Summary
Third party payers, often businesses, reported $6 trillion in miscellaneous income payments to IRS in tax year 2006 on Form 1099- MISC information returns. Payees are to report this income on their tax returns. Even a small share of payers failing to submit 1099-MISCs could result in billions of dollars of unreported payments. IRS data suggest that payees are more likely to report income on their tax returns if IRS receives payers' information returns. GAO was asked to examine 1099- MISC reporting including the extent to which payers fail to submit 1099-MISCs; impediments to payers to submitting1099-MISCs; and whether IRS could better use the 1099-MISCs it currently receives. GAO reviewed IRS documents and compliance data and interviewed officials from IRS, its advisory groups, and others who advise 1099-MISC payers.
The Internal Revenue Service (IRS) does not know to what extent payers fail to submit required 1099-MISCs, but various sources point to the possibility of a significant problem. For tax year 2005, 8 percent of the approximately 50 million small businesses with assets under $10 million submitted 1099-MISCs, but IRS does not know how many of the other 92 percent were required to report payments but did not. Many business payments, such as payments to corporations, are not subject to 1099-MISC reporting. If even a small share of the businesses that did not submit a 1099-MISC should have, millions of 1099- MISCs could be missing with significant amounts of unpaid taxes by payees. GAO's prior work in 2003 found significant 1099-MISC payer noncompliance by some federal agencies. IRS could mitigate costs for research on payer noncompliance by building on its existing research programs. Payers face a variety of impediments that may contribute to 1099-MISC noncompliance, including complex reporting requirements and an inconvenient submission process. For example, certain payments to unincorporated persons or businesses are subject to 1099-MISC reporting, but payments to corporations generally are not, requiring payers to determine the status of their payees. GAO in the past determined that the benefits in terms of increased tax revenue and improved taxpayer compliance justify eliminating this distinction. IRS agrees, and the Bush Administration's proposal to do so would have required legislative action. Other options to remind payers about their reporting obligations include adding a tax return checkbox asking if payers submitted required 1099-MISCs and adding a chart to help payers navigate the detailed instructions for the Form 1099-MISC. IRS matches what the payees report on their tax returns to what payers report on 1099-MISCs to detect payees underreporting income and taxes. But IRS does not pursue all mismatches its computers detect. If IRS were to increase payer compliance with 1099-MISC requirements, the number of mismatches would likely increase. However, IRS does not systematically collect information on the causes of mismatches or whether they could be prevented.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
| Director: |
James R. White |
| Team: |
Government Accountability Office: Strategic Issues |
| Phone: |
(202) 512-5594 |
Matters for Congressional Consideration
Recommendation: To simplify the burden that the corporate exemption places on payers to distinguish payees' business status and also provide greater information reporting, Congress may wish to consider requiring payers to report payments to corporations on the form 1099 MISC, as we previously suggested and as proposed in the Bush Administration's budget.
Status: Open
Comments: The Patient Protection and Affordable Care Act of 2010 enacted a provision to expand information reporting by removing the exemption for payments over $600 to corporations. The provision is effective for payments after December 31, 2011, so businesses will be required to report beginning in January 2013 on payments to corporations made in 2012 for property or services. The Internal Revenue Service plans to seek business input as it develops regulations to implement this reporting provision.
Recommendations for Executive Action
Recommendation: To gauge the extent of 1099-MISC payer noncompliance and its contribution to the tax gap, the Commissioner of Internal Revenue should, as part of future research studies, develop an estimate of 1099-MISC payer noncompliance.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: With the ongoing annual individual income tax reporting compliance studies, IRS will gather more data on payer and payee compliance related to form 1099-MISC. However, the income tax studies alone will not provide a comprehensive picture of the scope of potential 1099-MISC noncompliance. Additional data will be generated through IRS's National Research Program study of employment taxes, which is now in the planning stages. Like the individual income tax reporting compliance studies, the employment tax effort is expected to span multiple tax years. According to IRS, data collected from these studies should shed some light on whether employers are reporting 1099-MISC payments as required. As of February 2010, IRS said developing such an estimate requires a multi-pronged approach and a large amount of coordinated effort across the Service. One prong is to determine the extent of filing compliance among employers. A second prong would determine the extent to which 1099-MISC payers properly report their payments. Starting with the Tax Year 2001 individual income tax reporting compliance study,the National Research Program (NRP) office has been collecting some data related to Form 1099- MISC compliance, from both the payer and payee perspectives. With the on-going annual individual income tax reporting compliance studies, the IRS will gather more data on this issue. However, by themselves, these efforts will not provide a comprehensive picture of the scope of potential Form 1099-MISC non-compliance. Additional data will be generated by an NRP reporting compliance study for employment tax, which is now in the planning stages. Like the individual income tax reporting compliance studies, the employment tax effort is expected to span multiple tax years. Data collected from these studies should shed some light on whether employers are appropriately reporting required payments on Form 1099-MISC. IRS researchers will use all these sources of data to examine the extent of Form 1099-MISC payer non-compliance.
Recommendation: To gauge the extent of 1099-MISC payer noncompliance and its contribution to the tax gap, the Commissioner of Internal Revenue should, as part of future research studies, determine the nature and characteristics of those payers that do not comply with 1099-MISC reporting requirements so that this information can be factored into an IRS-wide strategy for increasing 1099-MISC payer compliance.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: IRS agreed with our recommendation that data collected from the annual individual income tax as well as the new employment tax compliance studies should shed some light on whether employers are reporting 1099-MISC payments as required. According to IRS, their researchers will examine data to determine the nature and characteristics of noncompliance among 1099-MISC payers once the reporting compliance studies are complete. As of February 10, 2010, IRS estimated a completion date of December 2015 for this recommendation.
Recommendation: To increase IRS's ability to detect 1099-MISC payer noncompliance, the Commissioner of Internal Revenue should test the option of developing a stop filer notice program to target business, state, and local entities that submitted 1099-MISC one year but did not do so the next.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: IRS plans to analyze data from its payer master file to determine an estimate of the number of filers who submitted 1099-MISCs in tax year 2005 versus tax year 2006. If the data analysis reveals a significant compliance issue, IRS will develop and test a 1099-MISC nonfiler notice.
Recommendation: To help payers better understand their 1099-MISC reporting responsibilities, the Commissioner of Internal Revenue should assess whether adding a checkbox to business tax returns, inquiring whether all 1099-MISCs have been submitted, to serve as a reminder to payers would help increase 1099-MISC payer compliance.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: In commenting on the draft report, IRS disagreed with the recommendation to assess whether adding a checkbox to business tax returns would increase 1099-MISC reporting compliance. As of April 2009, IRS decided not to add a checkbox at this time. According to IRS, the Paperwork Reduction Act of 1980 requires IRS to reduce unnecessary burden on taxpayer and prohibits IRS from collecting information already available. According to IRS, an assessment of the checkbox option was completed when IRS removed a similar question from the corporate tax return in 1981 after the Paperwork Reduction Act was enacted. As of May 2010, IRS plans no action on this recommendation.
Recommendation: To help payers better understand their 1099-MISC reporting responsibilities, the Commissioner of Internal Revenue should include a chart on the Form 1099-MISC as well as business income tax instructions for distinguishing reportable from non-reportable payments and for calculating whether reportable payments reached the 1099-MISC reporting threshold.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: IRS did not agree with this recommendation and plans no action to develop a 1099-MISC chart. IRS' explanation for not developing a chart is that the Instructions for Form 1D99-MISC,page 1, contain a bulleted list clearly describing the reportable payments and the minimum dollar amount required for each payment. Page 1 also contains a bulleted list of payments not required to be reported under the Exceptions heading. Pages 2 and 3 provide explanations of the reporting rules for certain types of payments, such as canceled debts and reporting to corporations. The instructions for each box also provide a list of payments to be reported in the box and examples. These instructions are reviewed by internal and external stakeholders each year. In addition, they said the Information Reporting Program Advisory Group annually reviews IRS information reporting products. The IRS said they have not received comments or suggestions from these stakeholders that presenting the information in a different format, such as a chart, would increase taxpayer compliance. As of May 2010, IRS plans no action on this recommendation.
Recommendation: To reduce the submission burden facing many payers each submitting small numbers of 1099-MISCs, the Commissioner of Internal Revenue should collect data on the numbers of computer-generated black and white 1099-MISCs submitted by payers and the labor spent reentering forms that cannot be scanned, and evaluate the cost-effectiveness of eliminating or relaxing the red ink requirement.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: In its 60 day letter response, IRS partially agreed with this recommendation, and officials said they would conduct a test to evaluate the cost effectiveness of the red drop out ink requirement. In April 2009, IRS conducted a the test to determine the difference in staff hours on a control sample of 4,027 information return documents in red dropout ink versus the same documents as black and white photocopies processed through the IRS processing system. Based on the test, IRS decided to retain the current requirement for red dropout ink information return forms and plans no further action on this recommendation.
Recommendation: To help IRS improve its use of 1099-MISC information, the Commissioner of Internal Revenue should collect and analyze data on the types of unproductive AUR cases to help identify reoccurring errors for use in the AUR case selection process and for identifying ways to improve guidance and outreach to help payers and payees more accurately report 1099-MISC payments.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: IRS agreed with this recommendation and plans to review a sample of 1099-MISC discrepancy cases during its annual automated underreporting program site visits. Based on findings about the sample cases, IRS will implement changes needed to improve inventory selection as well as outreach and education for 1099-MISC payers and payees.
Recommendation: To help payers better understand their 1099-MISC reporting responsibilities, the Commissioner of Internal Revenue should add a general reminder to Publication 535 Business Expenses to highlight 1099-MISC reporting responsibilities.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Closed - implemented
Comments: In the 2009 Publication 535, Business Expenses, IRS added a general reminder about 1099-MISC reporting responsibilities. Specifically, the reminder is to file Form 1099-MISC, Miscellaneous Income, for each person to whom you have paid during the year in the course of your trade or business at least $600 in rents, services (including parts and materials), prizes and awards, other income payments, medical and health care payments, and crop insurance proceeds. The reminder also directs businesses to see the Instructions for Form 1099-MISC for more information about their reporting requirements.
