Tax Compliance
Opportunities Exist to Improve Tax Compliance of Applicants for State Business Licenses Gao ID: GAO-09-569 June 15, 2009The California Department of Industrial Relations, Division of Labor Standards Enforcement (DLSE), requires applicants for California business licenses in three industries--farm labor contracting, garment manufacturing, and car washing and polishing--to be in compliance with federal employment tax obligations to qualify. Based on questions about whether the Internal Revenue Service (IRS) is fully using data from state and local governments to reduce the tax gap, GAO was asked to analyze (1) the extent to which requiring a demonstration of federal tax compliance to qualify for a state business license has the potential to improve federal tax compliance and (2) what opportunities exist for increasing arrangements that require federal tax compliance to qualify for state business licensing. To address these objectives, GAO analyzed IRS administrative and tax data. GAO identified California as a case study. GAO interviewed IRS and state officials and contacted revenue officials in the 50 states and the District of Columbia.
The California requirement that three types of businesses be in compliance with federal employment taxes to obtain a state business license shows promise as a valuable tool for improving federal tax compliance. According to data from IRS, of 7,194 businesses that applied for a California business license one or more times from calendar years 2006 through 2008 about 24 percent had to file employment tax returns or pay overdue taxes to come into compliance with federal employment taxes. California businesses filed 441 employment tax returns and IRS collected nearly $7.4 million in current dollars in employment taxes in calendar year 2006 and in 8 months of calendar year 2007. GAO estimated that IRS incurred about $331,348 to operate the data-sharing arrangement for this period. Using this cost estimate, the ROI for this arrangement is 22:1. IRS has not tracked the cost data needed to compare the ROI of the IRS-DLSE enforcement activity with other current enforcement activities. However, IRS's highest estimated ROI among five new direct revenue-producing enforcement initiatives proposed in its fiscal year 2009 budget was 11.4:1. Tax compliance among businesses after they applied for state business licenses showed continued improvement. GAO identified 2,017 businesses that applied for business licenses in calendar year 2006 only and found that 315 of these businesses had unpaid assessments as of September 18, 2006. By August 18, 2008, 165 of these businesses had resolved or lowered their unpaid assessment debt by $1,925,162. All but 1 of the 350 businesses that had unpaid assessments when they applied for business licenses in calendar year 2006 were small businesses. GAO's analysis, although showing a promising ROI, did not take into account certain factors, such as whether other tax collection activities were in process for the businesses that applied for licenses. Many opportunities exist to require federal tax compliance to qualify for state business licenses. GAO contacted revenue officials in every state and the District of Columbia to ask whether their states require tax compliance for business licenses. For the 48 respondents, 20 revenue officials said that their states require compliance with state taxes to obtain a state business license, and that these requirements exist for one or more industries. Twenty said that their states do not have such a requirement; 8 said that their states have no business license requirement at the state level. According to IRS, arrangements exist with 13 states that require compliance with one or more federal taxes to qualify for a state business license. Varying licensing requirements from state to state and lack of uniformity among states in categorizing a license as a "business license" make pinpointing the exact number of opportunities difficult. States that currently require compliance with state taxes for selected business license applicants may represent more of an immediate opportunity for establishing arrangements that require federal tax compliance to qualify for a state business license since they already see tax compliance as important for the businesses. Some challenges, such as a lack of current legal authority in some states to link businesses to tax compliance, would need to be addressed if requiring federal tax compliance for state business licenses is to be expanded.
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Report to the Committee on Finance, U.S. Senate:
United States Government Accountability Office:
GAO:
June 2009:
Tax Compliance:
Opportunities Exist to Improve Tax Compliance of Applicants for State
Business Licenses:
Tax Compliance:
GAO-09-569:
GAO Highlights:
Highlights of GAO-09-569, a report to the Committee on Finance, U.S.
Senate.
Why GAO Did This Study:
The California Department of Industrial Relations, Division of Labor
Standards Enforcement (DLSE), requires applicants for California
business licenses in three industries”farm labor contracting, garment
manufacturing, and car washing and polishing”to be in compliance with
federal employment tax obligations to qualify.
Based on questions about whether the Internal Revenue Service (IRS) is
fully using data from state and local governments to reduce the tax
gap, GAO was asked to analyze (1) the extent to which requiring a
demonstration of federal tax compliance to qualify for a state business
license has the potential to improve federal tax compliance and (2)
what opportunities exist for increasing arrangements that require
federal tax compliance to qualify for state business licensing. To
address these objectives, GAO analyzed IRS administrative and tax data.
GAO identified California as a case study. GAO interviewed IRS and
state officials and contacted revenue officials in the 50 states and
the District of Columbia.
What GAO Found:
The California requirement that three types of businesses be in
compliance with federal employment taxes to obtain a state business
license shows promise as a valuable tool for improving federal tax
compliance. According to data from IRS, of 7,194 businesses that
applied for a California business license one or more times from
calendar years 2006 through 2008 about 24 percent had to file
employment tax returns or pay overdue taxes to come into compliance
with federal employment taxes. California businesses filed 441
employment tax returns and IRS collected nearly $7.4 million in current
dollars in employment taxes in calendar year 2006 and in 8 months of
calendar year 2007. GAO estimated that IRS incurred about $331,348 to
operate the data-sharing arrangement for this period. Using this cost
estimate, the ROI for this arrangement is 22:1. IRS has not tracked the
cost data needed to compare the ROI of the IRS-DLSE enforcement
activity with other current enforcement activities. However, IRS‘s
highest estimated ROI among five new direct revenue–producing
enforcement initiatives proposed in its fiscal year 2009 budget was
11.4:1. Tax compliance among businesses after they applied for state
business licenses showed continued improvement. GAO identified 2,017
businesses that applied for business licenses in calendar year 2006
only and found that 315 of these businesses had unpaid assessments as
of September 18, 2006. By August 18, 2008, 165 of these businesses had
resolved or lowered their unpaid assessment debt by $1,925,162. All but
1 of the 350 businesses that had unpaid assessments when they applied
for business licenses in calendar year 2006 were small businesses. GAO‘
s analysis, although showing a promising ROI, did not take into account
certain factors, such as whether other tax collection activities were
in process for the businesses that applied for licenses.
Many opportunities exist to require federal tax compliance to qualify
for state business licenses. GAO contacted revenue officials in every
state and the District of Columbia to ask whether their states require
tax compliance for business licenses. For the 48 respondents, 20
revenue officials said that their states require compliance with state
taxes to obtain a state business license, and that these requirements
exist for one or more industries. Twenty said that their states do not
have such a requirement; 8 said that their states have no business
license requirement at the state level. According to IRS, arrangements
exist with 13 states that require compliance with one or more federal
taxes to qualify for a state business license. Varying licensing
requirements from state to state and lack of uniformity among states in
categorizing a license as a ’business license“ make pinpointing the
exact number of opportunities difficult. States that currently require
compliance with state taxes for selected business license applicants
may represent more of an immediate opportunity for establishing
arrangements that require federal tax compliance to qualify for a state
business license since they already see tax compliance as important for
the businesses. Some challenges, such as a lack of current legal
authority in some states to link businesses to tax compliance, would
need to be addressed if requiring federal tax compliance for state
business licenses is to be expanded.
What GAO Recommends:
GAO recommends that the Commissioner of Internal Revenue determine
whether the return on investment (ROI) of arrangements in which states
require compliance with federal taxes is sufficiently high to merit
their expansion and, if so, work to expand such arrangements. IRS
agreed with GAO‘s recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-09-569] or key
components. For more information, contact Michael Brostek at (202) 512-
9110 or brostekm@gao.gov.
[End of section]
Contents:
Letter:
Background:
Data-Sharing Arrangement Requiring Tax Compliance of California
Business License Applicants Can Be a Valuable Compliance Tool:
Many Opportunities Exist to Require Federal Tax Compliance to Qualify
for State Business Licenses, but Challenges Exist:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Number of Tax Returns Filed and Amount Collected from
Businesses That Were Noncompliant at the Time of Application, Calendar
Years 2006 and 2007:
Table 2: Number of California Business License Applicants with Unpaid
Employment Tax Assessments in Calendar Year 2006 and Status in Calendar
Year 2008:
Table 3: Amount of Unpaid Employment Tax Assessments and Debt Resolved
for 165 Business Applicants:
Table 4: Number of States That Require Businesses to Be Compliant with
Certain State Taxes to Qualify for State Business Licenses in One or
More Industries:
Figures:
Figure 1: How Data Sharing Operates between IRS and California:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
June 15, 2009:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
Sharing data between federal and state agencies can be a cost-effective
way to improve tax compliance by uncovering information that helps
identify businesses and individuals that are noncompliant with their
taxes.[Footnote 1] According to Internal Revenue Service (IRS) studies,
small businesses with cash incomes contribute significantly to the 2001
estimated gross tax gap of $345 billion.[Footnote 2] IRS operates a
wide variety of data-sharing arrangements with state revenue and
nonrevenue agencies designed to improve tax compliance among
individuals and businesses. In one type of arrangement, IRS and state
agencies share information about businesses that apply for state
business licenses.[Footnote 3] Under this arrangement, an individual
applying for a business license from the state is required to be in
compliance with federal tax obligations, state tax obligations, or both
before the state issues a business license. Some state tax and IRS
officials believe this type of data sharing has the potential to
benefit both IRS and state governments since the businesses would need
to initiate contact with IRS or state revenue agencies to demonstrate
compliance. If the businesses cannot demonstrate compliance, they are
then required to come into compliance to qualify for a business
license.
The Department of the Treasury's 2006 Comprehensive Strategy for
Reducing the Tax Gap recognizes the potential benefits of increased
coordination with state governments to improve compliance and reduce
the tax gap.[Footnote 4] It envisions improved document-matching
programs and federal-state partnerships as a means to reduce the tax
gap. In fact, we found that federal and state partnerships that involve
reciprocal agreements covering collection of unpaid tax debts benefited
both governments, and the use of levies and offsets showed even greater
potential for collecting millions in unpaid debts. In fiscal year 2004,
for example, although most states submit only personal income tax debt
and not business income tax debt to the Financial Management Service
(FMS) for collection, FMS still collected over $217 million on behalf
of various states through offsets of federal income tax refunds to pay
state income tax debt. Conversely, IRS received over $77 million from
states' levy of state income tax refunds to pay delinquent federal
taxes.[Footnote 5]
You have raised questions about whether IRS is fully using data from
state and local governments to reduce the tax gap. Related to this
interest, and at your request, we issued a report in November 2008 on
the State Reverse File Match Initiative (SRFMI) pilot program, which
matches federal and state taxpayer data to identify noncompliant
federal taxpayers.[Footnote 6] You also requested that we assess a data-
sharing arrangement between IRS and the California Department of
Industrial Relations, Division of Labor Standards Enforcement (DLSE).
Under this arrangement, applicants for California business licenses in
three industries--farm labor contracting, garment manufacturing, and
car washing and polishing--must be in compliance with federal
employment tax obligations to qualify.[Footnote 7] You asked us to
analyze (1) the extent to which requiring a demonstration of federal
tax compliance to qualify for a state business license has the
potential to improve federal tax compliance and (2) what opportunities
exist for increasing arrangements that require federal tax compliance
to qualify for state business licensing.
To determine the extent to which requiring a demonstration of federal
tax compliance to qualify for a state business license has the
potential to improve federal tax compliance, we used the IRS and State
of California data-sharing arrangement as a case study.[Footnote 8] To
determine the potential for improving federal tax compliance, we
estimated the return on investment (ROI) for the IRS Ogden/California
DLSE data-sharing arrangement by determining the amount collected and
estimating the cost of operating the arrangement. To determine the
amount collected, we used IRS Ogden spreadsheets that record the number
of federal tax returns filed by business license applicants and the
amount IRS collected from businesses that IRS informed that they were
not in compliance with federal employment taxes covering calendar year
2006 and 8 months in calendar year 2007.[Footnote 9] To determine the
cost of operating this data-sharing arrangement, we estimated the costs
of collecting the amounts owed by noncompliant businesses using actual
cost categories provided by IRS Ogden officials. We then compared the
ROI ratio for this data-sharing arrangement to IRS's estimates for five
revenue-producing enforcement initiatives in the IRS fiscal year 2009
budget submission.[Footnote 10] To determine whether California
businesses remained in compliance over time, we matched data on
California business applicants from an Access database maintained by
IRS Ogden with taxpayers in IRS's Unpaid Assessments file.[Footnote 11]
We used California business applicants for calendar year 2006 only from
the Access database and taxpayers in IRS's Unpaid Assessments file as
of the week of September 18, 2006, and the week of August 18, 2008. We
reviewed agency agreements and memoranda, regulations, and reports
covering the data-sharing arrangement and interviewed IRS and
California officials about the compliance value of the arrangement. The
Access database did not contain data prior to calendar year 2006
because IRS Ogden purged these historical data. While data from
previous years would be useful for evaluating the data-sharing
arrangement, we believe that the Ogden records that were available to
us were sufficiently reliable for developing an understanding of the
arrangement. We did not verify the accuracy of the data IRS provided or
its estimate of the revenue costs of its five new activities, including
the estimated ROI of these activities.
To determine what opportunities exist for increasing data sharing that
requires federal business tax compliance to qualify for state business
licensing, we contacted state revenue officials in 50 states and the
District of Columbia via e-mail about the extent to which their states
engage in data-sharing arrangements that require applicants to be tax
compliant to qualify for business licenses, reviewed and identified IRS
documentation on data-sharing arrangements between IRS and state
agencies that require federal tax compliance to qualify for state
business licensing, and interviewed state revenue officials whose
states engage in data-sharing arrangements that require businesses to
demonstrate federal tax compliance to qualify for state business
licenses.
We conducted this performance audit from June 2007 through June 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.
Background:
IRS engages in hundreds of data-sharing arrangements with state
revenue, human services, and law enforcement agencies for tax
compliance and other purposes. In a small portion of IRS's federal-
state data-sharing arrangements, states require federal tax compliance
to qualify for a state business license. In some instances, state
licensing agencies require compliance with both federal and state tax
obligations, and requirements can vary among states. These arrangements
can vary by industry; by type of taxes required for compliance, such as
employment taxes or income taxes; and even by the type of documentation
required to prove compliance. For example, in some states the
businesses may self-certify that they are in compliance with taxes, and
in others businesses must provide documentation from IRS or the state
revenue agency that they are in compliance with tax requirements.
IRS and California's DLSE are engaged in an arrangement that requires
compliance with federal employment taxes to operate a business in any
one of three industries in California.[Footnote 12] An individual
applying for a new business license or a renewal of his/her business
license to operate a farm labor contracting, garment manufacturing, or
car washing and polishing business must first prove full compliance
with federal employment taxes by filing all required federal employment
tax returns and resolving all outstanding federal employment taxes
through full payment or appeal. Each business license applicant in the
three industries requiring federal tax compliance must submit a state
business license application and a signed IRS Form 8821, Tax
Information Authorization, allowing IRS to disclose the applicant's tax
information to DLSE. IRS tax examiners in Ogden, Utah, review the tax
information in IRS's Integrated Data Retrieval System (IDRS) to check
the employment tax status of the applicant.[Footnote 13] If the
applicant is compliant, IRS provides DLSE and the applicant with a
statement that the applicant has met all filing and payment
requirements. If the applicant has an outstanding employment tax
liability, has not filed a federal employment tax return, or both, the
tax examiner prompts the system to generate a noncompliance letter,
which is sent to the applicant. Applicants with outstanding tax
liability can pay the amounts due or contact the IRS tax examiners for
more information or to make arrangements for payment. IRS officials
told us that IRS Ogden does not collect employment taxes from business
applicants directly. Noncompliant business applicants may pay federal
employment taxes they owe at local IRS offices or mail their payments
to IRS. Ogden officials are notified by e-mail or phone when business
applicants have paid the employment taxes identified in the
noncompliance letter. IRS informs DLSE that an applicant has paid all
employment taxes, is currently working with a revenue officer to pay
all balances due, or is otherwise compliant. After notification, DLSE
will issue the applicant's business license.
DLSE officials told us that for purposes of business licensing,
California business applicants in the three industries have resolved
their taxes if they have (1) paid their tax liability, (2) entered into
installment agreements, or (3) completed offers in compromise with IRS.
If an applicant's tax case is in bankruptcy, California's DLSE makes
the decision on whether to issue the business license.[Footnote 14] If
an applicant does not resolve his/her tax liability within 90 days of
applying, IRS staff in Ogden send the cases to the IRS Agricultural
Team in Fresno, where tax examiners open the case and do investigative
work on collecting the balance due. See figure 1 on how data sharing
between IRS and California operates.
Figure 1: How Data Sharing Operates between IRS and California:
[Refer to PDF for image: illustration]
Business owner:
(1) Business owner can submit forms to IRS by mail, fax, or e-mail;
(2) Business owner completes IRS form to authorize data sharing;
IRS Ogden Service Center: Tax examiners search IRS database to
determine whether business is compliant with federal employment taxes;
If business resolves its taxes within 90 days of applying, it becomes
compliant;
* IRS mails compliance results to applicant and DLSE;
* Summaries of Form 8821s are sent to DLSE weekly;
* If noncompliant for 90 days or more, business listings are compiled
and sent on CD to the IRS Agricultural Team in Fresno;
* Examiners open cases and do investigative work on collecting the
balance due;
(3) Business owner applies for CA business license to:
(4) California Division of Labor Standards Enforcement (DLSE);
(5) If compliant, California issues business license.
Source: GAO analysis of IRS information.
[End of figure]
Section 6103 of the Internal Revenue Code (I.R.C.) prohibits the
disclosure of tax returns and return information by IRS employees;
other federal employees, state employees, or both; and certain others
having access to the information except in specifically enumerated
circumstances. Data sharing between IRS and California DLSE is
authorized by a subsection of I.R.C. § 6103. Specifically, section
6103(c) authorizes IRS to disclose the return information of a taxpayer
to any other person at the taxpayer's request[Footnote 15]. State
licensing entities that wish to review federal tax information or have
IRS attest to tax compliance before issuing the license would need to
require the applicant to provide a written request to IRS authorizing
release of the information to the licensing entity.
Data-Sharing Arrangement Requiring Tax Compliance of California
Business License Applicants Can Be a Valuable Compliance Tool:
The data-sharing arrangement between IRS Ogden and California DLSE can
be a valuable tool for improving compliance among certain businesses.
According to IRS officials, this type of data-sharing arrangement has
mutual benefits for IRS, by increasing filing and payment compliance
with federal employment taxes, and for states, by minimizing concerns
about the success of the business and its compliance with unemployment
requirements. IRS officials noted that growth in this data-sharing
arrangement can generate many compliance benefits with a relatively
minimal resource allocation. According to a California DLSE official,
this data-sharing arrangement is beneficial because it helps to ensure
that businesses are competent and responsible and pay their taxes.
The amount of revenue in federal employment taxes collected through
this data-sharing arrangement appears to outweigh the cost of operating
the data-sharing arrangement. Thousands of California businesses apply
for a business license each year in order to operate a business in the
three industries previously mentioned, and must provide documentation
to DLSE to show that they are in compliance with federal employment
taxes. Many of these businesses were not in compliance with employment
taxes during the time of our analysis and, therefore, had to file tax
returns or pay employment taxes to rectify their compliance status.
According to the IRS Ogden database on business applicants, 7,194
businesses applied for a business license in the three industries one
or more times from calendar years 2006 through 2008 and requested that
IRS provide California with information on their compliance with
federal employment taxes. About 24 percent of businesses (i.e., 1,726
of the 7,194 that applied) had to file employment tax returns or pay or
otherwise resolve overdue taxes to come into compliance with federal
employment taxes.
IRS staff in Ogden use spreadsheets to track the number of federal tax
returns filed by noncompliant California business license applicants
and the amounts IRS collected from these businesses that are
attributable to the data-sharing arrangement. The spreadsheets show
that businesses not in compliance with federal employment taxes when
they applied for California business licenses filed hundreds of tax
returns in calendar years 2006 and 2007 and IRS collected millions in
federal employment taxes. California businesses filed 441 employment
tax returns to come into compliance to qualify for California business
licenses and IRS collected nearly $7.4 million in employment taxes,
according to IRS Ogden spreadsheets.[Footnote 16] IRS Ogden officials
told us that the nearly $7.4 million in employment taxes collected
represents the amount business applicants paid after receiving
noncompliance letters related to their DLSE business license
applications. Table 1 shows the number of tax returns filed and the
amount IRS collected from these applicants during calendar years 2006
and 2007.
Table 1: Number of Tax Returns Filed and Amount Collected from
Businesses That Were Noncompliant at the Time of Application, Calendar
Years 2006 and 2007:
Calendar year: 2006;
Number of federal tax returns filed: 277;
Amount collected[A]: $3,896,098.
Calendar year: 2007[B];
Number of federal tax returns filed: 164;
Amount collected[A]: $3,476,509.
Calendar year: Total;
Number of federal tax returns filed: 441;
Amount collected[A]: $7,372,607.
Source: GAO analysis of IRS data.
[A] The amounts collected are expressed in 2009 dollars.
[B] Spreadsheet data for calendar year 2007 exclude 4 months. Data were
not available for July, August, November, and December at the time we
obtained the data in November 2007.
[End of table]
Even though IRS did not track all of the costs it incurred for
operating the data-sharing arrangement, IRS officials noted that the
arrangement resulted in high revenues relative to costs.[Footnote 17]
In order to get some perspective on how this data-sharing arrangement
compares with other IRS enforcement efforts, we developed an estimate
of the costs of the arrangement using cost categories provided and
confirmed by IRS officials.[Footnote 18] The cost categories we
considered included personnel costs and nonpersonnel costs, such as
computers, telephones, and fax machines.
We estimated that IRS incurred about $331,348 to operate the data-
sharing arrangement in calendar years 2006 and 2007. Our cost estimate
included personnel costs of about $202,125 in pay and about $61,042 in
benefits for one General Schedule (GS) 5 clerk and two GS 7 tax
examiners. We also included about $10,197 for three computers, $1,237
for one dedicated printer, $313 for one fax machine with a dedicated
line and two dedicated phone lines with voice mail boxes, and
approximately $56,435 for supplies, facilities, utilities, and
supervision.[Footnote 19] These costs may be somewhat overstated
because, for instance, we used approximate purchase costs for equipment
and did not spread those costs over the useful life of the equipment or
other uses of the equipment.
Using our estimate, the ROI for this data-sharing arrangement is 22:1.
[Footnote 20] IRS has not tracked the cost data needed to do a study
comparing the ROI of the IRS Ogden/DLSE enforcement activity with those
of other current enforcement activities to determine how the IRS
Ogden/DLSE data-sharing arrangement ROI compares with those of IRS's
other enforcement activities. However, IRS has developed ROI estimates
for five new direct revenue-producing enforcement initiatives it
proposed in its fiscal year 2009 budget submission.[Footnote 21] IRS
estimates that the average ROI for these activities at full performance
(at the end of their second year of implementation) will be 7.1:1. IRS
projects the highest ROI for one of the five new initiatives (expanded
document matching) at 11.4:1. IRS officials told us that IRS calculates
the ROI each year for the revenue-producing initiatives included in the
President's budget request. They also said that these ROI calculations
are based on historical information in the Enforcement Revenue
Information System and the annually updated unit cost rates used in
budget formulation.[Footnote 22] We did not verify the accuracy of the
data IRS provided or its estimate of the revenues and costs of its five
new enforcement activities, including the estimated ROI of these
activities.
Tax Compliance among Businesses Showed Improvement after They Applied
for State Business Licenses:
We identified the 2,017 businesses that applied for business licenses
in calendar year 2006 only,[Footnote 23] and found that 315 of these
businesses had unpaid assessments at the time of applying and that tax
compliance improved for these 315 businesses. We identified the
businesses that applied for a California business license in 2006 only
so that we could follow the tax compliance of this set of specific
businesses over time. We matched data of California business license
applicants for calendar year 2006 from the IRS Ogden Access database
with IRS's Unpaid Assessments file at two points in time--for the week
of September 18, 2006, and the week of August 18, 2008.
Our analysis of California business license applicants matched against
the IRS Unpaid Assessments file database showed that 315 businesses
owed employment taxes as of September 18, 2006, and by August 18, 2008,
165 of those businesses had resolved or lowered their unpaid assessment
debt.[Footnote 24] The 165 businesses resolved or lowered their 2006
unpaid assessments in either calendar year 2007 or 2008. Our analysis
also revealed that 150 businesses had not resolved or reduced unpaid
assessment debt by August 18, 2008. Table 2 shows business license
applicants with unpaid assessments as of September 18, 2006, and
businesses that resolved/did not resolve their debt by August 18, 2008.
Table 2: Number of California Business License Applicants with Unpaid
Employment Tax Assessments in Calendar Year 2006 and Status in Calendar
Year 2008:
Calendar year 2006 business applicants;
Number with unpaid assessments as of week of September 18, 2006: 315;
Number that resolved or lowered debt as of week of August 18, 2008:
165;
Number with unresolved or unreduced debt as of week of August 18, 2008:
150.
Source: GAO analysis of IRS data.
Note: Data on business license applicants for calendar year 2007
include 10 months. Data were available through October at the time we
obtained the data in November 2007.
[End of table]
The 165 businesses resolved or lowered their unpaid assessments by
nearly $2 million--$1,925,162--from the weeks of September 18, 2006,
through August 18, 2008. The 115 business license applicants that
completely resolved their debt before August 18, 2008, resolved nearly
$800,000 in unpaid tax assessments in calendar years 2007 and 2008.
[Footnote 25] These applicants, in total, had a nearly $800,000 tax
liability as of September 18, 2006, but the unpaid assessments file
showed no tax liability for them as of the week of September 18, 2008.
Fifty additional businesses lowered their tax assessments from the
weeks of August 18, 2006, through September 18, 2008, by $1,135,216.
However, the 165 businesses may have resolved more than $1,925,162
because these taxpayers may have had additional taxes assessed after
the week of September 18, 2006, and may have resolved them before the
week of August 18, 2008. Our analysis compares unpaid assessments at
two points in time since the data file we used did not allow us to
track weekly changes in the businesses' unpaid assessments. Table 3
shows the amount of unpaid tax assessments as of the week of September
18, 2006, and as of the week of August 18, 2008, and the amount of
unpaid employment tax assessments resolved by the 165 businesses.
Table 3: Amount of Unpaid Employment Tax Assessments and Debt Resolved
for 165 Business Applicants:
Number of business applicants: 115 business applicants in 2006;
Amount of unpaid assessments as of week of September 18, 2006:
$789,946;
Amount of unpaid assessments as of week of August 18, 2008: $0;
Amount of debt resolved as of week of August 18, 2008[A]: $789,946.
Number of business applicants: 50 business applicants in 2006;
Amount of unpaid assessments as of week of September 18, 2006:
$7,158,680;
Amount of unpaid assessments as of week of August 18, 2008: $6,023,464;
Amount of debt resolved as of week of August 18, 2008[A]: $1,135,216.
Number of business applicants: Total;
Amount of unpaid assessments as of week of September 18, 2006:
$7,948,626;
Amount of unpaid assessments as of week of August 18, 2008: $6,023,464;
Amount of debt resolved as of week of August 18, 2008[A]: $1,925,162.
Source: GAO analysis of IRS data.
[A] Unpaid assessments and unresolved tax debt include accrued interest
and penalties.
[End of table]
All but 1 of the 350 businesses that had unpaid assessments when they
applied for business licenses in calendar year 2006 were small
businesses. The remaining business was a medium or large business.
According to IRS, "small businesses" includes businesses with assets of
less than $10 million.
The IRS Ogden/California DLSE data-sharing arrangement can be a
valuable compliance tool because the requirement to renew business
licenses annually provides a motivation to resolve tax debts timely.
The arrangement may help flag unpaid tax assessments when they are
recent and have a greater likelihood of collection. Our previous work
found that the age of the unpaid assessment is an indicator of the
extent to which the outstanding amounts owed are likely to be
collected.[Footnote 26] This work showed that the older an unpaid
assessment the lower the probability it will be paid. In another
report, we found that the IRS records we examined showed that 70
percent of all unpaid payroll taxes--estimated at $58 billion as of
September 30, 2007--were owed by businesses with more than a year (4
tax quarters) of unpaid federal payroll taxes. Over a quarter of unpaid
federal payroll taxes were owed by businesses that accumulated tax debt
for more than 3 years (12 tax quarters).[Footnote 27] One reason why
older debts may not be collected is that they lead to large and
increasing amounts of accrued interest and penalties. The requirement
that annual business license renewals depend on resolving unpaid
employment tax assessments may help businesses avoid the pyramiding of
interest and penalties.
The ROI for these enforcement activities can vary depending on factors
such as the efficiency of operating the data-sharing arrangements and
whether the data-sharing arrangements experience higher collections in
the early years of operation. For example, an IRS official suggested
that there may be a way to more efficiently operate this type of data-
sharing arrangement and thereby obtain a higher ROI. Applying an
automated filter to isolate business applicants with no taxes due, IRS
staff would only need to manually review data on businesses with
balances due or that have not filed required returns, and fewer IRS
staff may be needed to operate the data-sharing arrangement. An IRS
official in Ogden told us that the taxes collected by the IRS Ogden/
California DLSE data-sharing arrangement about 10 years ago were
substantially higher because there was very little compliance when the
data-sharing arrangement first started. This official recalled that
when the program was transferred to Ogden the numbers of noncompliant
applicants were at least three or four times higher than they are now.
In this official's view, consistency in enforcing the business tax
compliance requirement of the three industries has steadily improved
compliance and has resulted in fewer business applicants that are
noncompliant with their employment tax obligations when they apply for
business licenses.
A More Complete Evaluation Could Further Isolate and Quantify the
Benefits and Costs of the Business Licensing Requirement:
Given that our analysis indicates that the California business
licensing requirement likely has a higher ROI than the direct revenue-
producing enforcement initiatives IRS proposed in its 2009
Congressional budget submission, a fuller examination is warranted. A
more complete evaluation could address some potential factors that
could reduce or increase the ROI we calculated. For example, it could
evaluate whether IRS had taken other enforcement actions against the
California businesses at the same time as they were applying for
licenses. If IRS had sent collection notices to the businesses or taken
other enforcement action at or close to the time the businesses went
through the licensing reviews, the resolution of their debts might be
attributable to those enforcement actions. A more complete evaluation
could also compare the results of this enforcement approach to the
results for similar businesses that were not subject to the business
licensing requirement. Such an analysis could help demonstrate how well
the business licensing requirement fares compared to the "normal"
enforcement actions that would be taken by IRS with similarly situated
businesses. A more complete evaluation could take into account the
resolution of debts that may have been incurred before a business
applied for a license. Since the affected businesses know they must
resolve their employment tax debts in order to receive business
licenses, some may pay or otherwise resolve their debts in anticipation
of the licensing review by IRS. Any such advance payments or
resolutions could be included.
Similarly, although our tracing of businesses' compliance from calendar
years 2006 to 2008 shows improvement in the resolution of many firms'
debt, a more complete evaluation could compare their improvement to
similarly situated businesses that were not subject to the licensing
requirement. Such a comparison would help show whether this continued
improvement in the delinquent debts was better than what could have
occurred absent the licensing requirement.
During the period we reviewed, Ogden staff responsible for the business
licensing reviews discarded older operational data when they were no
longer needed for their purposes. Further, a few months of data were
lost even before they would have normally been discarded. Although
these data may not be needed to administer the program, they are needed
to support a more complete review of the program's ROI.
Many Opportunities Exist to Require Federal Tax Compliance to Qualify
for State Business Licenses, but Challenges Exist:
We contacted revenue officials in every state and the District of
Columbia to ask whether their states have business licensing
requirements and, if so, whether they require demonstration of state
tax compliance before business licenses are granted.[Footnote 28] Of
the 47 states and the District of Columbia that responded, 20 revenue
officials told us that the states require demonstration of compliance
with one or more state taxes for businesses to qualify for state
business licenses, and these requirements exist for one or more
industries.[Footnote 29] Based on these responses, the tax compliance
requirement is typically limited to a few industries, requires
compliance with selected taxes, and varies on the amount of
documentation required to show compliance with tax requirements. Table
4 summarizes responses on the number of states that require businesses
to be tax compliant to qualify for state business licenses in one or
more industries as of April 6, 2009.
Table 4: Number of States That Require Businesses to Be Compliant with
Certain State Taxes to Qualify for State Business Licenses in One or
More Industries:
Tax compliance requirement: Require state tax compliance;
Number of states: 20.
Tax compliance requirement: Do not require state tax compliance;
Number of states: 20.
Tax compliance requirement: Do not have a business license requirement
at the state level;
Number of states: 8.
Tax compliance requirement: No response;
Number of states: 3.
Tax compliance requirement: Total;
Number of states: 51.
Sources: Revenue agencies from the 50 states and the District of
Columbia.
[End of table]
Of the 19 states and the District of Columbia that require business
applicants to be compliant with state taxes, only the District of
Columbia requires applicants in all industries to be state tax
compliant to qualify for business licenses. Nineteen states require
business license applicants in one or more industries to be state tax
compliant to qualify for business licenses.
Most of the states that responded do not require compliance with three
types of taxes, employment, income, or sales and use, except for the
District of Columbia, which requires compliance with all three types of
taxes. Of the 19 states that identified compliance with state taxes to
qualify for a state business license, 15 identified the specific type
of tax or taxes being reviewed. Seven states require compliance with
their employment taxes, 8 states require compliance with state sales
and use taxes, and 10 states require compliance with state income
taxes. State requirements also vary in the amount and kind of
documentation required to prove compliance with tax requirements. For
example, Rhode Island allows businesses to self-certify that they are
in compliance with state tax requirements. Pennsylvania requires
licensing agencies to request verification of state tax compliance from
the state tax agency when a business owner applies for or renews a
license.
Federal Tax Compliance Requirements to Qualify for State Business
Licenses Differ by State:
IRS maintains information on data-sharing arrangements that include
requirements for federal tax compliance to qualify businesses for state
business licenses. According to an IRS document, 13 data-sharing
arrangements exist that require compliance with federal taxes to
qualify for state business licenses. For example, the State of Oregon
requires farm/forest labor contractors comply with federal and state
taxes to qualify for state business licenses. Each farm/forest labor
contractor applicant must submit IRS Form 8821 with the application. In
addition, applicants can be denied licenses if state and federal taxes
are owed. Similarly, the State of Connecticut requires applicants for
gaming licenses to be compliant with federal and state income taxes to
qualify for business licenses. Applicants for gaming licenses must
submit complete copies of their most recent federal and state income
tax returns and certify that there are no outstanding tax delinquencies
or unresolved disputes.
Officials See Benefit in Requiring Tax Compliance to Qualify for
Business License but Acknowledge That Challenges Exist:
While most states told us that they do not track tax collections and
program costs associated with these data-sharing arrangements, those
revenue officials that provided comments and participate in data-
sharing arrangements requiring state tax compliance told us that the
state arrangements improve state tax collections and promote voluntary
compliance. For example, a revenue official said that data sharing is
used as another tool to collect outstanding taxes due the state. This
official also said that the data-sharing arrangement has been very
effective in furthering the state's tax collection efforts. He added
that without a license, a business cannot operate. Another state
revenue official told us that the individual or business must keep all
state tax obligations current in order to prevent the denial or
revocation of the applicable license. In this official's view, this
causes the affected individuals or businesses to be less likely to have
delinquent returns and outstanding tax bills that are not on payment
agreements. Our analysis shows that 19 states and the District of
Columbia allow the taxpayer to obtain a business license if the
taxpayer sets up a payment agreement with the state's revenue agency.
IRS staff in Ogden told us that requiring tax compliance makes the
businesses think about the consequences of not being tax compliant.
They added that the data-sharing arrangement itself becomes a deterrent
after a while, since businesses, for which IRS is checking compliance,
learn that they cannot get licenses without being compliant.
While some state revenue officials see benefit in requiring tax
compliance to qualify for a business license, they recognize certain
challenges their agencies face from linking state business licensing
with tax compliance. One of the challenges is coordination between
state agencies. For example, a revenue official said that obtaining key
information from state agencies, such as tax identification numbers and
licensee names, and acting on her agency's request to suspend the
licenses are ongoing challenges. A 2008 state study noted that agency
coordination is crucial to the success of any tax clearance program. In
order for the program to be effective, each agency must be prepared to
share information with other agencies and to act on information
received from other agencies.[Footnote 30] Finally, states also face
technical issues with linking tax compliance with business licensing.
For example, a revenue official said that her state does not have
electronic linking between its Division of Alcoholic Beverages and
Tobacco and the Department of Revenue for verification of applicant
sales and use tax information. This official also said that the
challenge would be to link their present licensing computer system with
the Department of Revenue system. Another official said that her
agency's computer programs vary, are outdated, and are not integrated.
Some challenges identified by states likely would be especially
important for any expansion of requirements for federal tax compliance
to obtain state business licenses. For example, some of the revenue
officials we contacted identified legal issues relating to data
sharing. A state revenue official said that various licensing statutes
do not permit the revocation or threat of action against a licensee due
to tax noncompliance. An additional revenue official said that with
limited resources, implementing the legal requirement to review
licenses is difficult.
Opportunities Exist to Expand Federal Tax Compliance Requirements to
Qualify for State Business Licenses:
The potential to increase data-sharing opportunities between IRS and
state business licensing entities exists, but pinpointing the exact
number of opportunities is difficult. According to the Small Business
Administration, business licensing requirements vary from state to
state. For example, a state "business license" is the main document
required for tax purposes and conducting other basic business
functions. However, some states have separate licensing requirements
based on the product sold, such as licenses to sell liquor, lottery
tickets, gasoline, or firearms. Ultimately, it is up to each state to
determine what industries, occupations, and professions must be
licensed and the licensure requirements that applicants must meet.
Some states and some business types may represent more of an immediate
opportunity for establishing arrangements that require federal tax
compliance to qualify for state business licenses. States that
currently require compliance with state taxes for selected business
license applicants may be more amenable to requiring federal tax
compliance than states that do not even require state tax compliance
since they already recognize tax compliance as important for the
businesses. For example, North Carolina, Texas, and Missouri have a
requirement for tax compliance with state taxes for retail sales
businesses. These states do not require compliance with federal taxes.
In addition, states that currently require compliance with federal
employment taxes may be amenable to extending the requirement to
include federal income taxes. For example, California's DLSE requires
applicants for the three industries requiring licensing to be compliant
with federal employment taxes only. California's garment manufacturing,
farm labor contracting, and car washing and polishing license
applicants have no requirement to be in compliance with federal income
taxes to qualify for business licenses.
Conclusions:
Increasing data sharing between IRS and state governments to help
reduce the tax gap can be beneficial to IRS when such data-sharing
arrangements demonstrate firm compliance value. Data-sharing
arrangements requiring tax compliance among business license applicants
show real potential to be a valuable tool to improve tax compliance
among certain businesses. Our estimated ROI of the data-sharing
arrangement between IRS Ogden and California DLSE suggests that
requiring tax compliance to qualify for state business licenses can be
a cost-effective way of collecting tax debt. In fact, the data-sharing
arrangement's estimated ROI is higher than the estimated ROI for the
new direct revenue-producing tax enforcement initiatives in IRS's
fiscal year 2009 budget submission.[Footnote 31] However, a more
complete evaluation could take into account all the factors that could
affect ROI. To be in a better position to evaluate these data-sharing
arrangements, IRS needs to ensure that program data are retained.
Recommendations for Executive Action:
We recommend that the Commissioner of Internal Revenue take the
following three actions:
* Collect and retain the cost and revenue data needed to develop ROI
estimates for programs requiring businesses to demonstrate federal tax
compliance to obtain state business licenses.
* Evaluate the ROI of existing arrangements where states require
federal tax compliance to qualify for state business licenses to
determine whether the ROI of these programs is sufficient to merit
their expansion.
* To the extent that existing data-sharing arrangements have a
sufficiently high ROI, coordinate with states to expand requirements to
comply with federal taxes to qualify for state business licenses and
monitor the ROI of these expansions to gauge their success.
Agency Comments:
On behalf of the Commissioner of Internal Revenue, the Deputy
Commissioner for Services and Enforcement provided written comments on
a draft of this report in a June 8, 2009, letter. The Deputy
Commissioner agreed with our recommendations. IRS plans to gather
appropriate data to develop ROI estimates for this program, evaluate
the results to determine whether these programs merit expansion, and if
so, work with states to expand the programs.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 from
the report date. At that time, we will send copies to the Secretary of
the Treasury, the Commissioner of Internal Revenue, and other
interested parties. This report will also be available at no charge on
GAO's Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-9110 or brostekm@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 II.
Signed by:
Michael Brostek:
Director, Tax Issues Strategic Issues Team:
[End of section]
Appendix I: Scope and Methodology:
Our objectives were to analyze (1) the extent to which requiring a
demonstration of federal tax compliance to qualify for a state business
license has the potential to improve federal tax compliance and (2)
what opportunities exist for increasing arrangements that require
federal tax compliance to qualify for state business licensing. This
report focuses on data-sharing arrangements that require compliance
with federal or state tax obligations to qualify for state business
licensing. We did not include licensing requirements at the local level
or licensing for professions or occupations.
To provide background on data-sharing arrangements that require
compliance with tax obligations to qualify for state business
licensing, we reviewed relevant Internal Revenue Service (IRS) and
California Department of Industrial Relations, Division of Labor
Standards Enforcement (DLSE) documents and interviewed IRS and
California officials. We also reviewed laws and regulations related to
taxpayer disclosure.
To determine the extent to which requiring a demonstration of federal
tax compliance to qualify for a state business license has the
potential to improve federal tax compliance, we used the IRS and State
of California data-sharing arrangement as a case study. To determine
the potential for improving federal tax compliance, we estimated the
return on investment (ROI) for the IRS Ogden/California DLSE data-
sharing arrangement. To determine the amount collected, we used IRS
Ogden/California DLSE spreadsheets that record the number of federal
tax returns filed by applicants for business licenses in the three
industries and the amount IRS collected from businesses that were
notified by IRS that they were not in compliance with federal
employment taxes covering calendar year 2006 and 8 months in calendar
year 2007.[Footnote 32] Spreadsheet data for calendar year 2007
excluded 4 months. Ogden misplaced data for July and August, and data
for November and December were not available when we obtained the data
in November 2007. We also reviewed agency agreements and memoranda,
regulations, and reports covering the data-sharing arrangement between
IRS and California DLSE and interviewed IRS and California officials
about the value of the data-sharing arrangement to IRS and the state.
To determine the cost of operating this data-sharing arrangement, we
estimated the costs of collecting the amounts owed by noncompliant
businesses using actual cost categories provided by IRS Ogden
officials. We used the guidance for preparing agency budgets in
Executive Office of the President, Office of Management and Budget,
Circular A-11, Preparation, Submission, and Execution of the Budget,
and our Cost Estimating and Assessment Guide: Best Practices for
Developing and Managing Capital Program Costs, GAO-09-3SP (Washington,
D.C.: March 2009). We estimated personnel costs using the Office of
Personnel Management Salary Table 2009-RUS, for the locality pay area
"of rest of U.S.," effective January 2009, for General Schedule (GS) 5
and 7 personnel at step 5. We used step 5 to capture the midpoint of
the GS 5 and 7 grade levels so as not to bias pay in the direction of a
low or high estimate. We estimated the cost of benefits for these
employees using the Department of Labor's Bureau of Labor Statistics
30.2 percent average compensation cost for calendar year 2008.[Footnote
33] We estimated the cost of fax machines and printers by averaging the
costs for these items as shown on the Web sites for federal government
customers of two leading manufacturers of these products. We shared our
estimates with IRS officials to obtain concurrence with our estimates
of nonpersonnel costs. We did not analyze the taxes IRS may collect or
the costs it may incur after the noncompliant cases leave Ogden. We
then compared the ROI ratio for this data-sharing arrangement to IRS's
estimates for five revenue-producing enforcement initiatives in the IRS
fiscal year 2009 budget submission.[Footnote 34] The Ogden Service
Center sends information on the taxpayers that have unpaid assessments
90 days after Ogden first receives their application materials to the
Fresno Service Center for collection.
To determine whether California businesses remained in compliance over
time, we matched data on California business applicants from an Access
database maintained by IRS Ogden with taxpayers in IRS's Business
Master File Unpaid Assessments file. We selected the businesses that
according to the Access database, applied for California DLSE business
licenses in calendar year 2006 only--that is, applied in calendar year
2006 and did not reapply in calendar year 2007 or in the 10 months in
2008 for which we have IRS Ogden DLSE Access database data. The Access
database contained January 2006 through October 2007 data on business
license applicants in the three covered industries. For our analysis,
we matched records of the California businesses that we selected from
the Access database because they applied in calendar year 2006 only
with IRS's Unpaid Assessments file as of the weeks of September 18,
2006, and August 18, 2008; identified the number of businesses with
unpaid assessments and the amounts of their tax debt as of the week of
September 18, 2006; and identified the applicants for business licenses
in 2006 only that had resolved their unpaid assessments as of August
18, 2008, and the amounts of their tax debt they resolved. Our analysis
compares unpaid assessments at two points in time since the data file
we used did not allow us to track weekly changes in the businesses'
unpaid assessments. We could not follow the tax compliance of earlier
applicants into the present because IRS Ogden purged data from the
Access database for calendar years earlier than 2006. Unpaid
assessments in this report include the total tax assessment plus
interest and penalties where these exist.
To determine what opportunities exist for increasing data sharing for
arrangements that require federal tax compliance to qualify for state
business licensing, we (1) analyzed and summarized which states and the
District of Columbia have data-sharing arrangements that require state
tax compliance to qualify for state business licensing, which states do
not have such arrangements, and which states do not require businesses
to obtain business licenses on the state level; (2) contacted revenue
officials in 50 states and the District of Columbia via e-mail with
structured questions about the extent to which their states engage in
data-sharing arrangements that require demonstration of tax compliance
before business licenses are granted; and (3) sent a follow-up e-mail
to 21 state revenue officials who confirmed that their states require
applicants to be compliant with state taxes to qualify for business
licenses, by requesting information on the amount of taxes collected,
the costs associated with operating the data-sharing arrangements, and
benefits of these data-sharing relationships to the states. Three
states did not respond to our structured questions about the extent to
which their states engage in data-sharing arrangements that require
demonstration of tax compliance before businesses qualify for business
licenses. We also (1) summarized IRS information on existing data-
sharing arrangements between IRS and state agencies that require
compliance with federal taxes to qualify for state business licensing,
(2) interviewed IRS officials to determine which states have state
licensing requiring federal tax compliance, and (3) reviewed IRS
documentation on data-sharing arrangements between IRS and state
agencies that require businesses to demonstrate federal tax compliance
to qualify for state business licensing.
Our review was subject to some limitations. We did not verify the
accuracy of the data IRS provided or its estimate of the revenues and
costs of its five new enforcement activities, including the estimated
ROI of these activities. IRS Ogden's Access database on California
business applicants did not contain data prior to calendar year 2006
because IRS Ogden purged these historical data. While data from
previous years would be useful for evaluating the data-sharing
arrangement, we believe that the Ogden records that were available were
sufficient to attain an understanding of the potential value of this
arrangement as a compliance tool. The IRS Ogden spreadsheet used to
track the number of federal tax returns filed by noncompliant
California business license applicants and the amount IRS collected
from these businesses attributable to the data-sharing arrangement did
not contain data for the months of July, August, November, and December
2007. We acknowledge that data for the entire calendar year of 2007
would affect the number of tax returns filed and the amount IRS
collected from applicants during those months. Our estimate of the cost
of IRS and California's data-sharing arrangement may be somewhat
overstated because, for instance, we used approximate purchase costs
for equipment and did not spread those costs over the useful life of
the equipment or other uses of the equipment and used calendar year
2009 costs. Additionally, our analysis did not address some other
potential factors that could reduce, or increase, the ROI we
calculated. We did not verify the responses from the states about tax
compliance to qualify for state business licenses. We recognize that
the state revenue officials may not be knowledgeable about all of their
states' requirements for tax compliance to qualify for business
licenses, but they are a credible source of information about state tax
compliance to qualify for state business licenses.
We conducted this performance audit from June 2007 through June 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: GAO Contact and Staff Acknowledgments:
GAO Contact:
Michael Brostek, (202) 512-9110 or brostekm@gao.gov:
Acknowledgments:
In addition to the contact named above, Signora J. May, Assistant
Director; Amy R. Bowser; Jennifer K. Echard; Amy C. Friedlander; Arthur
L. James, Jr.; Stuart M. Kaufman; Edward J. Nannenhorn; Lou V. B.
Smith; Jessica Thomsen; and James J. Ungvarsky made key contributions
to this report.
[End of section]
Footnotes:
[1] GAO, Taxpayer Information: Options Exist to Enable Data Sharing
Between IRS and USCIS but Each Presents Challenges, [hyperlink,
http://www.gao.gov/products/GAO-06-100] (Washington, D.C.: Oct. 11,
2005).
[2] The gross tax gap represents the difference between the tax amounts
taxpayers pay voluntarily and on time and what they should pay under
the law. 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). IRS estimated that it would eventually collect about $55 billion
of the gross tax gap through late payments and IRS enforcement actions,
leaving a net tax gap of around $290 billion.
[3] Some states also engage in data sharing arrangements requiring tax
compliance to qualify for professional licenses, such as licenses to
practice nursing or law. This report focuses on business licenses.
[4] Department of the Treasury, Office of Tax Policy, Comprehensive
Strategy for Reducing the Tax Gap (Washington, D.C., Sept. 26, 2006).
[5] GAO, Financial Management: State and Federal Governments Are Not
Taking Action to Collect Unpaid Debt through Reciprocal Agreements,
[hyperlink, http://www.gao.gov/products/GAO-05-697R] (Washington, D.C.:
July 26, 2005).
[6] In this report, we recommended that IRS develop a methodologically
sound and documented evaluation plan to accurately and reliably assess
the SRFMI pilot program's results. In response, IRS agreed that it is
important to properly document and assess the SRFMI pilot program as a
whole before it is expanded to additional states. IRS also agreed to
develop an overall evaluation plan to accurately and reliably assess
all components of the SRFMI pilot program's results and include the key
evaluation features in our recommendation. GAO, Tax Administration: IRS
Needs to Strengthen Its Approach for Evaluating the SRFMI Data-Sharing
Pilot Program, [hyperlink, http://www.gao.gov/products/GAO-09-45]
(Washington, D.C.: Nov. 7, 2008).
[7] DLSE licenses farm labor contractors and registers garment
manufacturers and car washing and polishing firms. DLSE requires the
same tax compliance verification for both licensure and registration.
In this report, we use the term business license in discussing all
three California businesses.
[8] We selected the State of California data-sharing arrangement as a
case study because it required federal tax compliance to qualify for a
state business license, data were available on the number of businesses
and amounts of unpaid assessment businesses owed IRS and the cost to
operate the data-sharing arrangement, and this arrangement was
established in 1992. In addition, IRS officials said that this
arrangement generated big benefits relative to costs.
[9] The spreadsheets exclude 4 months for calendar year 2007. IRS Ogden
misplaced data for July and August, and November and December data were
not available when we obtained the data in November 2007.
[10] Internal Revenue Service, FY 2009 Congressional Budget Submission
(Washington, D.C.: Feb. 4, 2008).
[11] Unpaid assessments are legally enforceable claims against
taxpayers and consist of taxes, penalties, and interest that have not
been collected or abated. 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).
[12] The data-sharing arrangement started in the garment manufacturing
industry in the early 1990s and expanded to farm labor contracting. The
state extended the arrangement to the car washing and polishing
industry in December 2005.
[13] IDRS is a system that consists of databases and operating programs
that support IRS employees working active tax cases, allowing them to
take specific actions on taxpayer account issues, track status, and
post transaction updates back to the Master File. There are several
master files. The most significant are the individual master file--
which contains tax records of individual taxpayers--and the business
master file--which contains tax records of corporations and other
businesses.
[14] According to California DLSE, in the event that a taxpayer
disputes the tax assessment, DLSE would, on a case-by-case basis, make
a decision about granting the business license based on the amount owed
and the individual business circumstance.
[15] The taxpayer's request to release return information to another
must be in writing. I.R.C. § 6103(c). IRS Form 8821 is generally used
to authorize IRS's release of confidential information.
[16] The amounts of collections and cost dollars are expressed in 2009
dollars.
[17] In 2009, we reported that IRS was unable to readily determine the
costs of its direct activities and programs and did not have cost-based
performance information. 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).
[18] The estimate includes costs for calendar year 2006 and 8 months in
calendar year 2007 to correspond with data from the IRS Ogden
spreadsheets on amounts IRS collected in calendar years 2006 and 2007.
All costs are expressed in 2009 dollars.
[19] To develop our cost estimates, we used the guidance for preparing
agency budgets in Executive Office of the President, Office of
Management and Budget Circular A-11, Preparation, Submission, and
Execution of the Budget, and GAO, GAO Cost Estimating and Assessment
Guide: Best Practices for Developing and Managing Capital Program
Costs, [hyperlink, http://www.gao.gov/products/GAO-09-3SP] (Washington,
D.C.: March 2009).
[20] Our ROI estimate does not take into account several factors that
could decrease or increase the estimate. Those factors are discussed on
page 14.
[21] Internal Revenue Service, FY 2009 Congressional Budget Submission.
[22] IRS computed the ROI of the five new direct revenue-producing
enforcement initiatives it proposed in its fiscal year 2009 budget
submission by dividing the projected enforcement revenue for each new
enforcement initiative by the total cost of the initiative.
[23] Businesses that applied in calendar year 2006 only are those that
applied in calendar year 2006 and not again in 2007 or in the 10 months
in 2008 for which we have IRS Ogden DLSE Access database data.
[24] We use the term resolved to include situations where the taxpayer
paid all or some of the assessment, IRS abated the assessment, IRS
reclassified the debt as currently not collectible, or IRS agreed to
write off part of the debt in accepting an offer in compromise. We say
that businesses "lowered their unpaid assessment debt" when the amounts
of the businesses' unpaid assessment were less in calendar year 2008
than in calendar year 2006.
[25] Our analysis of unpaid assessments includes unpaid taxes assessed
plus accrued interest and penalties.
[26] GAO, Internal Revenue Service: Composition and Collectibility of
Unpaid Assessments, [hyperlink,
http://www.gao.gov/products/GAO/AIMD-99-12] (Washington, D.C.: Oct. 29,
1998).
[27] GAO, Tax Compliance: Businesses Owe Billions in Federal Payroll
Taxes, [hyperlink, http://www.gao.gov/products/GAO-08-617] (Washington,
D.C.: July 25, 2008).
[28] We also asked state revenue officials about compliance with
federal taxes to qualify for state business licenses to determine if
there were any additional states with federal tax compliance beyond
those in the information IRS had on federal tax compliance and state
business licenses. Not surprisingly, the state revenue officials did
not provide any additional information since that type of data-sharing
arrangement is typically between IRS and state licensing functions.
[29] Kansas, Massachusetts, and Ohio did not respond to our request on
whether their states have business licensing requirements and, if so,
whether they require demonstration of state tax compliance before
business licenses are granted.
[30] Virginia Department of Taxation, Tax Clearance Study to the
Governor and the General Assembly of Virginia, Senate Document No. 7
(Richmond, Va., 2008).
[31] Internal Revenue Service, FY 2009 Congressional Budget Submission.
[32] We applied an inflator factor derived from the Department of
Labor's Bureau of Labor Statistics Databases, Tables & Calculators by
Subject to capture collections for calendar year 2009. See [hyperlink,
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet] (accessed Apr. 24,
2009).
[33] Department of Labor, Bureau of Labor Statistics, NEWS: Employer
Costs for Employee Compensation--December 2008 (Washington, D.C.: Mar.
12, 2009). See [hyperlink,
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet] (accessed Apr. 24,
2009).
[34] Internal Revenue Service, FY 2009 Congressional Budget Submission.
[End of section]
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