The Internal Revenue Service is not doing enough to match incorrect or missing identification numbers on income and wage statements with existing tax accounts, potentially costing the U.S. Treasury billions in lost revenue, charged a Treasury Department watchdog.

The Treasury Inspector General for Tax Administration audited the IRS's progress in cutting down on the volume of mismatched names and ID numbers found on forms like the 1099 MISC and W-2. TIGTA noted that in tax years 2001 to 2004, the IRS received approximately 48 million miscellaneous income and wage statements, reporting $931 billion in income, which it was unable to use in determining if the recipients filed tax returns and reported the income. The majority involved non-employee compensation, such as for independent contractors.

In tax year 2004 alone, the IRS received about 3.8 million miscellaneous income statements reporting approximately $150 billion in earnings that could not be computer-matched to a filed tax return because of missing or erroneous ID numbers. Compared to when TIGTA originally reported on the problem in 2001, that represented a 63 percent increase in the number of unusable documents, and the earnings reported on the documents have more than doubled.

TIGTA said the information needed to be better matched in order to reduce the estimated $345 billion tax gap, the gap between taxes owed and taxes actually collected.

Despite the IRS's difficulties in matching the forms and numbers, when TIGTA auditors manually evaluated a sample of 374 miscellaneous income statements with incorrect or missing numbers and 246 wage statements from 2004, they were able to match 50 percent of the numbers to taxpayer accounts.

TIGTA recommended that the IRS increase its use of automated systems to resolve the mismatches, especially when they involve high dollar amounts. The IRS, however, said the effort would cost more than it was worth.

TIGTA disagreed. "This audit clearly shows that increased examination of statements with erroneous or mismatched numbers more than pays for itself in additional revenue," said Inspector General Russell George in a statement. "The IRS's opposition to this recommendation is confounding."

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