The IRS plans to take a closer look at businesses that don't file their tax returns, and identify more of them.
The IRS cannot develop a comprehensive estimate of the number of businesses that do not file tax returns and the tax gap associated with them because it lacks data about the population of all businesses, but the IRS could use the inventory of business nonfilers it already has on hand to determine noncompliance, according to a new government report.
The report, by the Government Accountability Office, noted that the IRS identifies several million potential business nonfilers each year, more than it can thoroughly investigate. The IRS could take a random sample of its inventory, thoroughly investigate those cases, and use the results to estimate the proportion of actual nonfilers in its inventory of potential nonfilers, said the report.
Until recently the IRS has not had a way to prioritize the cases in its large inventory. But the IRS modernized its business nonfiler program last year by incorporating income and other data in its records indicating business activity. Active businesses generally have an obligation to file a return. The IRSs Business Master File Case Creation Nonfiler Identification Process, or BMF CCNIP, now assigns each case a code based on this data. The IRS uses the code to select the cases to work with the goal of securing tax returns from nonfilers and collecting additional revenue.
This is a significant modernization, but the IRS lacks a formal plan to evaluate how well the codes are working. The IRS has performance information on its individual nonfiler program, but less on its business nonfiler program. Key management reports needed to provide program data are under development, but no deadline has been set. The IRS could also use more information on why many nonfiler cases are unproductive. This could potentially lead the IRS to identify actions that could reduce IRS resources used on these cases and the associated taxpayer burden.
The GAO identified several opportunities to enhance the IRSs identification and pursuit of business nonfilers. For example, the new BMF CCNIP selection codes provide a quick way to verify taxpayer statements that a business has ceased operations and does not need to file a tax return. IRS collections staff have been instructed to use the codes when making case closure decisions. They were previously instructed to use other income data, but the GAOs analysis indicated this may not have been done in all cases.
Non-IRS data on various businesses, including federal contractors, could be used to verify taxpayer statements about whether a tax return should have been filed. The GAOs analysis of cases in two states that were closed as not liable to file a return found 7,688 businesses where non-IRS data showed business activity as measured by sales totaling $4.1 billion.
The GAO also found cases closed as not liable to file a return involving 13,852 businesses on the federal contractor registry. The GAOs analyses illustrated the potential value of non-IRS data, but the GAO did not assess which non-IRS data would be most useful nor examine the capacity of IRSs systems to use such data on a large scale
The GAO recommended in the report that the IRS should develop a partial business nonfiler rate estimate and set a deadline for developing performance data. The IRS should also develop a plan for evaluating the selection codes, and reinforce the need to use income data and selection codes in verifying taxpayer statements. In addition, the report recommended that the IRS study the feasibility and cost-effectiveness of using non-IRS data to verify taxpayer statements.
In response, the IRS agreed that identifying and pursuing active business nonfilers is key to its enforcement efforts and acknowledged that the GAOs recommendations could assist these efforts. The IRS agreed with four of the GAOs recommendations and indicated some steps it would take to address the other four. We agree that identifying and pursuing business nonfilers who remain in business is a key component of our enforcement efforts and that your recommendations may assist us in those efforts, wrote IRS deputy commissioner of services and enforcement Steven T. Miller.
He noted that the IRS has looked into the possibility of purchasing private data from information resellers, but the IRS concluded that it was difficult to quantify the benefits because the IRS could not be assured that it was not buying duplicative records or that the data purchased would produce revenue-generating casework.
However, with regard to using federal contractor data to make a determination for filing tax returns, the IRS will evaluate the effectiveness of data mining using the Central Contractor Registration database maintained by the General Services Administration.
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