United States Government Accountability Office

GAO Report to the Committee on Finance, 

U.S. Senate 

TAX 

ADMINISTRATION 

Costs and Uses of 

Third-Party 

Information Returns 

November 2007 

 

GAO-08-266 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 2007

TAX ADMINISTRATION

Costs and Uses of Third-Party Information Returns

Highlights of GAO-08-266, a report to the 

Committee on Finance, U.S. Senate 

One proven approach for 

improving tax compliance is 

information reporting to the 

Internal Revenue Service (IRS) by 

third parties about taxpayers’ 

income and expenses. IRS matches 

information returns with taxpayers’ 

income tax returns to see if 

taxpayers have filed returns and 

reported all their income. The 

administration’s fiscal year 2008 

budget proposed requiring 

information reporting on merchant 

payment card reimbursements and 

on certain payments to 

corporations, raising an estimated 

$18.4 billion over 10 years. 

This report’s objectives are to (1) 

identify, using case studies, the 

compliance costs of existing 

information reporting; (2) 

determine the kinds of third-party 

compliance costs that may result 

from the two budget proposals and 

options for mitigating the costs; 

and (3) determine IRS’s ability to 

process and use additional 

information returns. 

GAO did nongeneralizable 

structured interviews with four 

payers volunteering information 

and with five companies filing a 

sizable percentage of all 

information returns. GAO’s work 

also included reviewing studies and 

documentation and contacting 

other government and 

nongovernment parties. 

What GAO Recommends

GAO makes no recommendations 

in this report. IRS provided 

technical comments, which GAO 

incorporated as appropriate. 

In nine case studies, filers of information returns told GAO that existing 

information return costs were relatively low. One small business employing 

under five people told GAO of possibly spending 3 to 5 hours per year filing 

Form 1099 information returns manually, using an accounting package to 

gather the information. Two parties selling services reported prices for 

preparing and filing Forms 1099 with IRS of about $10 per form for 5 forms to 

about $2 per form for 100 forms, with one of them charging about $.80 per 

form for 100,000 forms. As expected, unit prices for services provided to 

payers by selected software vendors, service bureaus, and return preparers 

decreased as the number of forms handled increased. 

The two information reporting proposals studied would impose new 

compliance costs, some of which could be mitigated. For payment card 

reimbursements, compliance costs would include (1) merging separately 

stored taxpayer and merchant identification numbers, especially in the case of 

multiple locations or franchises; and (2) more generally, new systems and 

added service requirements. Mitigations could include (1) having the reporting 

party be as close as possible to the merchant in a payment or reporting chain 

and (2) extending current systems and procedures that, for instance, might 

already generate and report related data used for other purposes. For 

payments to corporations for services, payer compliance costs would include, 

for example, additional bookkeeping, and mitigations could include limiting 

information return recipients to only some corporations. 

IRS already receives and handles a growing number of information returns, 

over 1.7 billion for tax year 2006. According to IRS officials, IRS uses about 90 

percent of potentially usable information returns in its matching efforts for 

individual taxpayers. IRS pursues millions of discrepancies, including both 

underreporting of income and failure to file tax returns, discovered through its 

matching efforts. According to IRS officials, millions of others are not pursued 

because of resource constraints. For the two proposals studied, IRS budgeted 

$11.8 million in programming and start-up costs for fiscal year 2008, with 

another $16.8 million expected in administrative implementation costs after 

2008. It did not estimate future enforcement costs. 

IRS Receipt of Information Returns (Numbers in Millions) 

To view the full product, including the scope 

and methodology, click on GAO-08-266. 

For more information, contact James White at 

(202) 512-9110 or whitej@gao.gov. 
Page i GAO-08-266 

Contents 

Letter 1

Results 3 

Agency Comments and Our Evaluation 5 

Appendix I Briefing Slides 6 

This is a work of the U.S. government and is not subject to copyright protection in the 

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permission from GAO. However, because this work may contain copyrighted images or 

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reproduce this material separately. 

 Costs and Uses of Third-Party Information Returns 
United States Government Accountability Office

Washington, DC 20548 

November 20, 2007 

The Honorable Max Baucus 

Chairman 

The Honorable Charles E. Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

The Honorable Max Baucus 

Chairman 

The Honorable Charles E. Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

The tax year 2001 gross tax gap—the difference between what taxpayers 

should have paid and what they actually paid—was an estimated $345 

billion. One proven approach for improving tax compliance is information 

reporting to the Internal Revenue Service (IRS) by third parties about 

taxpayers’ income and expenses. The administration’s fiscal year 2008 

budget contained information reporting proposals estimated to increase 

federal revenue by about $29 billion over 10 years. Two of the proposals 

would expand information reporting to cover (1) reimbursements by 

banks to merchants for the merchants’ payment card receipts and (2) 

payments by businesses to corporations for services the corporations 

provided, together raising an estimated $18.4 billion over 10 years. 

The tax year 2001 gross tax gap—the difference between what taxpayers 

should have paid and what they actually paid—was an estimated $345 

billion. One proven approach for improving tax compliance is information 

reporting to the Internal Revenue Service (IRS) by third parties about 

taxpayers’ income and expenses. The administration’s fiscal year 2008 

budget contained information reporting proposals estimated to increase 

federal revenue by about $29 billion over 10 years. Two of the proposals 

would expand information reporting to cover (1) reimbursements by 

banks to merchants for the merchants’ payment card receipts and (2) 

payments by businesses to corporations for services the corporations 

provided, together raising an estimated $18.4 billion over 10 years. 

IRS seeks to verify compliance by trying to compare the income or 

expenses reported by third parties to the income or expenses taxpayers 

report on their tax returns to see if taxpayers have filed returns and 

reported all their income. Like all information reporting, the proposals 

would assign some of the costs of tax administration to private sector 

parties who would have to file information reports with IRS. The 

administration did not estimate the costs of the information reporting 

proposals to third-party payers. In addition, questions have been raised 

about IRS’s ability to process and use additional information returns. You 

asked us for more details on the effects of expanding information return 

reporting requirements. 

IRS seeks to verify compliance by trying to compare the income or 

expenses reported by third parties to the income or expenses taxpayers 

report on their tax returns to see if taxpayers have filed returns and 

reported all their income. Like all information reporting, the proposals 

would assign some of the costs of tax administration to private sector 

parties who would have to file information reports with IRS. The 

administration did not estimate the costs of the information reporting 

proposals to third-party payers. In addition, questions have been raised 

about IRS’s ability to process and use additional information returns. You 

asked us for more details on the effects of expanding information return 

reporting requirements. 

This report’s objectives are to 

• identify the compliance costs associated with existing information 

reporting requirements as reported by selected case study payer 

organizations, software vendors, service bureaus that transmit information 

returns to IRS on behalf of payers, and return preparers; 

• identify the compliance costs associated with existing information 

reporting requirements as reported by selected case study payer 

organizations, software vendors, service bureaus that transmit information 

returns to IRS on behalf of payers, and return preparers; 

• determine the kinds of third-party compliance costs that may result from 

two information reporting proposals—merchant payment card 

Page 1 GAO-08-266 Costs and Uses of Third-Party Information Returns
reimbursements and payments to corporations—and any options for 

mitigating the costs; and 

• determine IRS’s ability to process and use additional information returns. 

To identify compliance costs reported in selected cases, we used (1) 

structured interviews, others’ studies, and other interviews about factors 

influencing costs; and (2) Web sites showing price information. We used 

structured interviews to see how much selected payers spend in-house on 

information reporting and how much selected parties charge for it. We 

interviewed four organizations volunteered through International 

Accounts Payable Professionals or the National Federation of Independent 

Business, an organization of small businesses that is on record as finding 

the information reporting proposals we are studying to be troublesome to 

small businesses. Also, we selected five companies from lists of vendors, 

IRS-approved e-filers, and Information Reporting Program Advisory 

Committee members, enough to include representatives of software 

vendors, service bureaus, and return preparers and cover a sizable 

percentage of all information returns. These nine case studies provide 

examples of costs but are not to be generalized to the entire population. 

We also examined Web sites of the five vendors, service bureaus, and 

return preparers that we interviewed and of others appearing on two IRS 

lists of e-filers. 

To determine the kinds of third-party compliance costs that may result 

from the two information reporting proposals and any options for 

mitigating the costs, we reviewed studies and documentation, interviewed 

government and nongovernment parties, and analyzed compliance costs 

and mitigations related to any overlap among the proposals and an 

expanded broker proposal. Nongovernment contacts included eight 

national organizations representing small businesses, banking and 

electronic transactions industries, and other interests; and companies in 

the payment card industry. For the payments-to-corporations proposal, 

which is closer to current requirements than the payment card proposal is, 

we used the structured interviews for the first objective described earlier 

for further insights into the compliance costs involved. Our lists of 

compliance costs and mitigations may not be exhaustive, and we did not 

evaluate (1) trade-offs that policymakers will have to make among items 

on the lists or (2) projected benefits from the proposals. Mitigation ideas 

are possible ways to reduce, not eliminate, costs, and their viability 

depends on their own costs and benefits and accompanying facts and 

circumstances. 

Page 2 GAO-08-266 Costs and Uses of Third-Party Information Returns
To determine IRS’s ability to process and use additional information 

returns, we analyzed how IRS uses information returns and how many 

information returns IRS processes and sends through its matching 

process. We also asked how IRS checks that all information returns that 

should be filed are filed. Finally, we interviewed IRS officials on how they 

would accommodate additional information returns and assessed related 

IRS costs and plans. We determined that the data used in this report to 

describe the growing number of information returns filed and the disparity 

between the numbers of tax underreporter and nonfiler cases identified 

and the numbers pursued are sufficiently reliable for the purposes of the 

report; we determined this after interviewing IRS officials and reviewing 

the information’s reasonableness against other information we had. 

We did our work from April 2007 through October 2007 in accordance with 

generally accepted government auditing standards. On November 6, 2007, 

we briefed your staff on the results of our work. This report conveys the 

information provided during that briefing. A copy of the briefing document 

with slight revisions is included in appendix I. 

In our nine case studies, filers of information returns told us that existing 

information return costs, both in-house and for external payments, were 

relatively low. In-house compliance costs included the costs of getting 

taxpayer identification numbers (TIN), buying software, tracking 

reportable payments, filing returns with IRS, and mailing copies to 

taxpayers. One small business employing under five people told us of 

possibly spending 3 to 5 hours per year filing Form 1099 information 

returns manually, using an accounting package to gather the information. 

An organization with more than 10,000 employees estimated spending less 

than .005 percent of its yearly staff time on preparing and filing Forms 

1099, including recordkeeping. Two external parties reported prices for 

preparing and filing Forms 1099 with IRS of about $10 per form for 5 forms 

to about $2 per form for 100 forms, with one of them charging about $.80 

per form for 100,000 forms. As expected, unit prices for services provided 

to payers by selected software vendors, service bureaus, and return 

preparers decreased as the number of forms handled increased. 

Results 

New information reporting requirements for payment card 

reimbursements and payments to corporations would impose new 

compliance costs, some of which could be mitigated. For payment card 

reimbursements, compliance costs would include (1) merging separately 

stored TINs and merchant identification numbers, especially in the case of 

multiple locations or franchises; and (2) more generally, new systems and 

Page 3 GAO-08-266 Costs and Uses of Third-Party Information Returns
added service requirements. Mitigations could include (1) having the 

reporting party be as close as possible to the merchant in a payment or 

reporting chain and (2) extending current systems and procedures that, for 

instance, might already generate and report related data for other 

purposes. 

For payments to corporations for services, payer compliance costs would 

include, for example, additional bookkeeping and postage, as well as the 

need for TIN collection and distinguishing between payments for goods or 

for services. Mitigations could include using or extending current systems, 

limiting information return recipients to only some corporations, and 

grandfathering ongoing relationships for TIN collection and other 

purposes or specifying a lead time for collecting information on them. 

IRS already receives and handles a growing number of information 

returns, over 1.7 billion for tax year 2006. According to IRS officials, after 

correction, about 98 percent of these information returns are potentially 

usable for matching purposes. IRS uses about 90 percent of these 

potentially usable information returns in its matching efforts for individual 

taxpayers. The majority of the remaining 10 percent of information returns 

cannot be used for individual matching efforts because they are associated 

with business, not individual, tax returns. IRS pursues millions of 

discrepancies, including both underreporting of income and failure to file 

tax returns, discovered through its matching efforts. According to IRS 

officials, millions of others are not pursued because of resource 

constraints. 

For the two proposals we studied, IRS budgeted $11.8 million in 

programming and start-up costs for fiscal year 2008, with another $16.8 

million expected in future administrative implementation costs, although 

for the payments-to-corporations proposal, IRS said its cost estimates 

could vary by an additional several million dollars. By design, it did not 

estimate future enforcement costs because of uncertainty over whether 

legislation would pass and how it would be implemented; for example, it 

did not cost out the expected hundreds of staff years needed to use 

payments-to-corporations information returns. Also for this proposal, it 

conservatively estimated 60 million forms arriving annually, saying the 

actual number could range into the billions. IRS will be in a better position 

to estimate how many information returns, including those in paper form, 

will be arriving if specific legislation is enacted. Any enacted proposals 

would require IRS to address their benefits and costs and minimize their 

burden on the public before the Office of Management and Budget 

approves the information collection. 

Page 4 GAO-08-266 Costs and Uses of Third-Party Information Returns
We provided a draft of the briefing document in appendix I to the Acting 

Commissioner of Internal Revenue for review and comment. IRS provided 

technical written comments, which we incorporated as appropriate. 

Agency Comments 

and Our Evaluation 

As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from its 

issue date. At that time, we will send copies to the Secretary of the 

Treasury; the Acting Commissioner of Internal Revenue; and other 

interested parties. In addition, this report will be available at no charge on 

the GAO Web site at http://www.gao.gov. 

If you or your staffs have any questions, please contact me at (202) 512-

9110 or at whitej@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

Key contributors to this report were Kevin Daly, Evan Gilman, George 

Guttman, Jyoti Gupta, Lawrence Korb, and Edward Nannenhorn. 

James R. White 

Director, Tax Issues 

Strategic Issues 

Page 5 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

Page 6 GAO-08-266 

Appendix I: Briefing Slides 

1

TAX ADMINISTRATION

Costs and Uses of Third-Party Information Returns

November 6, 2007 Briefing to the 

Senate Committee on Finance

 Costs and Uses of Third-Party Information Returns 
Appendix I: Briefing Slides 

2

Briefing Contents

• Introduction

• Objectives

• Results in Brief

• Scope and Methodology

• Background

• Information Reporting Costs of Case Study Organizations

• Payment Card Reimbursements

• Payments to Corporations

• The Internal Revenue Service’s (IRS) Ability to Process and Use Information 

Returns

Page 7 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

3

Costs and Uses of Third-Party Information Returns

Introduction

Page 8 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

4

Introduction

• The tax year 2001 gross tax gap--the difference between what taxpayers should 

have paid and what they actually paid--was an estimated $345 billion.

• One proven approach for improving tax compliance is information reporting to 

IRS by third parties about taxpayers’ income and expenses. IRS seeks to verify 

compliance by trying to compare the income or expenses reported by third 

parties to the income or expenses taxpayers report on tax returns.

• The administration’s fiscal year 2008 budget contained information reporting 

proposals estimated to increase federal revenue by about $29 billion over 10 

years. Two of the proposals would expand information reporting to cover

• reimbursements by banks to merchants for the merchants’ payment card 

receipts and 

• payments by businesses to corporations for services the corporations 

provided.

Page 9 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

5

Introduction (Cont.)

• Like all information reporting, the proposals would assign some of the costs of 

tax administration to private sector parties who would have to file information 

reports with IRS.

• The administration did not estimate the costs of the information reporting 

proposals to third-party payer organizations, or payers, making various kinds of 

payments and filing information returns.

• In addition to the compliance costs of the proposals, questions have been raised 

by some opponents of the proposals about IRS’s ability to process and use 

additional information reports.

• The Senate Committee on Finance asked us for more information on the effect 

of expanding information return reporting requirements.

Page 10 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

6

Costs and Uses of Third-Party Information Returns

Objectives

Page 11 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

7

Objectives

• Identify the compliance costs associated with existing information reporting 

requirements as reported by selected case study payer organizations, software 

vendors, service bureaus that transmit information returns to IRS on behalf of 

payers, and return preparers.

• Determine the kinds of third-party compliance costs that may result from two 

information reporting proposals—payments to corporations and merchant 

payment card reimbursements—and any options for mitigating the costs.

• Determine IRS’s ability to process and use additional information returns.

• To address our objectives, we did nongeneralizable structured interviews with 

five companies appearing on various lists and filing a sizable percentage of all 

information returns and with four payers volunteered by associations; we also 

reviewed studies and documentation and contacted IRS and other government 

and nongovernment parties.

Page 12 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

8

Costs and Uses of Third-Party Information Returns 

Results in Brief

Page 13 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

9

Results in Brief

Information Reporting Costs of Case Study Organizations

• In our nine case studies, filers of information returns told us that existing 

information return costs, both in-house and for external payments, were 

relatively low.

• One small business employing under five people told us of possibly 

spending 3 to 5 hours per year filing Form 1099 information returns 

manually, using an accounting package to gather the information.

• An organization with more than 10,000 employees estimated spending less 

than .005 percent of its yearly staff time on preparing and filing Forms 1099, 

including recordkeeping.

• Two external parties reported prices for preparing and filing Forms 1099 

with IRS of about $10 per form for 5 forms to about $2 per form for 100 

forms, with one of them charging about $.80 per form for 100,000 forms.

Page 14 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

10

Results in Brief (Cont.)

• As expected, unit prices for services provided by selected software vendors, 

service bureaus, and return preparers decreased as the number of forms 

handled increased.

Information Reporting Proposals—Compliance Costs and Mitigations

• New information reporting requirements for payment card reimbursements and 

payments to corporations would impose new compliance costs, some of which 

could be mitigated. 

• For example, for payment card reimbursements, compliance costs would include (1) merging separately stored taxpayer and merchant identification numbers, especially in the case of multiple locations or franchises; and (2) 

more generally, new systems and added customer service requirements. 

• Mitigations could include (1) having the reporting party be as close as possible to the merchant in a payment or reporting chain and (2) extending 

current systems and procedures that, for instance, might already generate 

and report related data used for other purposes. 

Page 15 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

11

Results in Brief (Cont.)

IRS’s Ability to Process and Use Information Returns

• According to IRS, after correction, about 98 percent of the information returns it receives are potentially

usable for matching purposes; IRS uses about 90 percent of these potentially usable information returns

in its matching efforts for individual taxpayers; of the remaining 10 percent of information returns, the

majority cannot be used for individual matching efforts because they are associated with business, not 

individual, tax returns. 

• After going through the matching process, IRS pursues millions of discrepancies above certain

dollar thresholds; according to IRS officials, millions of other discrepancies above the thresholds

are not pursued because of resource constraints. 

• For the two information reporting proposals GAO studied, IRS budgeted $11.8 million in 

programming and start-up costs for fiscal year 2008, with another $16.8 million expected 

in future administrative implementation costs. 

• IRS did not estimate future enforcement costs because of uncertainty over whether 

legislation would pass and how it would be implemented; for example, it did not cost 

out the expected hundreds of staff years needed to use payments-to-corporation information

returns.

• Any enacted proposals would require IRS to address their benefits and costs and minimize 

their burden on the public before the Office of Management and Budget approves the information 

collection.

Page 16 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

12

Costs and Uses of Third-Party Information Returns

Scope and Methodology

Page 17 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

13

Scope and Methodology

• Objective 1: used (1) structured interviews, others’ studies, and other interviews 

about factors influencing costs; and (2) Web sites showing price information.

• Used structured interviews to see how much selected (1) payer 

organizations spend in-house on information reporting and (2) software 

vendors, service bureaus, and return preparers charge for information 

reporting. 

• Interviewed four organizations volunteered through International

Accounts Payable Professionals or the National Federation of 

Independent Business, an organization of small businesses that is on 

record as finding the information reporting proposals we are studying to 

be troublesome to small businesses.

Page 18 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

14

Scope and Methodology 

(Cont.)

• Selected five companies from lists of vendors, IRS-approved e-filers,

and Information Reporting Program Advisory Committee members,

enough to include representatives of software vendors, service bureaus,

and return preparers and cover a sizable percentage of all information

returns.

• These nine case studies provide examples of costs but are not to be 

generalized to the entire population; however, they do provide insights

from the perspective of organizations of different sizes and from different

industries and of organizations filing their own information returns and 

those filing on behalf of others.

• Examined Web sites of the above five vendors, service bureaus, and return 

preparers we interviewed and others appearing on two IRS lists of e-filers.

Page 19 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

15

Scope and Methodology 

(Cont.)

• Objective 2: for each of the two information reporting proposals, reviewed 

studies and documentation on compliance costs to implement the proposals and 

ways to mitigate those compliance costs; interviewed IRS, the Department of the 

Treasury, and nongovernment parties about compliance costs and mitigations; 

and analyzed compliance costs and mitigations related to any overlap among 

the proposals and an expanded broker proposal.

• Nongovernment contacts included eight national organizations representing 

small businesses, banking and electronic transactions industries, and other 

interests; and companies in the payment card industry.

• Limitations: Our lists of compliance costs and mitigations may not be 

exhaustive, and we did not evaluate (1) trade-offs that policymakers will 

have to make among items on the lists or (2) projected benefits from the 

proposals; mitigation ideas are possible ways to reduce, not eliminate, 

costs, and their viability depends on their own costs and benefits and 

accompanying facts and circumstances.

• For the payments-to-corporations proposal, which is closer to current 

requirements than the payment card proposal is, we used the structured 

interviews for objective 1 for further insights into compliance costs involved.

Page 20 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

16

Scope and Methodology 

(Cont.)

• Objective 3: analyzed how IRS uses information returns and how many 

information returns IRS processes and sends through the matching process. In

addition,

• asked how IRS checks that all information returns that should be filed are 

filed, and 

• interviewed IRS officials on how they would accommodate additional 

information returns and assessed related IRS costs and plans.

• We determined that the data used in this report to describe the growing number 

of information returns filed and the disparity between the numbers of tax 

underreporter and nonfiler cases identified and the numbers pursued are

sufficiently reliable for the purposes of the report; we determined this after

interviewing IRS officials and reviewing the information’s reasonableness

against other information we had.

• We did our work from April through October 2007 in accordance with generally

accepted government auditing standards.

Page 21 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

17

Costs and Uses of Third-Party Information Returns

Background

Page 22 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

18

Background

How Information Reporting Works and Why It Is Important

• Information reporting involves third-party payers, such as employers or banks, 

filing returns with IRS and taxpayers after each calendar year that provide 

information on a variety of taxpayers’ transactions and payments, such as 

wages and miscellaneous income.

• IRS validates the accuracy of the names and taxpayer identification 

numbers (TIN) on the information returns; if accurate TINs are not provided, 

IRS can often require third parties to withhold taxes from payments to the 

taxpayers, a procedure known as backup withholding.

• IRS tries to match information from information returns filed by third parties 

against taxpayers’ income tax returns to see if taxpayers have filed returns 

and reported all their income. 

Page 23 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

19

Background (Cont.)

• As the next slide shows, voluntary reporting compliance is substantially higher 

for income subject to withholding or information reporting than for other income.

• For example, for wages and salaries, which are subject to withholding and 

substantial information reporting, taxpayers have consistently misreported 

only an estimated 1 percent of their income.

• For income with little or no information reporting, the tax year 2001 

estimated percentage was about 54 percent.

Page 24 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

20

Background (Cont.)

Individual Net Income Misreporting Categorized by the Extent of Income Subject to Withholding 

and Information Reporting, Tax Year 2001

Page 25 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

21

Background (Cont.)

Benefits and Costs of Information Reporting

• Improved compliance with the tax laws due to information reporting increases 

tax revenue. Increased revenue is not itself a benefit to society as a whole 

because the increased revenue simply transfers resources from the private 

sector to the public sector. Benefits depend on what is done with the revenue. 

The increased revenue could be used to reduce tax rates, increase spending, or 

reduce deficits.

• Increased compliance could provide benefits to society that include:

• increased economic growth if, for example, the increased revenue is used 

to reduce large, long-term federal budget deficits; 

• increased taxpayers’ perceptions of the fairness of the tax system; and

Page 26 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

22

Background (Cont.)

• increased economic efficiency by, for example, “leveling the playing field” 

for business, making it less likely that resources will be shifted into less 

productive activities simply because these activities present greater 

opportunities for noncompliance.

• The costs of information reporting include the in-house compliance costs of third 

parties, such as recordkeeping and employee time; third-party external costs, 

such as their payments to vendors and return preparers; and the resources used 

by IRS to process and match the returns.

• In line with this discussion on benefits and costs, the Paperwork Reduction Act 

of 1995 requires IRS to get Office of Management and Budget approval that the 

benefits of collecting any new information outweigh the costs.

Page 27 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

23

Costs and Uses of Third-Party Information Returns

Information Reporting Costs of 

Case Study Organizations

Page 28 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

24

Information Reporting Costs 

of Case Study Organizations

Third-Party Compliance Costs

• To comply with information reporting requirements, third parties would incur 

costs internally or pay external parties.

• In-house costs may involve additional recordkeeping costs beyond normal 

recordkeeping costs related to running a business, as well as the costs of 

preparing and filing the information returns themselves.

• If the third parties go outside their organizations for help, they would incur 

out-of-pocket costs to buy software or pay for others to prepare and file their 

returns.

Page 29 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

25

Information Reporting Costs of 

Case Study Organizations (Cont.)

For Case Study Entities Reporting Current Cost Information to Us, 

Their IRS Form 1099 Costs Were Relatively Small

• These case studies provided examples of in-house and external costs but are 

not to be generalized to the entire population.

In-house Costs

• In our case study payer organizations, current compliance costs included the 

costs of getting TINs, buying software, tracking reportable payments, filing 

returns with IRS, and mailing copies to taxpayers; organizations may file up to 

16 kinds of Forms 1099, but the organizations we studied filed mostly Forms 

1099-MISC reporting miscellaneous income, a category that includes 

nonemployee compensation.

• One organization with employees numbering in the low thousands estimated that its current costs of preparing and filing a couple hundred 

Forms 1099, which include recordkeeping and distinguishing goods from services, are a minimal addition to its normal business costs.

Page 30 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

26

Information Reporting Costs of 

Case Study Organizations (Cont.)

• An organization with more than five times the employees and Forms 1099 of the last organization estimated spending less than .005 percent of its yearly staff time on preparing and filing the 1099 forms, including 

recordkeeping.

• One business with fewer than 5 employees and Forms 1099 but with people knowledgeable about accounting told us of possibly spending 3 to 5 hours 

per year on filing 1099 forms manually, using an accounting package to gather the information.

• Another small business--one employing about 20 to 25 people and filing almost as many Forms 1099--told us of spending a little over an hour a year 

retyping and filing 1099 forms generated by its accounting package.

Page 31 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

27

Information Reporting Costs of 

Case Study Organizations (Cont.)

Payments to External Parties

• Unit prices for services provided by outside organizations we examined 

decreased as the number of forms handled increased.

• Selected software vendors, service bureaus, and return preparers, and 

various Web sites informed us that prices varied depending on the number 

of forms filed and the services performed.

• For one outside organization, prices for printing, filing with IRS, and mailing 

decreased from between $3 and $4 per form for 5 forms, subject to an 

overall fixed minimum of under $100, to well under $1 per form for doing 

100,000 forms.

• Prices for just filing with IRS fell to $.01 each after the first few thousand 

1099 forms.

Page 32 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

28

Information Reporting Costs of 

Case Study Organizations (Cont.)

• Prices from one vendor for off-the-shelf software for organizations to do 

their own preparation, filing, and mailing were in the low hundreds of dollars 

the first year and less afterwards for yearly updates.

• Prices from two other companies for preparing and filing Forms 1099 

ranged from about $10 per form for 5 forms to about $2 per form for 100 

forms, with one of them charging about $.80 per form for 100,000 forms.

Page 33 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

29

Information Reporting Costs of 

Case Study Organizations (Cont.)

Relationship to Studies That Have Been Done

• This relationship of price to size for entities we studied is consistent with what 

studies that we have seen show about the role of fixed costs and economies of 

scale in complying with the tax code; we are familiar with no similar studies of 

information returns.

• According to Slemrod and Bakija, studies consistently found that the smaller 

the firm, the larger the cost of complying with the tax system per dollar of 

various measures of the size of the firm. (See Joel Slemrod and Jon Bakija, 

Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes, 3rd ed. 

(Cambridge, Mass.: The MIT Press, 2004).

Page 34 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

30

Costs and Uses of Third-Party Information Returns

Payment Card Reimbursements

Page 35 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

31

Payment Card 

Reimbursements

Description of Payment Card Reimbursement Proposal

• “Merchant acquiring banks” would report to IRS the gross reimbursement 

payments made to merchants in a calendar year.

• Merchant acquiring banks (henceforth called banks) include organizations 

that process card payments for merchants that accept payment cards.

• Payment cards include credit and debit cards.

• The proposal was not detailed, with the overall cost and number of affected 

information return filers unknown and any resulting legislation still needing 

regulations to implement it.

• Under the proposal, IRS and the Department of the Treasury could make 

exceptions from the requirements where compliance costs of information 

reporting outweighed benefits from improved compliance.

Page 36 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

32

Payment Card 

Reimbursements (Cont.)

• IRS would compare reported amounts to the gross receipts that merchants 

reported on their tax returns.

• When reimbursements differ from gross receipts in a way that indicates that 

income might be underreported, IRS could use the information in selecting 

and conducting audits of taxpayers.

Revenue Estimate for the Payment Card Reimbursement Proposal

• The administration’s fiscal year 2008 budget estimated that the payment card 

reimbursement proposal would raise about $10.7 billion over 10 years. 

Page 37 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

33

Payment Card 

Reimbursements (Cont.)

Compliance Costs

• Merging separately stored TINs and 

other merchant information would 

add compliance costs, especially in 

the case of multiple locations or 

franchises.

• For example, different hotels in 

the same chain may have the 

same TIN but different merchant 

identification numbers for 

payment card purposes.

Mitigations

• The proposal could be made flexible 

so that parties reporting to IRS could 

be banks or an unknown number of 

other entities, such as parent 

corporations, that are as close as 

possible to the merchant in the 

payment or reporting chain and, thus, 

knowledgeable about the merchant; 

regulations could assure that the 

party actually (1) paying the 

merchant or (2) preparing the report 

on which the payment is based is the 

one reporting to IRS.

Page 38 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

34

Payment Card 

Reimbursements (Cont.)

Compliance Costs

• Costs would be incurred if the 

reporting requires that banks and 

others have their current merchants 

get TINs certified on an IRS form.

Mitigations

• Current merchant accounts that have 

already supplied uncertified TINs 

could be grandfathered, although this 

may mean that many could be 

grandfathered for many years or 

even indefinitely. 

• Certified TINs could be required at a 

specific future date, but TINs could 

change and need to be monitored 

over time.

Page 39 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

35

Payment Card 

Reimbursements (Cont.)

Compliance Costs

• Costs would be incurred if 

procedures and systems are 

established to insert backup 

withholding into ongoing, complicated 

relationships to increase the 

probability of getting accurate TINs.

Mitigations

• Legislation could be passed without a 

backup withholding provision, but this 

mitigation would limit the potential 

effectiveness of the proposal and risk 

losing revenue due to invalid TINs.

Page 40 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

36

Payment Card 

Reimbursements (Cont.)

Compliance Costs

• Banks and others may need to field questions when cash versus accrual 

and calendar year versus fiscal year 

information reporting do not match 

merchants’ accounting systems and 

uncertainty is created.

Mitigations

• Since 

• IRS is not planning an exact 

match anyway but only a trigger 

for questions, 

• almost all entities are on the 

calendar year basis, 

• large percentages are on the 

cash basis, and

• accrual taxpayers might be more 

sophisticated than others, 

IRS could let banks and others know 

that, possibly by analyzing multiple 

years’ data, it would work from the 

knowledge that years can differ for 

tax and accounting purposes. 

Page 41 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

37

Payment Card 

Reimbursements (Cont.)

Compliance Costs

• Because transactions involve cash 

backs, returns, tips, fees, gift cards, 

and other items, payment 

reimbursements may not match 

merchant receipts, creating costs for 

banks and others to the extent they 

have to address these discrepancies.

Mitigations

• Since IRS is not planning an exact match 

anyway, it could announce it was 

developing industry norms of net-to-gross 

ratios to evaluate information, although 

norms may not be foolproof or always 

possible.

• IRS could deal with part of the compliance 

cost by modeling the reporting form after 

the Form 1099-B for brokers and giving 

the information return preparer a choice 

on the form for gross or net information, 

although this mitigation could create 

inconsistencies across payers. 

• To the extent that gross and net amounts 

might even out over time, concern could 

center on any that do not.

Page 42 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

38

Payment Card 

Reimbursements (Cont.)

Compliance Costs

• Information on TINs in addition to 

merchant identification numbers 

flowing through the payment card 

system would increase the amount of 

confidential information that could be 

disclosed if a security breach 

occurred, creating clean-up and 

customer relations costs. 

• Legal liabilities related to payment 

card operating rules may change.

Mitigations

• The number of links in banks’ and 

others’ systems between TINs, 

merchant identification numbers, and 

merchant payment card receipts 

could be minimized. 

• Various parties could be involved in 

considering legislative and regulatory 

details. 

Page 43 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

39

Payment Card 

Reimbursements (Cont.)

Compliance Costs

• Overall, because of issues mentioned previously, software, hardware, 

systems, processes, and training 

would need to be developed, 

involving an uncertain amount of time 

and cost; banks and others would 

need to add service people to handle 

questions and inadvertent errors.

Mitigations

• To limit overall compliance costs, 

banks and others could extend 

systems and procedures already in 

place that, for instance, might already 

generate and report related data 

used for other purposes.

• Congress or IRS could provide 

adequate lead time to allow banks 

and others to develop any needed 

software, etc.

Page 44 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

40

Costs and Uses of Third-Party Information Returns

Payments to Corporations

Page 45 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

41

Payments to Corporations

Description of Payments-to-Corporations Proposal

• Today, businesses paying corporations for services generally do not have to 

send IRS information returns covering the payments.

• Payments to corporations are generally not covered by an overall requirement that taxpayers paying a total of $600 or more for services in the 

course of a trade or business send IRS an information return showing the 

dollar amount and the payee.

• Most payments requiring information reporting today are subject to backup 

withholding if the payee has not provided a valid TIN.

• To address compliance issues and improve voluntary compliance, the 

administration proposed requiring information returns for payments to 

corporations for services totaling $600 or more in a calendar year.

• It did not specify much detail.

Page 46 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

42

Payments to Corporations 

(Cont.)

Revenue Estimates for the Payments-to-Corporations Proposal

• The administration’s fiscal year 2008 budget estimated that the payments-tocorporations proposal would raise about $7.7 billion over 10 years, a greater 

amount than the Joint Committee on Taxation’s revenue estimate of $1.7 billion. 

• The Joint Committee’s estimate was footnoted to say that it was very 

preliminary and subject to change upon clarification of the proposal.

Page 47 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

43

Payments to Corporations 

(Cont.)

Our Previous Work

• In 1991, we suggested that Congress needed to pass legislation to require that 

payments to corporations be reported on information returns (GAO/GGD-91-

118).

• In 1992, we recommended that federal agencies issue information returns on 

payments to corporations providing services (GAO/GGD-92-130).

• Federal executive agencies are now required to file information returns on 

payments to corporations for services provided.

Page 48 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

44

Payments to Corporations 

(Cont.

Compliance Costs

• Payers would face additional costs for 

each additional Form 1099—costs for 

bookkeeping, dealing with IRS, postage, 

and outside help maybe for the first time; 

payers using payment cards may have to 

make changes to accounting systems if 

the systems do not show all qualifying 

payments to corporations but instead 

show payments only to the payment card 

industry.

Mitigations

• Payers would face additional costs, 

but other costs may be reduced 

because the need to distinguish 

corporate from other payees for tax 

reasons could disappear.

• With adequate lead time, many 

payers could limit costs by using or 

extending current systems and 

procedures for paying noncorporate 

entities, including procedures for 

recording payment card payments.

• With the risk of allowing 

noncompliance by some payees and 

gaming of the system, Congress or 

IRS could exempt small payer 

businesses based on their revenues 

or other factors.

Page 49 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

45

Payments to Corporations 

(Cont.)

Compliance Costs

• Payers may have to file Forms 1099 

for payments to about 6 million 

corporations, including S 

corporations, regardless of size, and 

some of the corporations would have 

many addresses.

Mitigations

• At the risk of extra complexity, 

Congress could require that Forms 

1099 be sent to only some 

corporations, such as those privately 

held or below a certain size, for 

instance, smaller than the Fortune 

500.

• To reduce payers’ burden of 

determining which corporations 

are exempt, exempt 

corporations’ invoices could 

show the exemption.

• Congress could raise the $600 

reporting floor, although compliance 

by current and future filers could 

suffer.

Page 50 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

46

Payments to Corporations 

(Cont.)

Compliance Costs

• Payers may have to incur the costs of 

reporting payments for outsourced 

daily operations, such as overnight 

mail delivery.

Mitigations

• IRS could extend existing exemptions 

for payments like freight, effectively 

exempting certain categories of 

corporations.

Page 51 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

47

Payments to Corporations 

(Cont.)

Compliance Costs

• Start-up costs would be incurred to 

collect TINs and to determine which 

corporations predominantly provide 

goods and which predominantly 

provide services.

Mitigations

• IRS could issue guidance to require 

that TINs and goods versus services 

information be provided immediately 

on starting a business relationship, 

for example, on the invoice.

• IRS could grandfather ongoing 

relationships or specify a lead time 

for collecting information on them.

Page 52 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

48

Payments to Corporations 

(Cont.)

Compliance Costs

• Costs may be incurred when cash 

versus accrual and calendar year 

versus fiscal year information 

reporting do not match taxpayers’ 

accounting systems and business 

uncertainty is created.

Mitigations

• Since 

• IRS is not planning an exact 

match anyway but only a trigger 

for questions, 

• almost all entities are on the 

calendar year basis, 

• large percentages are on the 

cash basis, and

• accrual taxpayers might be more 

sophisticated than others, 

IRS could let payers know that, 

possibly by analyzing multiple years’ 

data, it would work from the 

knowledge that years can differ for 

tax and accounting purposes.

Page 53 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

49

Payments to Corporations 

(Cont.)

Compliance Costs

• Added compliance costs would be imposed if more than one party—for 

instance, a bank and a payer to a 

service provider—is required to 

report information covering the same 

merchant transactions.

Mitigations

• Inefficient reporting could be avoided if IRS provides ordering rules or 

unified reporting rules so that the 

same transactions are not covered 

more than once.

• Proposals other than the payment card proposal could exempt 

transactions involving payment cards, 

as an administration proposal to 

expand broker information reporting 

does; that proposal, estimated to 

raise about $2.0 billion over 10 years 

(about $2.5 billion according to the 

Joint Committee on Taxation), would 

require brokers, such as auction 

houses, to file information returns for 

certain customers showing gross 

proceeds from the sale of tangible 

personal property; however, it would 

exempt sales that otherwise need to 

be reported, for instance, under the 

payment card reporting proposal.

Page 54 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

50

Payments to Corporations 

(Cont.)

Compliance Costs 

• (Previous slide continued)

Mitigations 

• Proposals could cover different kinds 

of transactions, such as payments to 

corporations continuing to focus on 

services and the broker proposal 

continuing to focus on tangible 

goods.

Page 55 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

51

Costs and Uses of Third-Party Information Returns

IRS’s Ability to Process and

Use Information Returns

Page 56 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

52

IRS’s Ability to Process and

Use Information Returns 

IRS Processing of Information Returns

• As shown on the next slide, IRS receives and handles a growing number of 

information returns from payers, reaching over 1.7 billion returns for tax year 

2006.

• Upon receipt, IRS puts them into a format that allows IRS to attempt to match 

information return information with tax return information.

• According to IRS officials, IRS has the capacity to process the information 

returns it currently receives electronically, but large files may take a few hours to 

upload from the receiving server to the main systems. 

• Delays in uploading files near the March 30 deadline may occur because 

this is the peak time for receipts.

Page 57 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

53

IRS’s Ability to Process and 

Use Information Returns (Cont.)

Source: IRS Data Books for tax years 2003 through 2005 and IRS for tax year 2006.

Note: Numbers include such information returns as mortgage interest, broker proceeds, interest and 

dividend distributions, and individual retirement arrangements.

Total 1,390 1,487 1,561 1,762

290

56

368

847

Tax year 2005

299

(as of October 

2007)

50

250

1,163

Tax year 2006

280

49

473

685

Type of information return Tax year 2003 Tax year 2004

Other (including wage and tax 275

statements from the Social 

Security Administration)

Paper 47

Magnetic tape 583

Electronic 485

Receipt of Information Returns 

(Numbers in Millions) 

Page 58 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

54

IRS’s Ability to Process and

Use Information Returns (Cont.)

• According to IRS officials, once formatted by IRS, 97 percent of information 

returns received can potentially be used for matching purposes. 

• Thus, about 3 percent of information returns received need a TIN supplied or 

corrected.

• According to IRS officials, IRS can supply or correct TINs for 35 to 40 percent of 

this 3 percent.

• Therefore, about 98 percent of information returns are potentially usable for 

matching purposes.

Page 59 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

55

IRS’s Ability to Process and

Use Information Returns (Cont.)

• According to IRS officials, IRS uses about 90 percent of the potentially usable 

information returns in its matching efforts for individual taxpayers. Discrepancies between 

what is reported on a taxpayer’s information returns and tax return may be referred to the 

Automated Underreporter (AUR) program. Information returns that cannot be matched to 

a filed individual tax return may be referred to the nonfiler program. Of the 10 percent of

information returns that cannot be used in the matching efforts for individual taxpayers, 

over 90 percent are associated with businesses that are not sole proprietors (businesses 

that do not file a Schedule C).

• IRS may not use each line on each type of usable information return for 

matching purposes.

• According to IRS officials, IRS does not know the total number of discrepancies 

that its matching efforts discover because discrepancies under certain dollar thresholds 

are not tracked.

• Above these dollar thresholds, as the next slide shows, the AUR and nonfiler programs 

pursue millions of discrepancies; according to IRS officials, millions of other discrepancies

above the thresholds are not pursued because of resource constraints.

Page 60 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

56

IRS’s Ability to Process and

Use Information Returns (Cont.)

Use of Information Returns

(Numbers in Millions)

Type of cases Tax year 2003 Tax year 2004 Tax year 2005

Pursued 4.4 3.1 2.8

Identified 7.4 7.5 7.9

Percentage pursued 59% 41% 35% 

Nonfiling of tax return 

cases (above IRS’s dollar 

threshold)

Percentage pursued 28% 31% 30%

Pursued 4.1 4.6 4.5

Identified 14.5 15.0 15.0

AUR cases (above IRS’s 

dollar threshold)

Source: IRS. 

Page 61 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

57

IRS’s Ability to Process and

Use Information Returns (Cont.)

Criteria Used to Select AUR Cases to Be Pursued

• Dollars by category

• Generally, AUR pursues the higher dollar cases after categorizing the cases based on the type of income or expenses involved and the potential extra tax that might be assessed. 

• Coverage

• However, regardless of dollars, AUR usually pursues a small number of cases in most categories to maintain a presence.

• High risk

• AUR also pursues cases in certain high-risk areas regardless of dollars and coverage (e.g., stock and bond sales and Schedule C returns).

Page 62 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

58

IRS’s Ability to Process and

Use Information Returns (Cont.)

Other Uses of Matching Data

• According to IRS officials, non-IRS requesters of information return data 

matched to tax return data use it for nontax purposes, such as determining 

eligibility for veterans and welfare benefits. 

• Also, according to IRS officials, IRS functions such as Examination, Collection, 

and Criminal Investigation also use the data.

Page 63 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

59

IRS’s Ability to Process and

Use Information Returns (Cont.)

IRS Efforts to Find Nonreporters and Underreporters of Information 

Returns

• IRS has a program to contact federal government entities that do not file any 

required information returns.

• As part of taxpayer audits and collection compliance checks, IRS officials are 

required to check if required information returns are filed. 

Page 64 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

60

IRS’s Ability to Process and

Use Information Returns (Cont.)

IRS Costs and Plans to Accommodate More Information Reporting

• In costing out its various fiscal year 2008 legislative proposals, IRS said that it 

assumed 100 percent electronic filing for most proposals. It added, however, 

that it would be reasonable to assume that about 15 to 20 percent of information 

returns would actually be on paper.

• For fiscal year 2008, programming and start-up costs were budgeted at $8 

million for the payment card proposal and $3.8 million for the payments-tocorporations proposal; after fiscal year 2008, IRS estimated administrative 

implementation costs at another $12.7 million and $4.1 million, respectively. 

Overall for the payments-to-corporations proposal, IRS said its cost estimates 

could vary by an additional several million dollars.

• According to the fiscal year 2008 budget proposal, IRS expected about 125 

million payment card returns annually associated with small business and selfemployed taxpayers.

Page 65 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

61

IRS’s Ability to Process and

Use Information Returns (Cont.)

• For the payments-to-corporations proposal, IRS conservatively estimated 60 

million forms arriving annually, saying the actual number could range into the 

billions.

• If specific legislation is enacted and IRS and Treasury are formulating 

regulations, IRS will be in a better position to estimate how many information 

returns, including those in paper form, will be arriving.

• By design, IRS estimated only the costs it did because of the uncertainty of 

whether legislation would pass and how it would be implemented, and it did not 

cost out enforcement estimates.

• For instance, it did not cost out the hundreds of full-time equivalent staff 

years that it expected to be needed on an ongoing basis to use information 

gained from the payments-to-corporations proposal.

Page 66 GAO-08-266 Costs and Uses of Third-Party Information Returns
Appendix I: Briefing Slides 

62

IRS’s Ability to Process and

Use Information Returns (Cont.)

• If information reporting proposals are passed, IRS would be responsible for 

addressing the benefits and costs of the resulting information collections as part 

of its responsibilities under the Paperwork Reduction Act of 1995. 

• Under the act, agencies are responsible for ensuring that information 

collections are implemented to minimize the burden on the public while 

maximizing utility. 

• In addition, the Office of Management and Budget is responsible for 

reviewing and approving proposed information collections.

 (450582) Page 67 GAO-08-266 Costs and Uses of Third-Party Information Returns
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