Tax Administration

Federal Agencies Should Report Service Payments Made to Corporations Gao ID: GGD-92-130 September 22, 1992

Federal agencies awarded $68 billion for service contracts of more than $25,000 in 1990. GAO estimates that 90 percent of this went to corporations. Because information reporting generally excludes payments to corporations, agencies did not have to inform the Internal Revenue Service (IRS) of $61 billion in payments. Requiring federal agencies to report such payments could improve corporate tax compliance and provide IRS with an important tool to detect unreported income or unfiled tax returns. Given past problems in reporting payments made to individuals, agencies need controls to ensure that they report all required payments made to federal contractors, as well as the correct tax identification numbers.

GAO found that: (1) Internal Revenue Service (IRS) random audits of 19,000 small corporations showed a 20-percent decrease in small corporate tax compliance between 1980 and 1987, and that small corporations had paid only 61 percent of their 1987 federal income tax; (2) IRS estimates that corporations will not pay about $31 billion in 1992 federal income taxes; (3) although federal agencies report service contract awards exceeding $25,000, neither tax law nor regulations require federal agencies to inform IRS of payments they make under those service contracts; and (4) such reporting could foster voluntary corporate tax compliance and help IRS detect unreported income and unfiled tax returns. GAO also found that, to improve reporting and corporate tax compliance, federal agencies could: (1) expand their reporting to IRS to include actual payments under service contract awards exceeding $25,000 or report all service payments, regardless of total contract costs; and (2) withhold a percentage of future payments until contractors correctly report and validate their tax identification numbers (TIN).

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Team: Phone:


The Justia Government Accountability Office site republishes public reports retrieved from the U.S. GAO These reports should not be considered official, and do not necessarily reflect the views of Justia.