Employer Identification Numbers
and Related Filing Requirements
Reference No. 090602 Date: 11/12/98
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Redaction Legend:
2b = Law Enforcement Guideline(s)
2e = Law Enforcement Procedure(s)
The Service Would Benefit From An Automated System For Satisfying Filing Requirements
Implementation Of Prior Internal Audit Recommendations Would Improve compliance Efforts
Attachment I - Detailed Objectives and Scope
Attachment II – Management’s Response
This review was conducted as part of Internal Audit’s Fiscal Year 1997 Business Taxpayer Audit Strategy. Under the strategy, Internal Audit initiated a series of national reviews which were designed to identify opportunities to improve customer service and reduce burden for the business taxpayer. This review focused on the Service’s processes designed to assign Employer Identification Numbers (EIN) and filing requirements. Specifically, the objective of this audit was to determine if procedures for establishing business entities and related filing requirements on the Business Master File (BMF) could be improved to reduce taxpayer burden, decrease costs and improve customer service.
Results
Overall the Service has efficient and effective processes for assigning EINs. Taxpayers have a variety of customer-friendly means to obtain EINs and the Service correctly processes Forms SS-4 (Application for Employer Identification Number) to establish accurate filing requirements for new business entities. An automated system for satisfying Form 941 filing requirements could be an additional means to improve customer service for business taxpayers. Such a system could reduce the burden of filing a tax return and decrease Service processing costs. In addition to those benefits, the Service could improve compliance efforts and focus Service resources on more productive cases by implementing corrective actions from a prior Internal Audit report.
Specifically we determined the following:
The Service has efficient and effective processes for assigning EINs and establishing filing requirements. Taxpayers have a variety of customer-friendly means to obtain EINs. At least two of the available methods, Tele-TIN and the pilot Federal Employer Identification Number (FEIN) program, provide taxpayers with the requested EINs immediately. The Service also establishes accurate filing requirements when assigning EINs. Filing requirements are established based on information taxpayers provide, including a planned business start date and a date the business plans to start paying wages. Taxpayers are not bound to inform the Service of changes to these planned dates. However, the Service expects taxpayers to file tax returns based on the planned dates provided by them.
An automated system for satisfying filing requirements for $0 Form 941 filers would benefit the Service and reduce taxpayer burden. In 1995 and 1996 the Service received and processed about 4.2 million Forms 941, Employer’s Quarterly Federal Tax Return, without a tax liability. We estimate that Forms 941 filed without a tax liability in 1995 and 1996 may have cost the Service up to $18 million to process. In addition, the Service spends thousands of hours resolving delinquency inquiries and satisfying filing requirements for taxpayers without tax liabilities. The Service could change this process by creating an interactive telephone system for use by BMF taxpayers who do not have a liability in a particular quarter.
Implementation of prior Internal Audit recommendations could improve compliance efforts. In a prior report, Internal Audit recommended that management modify computer programming to select more productive delinquency investigations and that the Service make better use of available information to establish filing requirements and ensure compliance. During this review we followed up on management’s implementation of corrective actions arising from those recommendations. One recommendation was not correctly implemented and timely implementation of the other recommendations is at risk. When advised of the incorrect implementation, management took immediate corrective action. For the remaining recommendations, the Service needs to take measures to ensure that they are timely implemented.
Summary Recommendations
We recommend that the Service:
This review was conducted as part of Internal Audit’s Fiscal Year 1997 Business Taxpayer Audit Strategy. Under the strategy, Internal Audit initiated a series of national reviews which were designed to identify opportunities to improve customer service and reduce burden for the business taxpayer. collectively, this series of reviews addressed the major points of contact that a business taxpayer could have with the Service---from establishing a new business, through making tax deposits and filing returns, and responding to notices. We evaluated the Service’s current processes from the perspective of how the business taxpayer might view them.
We discussed the reviews included in the strategy up-front with executive management and obtained their input on objectives and potential outcomes, as well as their commitment to take appropriate actions. We also worked closely with all levels of Service management to determine the significance and scope of the burden on the business taxpayer and the inefficiencies in existing practices for providing quality customer service. Through discussions with management, we jointly identified feasible alternatives to address these areas. We presented executive management with information to assist them in determining which alternatives to implement.
The objective of this audit was to determine if procedures for establishing business entities and related filing requirements on the Business Master File (BMF) could be improved to reduce taxpayer burden, decrease costs and improve customer service. Specifically, we:
To accomplish these objectives, we:
We conducted our review from July 1997 through May 1998 in accordance with generally accepted government auditing standards. See Attachment I for more information on our specific objectives and scope of review.
Employer Identification Numbers (EINs) are nine digit numbers assigned to sole proprietors, corporations, partnerships, estates, trusts, and other entities for filing and reporting purposes. Every business entity required to file a Federal tax return must have, or be assigned, an EIN. Approximately two million EINs are assigned to the BMF annually.
There are two ways the Service assigns EINs. The most common method is via a Form SS-4. A taxpayer may mail or fax the form to the appropriate service center or may request an EIN by telephone through the Tele-TIN program, and subsequently submit the form.
The second method is the assignment of an EIN to a business tax return filed without one (using information available on the return). A notice is mailed to the taxpayer informing the taxpayer of the assigned number. A Form SS-4 is included with the notice and should be completed and returned to the assigning service center.
Form SS-4 is also used by the Social Security Administration (SSA) to collect and code employer information, including industrial activities. SSA provides this data to other agencies. The census Bureau is the major user of SSA’s industry coding.
In addition to the above methods for assigning EINs, the Pacific Northwest District piloted the Federal EIN (FEIN) program. This program is a FedState cooperative venture that enables taxpayers to obtain EINs from Washington State licensing bureaus at the same time they apply for state business licenses.
As part of issuing EINs, the Service establishes filing requirements. Filing requirements identify the types of returns taxpayers are required to file and the types of returns the Service mails to taxpayers. Filing requirements are also used to perform delinquency checks to determine if taxpayers have filed required tax returns.
Overall the Service has efficient and effective processes for assigning EINs. However, the Service could decrease both taxpayer burden and processing costs by enhancing the means that Form 941 filers use to satisfy filing requirements when they have no employees. The Service could also enhance compliance efforts by ensuring implementation of recommendations from prior audit reports.
The Service Has Efficient And Effective Processes For Assigning EINs And Establishing Filing Requirements.
Assigning EINs. The Service has efficient and effective processes for assigning EINs. Taxpayers have several methods to apply for EINs. At least two of the available methods, Tele-TIN and the pilot FEIN program, can provide taxpayers with the requested EINs immediately. In 1993 63% of EINs were assigned by Tele-TIN. Tele-TIN is one of the most popular and successful taxpayer service initiatives.
In addition to Tele-TIN and the FEIN program, the Service also has Fax-TIN and regular paper processing. Fax-TIN allows taxpayers to fax their applications for EINs directly to the Service. Fax-TIN applicants may receive EINs within three days. Taxpayers may also mail Forms SS-4 to the Service for processing. According to Form SS-4 instructions, taxpayers should allow about four weeks to receive EINs via the mail.
customer satisfaction with the FEIN program is universally positive. Because of its success the program is being expanded to two states per region. Expansion is supported by results from a 90-day test in the State of Washington in the Pacific Northwest District. During the 90-day test a total of 1,017 FEINs were issued. Only four of the 1,017 EINs had to be canceled either because the entity already had a number or a state employee pushed the wrong computer key and assigned the number in error.
The Service also has a sufficient number of EINs available for future use. The current nine-digit EIN numbering system allows for one billion different combinations. As of 1994, an estimated 60 million EINs had been issued. Those EINs account for about 6% of the possible combinations, which means there is no shortage of available EINs.
Establishing Filing Requirements. The Service establishes accurate filing requirements based on information taxpayers provide on Form SS-4. We selected and reviewed a small judgmental sample of Forms SS-4 at the Andover Service center to determine the accuracy of established filing requirements. Accurate filing requirements were established for 49 of 50 Forms SS-4 reviewed. The results of our test are supported by a more comprehensive survey conducted by the Service in 1992.
According to the results of the 1992 survey, 63% of taxpayers agreed with the filing requirements established by the Service. About 3% partially agreed with the filing requirements and 34% disagreed. Of the 34% who disagreed, 56% of the errors were made by taxpayers when completing Form SS-4. Two percent were the result of IRS errors and the source of the remaining 42% could not be determined because Forms SS-4 were not available for review. If the 2% error rate remains constant for the cases that could not be determined, the Service may well have correctly processed Forms SS-4 about 96% of the time.
Filing requirements are established based on information taxpayers provide on Form SS-4, including a planned business start date and the date the business plans to start paying wages. Although the Service establishes accurate filing requirements based on Form SS-4 information, some businesses may not start or hire employees when planned. However, taxpayers are not bound to inform the Service if the business does not start or hire employees when planned. ****2b,2e****.
The Service Would Benefit From An Automated System For Satisfying Filing Requirements.
During calendar years 1995 and 1996, the Service received and processed about 44.3 million Forms 941, Employer’s Quarterly Federal Tax Return. Of these, approximately 10% (4.2 million) were filed by taxpayers without a liability, and processed at a cost to the Service of about four dollars per return. In addition to processing costs, the Service spends thousands of hours resolving delinquency inquiries and satisfying filing requirements for taxpayers without tax liabilities.
There are several reasons why business taxpayers without a liability file:
The Service does not have an efficient method for taxpayers to close their filing requirements when they are no longer in business. Approximately 872,000 (21%) of the 4.2 million $0 Forms 941 were filed as "Final" returns. These returns were filed by approximately 722,000 BMF taxpayers who wished to indicate to the Service that they would no longer need to file a return. Nineteen percent (about 137,000) of the businesses filed more than one final $0 return, including 257 businesses that filed five or more. This appears to be an inefficient method for BMF taxpayers to satisfy their filing requirements.
Filing requirements must be satisfied whether or not a business has employees. During 1995 and 1996, approximately 16% (681,000) of the $0 Forms 941 were filed in the same year the business was established. These businesses represent about 23% of all those that filed $0 Forms 941 in 1995 and 1996. New businesses do not always have employees when they indicate they will on the Form SS-4.
Actions taken by the Service encourage taxpayers to file these returns. About 30% of the businesses in our review had received a delinquency notice at some point prior to filing a $0 Form 941 return. In these cases taxpayers without a liability filed returns to satisfy the filing requirements established by the Service.
The Service informs taxpayers in their EIN receipt notices that they must file returns when they are without a liability. When taxpayers are assigned EINs, the Service establishes filing requirements based on information provided by taxpayers. The Service notifies taxpayers in writing of the assigned number and the related filing requirements. The notices instruct taxpayers to file required returns even if they were not in business or did not have employees for a specific period.
Additionally, procedures instruct Entity Unit tax examiners to inform taxpayers that if no business is conducted or no wages are paid, they are still required to file a tax return with no liability. However, there is no requirement for taxpayers to file such a return.
Once taxpayers start filing $0 Forms 941 they continue this practice. About half of the businesses that filed $0 Forms 941 in our review filed more than one, making up about 79% of the total $0 returns filed. Of these businesses, about 106,000 filed six or more of these returns in the two-year period reviewed, including about 11,000 businesses that filed a $0 Form 941 in all eight quarters.
Filing tax returns without a liability creates unnecessary taxpayer burden. Business taxpayers must satisfy their filing requirements in one of three ways: 1) file a $0 Form 941; 2) file a Form 9358, (stuffer accompanying the delinquency notice) indicating they are without a liability; or 3) call the Service and give an oral statement indicating they have no liability.
Many taxpayers (1.9 million) chose to file a $0 Form 941 during 1995 and 1996 as one way to satisfy filing requirements. The Service has placed an undue burden on these taxpayers by encouraging them to file a Form 941 even when they do not have a liability. We worked with management to find a better method for satisfying filing requirements.
changes to the process for satisfying filing requirements could have eliminated those $0 Forms 941 and associated processing costs, and reduced taxpayer burden. The Service could develop an interactive telephone system that would allow business taxpayers with no Form 941 liability in a particular quarter to telephonically satisfy the filing requirement. These taxpayers could inform the Service that they had no employees before they receive a delinquency notice for that quarter, or they could indicate a final or seasonal return. This change could be implemented in one of two existing systems: the Telephone Routing Interactive System (TRIS) or BMF TeleFile.
As of February 1998, TRIS had nine interactive applications. The Service could initiate another application that would allow Form 941 filers with no liability to satisfy their filing requirements by telephone. This would be a proactive step to reduce the number of $0 Forms 941 filed.
TRIS analysts expressed concern about taxpayer authentication. Taxpayers who currently use TRIS applications access them through a Personal Identification Number (PIN). PINs are provided by notice to these taxpayers. This method of authentication may be impractical for $0 Form 941 filers.
However, taxpayers could be authenticated on TRIS as they are now when they call the Service. Under current guidelines, taxpayers can speak to tax examiners and indicate that they have no liability. Tax examiners authenticate taxpayers by inquiring about entity data on file. A new TRIS application could be created which would require taxpayers to input sufficient data for authentication. For example, the application might require taxpayers to enter their EINs, street numbers and the first five letters of their business addresses. This information could be input via a touch-tone telephone.
BMF TeleFile could also be expanded to allow business taxpayers that have a $0 Form 941 liability to satisfy their filing requirements. BMF TeleFile for Forms 941 is scheduled for nationwide implementation in April 1998. currently, only a select group of business taxpayers qualify to use this system.
BMF TeleFile analysts expressed concern that the Service could not monitor all of the taxpayers using the system if it was expanded. However, current procedures allow tax examiners to conduct business telephonically after authenticating taxpayers. Taxpayers with no liability could use an automated version of this authentication process, satisfy the filing requirement, and eliminate the need to file a Form 941 with $0 liability.
In November 1997 we briefed the then Assistant commissioner (collection) and the Assistant commissioner (Forms and Submission Processing) on the status of our review and presented our preliminary results and potential recommendations. The Assistant commissioner (collection) agreed that a telephone voice response system was a good issue and one that should be pursued by Internal Audit.
Recommendations
Management’s Response: Management agreed, with reservation, to develop a simplified system to eliminate taxpayer burden with regard to $0 Forms 941. However, rather than modifying a current system management will include a tax compliance risk assessment as an early action item in their ETA Strategic Plan by January 1, 1999 and then proceed accordingly.
Management’s Response: Once a decision is made on the first recommendation, this action item will be included in the implementation plan.
Implementation of Prior Internal Audit Recommendations Would Improve compliance Efforts.
In a prior report, Internal Audit recommended that management:
During this review, we followed up on management’s implementation of corrective actions to the above recommendations. We determined programming was not correctly modified to select more productive cases, and the Service is not on track to implement a reporting agent/client cross-reference. As a result, the Service continues to generate less productive nonfiler cases and may not effectively implement two previous Internal Audit recommendations to improve compliance.
A ****2b,2e**** Feature Will Improve The Productivity Of Delinquency Investigations
In an August 1996 report, Internal Audit determined that ****2b,2e****. In that report Internal Audit estimated that each year the IRS closes about ****2b,2e****.
To improve the productivity of employment tax delinquency investigations, management agreed to modify the delinquency check program to ****2b,2e****. Management agreed to implement the check ****2b,2e**** by February 1, 1997.
During this review we followed up on management’s implementation of the check and determined that it was not implemented. ****2b,2e****. When advised of the programming problem, management took immediate action to implement the check.
We also suggest a modification to the original recommended ****2b,2e**** feature. We recommend that the ****2b,2e**** feature ****2b,2e****. Management agrees with our suggestion and has included this modification in a Request for Information Services.
Management should properly implement corrective actions to audit findings. correct implementation of the check should result in a reduction in unproductive nonfiler cases.
A Reporting Agent Indicator Will Allow More Effective Implementation Of Recommendations To Improve Employment Tax compliance
In an August 1996 report, Internal Audit recommended that the Service:
Both of the above recommendations were contingent on the Service establishing a Reporting Agent indicator recommended by an Andover Service center Natural Work Group. This reporting agent indicator was also referred to as a subsidiary indicator in the previous Internal Audit report.
current procedures allow parent corporations and certain agents to file consolidated employment tax returns for their subsidiaries and clients. These consolidated returns are filed under the EIN of the parent or agent. However, Forms W-2 and W-3 must be filed with SSA under the subsidiary’s or client’s EIN.
State reporting requirements mandate that each individual subsidiary or client file its own unemployment tax return (Form 940). Master File programming, with some exceptions, will generate a filing requirement for Form 941 if the Form 940 has been filed by the client. However, there is no cross-reference on the client’s master file account to show that a consolidated Form 941 has been filed by a reporting agent. This inconsistency creates unnecessary Master File and combined Annual Wage Reporting (cAWR) nonfiler cases on the clients.
An Andover Service center quality initiative made recommendations to implement an indicator to link client accounts to their reporting agents. The National Director of Quality recommended the proposed system changes be tested and appropriate changes made. Our prior audit did not recommend establishing this reporting agent indicator because the Andover Service center was taking steps to implement the indicator.
This reporting agent indicator needs to be implemented before a Forms W-3/W-2 employment tax filing requirement crosscheck can be fully effective. Internal Audit promised to follow up with the National Director of Quality and other National Office functions as appropriate concerning the creation of this reporting agent indicator.
We assessed management’s progress on establishing a reporting agent indicator. Implementation of the two recommendations from the Review of the Employment Tax Nonfiler Program Internal Audit report is contingent on this indicator. In our opinion, management has not made sufficient progress on establishing this indicator to ensure that the two recommendations will be timely implemented. Management needs to timely establish this indicator to allow sufficient time for implementing the two recommendations by February 1, 1999.
Implementation of these two recommendations should identify some nonfilers approximately 14 to 18 months earlier than current processes, and help to ensure that the Service is receiving employment tax returns from all employers who issued Forms W-2. In November 1997 we briefed the then Assistant commissioner (collection) and the Assistant commissioner (Forms and Submission Processing) on the status of our review and shared our preliminary results.
Recommendations
Management’s Response: Management submitted a Request for Information Services to change the program as stated in the recommendation.
Management’s Response: Management agreed with the recommendation to cross-reference the Business Master File with Employer Identification Numbers on Forms W-3 received from the Social Security Administration and on Forms W-2 associated with electronically filed Forms 1040. Management will also provide the necessary support to implement the reporting agent indicator. Requests for Information Services will be submitted to request the necessary programming and recommended actions will be implemented once supporting programming and tape matches are available for the cross referencing.
Our review showed that overall the process to assign EINs is efficient and effective. Taxpayers can apply for EINs through several methods, including two that provide EINs immediately. When EINs are established the Service assigns appropriate filing requirements based on the information provided by taxpayers.
Existing systems could be enhanced to reduce processing costs and taxpayer burden. The Service could change the process by which Form 941 filers without a liability satisfy their filing requirements. This change would eliminate the need for BMF taxpayers to file a $0 Form 941 when they are without a liability resulting in reduced taxpayer burden and Service processing costs. Either TRIS or BMF TeleFile could be expanded to accommodate these taxpayers. The Service currently receives and processes about 2.1 million $0 Forms 941 each year, filed solely to satisfy filing requirements.
Recommendations from a previous audit report were not properly implemented or are at risk for untimely implementation. When notified, management took immediate action to correctly implement a ****2b,2e**** feature. However, management has not made sufficient progress on establishing a reporting agent indicator. As a result, two other Internal Audit recommendations are at risk for untimely corrective actions.
/s/ Preston B. Benoit
Audit Manager
The overall objective of our review was to determine whether procedures for establishing entities and filing requirements on the Business Master File (BMF) were efficient and effective, and whether they could be improved to reduce taxpayer burden, reduce costs and improve customer service. To achieve this objective we:
Management Response
Response has been removed due to its size. To see the complete Response, please go to the Adobe PDF version of this report.