oversight

IRS's Use of Information on Taxpayers Claiming Many Allowances or Exemption From Federal Income Tax Withholding

Published by the Government Accountability Office on 2003-11-06.

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

United States General Accounting Office
Washington, DC 20548



          November 6, 2003


          The Honorable Mark W. Everson
          Commissioner of Internal Revenue

          Subject: 	    IRS’s Use of Information on Taxpayers Claiming Many Allowances or
                        Exemption From Federal Income Tax Withholding

          Dear Mr. Everson:

          In September 2003, we responded to a request from Representative Elton Gallegly to
          provide information on the number of taxpayers who claimed more than 10
          withholding allowances and taxpayers who claimed exemption from federal income
          tax withholding. The Internal Revenue Service (IRS) calls such claims questionable
          Form W-4s. However, in the course of performing our work, we became concerned
          about the reliability of the information that IRS maintains on these taxpayers and
          decided that we could not use it to answer Representative Gallegly’s questions. For
          background, see our letter to Representative Gallegly in enclosure 1.

          The objectives of this letter are to summarize our findings about the reliability of the
          information IRS maintains on taxpayers who claimed more than 10 withholding
          allowances or exemption from federal tax withholding and to bring to your attention
          some resulting questions about the value of IRS continuing to collect the information.

          Results
          We have two concerns about the information that IRS maintains on taxpayers who
          claimed more than 10 withholding allowances or exemption from federal tax
          withholding that precluded us from using it to respond to Representative Gallegly’s
          questions. First, we are concerned about the completeness of the information
          because a significant number of employers may not send IRS the required forms.
          According to IRS’s information, about 75 percent of the large employers with 1,000 or
          more employees in its Large and Medium-Size Business (LMSB) and Small
          Business/Self-Employed (SB/SE) divisions that filed employment tax returns in tax
          year 2001 did not send IRS any forms. Although the number of questionable Form
          W-4s IRS might receive from individual employers can vary, it seems unlikely that 75
          percent of employers with 1,000 or more employees could have no employees who
          submitted questionable Form W-4s. Second, some of the information may not be
          current—it may not reflect the current withholding status of some taxpayers. If an
          employee who previously claimed more than 10 allowances or claimed exemption


                                                 GAO-04-79R IRS’s Questionable Form W-4 Program
from federal income tax withholding submitted a new Form W-4 claiming 10 or fewer
allowances or not claiming exemption from withholding, the database would
continue to show the earlier information. There is no requirement for employers to
submit Form W-4s other than those claiming 10 or more allowances or exemption.
We could not quantify the significance of our concerns about the reliability of IRS’s
data; however, the uncertainty about how complete and current the data were
precluded us from using them to respond to Representative Gallegly’s questions.

While acknowledging the limitations of the information in the Questionable Form W-4
database, IRS’s Wage and Investment (W&I) Division officials stated that the
information in the database was useful to them for tax compliance purposes. The
officials said that they use the database to identify useful leads in determining
possible underwithholding issues that can lead to noncompliance. For example, tax
examiners at IRS’s Fresno Computing Center routinely review the withholding
information of certain taxpayers to substantiate their claims. If the taxpayers cannot
substantiate their claims, the examiners would require that the taxpayers’
withholdings be adjusted to appropriate levels. According to the Treasury Inspector
General for Tax Administration, about 70 percent of the cases closed by the
examiners in fiscal year 2001 resulted in no changes to the taxpayers’ withholding
claims.1

However, considering what we learned about the reliability of the data, questions
may be raised about the value and fairness of IRS’s enforcement efforts that rely on
the database. One question is whether it is worth devoting IRS’s resources to
maintaining a database of questionable reliability. According to information IRS
provided us in July 2003, 32 full time equivalent staff was dedicated to the
Questionable Form W-4 program. A related question is whether it is worth the
burden borne by those taxpayers who send IRS forms. Another question is about the
evenhandedness of IRS’s use of the database as a compliance tool. Taxpayers whose
employers are not submitting questionable Form W-4s are less likely to face
compliance checks under the program than taxpayers whose employers do submit
the forms.

IRS has reengineering efforts underway to improve the Questionable Form W-4
database, which we discuss in our report to Representative Gallegly. Based on
information from program officials, these efforts were being implemented when we
were preparing this report. Although we did not assess IRS’s reengineering plans, it
was not clear to us that the plans would address the data reliability concerns we
discussed in this report and in our report to Representative Gallegly. The
reengineering efforts address database improvements to enhance compliance checks.

In addition to summarizing our concerns, our letter to Representative Gallegly
contains details of the scope and methodology of the work that we performed from
October 2002 through June 2003 in accordance with generally accepted government
auditing standards.


1
Treasury Inspector General for Tax Administration, Improvements to the Questionable Form W-4
Program Are Needed to Determine Program Impact on Taxpayer Compliance, Reference Number:
2003-40-006 (Washington, D.C.: October 2002).


    Page 2                                GAO 04-79R IRS’s Questionable Form W-4 Program
Conclusions and Recommendation
We have questions about the value and fairness of using the Questionable Form W-4
program database for compliance purposes because of uncertainties about the extent
that the data are complete and current.

Because of these questions we recommend that you assess the value of IRS’s
Questionable Form W-4 program and determine whether the program should
continue in its current form.


Agency Comments and Our Evaluation
On October 28, 2003, we received comments from the Commissioner of Internal
Revenue on a draft of this report. The Commissioner agreed with our
recommendation, stating that he will undertake a comprehensive review of the
Questionable Form W-4 Program to determine its effectiveness and relevancy in the
current environment. Further, he said that the Commissioner of the W&I Division is
to lead the effort. The Commissioner’s comments are reprinted in enclosure 2.
                                         - - - - -
This report contains a recommendation to you. The head of a federal agency is
required by 31 U.S.C. 720 to submit a written statement on actions taken on this
recommendation. You should send your statement to the Senate Committee on
Governmental Affairs and the House Committee on Government Reform within 60
days after the date of this report. A written statement also must be sent to the House
and Senate Committees on Appropriations with the agency’s first request for
appropriations made over 60 days after the date of this report.

We are sending copies of this report to the Secretary of Treasury and to interested 

congressional committees. This report will also be available at no charge on GAO’s 

Web Site at http:www.gao.gov. 


If you have any questions about this report, please contact me at (202) 512-9110 or by 

E-mail at whitej@gao.gov. Key contributors to this assignment were Charlie Daniel 

and Arthur L. Davis. 


Sincerely yours, 





James R. White 

Director, Strategic Issues 



Enclosures 



Page 3                                 GAO-04-79R IRS’s Questionable Form W-4 Program
Enclosure 1: Report to Representative Elton Gallegly 





Page 4                   GAO 04-79R IRS’s Questionable Form W-4 Program
Page 5   GAO-04-79R IRS’s Questionable Form W-4 Program
Page 6   GAO 04-79R IRS’s Questionable Form W-4 Program
Page 7   GAO-04-79R IRS’s Questionable Form W-4 Program
Page 8   GAO 04-79R IRS’s Questionable Form W-4 Program
Page 9   GAO-04-79R IRS’s Questionable Form W-4 Program
Enclosure 2: Comments from the Internal Revenue
Service




Page 10                 GAO 04-79R IRS’s Questionable Form W-4 Program
(450248)


Page 11    GAO-04-79R IRS’s Questionable Form W-4 Program
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