Washington (July 11, 2003) -- Internal Revenue Service steps to improve its K-1 matching program, including more stringent screening criteria before notices can be sent, may not be enough to reduce the burden on compliant taxpayers, according to a General Accounting Office report.

Because of the significant amount of unreported flow-through income from partnerships, S corporations, estates and trusts, the IRS began in 2001 to match the tax year 2000 Schedule K-1 information against the flow-through income reported on individuals' tax returns.

Although the original IRS focus was to be on interest and dividends, the IRS expanded the program's scope to cover additional categories of income when it learned it couldn't separate K-1 interest and dividends from other underreported interest and dividend income, such as that paid by banks.

In April 2002 it started notifying taxpayers of potential discrepancies between the income reported by the flow-through entities and the income they reported on their individual 1040s. However, more than two-thirds of the 69,000 notices were sent to taxpayers later found to be compliant, and the IRS stopped sending the notices in August 2002.

Although the IRS has taken steps intended to improve the K-1 matching program for 2003, the GAO isn't sure enough is being done to reduce the burden on taxpayers.

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