oversight

Tax Administration: More Can Be Done to Ensure Federal Agencies File Accurate Information Returns

Published by the Government Accountability Office on 2003-12-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to Congressional Requesters




December 2003
                TAX
                ADMINISTRATION
                More Can Be Done to
                Ensure Federal
                Agencies File
                Accurate Information
                Returns




GAO-04-74
                a
                                                December 2003


                                                TAX ADMINISTRATION

                                                More Can Be Done to Ensure Federal
Highlights of GAO-04-74, a report to
congressional requesters
                                                Agencies File Accurate Information
                                                Returns



The Internal Revenue Service (IRS)              Federal agencies do not always adhere to information return reporting
matches information returns filed               requirements. About $5 billion in payments to 152,000 payees made during
by third parties, including federal             2000 and 2001 by agencies within three federal departments were not
agencies, with taxpayers’ income                reported to IRS. About 8,800 of these payees had received $421 million in
tax returns to determine whether                payments, yet had failed to file a tax return for these years. In addition,
taxpayers have filed a return and/or
reported all of their income. A
                                                about $20 billion in payments that were reported to IRS on 170,000
correct taxpayer identification                 information returns for 2000 and 2001 included invalid vendor TINs. This
number (TIN) is necessary to                    was due in part to the fact that few federal agencies use IRS’s TIN-matching
enable IRS to match these returns.              program, as use of this program is optional.
Prior GAO reviews have shown
that federal agency payment                     IRS has acted to aid federal agencies in complying with annual information
records often include invalid TINs,             return filing requirements. In August 2003, IRS notified federal agencies
particularly for vendors. GAO was               about information returns filed for 2001 that included invalid vendor TINs
asked to study federal agencies’                and the need for agencies to withhold a portion of future payments if the
compliance with filing information              vendors fail to provide a valid TIN. IRS is also in the process of making the
returns for service payments made               TIN-matching program available online.
to vendors, IRS’s efforts to improve
agencies’ compliance, and whether
additional measures could improve               IRS does not currently have a program to identify and follow up with federal
their compliance.                               agencies that fail to file required annual information returns for vendor
                                                payments. Improvements to IRS’s Payer Master File, which contains general
                                                information on all payers who file information returns, would be necessary
                                                for such a program. In addition, although the Central Contractor
To improve federal agency                       Registration is intended for use as a central source of valid vendor
compliance with annual                          information by all federal agencies, it contains some invalid TINs. Due to
information reporting requirements
                                                statutory restrictions, all vendor TINs in this database cannot currently be
for vendor payments, GAO is
making recommendations to                       validated through the IRS TIN-matching program, but options exist to
ensure that (1) IRS identifies and              address this problem.
follows up with federal agencies
that fail to file annual information            Forms 1099 MISC Submitted to IRS by Federal Agencies for Vendor Payments, Including
returns for vendor service                      Those with Invalid Vendor Taxpayer Identification Numbers That IRS Was Unable to Correct -
payments and (2) IRS and the                    Tax Years 2000 and 2001 Combined
Office of Management and Budget
(OMB) ensure that vendor TINs are
validated using IRS’s online TIN-
matching program.

IRS and OMB agreed to implement
our recommendations.




www.gao.gov/cgi-bin/getrpt?GAO-04-74.           Note: GAO analysis of IRS data.
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Michael
Brostek at (202) 512-9110 or
brostekm@gao.gov.
Contents



Letter                                                                                                    1
                             Results in Brief                                                             3
                             Background                                                                   5
                             Not All Federal Agencies File Required Information Returns or Take
                               Steps to Ensure That Information Provided Is Valid                         7
                             IRS Has Acted to Improve Form 1099 MISC Reporting
                               Compliance                                                                12
                             IRS Has No Program to Identify Federal Agencies That Fail to File
                               Forms 1099 MISC and the CCR Does Not Now Serve as a Central
                               Source of Valid TINs                                                      13
                             Conclusions                                                                 16
                             Recommendations for Executive Action                                        17
                             Agency Comments and Our Evaluation                                          17


Appendixes
              Appendix I:    Objectives, Scope, and Methodology                                          21
             Appendix II:    Forms 1099 MISC Filed by 14 Federal Departments for Tax
                             Years 2000 and 2001                                                         24
             Appendix III:   Forms 1099 MISC Filed with IRS with Invalid TINs for Tax
                             Years 2000 and 2001                                                         25
             Appendix IV:    Comments from the Internal Revenue Service                                  26
              Appendix V:    Comments from the Department of Defense                                     29
             Appendix VI:    GAO Contacts and Staff Acknowledgments                                      31
                             GAO Contacts                                                                31
                             Acknowledgments                                                             31


Tables                       Table 1: Number and Dollar Value of Forms 1099 MISC Filed with
                                      IRS for Tax Years 2000 and 2001                                    24
                             Table 2: Number and Percent of Forms 1099 MISC Filed with
                                      Invalid TINs for Tax Years 2000 and 2001                           25


Figure                       Figure 1: Forms 1099 MISC Submitted to IRS by Federal Agencies
                                       for Vendor Payments, Including Those with Invalid
                                       Vendor TINs That IRS Was Unable to Correct - Tax Years
                                       2000 and 2001 Combined                                             9




                             Page i                                GAO-04-74 Information Returns for Vendors
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Page ii                                        GAO-04-74 Information Returns for Vendors
A
United States General Accounting Office
Washington, D.C. 20548



                                    December 5, 2003                                                                              Leter




                                    The Honorable Bill Thomas
                                    Chairman, Committee on Ways and Means
                                    House of Representatives

                                    The Honorable Amo Houghton
                                    Chairman, Subcommittee on Oversight
                                    Committee on Ways and Means
                                    House of Representatives

                                    Federal agencies pay billions of dollars each year to vendors for services,
                                    such as compensation paid to individuals that are not employees and
                                    medical and health care payments. At the same time, some vendors fail to
                                    pay their taxes and have accrued billions of dollars in delinquent federal
                                    taxes. The Internal Revenue Service’s (IRS) ability to ensure vendors are
                                    properly paying their taxes hinges on having complete and accurate reports
                                    from federal agencies on their vendor payments.

                                    The Internal Revenue Code requires any service recipient, including federal
                                    agencies, to report service payments to IRS if the services total $600 or
                                    more during a calendar year. An IRS Form 1099 MISC (Miscellaneous
                                    Income) information return is used to report service payments to IRS and
                                    must include the vendor’s name, address, and taxpayer identification
                                    number (TIN).1

                                    IRS matches information returns with income tax returns to determine
                                    whether taxpayers have filed a return and/or reported all of their income.
                                    For fiscal year 2002, IRS used information returns to detect about 1.5
                                    million taxpayers that underreported their income by about $2.5 billion and
                                    also identified about 2 million taxpayers with tax liabilities of $2.4 billion
                                    that failed to file tax returns. However, when the TIN on an information
                                    return is invalid2 and IRS cannot ascertain the correct TIN, IRS is unable to
                                    match the information return data with tax return data and is thus unable


                                    1
                                      The TIN is a unique nine-digit number, usually a social security number (SSN) for an
                                    individual, an employer identification number (EIN) assigned by IRS for a partnership or
                                    corporation, and either an SSN or EIN if the vendor is a sole proprietor.
                                    2
                                      In this report, an invalid TIN refers to a missing TIN, a TIN with more or less than nine
                                    numeric characters, a TIN that includes an alpha character, or a TIN/name combination that
                                    does not match or cannot be found in IRS’s records.




                                    Page 1                                          GAO-04-74 Information Returns for Vendors
to detect either whether a taxpayer underreported income or failed to file a
tax return.

To help federal agencies identify whether vendor TINs are valid, in 1997
IRS initiated a TIN-matching program that agencies can use, prior to filing
their information returns, to determine whether vendors have provided a
correct TIN/name combination. If a vendor either fails to provide a TIN or
provides a TIN/name combination that does not match information in IRS’s
records, and the vendor subsequently fails to provide a correct TIN/name
combination upon request, the federal agency is required to initiate backup
withholding3of future payments for services.

Despite these efforts, our reviews of IRS’s Federal Payment Levy Program4
showed that federal agency payment records often contained invalid or
missing TINs and, therefore, could not be used to levy vendors’ federal
payments to recover delinquent federal taxes.5 As a result, you asked us to
assess whether federal agencies in general have been submitting complete
and accurate annual information returns to IRS for service payments to
vendors. Specifically, our objectives were to determine (1) the extent to
which federal agencies file required Forms 1099 MISC, take steps to ensure
that information on the returns, particularly TINs, are valid, and initiate
backup withholding if vendors provide invalid TINs; (2) recent actions IRS
has taken to help improve federal agency Form 1099 MISC filing
compliance; and (3) whether any additional measures could further
improve federal agency compliance with Form 1099 MISC filing
requirements.




3
  Section 3406 of the Internal Revenue Code requires that payers withhold and forward to
IRS a predetermined percentage of certain payments if a payee fails to provide the payer
with a correct TIN; this is known as backup withholding.
4
  The Federal Payment Levy Program, authorized by the Taxpayer Relief Act of 1997 and
conducted jointly by IRS and the Department of the Treasury’s Financial Management
Service, enables IRS to levy up to 15 percent of certain federal payments to collect
delinquent federal taxes, including payments made to vendors.
5
  U.S. General Accounting Office, Tax Administration: IRS’ Levy of Federal Payments
Could Generate Millions of Dollars, GAO/GGD-00-65 (Washington, D.C.: Apr. 7, 2000) and
Tax Administration: Millions of Dollars Could Be Collected If IRS Levied More Federal
Payments, GAO-01-711 (Washington D.C.: July 20, 2001).




Page 2                                         GAO-04-74 Information Returns for Vendors
                   To meet our objectives, we requested and obtained vendor payment
                   information for service payments made by the agencies and bureaus within
                   the 14 federal departments6 for calendar years 2000 and 2001 and compared
                   this information to vendor payment information included in IRS’s Payer
                   Master File and Information Returns Master File for the same 2-year
                   period. We also surveyed the 14 federal departments on their policies and
                   practices for obtaining vendor TINs and filing required Forms 1099 MISC.
                   In addition, we discussed with IRS officials actions recently taken or
                   pending for assisting federal agencies in filing complete and accurate
                   Forms 1099 MISC for service payments to vendors. Finally, we discussed
                   with both IRS and Office of Management and Budget (OMB) officials
                   additional measures that could further improve federal agency compliance
                   with Form 1099 MISC filing requirements. Our work was done from June
                   2002 through September 2003 in accordance with generally accepted
                   government auditing standards. (App. I describes our overall objectives,
                   scope, and methodology.)



Results in Brief   Federal agencies are not always filing required Forms 1099 MISC or taking
                   steps to ensure that information on the returns is valid. For example, we
                   found that about $5 billion in payments to about 152,000 payees made by
                   agencies within three federal departments during 2000 and 2001 were not
                   reported to IRS on Forms 1099 MISC, and about 8,800 of the payees failed
                   to file an income tax return for these years. In addition, about $20 billion in
                   service payments on almost 170,000 Forms 1099 MISC—13 percent of the
                   information returns filed by agencies within the 14 federal departments for
                   2000 and 2001 combined—included invalid TINs. IRS was unable to
                   correct the TINs on about 116,000 of these returns (68 percent) valued at
                   almost $9 billion, thus rendering them unusable for determining whether
                   the vendors had reported this income. In response to our survey, only two
                   federal departments indicated that their agencies were either using IRS’s
                   TIN-matching program to validate vendor TINs or initiating backup
                   withholding if vendors failed to provide valid TINs departmentwide. While
                   officials from some federal departments said they were unaware of IRS’s
                   TIN-matching program, others thought the program was currently
                   unavailable. The main reason cited for not initiating backup withholding
                   was the lack of a process in place within their respective financial


                   6
                     The Department of Homeland Security had not been established at the time this review
                   began.




                   Page 3                                        GAO-04-74 Information Returns for Vendors
management systems for accomplishing backup withholding of vendor
payments if vendors failed to provide valid TINs.

IRS has taken recent action and has other actions planned to assist federal
agencies in complying with Form 1099 MISC filing requirements. For
example, in August 2003 IRS sent a specific notice to federal agencies for
the first time, identifying Forms 1099 MISC filed by the agencies for 2001
that included invalid vendor TINs and reminding the agencies of their
responsibility to ensure that valid vendor TINs are provided and to initiate
backup withholding of subsequent payments for vendors who fail to
provide a valid TIN. Also, in late 2003 IRS plans to expand its TIN-matching
program to enable federal agencies to submit online up to 100,000
TIN/name combinations at one time and to receive a response from IRS
within 24 hours concerning whether these combinations match the
TIN/name combinations in IRS’s records.

IRS does not identify agencies that fail to file Forms 1099 MISC and IRS and
OMB have not taken steps to realize the potential of the Central Contractor
Registration (CCR)—a Department of Defense (DOD) database of vendors
that have registered to do business with DOD—to better ensure that
agencies include accurate TINs on their Forms 1099 MISC for federal
vendors. IRS does not currently have a program to identify and follow up
with federal agencies that fail to file Forms 1099 MISC. Although such a
program would be beneficial, it would require that IRS’s Payer Master File,
which IRS could use to identify federal agencies that do not file Forms 1099
MISC, be complete, accurate, and up to date. We found that 96 out of 147
federal agencies for which we had requested information from IRS were
not specifically identified as federal payers in the Payer Master File.
Further, although IRS’s online TIN-matching program has the potential to
assist federal agencies in reducing the number of Forms 1099 MISC
submitted to IRS with invalid TINs, as of October 2003 OMB began
requiring all federal agencies to use the CCR as the single validated source
of information about vendors doing business with the federal government.
However, TINs recorded in the CCR are not validated via IRS’s TIN-
matching program, there are no current plans to require such validation,
and our work has raised concerns about the validity of TINs contained in
the CCR. Having DOD validate vendor TINs recorded in the CCR through
IRS’s TIN-matching program would eliminate the need for each individual
federal agency to do so and would further OMB’s goal of having the CCR be
a central source of valid vendor data. DOD cannot validate all vendor TINs
under current law, but could if vendors gave it permission to do so or if the
law was changed.



Page 4                                  GAO-04-74 Information Returns for Vendors
             We are making recommendations to ensure that IRS identify and follow up
             with federal agencies that fail to file annual information returns for vendor
             service payments and that IRS and OMB ensure that vendor TINs are
             validated using IRS’s TIN-matching program. Both IRS and OMB generally
             agreed with our recommendations. DOD also indicated that actions were
             underway that should eventually enable vendor TINs in the CCR to be
             validated via IRS’s TIN-matching program.



Background   Section 6041A of the Internal Revenue Code requires any service recipient,
             including federal agencies, to file an annual information return with IRS for
             payments made to any person for services totaling $600 or more during a
             calendar year. Payments to corporations for certain services provided
             must also be reported, such as attorneys’ fees and medical and health care
             payments. In addition, federal executive agencies must report all payments
             for services provided by vendors, including payments made to
             corporations. Specific information required on the annual information
             return—an IRS Form 1099 MISC—includes the name, address, and TIN of
             both the payer and payee, as well as the total amounts paid during the year
             for the various types of services provided. The purpose of the Form 1099
             MISC filing requirement is to enable IRS to identify taxpayers who fail to
             file an income tax return as well as those who fail to report all of their
             income on their tax return for the related year.

             IRS enters Form 1099 MISC information in both a Payer Master File (PMF)
             and an Information Returns Master File (IRMF). The PMF is a database
             that includes all entities that make payments subject to information return
             reporting. The PMF includes general information on the total number and
             dollar value of information returns, including Forms 1099 MISC, filed by
             each payer for each year. The IRMF is a database that includes specific
             information on the type and amount of payments made to each payee,
             including whether the payee TIN was valid upon receipt of the information
             return and if the TIN was invalid, whether it was subsequently corrected by
             IRS. Both the PMF and IRMF include the payer’s TIN.

             Upon receipt of a Form 1099 MISC, basic information is entered into a
             temporary IRS database. IRS compares the payee TIN/name combination
             with TIN/name combinations in its records to determine if there is a match.
             If there is a match, the information is entered in the IRMF without the need
             for additional action. If there is not a match, IRS will try to validate the
             TIN/name combination via a TIN “validation” process, which entails
             matching the TIN and name control—the first four characters of an



             Page 5                                  GAO-04-74 Information Returns for Vendors
individual’s last name or the first four characters of a business name—on
the Form 1099 MISC with (1) a file which contains all social security
numbers ever issued and all name controls ever associated with them and
(2) a file that contains all employer identification numbers ever issued and
all name controls ever associated with them. If IRS is able to match the
TIN and name control through this process, the information is entered in
the IRMF with a code indicating that the TIN was corrected and is valid. If
IRS is unable to match the TIN and name control, the information is
entered in the IRMF with a code indicating that the TIN is invalid.

If the vendor TIN included on the Form 1099 MISC is initially valid or
subsequently corrected by IRS, and the vendor files a tax return for the
corresponding year, IRS can electronically match the TIN, name control,
and amount entered in the IRMF with the amount reported on the vendor’s
tax return via the Document Matching Program.7 This enables IRS to
determine whether the vendor has reported all of the income on the tax
return. Alternatively, if there is no corresponding return with the same TIN
and name control as that entered in the IRMF, IRS can determine that the
vendor is a potential nonfiler. However, if the TIN entered in the IRMF is
invalid, IRS is unable to use the information to detect either underreporting
or nonfiling on the part of a vendor.

Since 1997, IRS has had a TIN-matching program that federal agencies can
use to verify the accuracy of TIN/name combinations furnished by federal
payees. This program was intended to reduce the number of notices of
incorrect TIN/name combinations issued for backup withholding by
allowing agencies the opportunity to identify TIN and name discrepancies
and to contact payees for corrected information before issuing an annual
information return, such as a Form 1099 MISC. Monthly, federal agencies
can submit a batch of TIN/name combinations to IRS for verification. IRS
then matches each record submitted and informs the agency whether the
TIN and name combination submitted matches its records.8

In order to encourage vendors to provide a valid TIN and to ensure that
taxes are paid when they do not, Internal Revenue Code Section 3406


7
  The Document Matching Program matches information on selected tax issues (usually
income) reported on tax returns by individual taxpayers and reported on information
returns by third parties, such as employers, banks, and other payers of income.
8
  IRS cannot tell an agency what the correct TIN, name, or both TIN and name should be if
the records do not match, as to do so would violate tax disclosure laws.




Page 6                                         GAO-04-74 Information Returns for Vendors
                         requires payers, including federal agencies, to initiate backup withholding
                         of a federal payment if a payee, including a vendor, fails to provide a TIN or
                         provides an invalid TIN, and upon notice fails to provide a correct TIN. IRS
                         considers a TIN to be missing if it is not provided, has more or less than
                         nine numbers, or has an alpha character in one of the nine positions. IRS
                         considers the TIN to be invalid if it is in the proper format, but the
                         TIN/name combination doesn’t match or cannot be found in IRS or Social
                         Security Administration files. Payments subject to backup withholding
                         include various types of income reportable on a Form 1099 MISC, including
                         compensation paid to individuals that are not employees. The current rate
                         for backup withholding is 30 percent of the payment.



Not All Federal          Federal agencies are not always adhering to Form 1099 MISC filing
                         requirements. For 2000 and 2001, about 152,000 information returns for
Agencies File Required   federal payments totaling about $5 billion were not filed with IRS, while
Information Returns or   about 170,000 information returns, including $20 billion in federal
                         payments that were filed, included invalid TINs. Few agencies are taking
Take Steps to Ensure     advantage of IRS’s TIN-matching program to validate vendor TINs prior to
That Information         submitting information returns to IRS. Similarly, few agencies are initiating
Provided Is Valid        backup withholding on payments made to vendors that have provided
                         invalid TINs.



With Some Exceptions,    While most federal agencies filed information returns for vendors, some
Federal Agencies File    did not. For both 2000 and 2001, the 14 federal departments collectively
                         filed over 600,000 Forms 1099 MISC in which they reported over
Forms 1099 MISC          $100 billion in payments each year. (See app. II for the number and dollar
                         value of Forms 1099 MISC filed individually by the 14 federal departments.)

                         Although the 14 federal departments collectively filed a substantial number
                         of Forms 1099 MISC over this 2-year period, we found some significant
                         exceptions, as the following examples illustrate.

                         • About $5 billion in payments to about 152,000 payees made collectively
                           by the Departments of Agriculture, Commerce, and Justice for 2000 and
                           2001 combined were not reported to IRS on Forms 1099 MISC. About
                           8,800 of these payees who collectively received payments totaling about
                           $421 million dollars—an average of about 48,000 each—failed to file an
                           income tax return for these 2 years, according to IRS’s records. If
                           information returns had been filed and IRS had this information, it



                         Page 7                                   GAO-04-74 Information Returns for Vendors
   would have provided a basis for IRS to assess the appropriate taxes
   against these payees.

• Almost $3.0 billion in payments made via purchase cards by DOD
  between 2000 and 2001 had not been reported to IRS due to incorrect or
  missing vendor TINs. DOD officials indicated that obtaining vendor
  information needed for Forms 1099 MISC from payment card companies
  has been a long-standing problem. They estimated that they could have
  filed as many as 40,000 additional Forms 1099 MISC for 2000 and 2001 if
  they had received the necessary vendor information from payment card
  companies.

• According to the Department of Transportation, Forms 1099 MISC were
  not filed for services if the vendor was a corporation that provided both
  goods and services, as their vendor payment system cannot distinguish
  between the two for the purpose of issuing Forms 1099 MISC. As a
  result, only about $8 million of $92 million in service payments for tax
  years 2000 and 2001 were reported to IRS on Forms 1099 MISC.

• One Department of Housing and Urban Development agency that made
  payments to vendors for services totaling over $73 million for 2000 and
  2001, failed to file any Forms 1099 MISC for these 2 years. According to
  a Department of Housing and Urban Development official, because the
  agency is a wholly owned corporation within HUD and is therefore
  quasi-federal, agency officials were not aware that they were required to
  file Forms 1099 MISC. They further indicated that the agency had
  subsequently issued Forms 1099 MISC to its vendors for payments made
  for 2002.

In response to our survey of departmental policies and practices for filing
Forms 1099 MISC, department officials cited various reasons for not filing a
Form 1099 MISC for vendor payments. Not having a valid vendor TIN was
the foremost reason cited. Other reasons included the inability to
distinguish between goods and services provided by a vendor,9 as cited
above, and problems obtaining necessary vendor information, namely
TINs, from payment card companies for vendors that are paid via
government purchase cards.


9
  We did not review the capabilities of individual agency and department vendor payment
systems to distinguish between goods and services, as this was beyond the scope of our
review.




Page 8                                         GAO-04-74 Information Returns for Vendors
Forms 1099 MISC Often          Even when federal agencies do file Forms 1099 MISC, they often include an
Include Missing or Incorrect   invalid vendor TIN. As a result, IRS has to expend resources in an attempt
                               to identify a correct TIN via its TIN validation process and, in most cases,
TINs                           IRS is unable to use the information returns to determine whether vendors
                               had either underreported their income or failed to file a tax return. As
                               shown in figure 1, the 14 federal departments filed almost 170,000 Forms
                               1099 MISC with invalid vendor TINs for tax years 2000 and 2001 combined.
                               Almost $20 billion in vendor payments were included on these information
                               returns. Overall, for the 2 years combined, about 13 percent of all Forms
                               1099 MISC filed by the 14 federal departments included an invalid TIN
                               when they were submitted to IRS. (See app. III for the number and
                               percentage of Forms 1099 MISC filed individually by the 14 federal
                               departments with invalid TINs.)



                               Figure 1: Forms 1099 MISC Submitted to IRS by Federal Agencies for Vendor
                               Payments, Including Those with Invalid Vendor TINs That IRS Was Unable to Correct
                               - Tax Years 2000 and 2001 Combined
                                                                       1,098,929
                                                                       Valid TINs
                                                                                                                     115,993
                                                                       169,378
                                                                       Invalid TINs
                                                                                                                     53,385




                                                                                                             32%
                                              87%
                                                                 13%
                                                                                                68%




                                          Corrected

                                          Uncorrected

                               Source: IRS.

                               Note: GAO analysis of IRS data.




                               Page 9                                                 GAO-04-74 Information Returns for Vendors
                              As also shown in figure 1, IRS was subsequently able to correct about 32
                              percent of the invalid vendor TINs through its TIN validation process.
                              However, IRS was unable to correct the invalid TINS included on about
                              116,000 of the Forms 1099 MISC filed by the 14 departments, which were
                              valued at almost $9 billion, an average of about $77,000 per return. As a
                              result, IRS would be unable to match this income with income reported on
                              income tax returns for the same period to determine whether these
                              vendors had either underreported the income or failed to file a tax return.

                              One reason cited by department officials for filing Forms 1099 MISC with
                              invalid TINs was the lack of a means for validating vendor TINs. This was
                              cited, in particular, by those departments whose agencies were not using
                              IRS’s existing TIN-matching program.

                              In addition to negatively affecting IRS’s ability to ensure that vendors
                              report all required income on their tax returns, invalid vendor TINs also
                              impede the Department of the Treasury’s ability to offset federal tax debts
                              through the Federal Payment Levy Program, as well as its ability to offset
                              other debts through the Treasury Offset Program.10 Each program requires
                              a match of the payee’s TIN and name control on both the payment record
                              submitted to the Financial Management Service (FMS) and the debt
                              information included in the FMS database, in order for the payment to be
                              offset against the debt.



Federal Agencies Do Not       Although the TIN-matching program is available, most federal agencies do
Consistently Use IRS’s TIN-   not consistently use this program to ensure that the TINs included on
                              information returns are valid. From our survey of federal department
Matching Program
                              policies and practices for obtaining vendor TINs and filing required Forms
                              1099 MISC we found the following.

                              • Officials from only 2 of the 14 federal departments—Labor and Housing
                                and Urban Development—said their agencies were currently using IRS’s
                                TIN-matching program departmentwide. Even so, we noted that
                                according to IRS’s records, agencies within both departments had filed

                              10
                                The Debt Collection Improvement Act of 1996 requires federal agencies to obtain a valid
                              TIN from federal payees, including vendors, to facilitate federal debt collection via the
                              Treasury Offset Program. The Treasury Offset Program involves a centralized database of
                              delinquent federal nontax debts that have been referred by federal agencies for offset
                              against federal payments processed by the Department of the Treasury’s Financial
                              Management Service.




                              Page 10                                        GAO-04-74 Information Returns for Vendors
                                some Forms 1099 MISC for tax years 2000 and 2001 with invalid vendor
                                TINs.

                           • Three other federal departments—Health and Human Services, Interior,
                             and Justice—indicated that IRS’s TIN--matching program is used, but
                             only by some of the agencies or bureaus within the respective
                             departments.

                           While officials from some federal departments said they were unaware of
                           the TIN-matching program, others thought the program was currently
                           unavailable. DOD officials stated that they rely on the CCR for validating
                           vendor TINs and thus do not use the IRS TIN-matching program. A
                           Department of the Interior official indicated that it is in the process of
                           implementing use of the CCR by its bureaus and agencies as of October
                           2003 at the direction of OMB.



In General, Federal        Although backup withholding is required if vendors fail to provide a valid
Agencies Do Not Initiate   TIN to a federal payer, most federal agencies do not initiate backup
                           withholding. From our survey of federal department policies and practices
BackupWithholding as       for obtaining vendor TINs and filing required Forms 1099 MISC we found
Required                   the following.

                           • Officials from only 2 of the 14 federal departments—Energy and
                             Transportation—said that their agencies initiate backup withholding
                             departmentwide.

                           • Three other federal departments—Health and Human Services, Interior,
                             and Justice—indicated that backup withholding is initiated only by
                             some of the agencies or bureaus within the respective departments.

                           The main reason cited by officials from several of the federal departments
                           for not initiating backup withholding was the lack of a process in place
                           within their respective financial management systems for accomplishing
                           backup withholding of vendor payments.11 Some department officials also
                           indicated that they had no way of knowing when a vendor’s TIN is invalid
                           and therefore subject to backup withholding. An official with one of the
                           agencies within the Department of Health and Human Services indicated

                           11
                             As indicated earlier, we did not review the capabilities of individual agency and
                           department vendor payment systems, as this was beyond the scope of our review.




                           Page 11                                         GAO-04-74 Information Returns for Vendors
                    that they deny payment to vendors who fail to provide a valid TIN in lieu of
                    backup withholding.



IRS Has Acted to    IRS has taken some recent actions and has other actions planned to assist
                    federal agencies in complying with Forms 1099 MISC filing requirements,
Improve Form 1099   as the following examples illustrate.
MISC Reporting
                    • In August 2003, for the first time, IRS sent a specific notice (Notice 1313)
Compliance            to federal agencies identifying Forms 1099 MISC filed for 2001 in which
                      the vendor’s TIN was invalid and reminding the agencies of their
                      responsibility to ensure that TINs are valid and to initiate backup
                      withholding for any vendors who subsequently fail to provide the
                      agency with a correct TIN upon notification by the agency. Sending
                      these notices annually may address agency concerns about not having a
                      way to determine that a vendor’s TIN is invalid and that backup
                      withholding should be initiated.

                    • By the end of 2003, IRS plans to expand its TIN-matching program to
                      enable federal agencies to submit online up to 100,000 TIN/name
                      combinations at a time and to receive a response from IRS within 24
                      hours concerning whether the TIN/name combinations submitted match
                      the TIN/name combinations in IRS’s records. As an interim step, IRS
                      plans to have an interactive computer application available that will
                      allow federal agencies to submit up to 25 TIN/name combinations and
                      receive feedback within 5 seconds on whether these match the
                      TIN/name combinations in IRS’s records. As with the existing TIN-
                      matching program, IRS will not be able to provide an agency with the
                      correct TIN or name if they do not match IRS’s records due to the
                      disclosure laws. Instead, the agencies will continue to be responsible
                      for contacting a vendor for the correct TIN/name combination.
                      However, the online TIN-matching program should make it easier for
                      federal agencies to identify vendors that are to be contacted to obtain a
                      valid TIN and thus prevent the agencies from filing Forms 1099 MISC
                      that include invalid TINs.

                    • In February 2003 IRS issued a proposed revenue procedure that would
                      enable payment card companies to act on behalf of cardholders/payers,
                      such as federal agencies, in soliciting, collecting, and validating vendor
                      information, including TINs. This procedure would enable payment
                      card companies to use IRS’s TIN-matching program to validate the
                      TIN/name combinations provided by vendors for which a Form 1099



                    Page 12                                  GAO-04-74 Information Returns for Vendors
                               MISC is to be filed. Once adopted, this procedure may help to eliminate
                               some of the problems agencies have experienced in getting necessary
                               vendor information related to purchase card payments.

                            In addition, IRS has initiated meetings with various federal agencies,
                            including the Departments of Defense and Agriculture, to identify specific
                            problems associated with obtaining valid vendor TINs and filing accurate
                            Forms 1099 MISC, particularly problems related to purchase card
                            payments. In November 2003, IRS plans to present a federal agency
                            seminar covering various topics related to filing Forms 1099 MISC,
                            including use of the TIN-matching program, information reporting
                            requirements, and the previously mentioned proposed revenue procedure.



IRS Has No Program to       Although IRS can identify whether Forms 1099 MISC filed by federal
                            agencies include a valid TIN, IRS does not have a program to identify and
Identify Federal            follow up with agencies that fail to file Forms 1099 MISC. In addition, the
Agencies That Fail to       CCR does not, as OMB intends, serve as a central source of valid TIN data
                            that federal agencies can use.
File Forms 1099 MISC
and the CCR Does Not
Now Serve as a Central
Source of Valid TINs

At Present, IRS Has No      IRS does not have a program to periodically identify and follow up with
Program to Detect Federal   federal agencies that fail to file Forms 1099 MISC for vendor payments. IRS
                            officials indicated that their emphasis has been on identifying Forms 1099
Agencies That Do Not File
                            MISC filed with invalid TINs by nonfederal payers. This is because Internal
Forms 1099 MISC             Revenue Code section 6721 authorizes IRS to assess a penalty of $50
                            against a nonfederal payer for each information return filed with an invalid
                            TIN, up to a maximum penalty of $250,000 per calendar year. IRS proposed
                            just over $204 million in penalties against nonfederal payers for
                            information returns with invalid TINs for tax years 2000 and 2001
                            combined. IRS estimated that an additional $6.9 million in penalties could




                            Page 13                                 GAO-04-74 Information Returns for Vendors
                          have been proposed against federal agencies for filing information returns
                          with invalid TINs, if IRS had the authority to do so.12

                          A complete and accurate Payer Master File, which includes general payer
                          information, such as the payer name and TIN, as well as the total number
                          and dollar value of various types of Forms 1099 filed by each payer, would
                          enable IRS to identify federal agencies that fail to file Forms 1099 MISC.
                          IRS could then contact these agencies to ascertain why these returns were
                          not filed. IRS initially indicated to us that federal payers are specifically
                          coded as such in the Payer Master File to distinguish them from nonfederal
                          payers. However, we found that 96 of 147 federal agencies and bureaus for
                          which we needed information concerning Forms 1099 MISC they filed with
                          IRS for 2000 and 2001 were not coded as federal payers in the Payer Master
                          File. IRS officials agreed that there is a need to update the Payer Master
                          File to ensure that all federal payers are properly coded as federal.
                          Conducting a survey of all payers included in this file would be a way for
                          IRS to update this information, thus ensuring that all federal payers are
                          correctly coded as federal in the Payer Master File.



TINs in the CCR Are Not   OMB has instructed federal agencies to begin using the CCR as of October
Validated                 2003, as the single validated source of information about vendors doing
                          business with the federal government, but CCR vendor TINs are not
                          validated with IRS’s TIN-matching program. The CCR, which is maintained
                          by DOD, includes information on over 234,000 vendors that have registered
                          to do business with DOD, including the vendors’ TIN and name. The
                          accuracy and completeness of information listed in this database is the
                          responsibility of the individual vendors and must be updated annually.
                          According to CCR officials, vendor TINs are not validated via IRS’s TIN-
                          matching program. Instead, CCR does an edit check to ensure that a
                          vendor’s TIN is in the correct format, namely that it contains nine numbers.




                          12
                            IRS Policy Statement P-2-4 states “penalties and interest will not be assessed against
                          agencies or instrumentalities of the United States.”




                          Page 14                                          GAO-04-74 Information Returns for Vendors
At the time of our review and resulting July 2001 report13 mentioned earlier,
we found that there were a substantial number of invalid vendor TINs in
the CCR. In addition, during our current review, we found that the CCR
included about 7,000 vendor employer identification numbers that were not
included in IRS’s Business Master File.14

Due to the lack of validated TINs in the CCR, agencies’ use of this
centralized database as a source of TINs for vendors in and of itself would
not ensure that the agencies include valid TINs on Forms 1099 MISC
submitted to IRS. As noted earlier, in line with OMB’s expectations, DOD
relies on the CCR as a source of valid TINs and therefore does not use IRS’s
TIN-matching program; Interior officials say they also plan to use the CCR.

If the name and TIN of vendors recorded in the CCR were validated by
DOD initially and then periodically thereafter through IRS’s TIN-matching
program, the CCR could become a central source of valid vendor TINs for
all agencies to use for their Forms 1099 MISC submitted to IRS. However,
because agencies are restricted to using the TIN-matching program only for
validating TINs for which an information return is required, DOD would not
be able to validate all vendor TINs included in the CCR because not all
vendors in the CCR actually receive DOD contracts to provide services.
This restriction could be addressed through a change to the disclosure
laws, thus authorizing DOD to use the TIN-matching program for all
vendors that have registered with the CCR. Alternatively, individual
vendors could be asked to agree to have their TIN and name matched to
IRS data when they apply to do business with the government. Section
6103 of the Internal Revenue Code protects taxpayer information, including
TINs, from disclosure. However, taxpayers can waive this protection. This
would enable IRS to provide more information than can currently be
provided under the TIN-matching program, such as the correct TIN/name
combination.

Given that the CCR is not currently a valid source of vendor TINs, agencies
cannot rely on the CCR as OMB intends. Therefore, each agency would
need to use IRS’s online TIN-matching program as the only way to
independently verify vendor TINs necessary to include on their Forms 1099


13
     GAO-01-711.
14
  The Business Master File is an IRS database that contains tax return filing histories for
business entities.




Page 15                                          GAO-04-74 Information Returns for Vendors
              MISC. However, at the present time agency use of the TIN-matching
              program is optional.



Conclusions   Some federal agencies’ failure to file required annual Forms 1099 MISC and
              other agencies’ failure to file returns with valid vendor TINs adversely
              affects IRS’s efforts to detect unreported vendor income and vendors that
              fail to file income tax returns. In addition, invalid TINs in federal agency
              payment records negatively affect Department of the Treasury efforts to
              offset federal tax debts through the Federal Payment Levy Program and
              other federal debts through the Treasury Offset Program.

              Although IRS has taken some positive actions to improve federal agency
              compliance with Form 1099 MISC filing requirements, additional steps
              could be taken. IRS could identify and follow up with federal agencies that
              fail to file required Forms 1099 MISC if it had a complete and accurate
              Payer Master File. In addition, the CCR could become, as OMB intends, a
              central source for valid vendor information, including TINs. Currently,
              CCR TIN data are not always accurate. Except for current statutory
              restrictions on the use of IRS’s TIN-matching program, the CCR’s
              administrator, DOD, could use IRS’s new online TIN-matching program to
              routinely verify the TINs of all vendors as they are added to the CCR and
              then periodically thereafter. This would carry out OMB’s desire for the
              CCR to be a central source of valid vendor information and would thereby
              avoid each agency independently verifying TINs for some of the same
              vendors. Asking vendors to permit DOD to routinely verify their TINs
              when they register to do business with the federal government would be
              one option to enable DOD to verify TINs in the CCR against IRS’s records.
              Alternatively, OMB and IRS could determine whether an exception to
              section 6103 of the Internal Revenue Code should be requested.

              In the absence of the CCR as a valid source of TINs, agencies must
              individually and voluntarily use IRS’s TIN-matching program to validate
              vendor TINs. Agencies have not consistently used the TIN-matching
              program in large part because they say they were unaware of it. IRS’s new
              online TIN-matching program and publicity IRS plans as it launches the
              new system later this year may make officials more aware of the program
              and increase their use of it. However, until OMB is able to realize its intent
              of having the CCR be a valid source of information for federal vendors,
              additional assurance could be gained that agencies would use the matching
              program if OMB required them to do so. Because IRS has made the system




              Page 16                                  GAO-04-74 Information Returns for Vendors
                      available online, fulfilling such a requirement should now be easier than in
                      the past.



Recommendations for   To ensure that federal agencies file Forms 1099 MISC for payments to
                      vendors for services provided, we recommend that the Commissioner of
Executive Action      Internal Revenue

                      • ensure the accuracy of identification information concerning federal
                        payers in IRS’s Payer Master File and

                      • develop a program to periodically identify federal agencies that fail to
                        file Forms 1099 MISC and follow up to determine why the forms were
                        not filed.

                      To minimize duplicate agency effort in validating vendors’ TINs and to
                      reinforce the anticipated role of the Central Contractor Registration as the
                      single validated source of vendors doing business with the federal
                      government, we also recommend that the Commissioner of Internal
                      Revenue and the Director of the Office of Management and Budget
                      consider options to routinely validate all vendor TINs in the CCR and to
                      then require all agencies to use vendor and TIN information from the CCR
                      for their Forms 1099 MISC. If this proves to be infeasible, OMB should
                      require each agency to validate TINs for vendors who provide services
                      through IRS’s TIN-matching program.



Agency Comments and   We received written comments on a draft of this report from the
                      Commissioner of Internal Revenue (see app. IV) and the Under Secretary of
Our Evaluation        Defense (Comptroller) (see app. V).

                      The Commissioner agreed with our recommendations. However, he also
                      emphasized that agencies may not wish to spend the resources to
                      effectively use IRS’s TIN-matching program and that IRS cannot compel
                      agencies to meet their Form 1099 MISC reporting responsibilities.

                      To ensure the accuracy of identification information concerning federal
                      payers included in IRS’s Payer Master File, the Commissioner agreed to
                      perform periodic reviews of the database to ensure its accuracy. In
                      addition, as part of an education-compliance program geared to federal
                      agencies that IRS is in the process of developing, the Commissioner stated



                      Page 17                                 GAO-04-74 Information Returns for Vendors
that IRS plans to contact federal agencies to identify and verify that all TINs
used by each agency have been properly identified, thus compiling an
accurate list of all federal agency payer TINs.

To identify federal agencies that fail to file Forms 1099 MISC and the
reasons why the forms were not filed, the Commissioner agreed to
compare the above mentioned list of federal agency payer TINs to the
Payer Master File to identify agencies that did not file Forms 1099 MISC
and to then contact the agencies to determine if Forms 1099 MISC were
required.

To minimize duplicate agency effort in validating vendors’ TINs and to
reinforce the role of the CCR as the single validated source of vendors
doing business with the federal government, the Commissioner agreed that
IRS will work with DOD to ensure that vendor TINs on the CCR are
accurate, to include exploring the expanded use of the TIN-matching
program to validate all TINs included in the CCR.

In addition to commenting on the report recommendations, the
Commissioner pointed out that IRS Policy Statement P-2-4, which provides
that federal agencies are not subject to penalties and interest for failure to
comply with Form 1099 MISC filing requirements, is based on a 1978 GAO
Comptroller General Decision (B-161457). This decision states that agency
appropriations are not available for payment of interest and penalties. The
Commissioner noted that if an agency does not wish or is unable to comply
with its Form 1099 MISC reporting responsibilities, there is nothing that
IRS can do but rely on voluntary compliance on the part of the agency.

Although we agree that IRS cannot compel agencies to meet their Form
1099 MISC reporting responsibilities, we believe implementing our
recommendations will better ensure that agencies do so. For instance, by
bringing to agencies’ attention that they are not filing the required
information returns, IRS can help educate agencies about their reporting
responsibilities. Further, by improving the validity of TINs in the CCR, IRS,
working with OMB, can make it easier for agencies to comply.

The Commissioner also stated that a number of federal agencies indicated
that they have been unable to use IRS’s TIN-matching program because
their financial reporting systems were incompatible with the TIN-matching
program and that the cost to make agency systems compatible would be
prohibitive. If IRS and DOD are able to arrange validation of TINs included
in the CCR via the TIN-matching program as we recommend, this would



Page 18                                  GAO-04-74 Information Returns for Vendors
eliminate the need for individual agencies to use the TIN-matching
program. In the event that IRS and DOD are unable to work out such an
arrangement, IRS’s online TIN-matching program, which can be accessed
via the Internet using a desk-top workstation, may be an effective
alternative to agencies making substantial changes to their financial
accounting systems.

The Under Secretary of Defense (Comptroller) did not directly say he
agreed with our recommendation, but indicated that efforts currently
underway to improve the accuracy of TINs in the CCR for both DOD and all
other federal agencies mirror our recommendation for IRS and OMB to
consider options to routinely validate all vendor TINs in the CCR and to
require all agencies to use vendor and TIN information from the CCR for
their Forms 1099. The Under Secretary pointed out that the mandated use
of the CCR throughout the federal government coupled with IRS’s online
TIN-matching program should enable DOD to establish a basic level of
validation in the near term, perhaps as soon as the second quarter of fiscal
year 2004.

The Under Secretary also pointed out that the Defense Finance and
Accounting Service has been working with payment card companies, such
as VISA and Master Card, to improve the process for reporting payments
made via payment cards. As a result, DFAS expects a significant increase
in the number and dollars reported for the card programs on Forms 1099
for calendar year 2003. We commend these efforts to address the long-
standing problem of obtaining necessary vendor information from payment
card companies. Coupled with IRS’s proposal to enable payment card
companies to act on behalf of cardholder/payers in soliciting, collecting,
and validating vendor information, including TINs, these efforts should go a
long way in addressing this problem.

On November 26, 2003, we also received oral comments from
representatives of OMB's Offices of Federal Procurement Policy and
Federal Financial Management. OMB generally agreed with our
recommendation. Accordingly, OMB agreed to develop and issue a
memorandum to federal agencies directing them to validate TINs by using
the TIN-matching program or the CCR. In addition, OMB agreed to work
with IRS and the CCR to ensure agencies are provided the necessary
information to use either of the methods recommended. Although we
believe that either using IRS’s TIN-matching program or validating TINs in
the CCR can be effective means for ensuring that agencies include valid
TINs on their Forms 1099 MISC, using the CCR as the primary source of



Page 19                                 GAO-04-74 Information Returns for Vendors
valid TINs would reinforce OMB’s intention that the CCR become the
government’s central source of contractor data and would minimize
duplicate effort among agencies in validating TINs. Therefore, we
encourage OMB to pursue use of the CCR as the primary option for
agencies to obtain valid TINs.


We are sending copies of this report to the Ranking Minority Member,
House Committee on Ways and Means; Ranking Minority Member,
Subcommittee on Oversight, House Committee on Ways and Means; and
the Chairman and Ranking Minority Member, Senate Committee on
Finance. We will also send copies to the Commissioner of Internal
Revenue, the Director of the Office of Management and Budget, the
Secretary of Defense, and other interested parties. Copies of this report
will also be made available to others upon request. The report will also be
available at no charge on GAO’s Web site at http://www.gao.gov.

If you have any questions concerning this report, please contact me at (202)
512-9110 or Ralph Block at (415) 904-2150. Key contributors to this report
are listed in appendix VI.




Michael Brostek
Director, Tax Issues




Page 20                                 GAO-04-74 Information Returns for Vendors
Appendix I

Objectives, Scope, and Methodology                                                                    AA
                                                                                                       ppp
                                                                                                         ep
                                                                                                          ned
                                                                                                            nx
                                                                                                             idx
                                                                                                               eIis




              Our objectives were to determine (1) the extent to which federal agencies
              file required Forms 1099 MISC, take steps to ensure that information on the
              returns, particularly Taxpayer Identification Numbers (TIN), are valid, and
              initiate backup withholding if vendors provide invalid TINs; (2) recent
              actions the Internal Revenue Service (IRS) has taken to help improve
              federal agency Form 1099 MISC (Miscellaneous Income) filing compliance;
              and (3) whether any additional measures could further improve federal
              agency compliance with Form 1099 MISC filing requirements.



Scope and     To determine whether federal agencies annually file required Forms 1099
              MISC with IRS, we requested and obtained vendor service payment
Methodology   information from the 14 federal departments for calendar year 2000 and
              2001. We specifically asked for the vendor name, TIN, and total dollar
              value of all payments made by the various agencies and bureaus within
              these departments for services provided during calendar years 2000 and
              2001. However, we were unable to verify whether they fully complied with
              our request, such as only providing payments for services and not for
              goods. We compared the information we obtained from the 14 federal
              departments with vendor payment information included in IRS’s Payer
              Master File (PMF) and Information Returns Master File (IRMF) for the
              same 2-year period. On the basis of our review of IRS's procedures for
              processing information returns and our testing of database extracts
              obtained from IRS's Payer Master File and Information Returns Master
              File, we determined that the data were sufficiently reliable to enable us to
              determine whether Forms 1099 MISC had been filed by the agencies and
              bureaus within the 14 federal departments and, if so, whether they included
              valid vendor TINs.

              We obtained vendor payment information from the following federal
              departments:1

              Agriculture
              Commerce
              Defense
              Education
              Energy
              Health and Human Services

              1
               The Department of Homeland Security had not been established at the time this review
              began.




              Page 21                                       GAO-04-74 Information Returns for Vendors
Appendix I
Objectives, Scope, and Methodology




Housing and Urban Development
Interior
Justice
Labor
State
Transportation
Treasury
Veterans Affairs

In an effort to gauge the potential result of not filing Forms 1099 MISC, we
selected payment information provided to us by the agencies within 3 of
the 14 federal departments for 2000 and 2001 and identified the amounts
paid to individual payees that were not included on IRS’s IRMF, thus
indicating that a Form 1099 MISC had not been filed. We then compared
the payee information to an IRS file of nonfilers to determine whether the
individual payees had filed federal income tax returns for the comparable
years.

To determine whether Forms 1099 MISC filed with IRS by federal agencies
include valid vendor TINs, we analyzed IRS’s IRMF for calendar years 2000
and 2001. We identified the number and dollar value of Forms 1099 MISC
filed by the 14 federal departments that, according to the IRMF, contained
invalid TINs. Of these, we further identified the number and dollar value
associated with invalid TINs that IRS was able to correct via its TIN
validation program, as well as those that remained invalid because IRS was
unsuccessful in correcting them.

To determine whether federal agencies take steps to ensure that
information on the returns, particularly TINs, is valid, by using IRS’s TIN-
matching program to validate vendor TINs or initiate backup withholding
on future payments to vendors that have submitted invalid TINs, we sent a
survey to the 14 federal departments about their policies and practices for
obtaining vendor TINs and filing Forms 1099 MISC. We asked whether they
validate vendor TINs through IRS’s TIN-matching program and if not, why
not. We also asked whether they initiate backup withholding if it is
determined that a vendor has provided an invalid TIN. We then
summarized the overall department responses.

To identify recent actions IRS has taken to help improve federal agency
Form 1099 MISC filing compliance, we discussed with IRS officials any
actions that were either recently implemented or pending. We also tracked




Page 22                                 GAO-04-74 Information Returns for Vendors
Appendix I
Objectives, Scope, and Methodology




the progress of IRS’s pending on-line TIN-matching program, which is
expected to be available to federal agencies in the latter part of 2003.

To identify any additional measures that could further improve federal
agency compliance with Form 1099 MISC reporting requirements, we
discussed this issue with IRS and the Office of Management and Budget
(OMB) officials and analyzed both recent and pending actions that would
affect such compliance.

We did our work at IRS and OMB headquarters in Washington, D.C., from
June 2002 through September 2003 in accordance with generally accepted
government auditing standards.

We obtained written comments on a draft of this report from the
Commissioner of Internal Revenue (see app. IV) and the Secretary of
Defense (see app. V). We also obtained oral comments from
representatives of the Office of Management and Budget.




Page 23                                 GAO-04-74 Information Returns for Vendors
Appendix II

Forms 1099 MISC Filed by 14 Federal
Departments for Tax Years 2000 and 2001                                                                                  Appendx
                                                                                                                               Ii




              This appendix provides details concerning the specific number and dollar
              value of Forms 1099 MISC filed by each of the 14 federal departments for
              tax years 2000 and 2001.

              As table 1 shows, the Department of Defense filed the greatest number and
              dollar value of Forms 1099 MISC each year, while the Department of
              Transportation filed the least. With a few exceptions, most departments
              filed more Forms 1099 MISC in 2001 than in 2000.



              Table 1: Number and Dollar Value of Forms 1099 MISC Filed with IRS for Tax Years
              2000 and 2001

              Dollars in millions (rounded)
                                                       Number filed            Amount filed   Number filed Amount filed
              Department                                  for 2000                for 2000       for 2001     for 2001
              Agriculture                                         32,617           $1,183.1         42,440       $1,579.0
              Commerce                                             7,369            1,370.6          7,601          962.2
              Defense                                           245,917            49,944.3        257,382       60,974.1
              Education                                            2,428              906.1          2,686        1,068.4
              Energy                                               3,587            6,066.4          3,381        7,250.0
              Health & Human
              Services                                             8,464           41,735.4          8,859       40,312.8
              Housing & Urban
              Development                                         17,347            1,118.5         15,522        1,065.9
              Interior                                            23,394            1,292.5         26,197        1,549.3
              Justice                                             21,241            1,705.5         22,868        2,146.6
              Labor                                               66,285              965.4         66,245        1,126.5
              State                                                6,345            1,195.6          6,411        1,552.2
                                                                                                                         a
              Transportation                                            93              7.7              4
              Treasury                                             5,846            1,537.1          7,481        1,767.7
              Veterans Affairs                                  173,988             6,301.1        186,309        6,953.1
              Total                                             614,921          $115,329.3        653,386     $128,307.8
              Source: GAO analysis of IRS’s Information Returns Master File.
              a
               Less than $1 million rounded.




              Page 24                                                            GAO-04-74 Information Returns for Vendors
Appendix III

Forms 1099 MISC Filed with IRS with Invalid
TINs for Tax Years 2000 and 2001                                                                                            Appendx
                                                                                                                                  iI




               This appendix provides details concerning the specific number and
               percentage of Forms 1099 MISC filed by each of the 14 federal departments
               for tax years 2000 and 2001 that included invalid TINs when received by
               IRS.

               As table 2 shows, the Departments of Defense and Veterans Affairs filed the
               greatest number of Forms 1099 MISC with invalid TINs each year, while the
               Departments of Transportation and Education filed the least. The
               Departments of Transportation and Agriculture filed the greatest
               percentage of Forms 1099 MISC with invalid TINs each year, while the
               Department of Health and Human Services filed the least.



               Table 2: Number and Percent of Forms 1099 MISC Filed with Invalid TINs for Tax
               Years 2000 and 2001

                                                   Number of                      Percent of     Number of         Percent of
                                                  invalid TINs                  invalid TINs    invalid TINs     invalid TINs
               Department                                 2000                          2000            2001             2001
               Agriculture                                  6,820                      20.9            9,518            22.4
               Commerce                                        510                       6.9             788            10.4
               Defense                                    27,246                       11.1           26,006            10.1
               Education                                       352                     14.5              313            11.7
               Energy                                          469                     13.1              531            15.7
               Health & Human
               Services                                        503                       5.9             493             5.6
               Housing & Urban
               Development                                  3,397                      19.6            2,916            18.8
               Interior                                     2,986                      12.8            3,319            12.7
               Justice                                      3,949                      18.6            4,005            17.5
               Labor                                        9,086                      13.7            9,555            14.4
               State                                        1,021                      16.1            1,053            16.4
               Transportation                                    20                    21.5                1            25.0
               Treasury                                        999                     17.1            1,132            15.1
               Veterans Affairs                           25,781                       14.8           26,609            14.3
               Totals                                     83,139                       13.5           86,239            13.2
               Source: GAO analysis of IRS’s Information Returns Master file.




               Page 25                                                              GAO-04-74 Information Returns for Vendors
Appendix IV

Comments from the Internal Revenue Service                           Appendx
                                                                           iIV




              Page 26        GAO-04-74 Information Returns for Vendors
Appendix IV
Comments from the Internal Revenue Service




Page 27                                      GAO-04-74 Information Returns for Vendors
Appendix IV
Comments from the Internal Revenue Service




Page 28                                      GAO-04-74 Information Returns for Vendors
Appendix V

Comments from the Department of Defense                             Append
                                                                         x
                                                                         i
                                                                         V




              Page 29       GAO-04-74 Information Returns for Vendors
Appendix V
Comments from the Department of Defense




Page 30                                   GAO-04-74 Information Returns for Vendors
Appendix VI

GAO Contacts and Staff Acknowledgments                                                         Appendx
                                                                                                     iVI




GAO Contacts      Michael Brostek, (202) 512-9119
                  Ralph T. Block, (415) 904-2150



Acknowledgments   In addition to those named above, Tom Bloom, Janet Eackloff, Evan
                  Gilman, Shirley Jones, Bob McKay, and James Ungvarsky made key
                  contributions to this report.




(440132)          Page 31                              GAO-04-74 Information Returns for Vendors
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