TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION
MORE COMPLETE AND ACCURATE DATA ARE
NEEDED TO ASSESS THE IMPACT OF ACTIONS TO ADDRESS COMPLIANCE REPORTING OF STATE
AND LOCAL GOVERNMENT ENTITIES
Issued on June 8, 2007
Highlights
Highlights of
Report Number: 2007-10-081 to the
Internal Revenue Service Commissioner for
the Tax-Exempt and Government Entities Division.
IMPACT ON TAXPAYERS
Payments by Federal, State, and
Local Governments office (hereafter referred to as the FSLG office or the
Office) customers represent a large part of the national economy. Annually, Federal, State, and local governments purchase
goods and services of more than $2.5 trillion that potentially affect
information return and backup withholding requirements. Because
of the potential volume and dollar amount of the information returns issued by governments,
any omissions could affect the tax gap if the income paid by governments is not
reported to the Internal Revenue Service and reflected on the individuals’ tax
returns. In addition to the immediate
compliance concern, this noncompliance threatens the perceptions of fairness
and accountability that are at the foundation of the voluntary tax compliance
system.
WHY TIGTA DID THE AUDIT
This
audit was conducted as part of TIGTA’s Fiscal Year 2007 Annual Audit Plan. A December 2003 Government
Accountability Office review of Federal Government agencies found significant
compliance issues involving information return filing and backup
withholding. Due to the prior attention to
the compliance reporting of Federal Government agencies by the Government
Accountability Office, our review focused on information return filing and
backup withholding compliance by State and local governments.
WHAT TIGTA FOUND
The
FSLG office is taking some actions to address State and local governments’
information return filing and backup withholding requirements, including
performing research during the case selection process to identify potential
noncompliance in these areas and combining focused outreach efforts and the
development of new educational products in Fiscal Years 2005 and 2006. Although the Office has made progress in this
area, its database contained inaccurate and incomplete information related to case
disposition and productivity in 21 (30 percent) of 71 cases TIGTA
reviewed. As a result, TIGTA could not
determine the overall impact of actions taken by the FSLG office to improve
State and local governments’ compliance with information return filing and
backup withholding requirements.
Continued emphasis by the FSLG office in this area and more accurate
information related to its compliance check and examination efforts will
provide assurance that Office customers file all necessary information returns
and tax revenue is accurately reported as required.
WHAT TIGTA RECOMMENDED
TIGTA recommended the
Director, FSLG, (1) reemphasize and update existing guidelines for the case selection survey sheet used
to track the disposition and productivity of closed compliance contacts, (2) update
the FSLG office’s database with the compliance information on the large
non-Federal Government entity examinations closed in Fiscal Years 2005 and 2006
and ensure future initiatives are tracked on the database, and (3) review our
analyses of State and local government entities’ information return filings for
Tax Years 2003 – 2005 to determine if potential compliance activities are
warranted and if revisions to the current classification process are necessary to better identify potential nonfilers.
In their response to the report, Internal Revenue Service officials
agreed with our recommendations and are planning to take adequate corrective
actions.
READ THE
FULL REPORT
To view the report,
including the scope, methodology, and full Internal Revenue Service response,
go to:
http://www.treas.gov/tigta/auditreports/2007reports/200710081fr.html.
Email
Address: Bonnie.Heald@tigta.treas.gov
Phone Number: 202-927-7037
Web Site:
http://www.tigta.gov