The Internal Revenue Service needs to do a better job of collecting accurate tax return information from federal, state and local government entities, according to a new report.
The report, by the Treasury Inspector General for Tax Administration, acknowledged that government entities are generally more compliant than most taxpayers in submitting accurate information returns to the IRS. However, the report recommended that the IRS take additional steps to improve the compliance of government entities with the tax laws.
The report found that relatively few government entities were responsible for nearly half the inaccuracies that the IRS was able to identify. But the IRS’s selection criteria for deciding which government entities’ information returns deserve closer scrutiny could leave many of the problems undetected. The report found problems such as invalid payee data and missing or mismatched names and Taxpayer Identification Numbers.
“Given the importance of collecting the correct amount of tax revenue for government operations, government entities are expected to set a near-perfect example of submitting information returns with accurate information,” TIGTA Inspector General J. Russell George said in a statement. “If the IRS will take additional steps to ensure accuracy in this area, enhanced compliance will help government entities do their part to chip away at the tax gap.”
The tax gap is the difference between what taxpayers should have paid and what they actually pay on a timely basis. It was estimated at $345 billion in 2001, the most recent year the IRS estimated its size.
TIGTA performed its audit to determine the extent to which governmental entities are submitting accurate information returns and whether additional steps are needed to further enhance compliance with reporting requirements. TIGTA found that a relatively small number of governmental entities (75 of 85,139) were responsible for 48 percent of the inaccuracies. In addition, most of the inaccuracies were limited to specific types of information returns.
TIGTA also found that the selection criteria used by the IRS to select entities for compliance activities focus on the overall percentage of inaccurate returns, rather than the total number of inaccurate information returns submitted.
TIGTA recommended that the IRS expand the criteria used to select government entities for compliance activities to include the volume of inaccurate information returns; and that compliance activities for entities selected based on the volume of inaccurate returns not be closed until IRS personnel assess the reasons for the inaccuracies and determine any corrective actions that should be taken, thoroughly documenting these assessments in the compliance case files.
IRS officials agreed with the recommendations and stated that corrective actions have been taken.
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