRS to reach out to other government
and business payers that drop off the radar. Developing an estimate of
payer noncompliance and the characteristics of those payers would be
key for IRS in developing a cost-effective strategy to identify payers
that never submit 1099-MISCs.
Another approach for increasing 1099-MISC reporting compliance is for
IRS to address the variety of impediments facing payers preparing and
submitting 1099-MISCs. Eliminating the reporting exemption for payments
to corporations would ease payer burden associated with first
determining the status of their payees to identify whether payments are
reportable. As early as 1991, we determined that the benefits in terms
of increased tax revenue and voluntary taxpayer compliance would exceed
the costs of extending 1099-MISC reporting, although we did not
formally recommend the matter for congressional consideration at that
time. IRS agrees that the benefits of eliminating the corporate
exemption outweigh the costs, and the Bush Administration has proposed
legislative action in its last two budgets. Although it is unclear the
extent to which taxpayers read guidance on reporting requirements,
especially taxpayers who use paid preparers, options for additional
guidance and general reminders are a low cost way to help payers
understand whether they have a 1099-MISC reporting requirement. For
other options where it is unclear whether the benefits outweigh the
associated costs, additional research by IRS could help to evaluate
whether specific options would be feasible or effective in increasing
payer compliance.
In turn, IRS research and other activities aimed at increasing payer
reporting compliance would likely increase the number of 1099-MISC
related AUR cases. Reducing the number of unproductive cases would free
up resources for IRS to handle this increased workload and make better
use of the 1099-MISC information it receives.
Matter for Congressional Consideration:
To simplify the burden that the corporate exemption places on payers to
distinguish payees' business status and also provide greater
information reporting, Congress should consider requiring payers to
report payments to corporations on the form 1099 MISC, as we previously
suggested and as proposed in the Bush Administration's budget.
Recommendations for Executive Action:
We are making eight recommendations to the Commissioner of Internal
Revenue.
To gauge the extent of 1099-MISC payer noncompliance and its
contribution to the tax gap, we recommend that the Commissioner of
Internal Revenue as part of future research studies:
* develop an estimate of 1099-MISC payer noncompliance and:
* determine the nature and characteristics of those payers that do not
comply with 1099-MISC reporting requirements so that this information
can be factored into an IRS-wide strategy for increasing 1099-MISC
payer compliance.
To increase IRS's ability to detect 1099-MISC payer noncompliance, we
recommend that the Commissioner of Internal Revenue:
* test the option of developing a stop filer notice program to target
business, state, and local entities that submitted 1099-MISC one year
but did not do so the next.
To help payers better understand their 1099-MISC reporting
responsibilities, we recommend that the Commissioner of Internal
Revenue:
* add a general reminder to Publication 535 Business Expenses to
highlight 1099-MISC reporting responsibilities;
* assess whether adding a checkbox to business tax returns, inquiring
whether all 1099-MISCs have been submitted, to serve as a reminder to
payers would help increase 1099-MISC payer compliance; and:
* include a chart on the Form 1099-MISC as well as business income tax
instructions for distinguishing reportable from non-reportable payments
and for calculating whether reportable payments reached the 1099-MISC
reporting threshold.
To reduce the submission burden facing many payers each submitting
small numbers of 1099-MISCs, we recommend that the Commissioner:
* collect data on the numbers of computer-generated black and white
1099-MISCs submitted by payers and the labor spent reentering forms
that cannot be scanned, and evaluate the cost-effectiveness of
eliminating or relaxing the red ink requirement.
To help IRS improve its use of 1099-MISC information, we recommend that
the Commissioner:
* collect and analyze data on the types of unproductive AUR cases to
help identify reoccurring errors for use in the AUR case selection
process and for identifying ways to improve guidance and outreach to
help payers and payees more accurately report 1099-MISC payments.
Agency Comments and Our Evaluation:
In written comments on a draft of this report (which are reprinted in
appendix II), IRS's Deputy Commissioner for Services and Enforcement
acknowledged that the evidence in our report indicates that the number
of 1099-MISCs that payers are required to submit could be much higher
than what IRS currently receives. IRS agreed with six of our eight
recommendations. IRS staff provided technical comments that we
incorporated as appropriate.
IRS agreed to gather additional data from its ongoing and planned NRP
studies to determine the extent of 1099-MISC noncompliance. IRS also
agreed to determine the nature and characteristics of noncompliant 1099-
MISC payers once several years of reporting compliance data are
available. In addition, IRS agreed to (1) analyze PMF data and develop
a 1099-MISC stop filer notice test; (2) evaluate the cost effectiveness
of eliminating or relaxing the red ink requirement; and (3) analyze
data for a sample of AUR cases to identify opportunities to improve
case selection and outreach and education for payers and payees.
IRS disagreed with our recommendation to assess whether adding a
checkbox to business tax returns would increase 1099-MISC reporting
compliance. IRS agreed to enhance instructions about 1099-MISC
reporting requirements to improve voluntary compliance by payers. We do
not believe this is fully responsive to our recommendation. IRS stated
that a similar question was removed from the corporate tax return after
the Paperwork Reduction Act of 1980 was enacted. IRS said that the act
requires reducing unnecessary burden on taxpayers and prohibits
collecting information already available. We recognize that the
Paperwork Reduction Act requires agencies to certify that any
collection of information avoids unnecessary duplication and is
necessary for the proper performance of the functions of the agency,
including whether the information has practical utility. In
recommending that IRS explore the potential for this option to increase
1099-MISC reporting, we believe information about the experience of
California and other states using a similar checkbox query could yield
insight on how this option could improve payers' reporting compliance
by reminding payers of their reporting obligations. As discussed in
this report, many taxpayers rely on tax preparers and tax software and
may not look at IRS guidance. For this reason, the checkbox option--
which we clarified would require taxpayers to respond under penalty of
perjury--might be more effective because it would force tax preparers
and software to query taxpayers about their expenses. Further, results
from the evaluation we recommend could be useful to IRS in revisiting
its 1981 assessment and weighing the benefits and burdens associated
with the checkbox option. We clarified in the report that the National
Taxpayer Advocate has reported that the taxpayer burden associated with
the checkbox option would be small.
IRS also disagreed with our recommendation to include a chart in the
1099-MISC instructions and business income tax instructions. IRS stated
that the Form 1099-MISC instructions already contain two bulleted lists
describing which payments are reportable as well as explanations of the
rules for specific payment types. However, these two lists as well as a
third bulleted list describing reportable payments to corporations
include 19 bullet points spanning two pages of the eight pages of
single-spaced 1099-MISC instructions. We added an example to the report
citing a chart in IRS's 19-page general instructions that highlights
what payments and amounts to report on the Form 1099-MISC. We believe
that the chart approach is an effective way to provide taxpayers with a
quick guide for navigating the detailed instructions for the Form 1099-
MISC. For this reason, we continue to recommend adding a chart to the
1099-MISC instructions and business tax instructions.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from its issue date. At that time, we will send copies to the Chairman
and Ranking Member, House Committee on Ways and Means; the Secretary of
the Treasury; the Commissioner of Internal Revenue; and other
interested parties. This report will be available at no charge on the
GAO Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions, please contact me on (202) 512-
9110 or whitej@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Key contributors to this report are listed in appendix III.
Signed by:
James R. White:
Director, Tax Issues Strategic Issues Team:
[End of section]
Appendix I: Scope and Methodology:
The objectives of this report were to determine: (1) what IRS knows
about 1099-MISC reporting noncompliance by payers; (2) how IRS detects
and pursues 1099-MISC reporting noncompliance by payers; (3) what
impediments payers encounter in preparing and submitting accurate 1099-
MISC forms and what options could help IRS address these impediments;
and (4) what opportunities exist to enhance IRS's use of 1099-MISC
information to both detect payee noncompliance and promote voluntary
compliance.
For background about 1099-MISC reporting requirements, we reviewed laws
and regulations as well as IRS guidance related to the Form 1099-MISC
and also spoke with IRS officials. For background about the numbers and
amounts of payments reported on the 1099-MISC, we obtained information
reporting program data from Martinsburg Computing Center for tax year
2006. We also obtained data from IRS's Payer Master File (PMF) on the
aggregate numbers of payers submitting 1099-MISCs on paper and
electronically for tax year 2006. We determined that these data were
sufficiently reliable for our descriptive purposes.
To determine what IRS knows about the extent of 1099-MISC payer
noncompliance, we reviewed IRS documents including plans for reducing
the federal tax gap and National Research Program (NRP) as well as
budget proposals to expand 1099-MISC reporting.[Footnote 45] Other
reports we reviewed include past GAO and Treasury Inspector General for
Tax Administration (TIGTA) reports on 1099-MISC reporting compliance by
federal, state and local government entities.[Footnote 46] We also
interviewed NRP officials and staff about research on 1099-MISC
reporting compliance.
To obtain perspective on the potential magnitude of payer
noncompliance, we compared the number of small businesses filing tax
returns with number of small businesses submitting 1099-MISCs for tax
years 2002 to 2005. We used IRS's definition of small businesses--
businesses entities including sole proprietorships, S-corporations, and
partnerships with assets under $10 million--under supervision of IRS's
Small Business and Self-Employed (SB/SE) business operating division.
We obtained total numbers of small business tax returns submitted in
these four years from IRS's Business Master File and the Individual
Master File. For these IRS databases, we relied on the work we perform
during our annual audits of IRS's financial statements.[Footnote 47]
While our financial statement audits have identified some data
reliability problems associated with coding some fields in IRS's tax
records, we determined that the tax form count data were sufficiently
reliable to address the report's objectives. We then compared the
aggregate number of payers identified as small businesses from IRS's
PMF database to calculate the percentage of small business tax filers
that submitted 1099-MISCs. The last complete year of payer type
information available at the time of our analysis was 2005. While we
could not isolate which businesses were required to submit a 1099-MISC
but did not, we determined the data were sufficiently reliable to show
how many small businesses submitted 1099-MISCs to IRS.
We could not produce a comparable 1099-MISC reporting percentage for
large corporations and partnerships under supervision of IRS's Large
and Mid-Size Business (LMSB) business operating division. Large
businesses may file a consolidated corporate income tax return under
the parent company's taxpayer identification number (TIN) for all its
subsidiaries but submit 1099-MISCs under the individual subsidiaries'
TINs.[Footnote 48]
To obtain additional perspective on potential 1099-MISC payer reporting
noncompliance among small businesses, we examined the 1099-MISC
submission rates for a sample of small business Schedule C filers.
Contract labor payments to a non-incorporated payee totaling $600 or
more are reportable on a 1099-MISC, so we used contract labor line on
Schedule C as proxy for a possible 1099-MISC reporting requirement. We
included all Schedule C filers that reported $600 or more contract
labor expenses from IRS's Statistics of Income (SOI) for tax year 2006
(the last year available).[Footnote 49] We identified the Schedule C
filers and provided their TINs to IRS. IRS provided data on whether
these filers submitted a 1099-MISC as indicated on the IRS's
Information Return Master File. This resulted in 44 percent of the SOI
sample (unweighted) matching 1099-MISC forms. We then used these
matches to produce generalizable estimates of Schedule C filers
reporting $600 or more in contract labor expenses. Using SOI sampling
weights, we provide the margin of error based on 95 percent confidence
for our SOI estimate. We determined the SOI results were reliable for
estimating how many Schedule C filers who reported contract labor
submitted a 1099-MISC. However, we could not discern whether those that
did not submit 1099-MISCs had a filing requirement due to the
exceptions for any payment under $600 and payments to corporations.
To determine how IRS detects and pursues payer noncompliance with 1099-
MISC reporting requirements, we reviewed IRS's procedures for checking
compliance used by IRS's business operating divisions--Tax Exempt and
Government Entities Division (TE/GE), LMSB, and SB/SE. We also
interviewed IRS examination and compliance staff from each of these
divisions. Within TE/GE, we spoke with IRS officials responsible for
working with federal, state and local government entities as well as
Indian tribal governments.[Footnote 50] We interviewed IRS officials
and staff about information returns processing and related penalties.
Data on IRS's small business examination coverage came from IRS's
publicly available Data Book. We believe the data were sufficiently
reliable for the purposes of our review.
To identify impediments that payers encounter with 1099-MISC reporting,
options and challenges IRS confronts in addressing these concerns, we
reviewed IRS and IRS advisory committee reports, previous GAO reports
as well as those of the National Taxpayer Advocate. Further, we
reviewed IRS's 1099-MISC form, instructions, and related guidance in
addition to outreach material used to educate payers about 1099-MISC
reporting requirements. We interviewed members of IRS advisory groups-
-Electronic Tax Administration Advisory Committee (ETAAC), Information
Reporting Program Advisory Committee (IRPAC), and Internal Revenue
Service Advisory Council (IRSAC).[Footnote 51] To obtain perspectives
from tax preparers and others professionals knowledgeable about 1099-
MISC payers, we interviewed attendees at IRS's fall 2007 National
Public Liaison meeting that included members of national stakeholder
organizations, business and professional associations, tax
professionals who prepare and submit forms to the IRS, and tax software
vendors. We also observed IRS's November 2007 National Phone Forum on
Form 1099-Information Reporting and reviewed IRS's question and answer
summary provided to participants.[Footnote 52] We also reviewed
California Franchise Tax Board's corporation and S corporation tax
return forms and interviewed the California officials about their
experience with the check-the-box question on the California business
returns.
To determine IRS's use of 1099-MISC information, we reviewed IRS
guidance for 1099-MISC submission processing and the Automated
Underreporter (AUR) program. We also interviewed IRS's Martinsburg
Enterprise Computing Center, AUR, and nonfiler program officials and
staff. We obtained program data on the AUR inventory, case selection,
and additional dollars assessed for tax year 2004, the last full year
available in time for this report. The number of information returns
submitted to IRS came from SOI's Data Book. We determined that the data
we used were sufficiently reliable for the purpose of our review.
IRS nonfiler officials stated they are not able to distinguish nonfiler
income tax return cases that were identified through 1099-MISC
information from those identified through its stop filer program that
identifies a gap in a taxpayer's filing of tax returns. Consequently we
were unable to quantify the extent to which 1099-MISC information is
used to detect payee nonfiling in the program.
We conducted this performance audit from June 2007 through January 2009
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the Internal Revenue Service:
Department Of The Treasury:
Deputy Commissioner:
Internal Revenue Service:
Washington, D.C. 20224:
January 13, 2009:
Mr. James R. White:
Director, Tax Issues:
United States General Accounting Office:
Washington, DC 20548:
Dear Mr. White:
Thank you for the opportunity to review your draft report entitled "Tax
Gap - IRS Could Do More to Promote Compliance by Third Parties With
Miscellaneous Income Reporting Requirements (GAO-09-238)."
We recognize information reporting by third parties is an important
tool in addressing the tax gap and agree many of your suggestions will
assist in promoting voluntary compliance with the miscellaneous income
(Form 1099-MISC) information reporting requirements.
For tax year 2006, IRS received over 82 million Forms 1099-MISC from
third parties, reporting over $6 trillion in payments. However, as your
report indicates, there is evidence the number required to be filed
could be much higher. IRS will gather additional data during the on-
going National Research Program (NRP) individual income tax reporting
compliance studies to stratify the extent of payer noncompliance with
filing information returns. In our recently completed individual NRP,
we included several questions related to the filing of information
returns and imposition of failure to file penalties. Plans are also
underway for an Employment Tax NRP study. The combined information from
these NRP studies will provide specific information related to payer
noncompliance that will be used to refine our efforts to address
reporting compliance.
Your report also considered numerous factors influencing the filing of
Form 1099-MISC. To improve reporting compliance we will 1) enhance our
instructions to taxpayers regarding appropriate filing of information
returns, 2) review the requirement to submit information returns using
specialized red ink, 3) analyze data from the Payor Master File (PMF)
and, if indicated, implement a test of a Form 1099-MISC Stop Filer
Program and 4) analyze data from AUR cases to identify opportunities to
improve selection criteria as well as outreach and education for payers
and payees.
The enclosed response addresses each of your recommendations in more
detail. If you have any questions, please contact Christopher Wagner,
Commissioner, Small Business/Self-Employed Division at (202) 622-0600.
Sincerely,
Signed by:
Linda E. Stiff:
Enclosure:
Recommendation 1:
Develop an estimate of 1099-MISC payer noncompliance.
Comment:
IRS will gather additional data during the on-going individual income
tax reporting compliance studies. Additional data will be generated by
an NRP reporting compliance study for employment tax, which is now in
the planning stages. Data collected from these studies should provide
valuable information regarding whether service recipients are
appropriately reporting required payments on Form 1099-MISC.
IRS researchers will use all of these sources of data to examine the
extent of Form 1099-MISC payer noncompliance. The individual income tax
reporting compliance studies are underway for tax year 2006 and 2007.
Examinations for the employment tax reporting compliance study should
begin in 2010. The data from employment tax study are expected to
become available in January 2012. In order to draw reliable
conclusions, we plan to combine the results from several years of these
studies
Recommendation 2:
Determine the nature and characteristics of those payers who do not
comply with 1099-MISC reporting requirements so that this information
can be factored into an IRS-wide strategy for increasing 1099-MISC
compliance.
Comment:
IRS researchers will examine data to determine the nature and
characteristics of noncompliance among 1099-MISC payers once the
results from several years of the reporting compliance studies become
available.
Recommendation 3:
Test the option of developing a stop filer notice program to target
business, state, and local entities that submitted 1099-MISC one year
but did not do so the next.
Comment:
We will analyze data from the Payor Master File (PMF) to determine an
estimate of the number of filers who filed Form 1099-MISC in tax year
2005 versus tax year 2006. A team will be formed to develop a stop-
filer test based upon the results of the analysis. The team will
consist of the various Business Operating Divisions (BODs) where
significant scope and risk have been determined.
Recommendation 4:
Add a general reminder to Publication 535 Business Expenses to
highlight 1099-MISC reporting responsibilities.
Comment:
We agree to adopt this recommendation.
Recommendation 5:
Assess whether adding a checkbox to business tax returns, inquiring
whether all 1099-MISCs have been submitted, to serve as a reminder to
payers would help increase 1099-MISC payer compliance.
Comment:
The question suggested in your report was previously on Form 1120 until
1980 when it was removed in 1981 due to the enactment of the Paperwork
Reduction Act (PRA) of 1980. The PRA requires us to reduce unnecessary
burden on taxpayers and prohibits us from collecting information
already available from other government sources. However, we agree to
revise the instructions, where appropriate, to remind taxpayers of
their reporting obligations.
Recommendation 6:
Include a chart on the Form 1099-MISC as well as business income tax
instructions for distinguishing reportable from non-reportable payments
and for calculating whether reportable payments reached the 1099-MISC
reporting threshold.
Comment:
The Instructions for Form 1099-MISC contain a bulleted list that
describes the reportable payments and minimum dollar amount required
for each payment. The instructions also contain a bulleted list of
payments not required to be reported and provide explanations of the
reporting rules for certain types of payments.
Recommendation 7:
Collect data on the numbers of computer-generated black and white 1099-
MISCs submitted by payers and the labor spent reentering forms that
cannot be scanned; and evaluate the cost-effectiveness of eliminating
or relaxing the magnetic red ink requirement.
Comment:
We are unable to collect data on the numbers of computer-generated
black and white Forms 1099, MISC as we cannot determine which black and
white forms are computer-generated. Additionally, Forms 1099 are not
processed by specific type, but are worked as Information Return
Processing (IRP) documents.
We will conduct control tests to determine the cost of processing black
and white versus "red drop-out ink" IRP documents. Testing will begin
in May 2009 and run through June 2009. By October 15, 2009, we will
evaluate the cost effectiveness of eliminating or relaxing the "red
drop-out ink" requirement.
Recommendation 8:
Collect and analyze data on types of unproductive Automated
Underreporter Program (AUR) cases to help identify recurring errors for
use in identifying ways to improve guidance and outreach to help payers
and payees more accurately report 1099-MISC payments.
Comment:
We will review a sampling of Form 1099-MISC discrepancy cases during
our AUR annual site visitations and, based on our findings, implement
needed changes to improve inventory selection and outreach and
education.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
James R. White, (202) 512-9110 or whitej@gao.gov:
Acknowledgments:
In addition to the contact named above, MaryLynn Sergent, Assistant
Director; Jeff Arkin; Bertha Dong; Ellen Grady; Leon Green; Shirley
Jones; Donna Miller; Karen O'Conor; Jessica Thomsen; Cheri Truett;
James Ungvarsky; Shana Wallace; and John Zombro made key contributions
to this report.
[End of section]
Related GAO Products:
Tax Gap: Actions That Could Improve Rental Real Estate Reporting
Compliance. [hyperlink, http://www.gao.gov/products/GAO-08-956].
Washington, D.C.: August 28, 2008.
Highlights of the Joint Forum on Tax Compliance: Options for
Improvement and Their Budgetary Potential. [hyperlink,
http://www.gao.gov/products/GAO-08-703SP]. Washington, D.C.: June 2008.
Tax Administration: Costs and Uses of Third Party Information Returns.
[hyperlink, http://www.gao.gov/products/GAO-08-266]. Washington, D.C.:
November 20, 2007.
Tax Compliance: Inflation Has Significantly Decreased the Real Value of
Some Penalties. [hyperlink, http://www.gao.gov/products/GAO-07-1062].
Washington, D.C.: August 23, 2007.
Tax Gap: A Strategy for Reducing the Gap Should Include Options for
Addressing Sole Proprietor Noncompliance. [hyperlink,
http://www.gao.gov/products/GAO-07-1014]. Washington, D.C.: July 13,
2007.
Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap.
[hyperlink, http://www.gao.gov/products/GAO-07-488T]. Washington, D.C.:
February 16, 2007.
Opportunities for Congressional Oversight And Improved Use of Taxpayer
Funds: Budgetary Implications of Selected GAO Work. [hyperlink,
http://www.gao.gov/products/GAO-04-649]. Washington, D.C.: May 4, 2004.
Tax Administration: More Can Be Done to Ensure Federal Agencies File
Accurate Information Returns. [hyperlink,
http://www.gao.gov/products/GAO-04-74]. Washington, D.C.: December 5,
2003.
Tax Administration: Federal Agencies Should Report Service Payments to
Corporations. [hyperlink, http://www.gao.gov/products/GAO/GGD-92-130].
Washington, D.C.: September 22, 1992.
Tax Administration: Benefits of a Corporate Document Matching Program
Exceed the Costs. [hyperlink,
http://www.gao.gov/products/GAO/GGD-91-118]. Washington, D.C.:
September 27, 1991.
[End of section]
Footnotes:
[1] See generally 26 U.S.C. §6041 and §6041A. §6041 requires
information reporting for payments made in the course of a trade or
business to another person such as for rent, salaries, compensation,
etc. §6041A relates to returns regarding payments of remuneration for
services and direct sales.
[2] The gross tax gap--$345 billion in 2001 according to IRS's latest
estimate--is the annual difference between what taxpayers should have
paid and what they voluntarily paid on time. IRS estimated that it
would eventually recover around $55 billion of the 2001 tax gap through
late payments and IRS enforcement actions, leaving a net tax gap of
$290 billion.
[3] GAO, Tax Gap: A Strategy for Reducing the Gap Should Include
Options for Addressing Sole Proprietor Noncompliance, [hyperlink,
http://www.gao.gov/products/GAO-07-1014] (Washington, D.C.: July 13,
2007).
[4] GAO, Tax Administration: More Can Be Done to Ensure Federal
Agencies File Accurate Information Returns, [hyperlink,
http://www.gao.gov/products/GAO-04-74] (Washington, D.C.: Dec. 5,
2003).
[5] Treasury Inspector General for Tax Administration, More Complete
and Accurate Data are Needed to Assess the Impact of Actions to Address
Compliance Reporting of State and Local Government Entities (Reference
No. 2007-10-081, June 8, 2007).
[6] The last complete year of payer type data available for our
analysis was tax year 2005.
[7] Some rent payments of at least $600, other than those paid to real
estate agents, are also reported on the 1099-MISC. Treasury Regulations
§1.6041-3(d.). See GAO, Tax Gap: Actions That Could Improve Rental Real
Estate Reporting Compliance, [hyperlink,
http://www.gao.gov/products/GAO-08-956] (Washington, D.C.: Aug. 28,
2008).
[8] Internal Revenue Service, 2007 Instructions for Form 1099-MISC
(revised April 2007).
[9] Boxes 11 and 12 currently are not used to report payments.
[10] Nonemployee compensation is payment for labor or services to an
individual a business does not officially employ. The nonemployee box
also includes attorney fees paid to legal corporations as well as
federal executive agency payments to corporate vendors.
[11] Internal Revenue Service, General Instructions for Filing Forms
1098, 1099, 5498, and W-2G, 2007.
[12] IRS uses the Service Center Recognition Image Processing System
(SCRIPS) to capture printed or handwritten information from paper forms
and convert the information into machine-readable format for computer
processing.
[13] 26 U.S.C. § 6011(e)(2)(A).
[14] Figure 3 does not include data for magnetic submissions. IRS is
phasing out magnetic submissions after December 31, 2008. See Internal
Revenue Service, Publication 1220 Specifications for Filing Forms 1098,
1099, 5498, and W-2G Electronically (June 9, 2008).
[15] IRS generally defines large and mid-size corporations and
partnerships as those with assets over $10 million. Small businesses
are those with assets under $10 million, including sole
proprietorships.
[16] 26 U.S.C. § 6721.
[17] 26 U.S.C. § 6721 provides for lower maximum penalties for small
businesses with average annual gross receipts of $5 million or less for
the 3 most recent tax years (or for the period in existence if shorter)
ending before the calendar year in which the information returns were
due.
[18] 26 U.S.C. § 6724.
[19] The administration estimated that this proposal would generate
$391 million over the next ten years.
[20] GAO, Tax Compliance: Inflation Has Significantly Decreased the
Real Value of Some Penalties, [hyperlink,
http://www.gao.gov/products/GAO-07-1062] (Washington, D.C.: Aug. 23,
2007).
[21] Payments that are not reportable on 1099-MISC may, nonetheless, be
taxable to the payee, and payees must report all income to IRS on their
income tax returns.
[22] Internal Revenue Service, "Reporting Miscellaneous Income" Fact
Sheet, FS-2007-26, November 2007.
[23] An S-corporation is a corporation with a limited number of
shareholders (100 or fewer) that is not taxed as a regular corporation
and meets certain other requirements. According to IRS, this is the
most common corporate entity.
[24] Even among the 8 percent submitting 1099-MISCs, some small
business payers submitted their 1099-MISCs late or missing key payee
information, and some may have failed to submit 1090-MISCs for some
reportable payments. Below we discuss impediments facing payers in
preparing and submitting Form 1099-MISCs to IRS.
[25] The difference between large businesses filing tax returns and
submitting 1099-MISCs is much smaller as large businesses may file
consolidated income tax returns while submitting information returns
under individual subsidiaries.
[26] Beginning in tax year 2007, IRS instructions specify that expenses
reported on the Schedule C contract labor line may be reportable on the
1099-MISC.
[27] For the SOI sample estimate of 28.9 percent, we are 95 percent
confident that the actual estimate is between 27.3 and 30.5 percent.
[28] [hyperlink, http://www.gao.gov/products/GAO-04-74].
[29] At the time, IRS did not have a program to identify and follow-up
with federal agencies that did not submit information returns. IRS
activities to monitor federal compliance with 1099-MISC reporting
requirements in response to our 2003 recommendations are discussed
later in this section.
[30] Government audits, such as in New York City and Detroit, confirm
that some local agencies did not always report 1099-MISCs as required.
City of New York, Office of the Comptroller, Audit Report: Follow-up
Audit on the Financial and Operating Practices of the Queens County
Public Administrator, MD06-057F, April 24, 2006; and City of Detroit,
Office of the Auditor General, Follow-up Audit of the Law Department,
July 2005-June 2007.
[31] NRP data with 2006 and 2007 results will be available in late 2009
and late 2010, respectively.
[32] IRS can check for payer compliance with 1099-MISC reporting
requirements through examinations and voluntary compliance checks. An
examination may involve an in-depth review of an entity's tax records,
and identifying tax discrepancies or an additional tax liability. A
compliance check involves contact with the entity or individual, but is
more limited in its scope, because it does not involve determining a
tax liability. An entity has the right to decline to participate in a
compliance check.
[33] In [hyperlink, http://www.gao.gov/products/GAO-04-74], we found
that IRS did not have a mechanism for identifying and tracking federal
agencies that failed to file Forms 1099-MISCs for vendor payments. One
of our recommendations was that IRS establish such a program.
[34] The sample was selected from over 23,000 state and local agencies
which were identified by TIGTA as not submitting any 1099-MISCs and not
subject to any previous compliance check by TE/GE.
[35] If a payer submitted 1099-MISCs with missing TINS and was
previously directed by IRS to begin backup withholding for the payees
without TINS, the payer can be held liable for amounts of backup
withholding not withheld from those payees.
[36] [hyperlink, http://www.gao.gov/products/GAO-07-1014].
[37] Whereas the SOI sample dataset we used in our Schedule C analysis
included contract labor expense information, IRS currently does not
transcribe the contract labor expense line for all Schedule Cs filed.
[38] IRS advisory groups include Electronic Tax Administration Advisory
Committee (ETAAC), Information Reporting Program Advisory Committee
(IRPAC), and Internal Revenue Service Advisory Council (IRSAC). We also
interviewed tax professionals, tax software vendors, paid preparers,
and other business and professional association representatives
knowledgeable about 1099-MISC payer reporting attending the IRS
National Public Liaisons (NPL) fall 2007 meeting.
[39] The table notes options specifically recommended by IRS's advisory
groups or by IRS in its budgets and tax gap plans.
[40] GAO, Highlights of the Joint Forum on Tax Compliance: Options for
Improvement and Their Budgetary Potential, [hyperlink,
http://www.gao.gov/products/GAO-08-703SP] (Washington, D.C.: June
2008).
[41] The 1099-MISC related cases include eight of over 60 AUR
categories: (1) nonemployee compensation of 50 percent or more of the
taxpayer's income (2) nonemployee compensation with fishing income
where the tax change was 80 percent or greater than the original tax
reported, (3) fishing income, (4) rents and royalties), (5) medical
payments, (6) other income, (7) payments in lieu of dividends, and (8)
crop insurance.
[42] Nonemployee compensation cases include those where 50 percent or
more of the taxpayer's income was nonemployee compensation or where the
tax change was 80 percent greater than the original tax reported.
Nonemployee compensation cases can yield both income and self-
employment tax assessments and accounted for 91 percent of additional
assessments from 1099-MISC related cases for tax year 2004.
[43] Additional AUR assessments include total assessments recommended
for taxes and associated penalties net of any refunds. Amounts of
recommended assessments could be abated in appeals or may not be
collected, and thus should not be construed as amounts ultimately
collected.
[44] A case also may result in no tax change if, for example, the payee
incorrectly reported net income instead of reporting the full 1099-MISC
payment and associated expenses.
[45] Internal Revenue Service, Reducing the Federal Tax Gap: A Report
on Improving Voluntary Compliance, (Washington, D.C.: Aug. 2, 2007).
[46] See GAO, Tax Administration: More Can Be Done to Ensure Federal
Agencies File Accurate Information Returns, [hyperlink,
http://www.gao.gov/products/GAO-04-74] (Washington, DC: Dec. 5, 2003)
and Treasury Inspector General for Tax Administration: More Complete
and Accurate Data are Needed to Assess the Impact of Actions to Address
Compliance Reporting of State and Local Government Entities (Reference
No. 2007-10-081, June 8, 2007).
[47] GAO, Financial Audit: IRS's Fiscal Years 2008 and 2007 Financial
Statements, [hyperlink, http://www.gao.gov/products/GAO-09-119]
(Washington, D.C.: Nov. 10, 2008).
[48] For large businesses, subsidiaries with over 80 percent of its
control under its parent company have the option of filing income tax
under its parent company using a consolidated corporate income tax
return.
[49] SOI is a widely used IRS research database. The SOI files are a
stratified probability sample of unaudited income tax returns. Data
analysis results using SOI are subject to imprecision owing to sampling
variability.
[50] We did not address 1099-MISC payer reporting compliance by tax-
exempt organizations, such as chartable organizations and foundations,
or employee retirement plans.
[51] All three IRS advisory groups provide a public forum for
discussions between IRS officials and representatives of the public.
ETAAC advises on IRS's electronic tax administration activities. IRPAC
advises on improving information reporting, while IRSAC advises on
emerging tax administration challenges and the perspectives of specific
tax payer segments.
[52] IRS offered three sessions of its free 1099-MISC phone training
for tax practitioners, businesses, government agencies, and other
interested parties. Participants could ask questions during the
sessions or submit their questions by email for IRS to answer.
[End of section]
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