Information Returns: Correcting Taxpayer Identification Is Possible Without Disclosing Tax Data

Published by the Government Accountability Office on 1990-06-05.

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

--.-.- ._...._.
J llllt~ I !I90
                     Correcting Taxpayer
                     Identification Is
                     Possible Without
                     Disclosing Tax Data


      United States
GAO   General Accounting Off&e
      Washington, D.C. 20548

      General Government       Division


      June 5,1QQ0

      The Honorable Lloyd Bentsen
      Chairman, Committee on Finance
      United States Senate

      The Honorable Dan Rostenkowski
      Chairman, Committee on Ways and Means
      House of Representatives

      This report responds to Section 7714 of the Omnibus Budget Reconcilia-
      tion Act of 1989. Section 7714 requires that we, in consultation with the
      Secretary of the Treasury or his delegate, study ways to resolve, with
      the least disclosure of return information possible, discrepancies
      between taxpayer identification numbers (TIN) and names on informa-
      tion returns and the same information in Internal Revenue Service (IRS)

      Each year as part of IRS’ Information Returns Program, banks and other
      financial institutions (called “payors”) file information returns with IRS.
      These returns report interest and dividend income payments made by
      the payors to individuals (called “payees”).’ IRS matches the income on
      the information returns with that reported by payees on their tax
      returns. This allows IRSto identify taxpayers who have potentially
      failed to report all their interest and dividend income. For IRS’matching
      program to be successful, information about payees on information
      returns must be accurate. Of the 407 million interest and dividend
      returns processed for calendar year 1988 (totaling $611 billion), IRS was
      unable to match about 20 million, or 6 percent, of the returns. In these
      cases, the payee’s name and/or TIN, which is usually a Social Security
      number, did not match information in either Social Security or IRS files.

      When IRS cannot make a match, it sends the payee’s identification
      number back to payors for them to obtain correct identification numbers
      and to update their files. In the past, payors have complained that IRS
      does not provide them with enough information to determine why a mis-
      match occurred. Payors say that knowing if the mismatch was caused
      by variations in the payee’s name or a transposition error, for example,
      would make it easier for them to submit correct information the fol-
      lowing year. IRS believes that providing payors with specific information
      would constitute an unauthorized disclosure of taxpayer information.

      ‘Although payorssometimesreport interest and dividend incomepaymentsmadeto businesses,IRS
      doesnot have an Information ReturnsProgramfor businesses.

      Page 1                                   GAO/GGD-9&90    JRS’ Information   &turns   Program
                   E.239874                                                                  d

                   In its Commissioner’s 1989 Study of Civil Penalties, IRS recommended
                   that the law be changed to allow it to provide payors with the informa-
                   tion they need to correct information returns. Congress-through     the
                   Omnibus Budget Revenue Reconciliation Act of 1989~asked us to
                   determine if other options were available.

                   There are three things IRS could do, without legislative changes, to help
Results in Brief   payors resolve incorrect information returns and improve the effective-
                   ness of the Information Returns Program.

                   First, IRS should ask payors to obtain information on payee name
                   changes not reported to the Social Security Administration (e.g., those
                   due to marriage) when payees open an account with the payor. Payors
                   should then include both names on information returns sent to IRS. IRS,
                   which uses Social Security data in its matching process, is unable to
                   match many information returns because the payee’s name differs from
                   the name on record at the Social Security Administration. This is the
                   primary cause of mismatches. Because IRS already can use multiple
                   names in its matching process, the name changes obtained through the
                   payors would allow IRS to match more information returns and eventu-
                   ally reduce the number of incorrect TINS sent back to payors.

                   Second, IRS should expand its plans to correct taxpayer names on income
                   tax returns. Currently, IRS uses Social Security data to verify TINS and
                   names on income tax returns. Beginning in 1991, IRS plans to adopt pro-
                   cedures that will allow it to update taxpayer accounts using the name
                   reported on the tax return even though it differs from a name on Social
                   Security records. These procedures should benefit the Information
                   Returns Program because the additional taxpayer names will become
                   part of the data base used to match information returns. IRS plans to
                   apply this procedure only to primary filers (those whose names appear
                   on the first name line of a tax return). Based on discussions with IRS
                   officials and statistics reported by IRS Internal Audit, we believe that
                   including the names of secondary filers (those whose names appear on
                   the second line of a joint return) would further benefit IRS’ matching
                   program and reduce the number of incorrect TINS returned to payors.

                   Third, IRS should tell payors when there is no current record of a partic-
                   ular TIN in IRS or Social Security files, This information would help
                   payors isolate the reason why some TINS are incorrect. Moreover,
                   according to IRS’ Office of Chief Counsel, this practice does not consti-
                   tute a disclosure of taxpayer information. IRS attempted to provide this

                   Page 2                            GAO/GGD-90-90IRS’ Information Returns Program

             service for calendar year 1986 and 1987 information returns but
             because of a computer programming error decided to discontinue it, IRS
             has since corrected the problem but has not resumed sending payors this

             When IRS receives information returns from payors, it matches the
Background   payee’s name and TIN on the information returns against information
             from Social Security and IRSfiles. Social Security files show the names
             and any name changes associated with Social Security numbers; the IRS
             file contains similar information about names associated with employer
             identification numbers.’ If IRS obtains a match on both the name and TIN,
             it considers the TIN valid. IRS then matches the validated information
             returns against tax returns as part of the Information Returns Program.

             Those TINS that IRS is unable to validate against Social Security and IRS
             files are returned to payors as incorrect. Under the Interest and Divi-
             dend Tax Compliance Act of 1983, payors are required to ask payees
             with incorrect TINS to supply a corrected TIN or certify that the TIN they
             originally provided was correct. Payors then make whatever corrections
             are necessary before they submit their next information returns to IRS. If
             the payee fails to certify the TIN, the act requires payors to withhold and
             remit to Treasury 20 percent of all interest and dividend payments
             made to a payee’s account until the payee provides a certified TIN.

             Information returns fail to validate against Social Security and IRS files
             for a variety of reasons. For example, the payee could provide the
             wrong TIN to the payor, a payor could make an error when transcribing
             the TIN or payee’s name on an information return, or a payee’s name
             might differ from that associated with the same TIN in Social Security or
             IRS files. This last reason is one of the more difficult problems to resolve
             because it may not be due to any error on the information return. For
             example, IRS would consider the information return incorrect if a
             recently married woman opened a savings account under her married
             name but did not notify the Social Security Administration of her name

             At about the same time that IRS sends its lists of incorrect TINS to payors,
             it also tries internally to correct the TINS it was unable to validate. For

             ‘An employeridentification numberis a g-digit numberassignedto a businessby IRS

                      calendar year 1988 returns, IRS was able to correct about 34 percent of
                      the returns it could not validate.”

                      In the past, payors have asked IRS to provide more information to
                      explain why TINS are returned as incorrect. Payors contend that
                      knowing how IRS was able to correct some of these TINS would help them
                      make their own corrections, Payors state that it would be helpful to
                      know, for example, whether a TIN failed to match IRS files because of a
                      problem with the TIN itself or because of a problem with the payee’s

                      Although IRS would like to provide more information to payors, it
                      believes that to do so might result in an unauthorized disclosure of tax-
                      payer information. Section 6103 of the Internal Revenue Code estab-
                      lishes the general rule of confidentiality and prohibits the disclosure of
                      taxpayer information in the absence of specific statutory authority. IRS’
                      Office of Chief Counsel has concluded that no subsection of 6103 pro-
                      vides explicit authority for IRS to disclose corrected TINS to payors. More-
                      over, IRS is concerned that even where it has presumably determined
                      that a TIN is correct, it cannot guarantee that the TIN has not been mis-
                      takenly associated with some other taxpayer. Thus, IRS runs the risk of
                      disclosing someone else’s name or identification number to the payor,

                      To meet the requirement of the Omnibus Budget Reconciliation Act of
Objective, Scopeand   1989 (Section 7714), our objective was to determine what options exist,
Methodology           without a legislative change, to help payors provide correct names and
                      TINS to IRS.

                      To determine what options exist to help payors, we relied on our past
                      work that addressed ways to correct TINS, reviewed IRS Internal Audit
                      reports, reviewed IRS statistics compiled on information returns for cal-
                      endar year 1988, and interviewed officials in the IRS National Office and
                      Central Region. We also interviewed representatives of trade associa-
                      tions for the banking and securities industries, savings institutions,
                      credit unions, and insurance companies to solicit their opinions about
                      what could be done to resolve incorrect TINS.

                      %ecauseIRSdoesnot maintain separaterecordsfor interest and dividend information returns, the
                      34 percentcorrectionrate includesother types of information returns, such asreportson employee
                      earnings(FormW-2)and reportson miscellaneousincome(Form 1099-MISC).

                      Page 4                                     GAO/GGD90-90IRS’ Information Retuma Progrm
  \                    B-239874

                       We reviewed Section 6103 of the Internal Revenue Code to determine
                       what type of information IRS can disclose to payors. We also obtained a
                       legal opinion from the IRS Office of Chief Counsel and made our own
                       legal analysis of the section. To further clarify IRS’ responsibilities
                       regarding the disclosure of taxpayer information, we interviewed offi-
                       cials at IRS’ National Office in the Offices of the Assistant Commissioner
                       (Examination) and Chief Counsel (Disclosure Litigation).

                       Time constraints did not permit our obtaining agency comments on this
                       report. Instead, the views of responsible agency officials were sought
                       during the course of our work and are incorporated where appropriate.
                       We did our work from March to May 1990 in accordance with generally
                       accepted government auditing standards.

                       Upon their receipt of an IRS list of incorrect TINS, payors are required to
IRS Should Encourage   attest to due diligence in obtaining a corrected payee TIN or a certifica-
Payors to Provide      tion that the TIN originally provided was correct. Payors are not
More Information       required to obtain correct names, yet many of the TINS listed are consid-
                       ered incorrect because the names associated with them on the informa-
About Payee Nme        tion returns are not the same as the names associated with them in
Changes                Social Security or IRS files. As part of a review we completed in 1988,3
                       payors told us that they should not be asked to serve as enforcement
                       agents for resolving incorrect TINS resulting from circumstances beyond
                       their control, such as name changes that were not provided to Social
                       Security. They suggested that those problems should be resolved by IRS
                       or the Social Security Administration. While we agree that name mis-
                       matches are many times outside payors’ control, these types of mis-
                       matches continue to pose a problem for both the IRS Information Returns
                       Program and payors.

                       Of the 407 million interest and dividend information returns processed
                       by IRS for calendar year 1988, IRS could not validate 20 million against
                       Social Security or IRS files. Using IRS’ statistics, we estimate that about
                       16 percent of the 20 million were considered incorrect even though the
                       TIN on the information returns exactly matched a TIN in Social Security
                       and IRS files. IRS considered these returns incorrect because the name on
                       the return did not match the name in those files.

                       “Tax Administration: Accuracyof Taxpayer Identification Numberson Information ReturnsCanBe
                       Improved(GAO/m88 -110, September6,lQfB).

                       Page 6                                    GAO/GGJMW90     IRS’ Information   Return   Program
                     B239874                                                                                       ,

                     Even though payors may not be responsible for name mismatches, they
                     end up having to deal with the problem because name mismatches are
                     returned to them for resolution and possible backup withholding. There-
                     fore, we believe payors would respond positively if IRS did more to
                     encourage them to obtain name change information when payees open
                     new accounts. Such information could then be included on the payor’s
                     information return for that payee, allowing IRS-whose matching pro-
                     gram is set up to accept multiple name lines-to match the information
                     return against its files. And payors would avoid dealing with an incor-
                     rect TIN at a later date,

                     IRS officials believe that they are actively trying to get payors to obtain
                     name change information. For example, TIN certification instructions for
                     existing and new accounts ask payors to obtain payee name changes.”
                     We believe IRS could do more to encourage payors to obtain name
                     changes, for example by making public service announcements and
                     including in its lists of incorrect TINS a message on the importance of
                     obtaining name changes.

                     @&her way IRS could reduce the number of name mismatches in the
IRS Should Expand    Information Returns Program would be to expand its plans to correct
Plans to Correct     taxpayer names on income tax returns. IRS uses the same approach in
Nameson Income Tax   validating taxpayer names and identification numbers on income tax
                     returns that it does in validating information returns. That is, before tax
Returns              return information is entered onto taxpayers’ accounts at IRS’ Martins-
                     burg Computer Center, the taxpayer’s name and identification number
                     are matched against Social Security data. When the name and number
                     do not match these data, the return is sent back for correction to the IRS
                     service center that originally processed it. At the service centers, the
                     documents are reviewed to identify and correct any IRS errors. If there
                     are no such errors and the problem cannot be corrected internally by IRS,
                     the taxpayer is then contacted to obtain the information needed to cor-
                     rect the problem.

                     Currently, corrections made by the service centers only resolve the
                     immediate problem-getting    IRS’ processing system to update the tax-
                     payer’s account. In 1991, however, on the basis of a report issued in

                     “IRS instructions for FormW-9(Requestfor Taxpayer Identification Numberand Certification),
                     which payors are supposedto sendto payeeswith incorrectTINS,state,“. . .if you have changed
                     your last name,for instance,due to marriage,without informing the SocialSecurity Administration
                     of the namechange,pleaseenter your first nameand both the last nameshown on your social
                     security card and your new last name.”

                     Page 6                                      GAO/GGJMO-90IRS’ Information Returns Program
  .                      B229874

                         1989 by IRS’Internal Audit Division, IRS plans to begin adding correc-
                         tions made by service centers to its file of Social Security information.
                         Thus, the next time IRS receives a tax return with the same name
                         problem, the system should update the account. Moreover, the type of
                         corrections that will be added to its Social Security data base file will
                         help resolve name mismatches on information returns. This planned cor-
                         rection process would benefit the Information Returns Program even
                         more if it were expanded to include secondary filers on joint income tax
                         returns. Because IRS’ processing system enters income tax return infor-
                         mation to the accounts of primary filers, its current correction plans
                         focus only on the primary filers. Secondary filers, however, account for
                         over half the name mismatches on information returns. Of the 4 million
                         calendar year 1988 information returns on which IRS corrected a name,
                         about 2.9 million involved names of secondary filers.

                         IRS should be able to update secondary filer data easily with minimal
                         changes to existing procedures. Currently, when the name of a sec-
                         ondary filer on a tax return does not match against Social Security files,
                         IRS sends a notice advising the taxpayer to contact Social Security and
                         provide IRS with the information needed to update the taxpayer’s
                         account. When IRS receives the updated information, it could add the
                         information to its Social Security data base, much as it plans to do when
                         adding data on primary filers.

                         The process to add this information will primarily be a manual one and
                         will increase IRS’ costs. However, according to IRS officials, the costs
                         should begin to decrease after the first year because many of the names
                         corrected should not require corrections in subsequent years. IRS offi-
                         cials believe that they can expand the process to correct the names of
                         secondary filers. However, they want to see how the process works with
                         primary filers for the first year before including secondary filers.

                         When IRS validates information returns against Social Security and IRS
IRS Should Tell Payors   files, it separates the returns into those with incorrect TINS and those
When a TIN Is Not in     with correct TINS. Among the incorrect TINS are those returns with no
Social Security or IRS   record of the payee’s TIN in Social Security or IRS files.
Files                    To help payors determine why it considered some of the TINS incorrect
                         on calendar year 1986 and 1987 information returns, IRS attempted to
           i             tell payors which TINS were not in Social Security or IRS files. Unfortu-
                         nately, according to the TIN Penalty Program Coordinator in IRS’ National
                         Office, a programming error resulted in, IRS overstating the number of

                         Page 7                            GAO/GGD-90-90JRS’Information Returns Program

                          B-259874                                                                           1

                          such TINS and probably hindered more than helped payors’ attempts to
                          resolve the incorrect TINS. She said the programming error that over-
                          stated the data for calendar year 1986 and 1987 information returns
                          stemmed from IRS’ failure to run the incorrect TINS against the IRS file of
                          employer identification numbers-an error that has since been cor-
                          rected. Because of the bad experience, IRS, according to the coordinator,
                          decided to discontinue sending payors the data.

                          We believe that IRS should resume sending payors data about TINS that
                          are not in Social Security or IRS files. IRS’ Office of Chief Counsel has
                          determined that these data can be shared without risking an unautho-
                          rized disclosure of taxpayer information. And we believe providing the
                          data would help payors resolve incorrect TINS. IRS officials agree; they
                          said that the lists of incorrect TINS for calendar year 1989 information
                          returns will identify TINS not currently on Social Security or IRS files.

                          There are nonlegislative options available to help payors submit correct
Conclusions               information returns. Payors can obtain name changes to prevent having
                          to resolve incorrect TINS at a later date. IRS can reduce the number of
                          incorrect TINS sent back to payors for resolution and can supply payors
                          additional information to help them determine why a TIN was considered
                          incorrect. These options do not address all the reasons an information
                          return might be incorrect, but they do address one of the problems that
                          payors find most difficult to resolve-when a payee’s name differs from
                          that shown in Social Security and IRS files.

                          We recommend that the IRS Commissioner
the Commissioner of   l encourage payors to obtain information from payees about name
Internal Revenue        changes not reported to Social Security when they open new accounts
                        and to include the names on information returns,
                      . expand IRS’ plans to correct names of primary filers on income tax
                        returns to include secondary filers, and
                      l tell payors when a TIN is not in Social Security or IRS files when pro-
                        viding lists of incorrect TINS to payors.

                          We will send copies of this report to the Commissioner, Internal Revenue
                          Service, and other interested parties. Major contributors to this report

                          Page 8                             GAO/GGDM-90   L&s’ Infbrmation   Returns   Progm

    are listed in the appendix. If you have any questions on this report,
    please contact me on 276-6407.

    Jennie S. Stathis
    Director, Tax Policy
      and Administration    Issues

    Page 9                            GAO/GGD-9090   IRS’ Information   Returns Program

Appendix I

Major Contributors to This Report

                        Lynda Willis, Assistant Director, Tax Policy and
I.  _ _
          --- -.          Administration Issues
Division, Washington,

                        Bob Lidman, Regional Management Representative
Cincinnati Regional     Deborah Smith, Evaluator-in-Charge

(268467)                Page10                           GAO/GGD-99-9OLRS'InformationRetumsProgrm

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