GAO 

United States Government Accountability Office

Report to the Committee on Finance, 

U.S. Senate 

TAX COMPLIANCE

Opportunities Exist to 

Improve Tax 

Compliance of 

Applicants for State 

Business Licenses 

June 2009 

GAO-09-569 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2009

TAX COMPLIANCE

Opportunities Exist to Improve Tax Compliance of 

Applicants for State Business Licenses

Highlights of GAO-09-569, a report to the 

Committee on Finance, U.S. Senate 

The California Department of 

Industrial Relations, Division of 

Labor Standards Enforcement 

(DLSE), requires applicants for 

California business licenses in 

three industries—farm labor 

contracting, garment 

manufacturing, and car washing 

and polishing—to be in compliance 

with federal employment tax 

obligations to qualify. 

Based on questions about whether 

the Internal Revenue Service (IRS) 

is fully using data from state and 

local governments to reduce the 

tax gap, GAO was asked to analyze 

(1) the extent to which requiring a 

demonstration of federal tax 

compliance to qualify for a state 

business license has the potential 

to improve federal tax compliance 

and (2) what opportunities exist for 

increasing arrangements that 

require federal tax compliance to 

qualify for state business licensing. 

To address these objectives, GAO 

analyzed IRS administrative and 

tax data. GAO identified California 

as a case study. GAO interviewed 

IRS and state officials and 

contacted revenue officials in the 

50 states and the District of 

Columbia. 

What GAO Recommends

GAO recommends that the 

Commissioner of Internal Revenue 

determine whether the return on 

investment (ROI) of arrangements 

in which states require compliance 

with federal taxes is sufficiently 

high to merit their expansion and, 

if so, work to expand such 

arrangements. IRS agreed with 

GAO’s recommendations. 

The California requirement that three types of businesses be in compliance 

with federal employment taxes to obtain a state business license shows 

promise as a valuable tool for improving federal tax compliance. According to 

data from IRS, of 7,194 businesses that applied for a California business 

license one or more times from calendar years 2006 through 2008 about 24 

percent had to file employment tax returns or pay overdue taxes to come into 

compliance with federal employment taxes. California businesses filed 441 

employment tax returns and IRS collected nearly $7.4 million in current 

dollars in employment taxes in calendar year 2006 and in 8 months of calendar 

year 2007. GAO estimated that IRS incurred about $331,348 to operate the 

data-sharing arrangement for this period. Using this cost estimate, the ROI for 

this arrangement is 22:1. IRS has not tracked the cost data needed to compare 

the ROI of the IRS-DLSE enforcement activity with other current enforcement 

activities. However, IRS’s highest estimated ROI among five new direct 

revenue–producing enforcement initiatives proposed in its fiscal year 2009 

budget was 11.4:1. Tax compliance among businesses after they applied for 

state business licenses showed continued improvement. GAO identified 2,017 

businesses that applied for business licenses in calendar year 2006 only and 

found that 315 of these businesses had unpaid assessments as of 

September 18, 2006. By August 18, 2008, 165 of these businesses had resolved 

or lowered their unpaid assessment debt by $1,925,162. All but 1 of the 350 

businesses that had unpaid assessments when they applied for business 

licenses in calendar year 2006 were small businesses. GAO’s analysis, 

although showing a promising ROI, did not take into account certain factors, 

such as whether other tax collection activities were in process for the 

businesses that applied for licenses. 

Many opportunities exist to require federal tax compliance to qualify for state 

business licenses. GAO contacted revenue officials in every state and the 

District of Columbia to ask whether their states require tax compliance for 

business licenses. For the 48 respondents, 20 revenue officials said that their 

states require compliance with state taxes to obtain a state business license, 

and that these requirements exist for one or more industries. Twenty said that 

their states do not have such a requirement; 8 said that their states have no 

business license requirement at the state level. According to IRS, 

arrangements exist with 13 states that require compliance with one or more 

federal taxes to qualify for a state business license. Varying licensing 

requirements from state to state and lack of uniformity among states in 

categorizing a license as a “business license” make pinpointing the exact 

number of opportunities difficult. States that currently require compliance 

with state taxes for selected business license applicants may represent more 

of an immediate opportunity for establishing arrangements that require 

federal tax compliance to qualify for a state business license since they 

already see tax compliance as important for the businesses. Some challenges, 

such as a lack of current legal authority in some states to link businesses to 

tax compliance, would need to be addressed if requiring federal tax 

compliance for state business licenses is to be expanded. 

View GAO-09-569 or key components.

For more information, contact Michael 

Brostek at (202) 512-9110 or 

brostekm@gao.gov. 
Page i GAO-09-569 

Contents 

Letter 1

Background 5 

Data-Sharing Arrangement Requiring Tax Compliance of California 

Business License Applicants Can Be a Valuable Compliance Tool 8 

Many Opportunities Exist to Require Federal Tax Compliance to 

Qualify for State Business Licenses, but Challenges Exist 15 

Conclusions 19 

Recommendations for Executive Action 19 

Agency Comments 20 

Appendix I Scope and Methodology 21 

Appendix II GAO Contact and Staff Acknowledgments 25 

Tables 

Table 1: Number of Tax Returns Filed and Amount Collected from 

Businesses That Were Noncompliant at the Time of 

Application, Calendar Years 2006 and 2007 9 

Table 2: Number of California Business License Applicants with 

Unpaid Employment Tax Assessments in Calendar Year 

2006 and Status in Calendar Year 2008 12 

Table 3: Amount of Unpaid Employment Tax Assessments and 

Debt Resolved for 165 Business Applicants 13 

Table 4: Number of States That Require Businesses to Be 

Compliant with Certain State Taxes to Qualify for State 

Business Licenses in One or More Industries 16 

Figures 

Figure 1: How Data Sharing Operates between IRS and California 7 

Tax Compliance
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Page ii GAO-09-569 Tax Compliance
Page 1 GAO-09-569 

iety of 

ement, 

oth 

 

United States Government Accountability Office

Washington, DC 20548 

 

June 15, 2009 

The Honorable Max Baucus 

Chairman 

The Honorable Charles E. Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

Sharing data between federal and state agencies can be a cost-effective 

way to improve tax compliance by uncovering information that helps 

identify businesses and individuals that are noncompliant with their 

taxes.1

 According to Internal Revenue Service (IRS) studies, small 

businesses with cash incomes contribute significantly to the 2001 

estimated gross tax gap of $345 billion.2

 IRS operates a wide var

data-sharing arrangements with state revenue and nonrevenue agencies 

designed to improve tax compliance among individuals and businesses. In 

one type of arrangement, IRS and state agencies share information about 

businesses that apply for state business licenses.3

 Under this arrang

an individual applying for a business license from the state is required to 

be in compliance with federal tax obligations, state tax obligations, or b

before the state issues a business license. Some state tax and IRS officials 

believe this type of data sharing has the potential to benefit both IRS and 

state governments since the businesses would need to initiate contact with 

IRS or state revenue agencies to demonstrate compliance. If the 

businesses cannot demonstrate compliance, they are then required to 

come into compliance to qualify for a business license. 

1

GAO, Taxpayer Information: Options Exist to Enable Data Sharing Between IRS and 

USCIS but Each Presents Challenges, GAO-06-100 (Washington, D.C.: Oct. 11, 2005). 

2

The gross tax gap represents the difference between the tax amounts taxpayers pay 

voluntarily and on time and what they should pay under the law. GAO, Tax Gap: A 

Strategy for Reducing the Gap Should Include Options for Addressing Sole Proprietor 

Noncompliance, GAO-07-1014 (Washington, D.C.: July 13, 2007). IRS estimated that it 

would eventually collect about $55 billion of the gross tax gap through late payments and 

IRS enforcement actions, leaving a net tax gap of around $290 billion. 

3

Some states also engage in data sharing arrangements requiring tax compliance to qualify 

for professional licenses, such as licenses to practice nursing or law. This report focuses on 

business licenses. 

Tax Compliance
 

The Department of the Treasury’s 2006 Comprehensive Strategy for 

Reducing the Tax Gap recognizes the potential benefits of increased 

coordination with state governments to improve compliance and reduce 

the tax gap.4

 It envisions improved document-matching programs and 

federal-state partnerships as a means to reduce the tax gap. In fact, we 

found that federal and state partnerships that involve reciprocal 

agreements covering collection of unpaid tax debts benefited both 

governments, and the use of levies and offsets showed even greater 

potential for collecting millions in unpaid debts. In fiscal year 2004, for 

example, although most states submit only personal income tax debt and 

not business income tax debt to the Financial Management Service (FMS) 

for collection, FMS still collected over $217 million on behalf of various 

states through offsets of federal income tax refunds to pay state income 

tax debt. Conversely, IRS received over $77 million from states’ levy of 

state income tax refunds to pay delinquent federal taxes.5

You have raised questions about whether IRS is fully using data from state 

and local governments to reduce the tax gap. Related to this interest, and 

at your request, we issued a report in November 2008 on the State Reverse 

File Match Initiative (SRFMI) pilot program, which matches federal and 

state taxpayer data to identify noncompliant federal taxpayers.6

 You also 

requested that we assess a data-sharing arrangement between IRS and the 

California Department of Industrial Relations, Division of Labor Standards 

Enforcement (DLSE). Under this arrangement, applicants for California 

business licenses in three industries—farm labor contracting, garment 

manufacturing, and car washing and polishing—must be in compliance 

 

4

Department of the Treasury, Office of Tax Policy, Comprehensive Strategy for Reducing 

the Tax Gap (Washington, D.C., Sept. 26, 2006). 

5

GAO, Financial Management: State and Federal Governments Are Not Taking Action to 

Collect Unpaid Debt through Reciprocal Agreements, GAO-05-697R (Washington, D.C.: July 

26, 2005). 

6

In this report, we recommended that IRS develop a methodologically sound and 

documented evaluation plan to accurately and reliably assess the SRFMI pilot program’s 

results. In response, IRS agreed that it is important to properly document and assess the 

SRFMI pilot program as a whole before it is expanded to additional states. IRS also agreed 

to develop an overall evaluation plan to accurately and reliably assess all components of 

the SRFMI pilot program’s results and include the key evaluation features in our 

recommendation. GAO, Tax Administration: IRS Needs to Strengthen Its Approach for 

Evaluating the SRFMI Data-Sharing Pilot Program, GAO-09-45 (Washington, D.C.: Nov. 7, 

2008). 

Page 2 GAO-09-569 Tax Compliance
 

with federal employment tax obligations to qualify.7 You asked us to 

analyze (1) the extent to which requiring a demonstration of federal tax 

compliance to qualify for a state business license has the potential to 

improve federal tax compliance and (2) what opportunities exist for 

increasing arrangements that require federal tax compliance to qualify for 

state business licensing. 

To determine the extent to which requiring a demonstration of federal tax 

compliance to qualify for a state business license has the potential to 

improve federal tax compliance, we used the IRS and State of California 

data-sharing arrangement as a case study.8

 To determine the potential for 

improving federal tax compliance, we estimated the return on investment 

(ROI) for the IRS Ogden/California DLSE data-sharing arrangement by 

determining the amount collected and estimating the cost of operating the 

arrangement. To determine the amount collected, we used IRS Ogden 

spreadsheets that record the number of federal tax returns filed by 

business license applicants and the amount IRS collected from businesses 

that IRS informed that they were not in compliance with federal 

employment taxes covering calendar year 2006 and 8 months in calendar 

year 2007.9

 To determine the cost of operating this data-sharing 

arrangement, we estimated the costs of collecting the amounts owed by 

noncompliant businesses using actual cost categories provided by IRS 

Ogden officials. We then compared the ROI ratio for this data-sharing 

arrangement to IRS’s estimates for five revenue-producing enforcement 

initiatives in the IRS fiscal year 2009 budget submission.10 To determine 

whether California businesses remained in compliance over time, we 

 

7

DLSE licenses farm labor contractors and registers garment manufacturers and car 

washing and polishing firms. DLSE requires the same tax compliance verification for both 

licensure and registration. In this report, we use the term business license in discussing all 

three California businesses. 

8

We selected the State of California data-sharing arrangement as a case study because it 

required federal tax compliance to qualify for a state business license, data were available 

on the number of businesses and amounts of unpaid assessment businesses owed IRS and 

the cost to operate the data-sharing arrangement, and this arrangement was established in 

1992. In addition, IRS officials said that this arrangement generated big benefits relative to 

costs. 

9

The spreadsheets exclude 4 months for calendar year 2007. IRS Ogden misplaced data for 

July and August, and November and December data were not available when we obtained 

the data in November 2007. 

10Internal Revenue Service, FY 2009 Congressional Budget Submission (Washington, D.C.: 

Feb. 4, 2008). 

Page 3 GAO-09-569 Tax Compliance
 

matched data on California business applicants from an Access database 

maintained by IRS Ogden with taxpayers in IRS’s Unpaid Assessments 

file.11 We used California business applicants for calendar year 2006 only 

from the Access database and taxpayers in IRS’s Unpaid Assessments file 

as of the week of September 18, 2006, and the week of August 18, 2008. We 

reviewed agency agreements and memoranda, regulations, and reports 

covering the data-sharing arrangement and interviewed IRS and California 

officials about the compliance value of the arrangement. The Access 

database did not contain data prior to calendar year 2006 because IRS 

Ogden purged these historical data. While data from previous years would 

be useful for evaluating the data-sharing arrangement, we believe that the 

Ogden records that were available to us were sufficiently reliable for 

developing an understanding of the arrangement. We did not verify the 

accuracy of the data IRS provided or its estimate of the revenue costs of 

its five new activities, including the estimated ROI of these activities. 

To determine what opportunities exist for increasing data sharing that 

requires federal business tax compliance to qualify for state business 

licensing, we contacted state revenue officials in 50 states and the District 

of Columbia via e-mail about the extent to which their states engage in 

data-sharing arrangements that require applicants to be tax compliant to 

qualify for business licenses, reviewed and identified IRS documentation 

on data-sharing arrangements between IRS and state agencies that require 

federal tax compliance to qualify for state business licensing, and 

interviewed state revenue officials whose states engage in data-sharing 

arrangements that require businesses to demonstrate federal tax 

compliance to qualify for state business licenses. 

We conducted this performance audit from June 2007 through June 2009 in 

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

 

11Unpaid assessments are legally enforceable claims against taxpayers and consist of taxes, 

penalties, and interest that have not been collected or abated. GAO, Financial Audit: IRS’s 

Fiscal Years 2008 and 2007 Financial Statements, GAO-09-119 (Washington, D.C.: Nov. 

10, 2008). 

Page 4 GAO-09-569 Tax Compliance
 

IRS engages in hundreds of data-sharing arrangements with state revenue, 

human services, and law enforcement agencies for tax compliance and 

other purposes. In a small portion of IRS’s federal-state data-sharing 

arrangements, states require federal tax compliance to qualify for a state 

business license. In some instances, state licensing agencies require 

compliance with both federal and state tax obligations, and requirements 

can vary among states. These arrangements can vary by industry; by type 

of taxes required for compliance, such as employment taxes or income 

taxes; and even by the type of documentation required to prove 

compliance. For example, in some states the businesses may self-certify 

that they are in compliance with taxes, and in others businesses must 

provide documentation from IRS or the state revenue agency that they are 

in compliance with tax requirements. 

Background 

IRS and California’s DLSE are engaged in an arrangement that requires 

compliance with federal employment taxes to operate a business in any 

one of three industries in California.12 An individual applying for a new 

business license or a renewal of his/her business license to operate a farm 

labor contracting, garment manufacturing, or car washing and polishing 

business must first prove full compliance with federal employment taxes 

by filing all required federal employment tax returns and resolving all 

outstanding federal employment taxes through full payment or appeal. 

Each business license applicant in the three industries requiring federal 

tax compliance must submit a state business license application and a 

signed IRS Form 8821, Tax Information Authorization, allowing IRS to 

disclose the applicant’s tax information to DLSE. IRS tax examiners in 

Ogden, Utah, review the tax information in IRS’s Integrated Data Retrieval 

System (IDRS) to check the employment tax status of the applicant.13 If 

the applicant is compliant, IRS provides DLSE and the applicant with

statement that the applicant has met all filing and payment requirements. 

If the applicant has an outstanding employment tax liability, has not filed a 

federal employment tax return, or both, the tax examiner prompts the 

 a 

 

12The data-sharing arrangement started in the garment manufacturing industry in the early 

1990s and expanded to farm labor contracting. The state extended the arrangement to the 

car washing and polishing industry in December 2005. 

13IDRS is a system that consists of databases and operating programs that support IRS 

employees working active tax cases, allowing them to take specific actions on taxpayer 

account issues, track status, and post transaction updates back to the Master File. There 

are several master files. The most significant are the individual master file—which contains 

tax records of individual taxpayers—and the business master file—which contains tax 

records of corporations and other businesses. 

Page 5 GAO-09-569 Tax Compliance
 

system to generate a noncompliance letter, which is sent to the applicant. 

Applicants with outstanding tax liability can pay the amounts due or 

contact the IRS tax examiners for more information or to make 

arrangements for payment. IRS officials told us that IRS Ogden does not 

collect employment taxes from business applicants directly. Noncompliant 

business applicants may pay federal employment taxes they owe at local 

IRS offices or mail their payments to IRS. Ogden officials are notified by email or phone when business applicants have paid the employment taxes 

identified in the noncompliance letter. IRS informs DLSE that an applicant 

has paid all employment taxes, is currently working with a revenue officer 

to pay all balances due, or is otherwise compliant. After notification, DLSE 

will issue the applicant’s business license. 

DLSE officials told us that for purposes of business licensing, California 

business applicants in the three industries have resolved their taxes if they 

have (1) paid their tax liability, (2) entered into installment agreements, or 

(3) completed offers in compromise with IRS. If an applicant’s tax case is 

in bankruptcy, California’s DLSE makes the decision on whether to issue 

the business license.14 If an applicant does not resolve his/her tax liability 

within 90 days of applying, IRS staff in Ogden send the cases to the IRS 

Agricultural Team in Fresno, where tax examiners open the case and do 

investigative work on collecting the balance due. See figure 1 on how data 

sharing between IRS and California operates. 

 

14According to California DLSE, in the event that a taxpayer disputes the tax assessment, 

DLSE would, on a case-by-case basis, make a decision about granting the business license 

based on the amount owed and the individual business circumstance. 

Page 6 GAO-09-569 Tax Compliance
 

Figure 1: How Data Sharing Operates between IRS and California 

Source: GAO analysis of IRS information.

If noncompliant for 90 days

or more, business listings

are compiled and sent on 

CD to the IRS Agricultural 

Team in Fresno

Data sharing

California Division

of Labor Standards

Enforcement

(DLSE)

IRS Ogden

Service Center

Tax examiners search IRS

database to determine whether 

business is compliant with federal 

employment taxes

If compliant, 

California issues

business license

If business resolves its

taxes within 90 days of 

applying, it becomes

compliant

Business owner

Business owner applies for 

CA business license

Business owner completes IRS

form to authorize data sharing

FAX

Business owner can 

submit forms to IRS by 

mail, fax, or e-mail

$ $

$ $

CALIFORNIA

Business

license

Summaries of Form 8821s

are sent to DLSE weekly

IRS mails compliance results

to applicant and DLSE

Examiners open cases

and do investigative 

work on collecting the 

balance due

@

Section 6103 of the Internal Revenue Code (I.R.C.) prohibits the disclosure 

of tax returns and return information by IRS employees; other federal 

employees, state employees, or both; and certain others having access to 

the information except in specifically enumerated circumstances. Data 

sharing between IRS and California DLSE is authorized by a subsection of 

I.R.C. § 6103. Specifically, section 6103(c) authorizes IRS to disclose the 

Page 7 GAO-09-569 Tax Compliance
 

return information of a taxpayer to any other person at the taxpayer’s 

request.15 State licensing entities that wish to review federal tax 

information or have IRS attest to tax compliance before issuing the license 

would need to require the applicant to provide a written request to IRS 

authorizing release of the information to the licensing entity. 

The data-sharing arrangement between IRS Ogden and California DLSE 

can be a valuable tool for improving compliance among certain 

businesses. According to IRS officials, this type of data-sharing 

arrangement has mutual benefits for IRS, by increasing filing and payment 

compliance with federal employment taxes, and for states, by minimizing 

concerns about the success of the business and its compliance with 

unemployment requirements. IRS officials noted that growth in this datasharing arrangement can generate many compliance benefits with a 

relatively minimal resource allocation. According to a California DLSE 

official, this data-sharing arrangement is beneficial because it helps to 

ensure that businesses are competent and responsible and pay their taxes. 

Data-Sharing 

Arrangement 

Requiring Tax 

Compliance of 

California Business 

License Applicants 

Can Be a Valuable 

Compliance Tool 

The amount of revenue in federal employment taxes collected through this 

data-sharing arrangement appears to outweigh the cost of operating the 

data-sharing arrangement. Thousands of California businesses apply for a 

business license each year in order to operate a business in the three 

industries previously mentioned, and must provide documentation to 

DLSE to show that they are in compliance with federal employment taxes. 

Many of these businesses were not in compliance with employment taxes 

during the time of our analysis and, therefore, had to file tax returns or pay 

employment taxes to rectify their compliance status. According to the IRS 

Ogden database on business applicants, 7,194 businesses applied for a 

business license in the three industries one or more times from calendar 

years 2006 through 2008 and requested that IRS provide California with 

information on their compliance with federal employment taxes. About 24 

percent of businesses (i.e., 1,726 of the 7,194 that applied) had to file 

employment tax returns or pay or otherwise resolve overdue taxes to 

come into compliance with federal employment taxes. 

 

15The taxpayer’s request to release return information to another must be in writing. I.R.C. 

§ 6103(c). IRS Form 8821 is generally used to authorize IRS’s release of confidential 

information. 

Page 8 GAO-09-569 Tax Compliance
 

IRS staff in Ogden use spreadsheets to track the number of federal tax 

returns filed by noncompliant California business license applicants and 

the amounts IRS collected from these businesses that are attributable to 

the data-sharing arrangement. The spreadsheets show that businesses not 

in compliance with federal employment taxes when they applied for 

California business licenses filed hundreds of tax returns in calendar years 

2006 and 2007 and IRS collected millions in federal employment taxes. 

California businesses filed 441 employment tax returns to come into 

compliance to qualify for California business licenses and IRS collected 

nearly $7.4 million in employment taxes, according to IRS Ogden 

spreadsheets.16 IRS Ogden officials told us that the nearly $7.4 million in 

employment taxes collected represents the amount business applicants 

paid after receiving noncompliance letters related to their DLSE business 

license applications. Table 1 shows the number of tax returns filed and the 

amount IRS collected from these applicants during calendar years 2006 

and 2007. 

Table 1: Number of Tax Returns Filed and Amount Collected from Businesses That 

Were Noncompliant at the Time of Application, Calendar Years 2006 and 2007 

Calendar year 

Number of 

federal tax 

returns filed 

Amount

collecteda

2006 277 $3,896,098

2007b164 3,476,509

Total 441 $7,372,607

Source: GAO analysis of IRS data. 

a

The amounts collected are expressed in 2009 dollars. 

b

Spreadsheet data for calendar year 2007 exclude 4 months. Data were not available for July, 

August, November, and December at the time we obtained the data in November 2007. 

Even though IRS did not track all of the costs it incurred for operating the 

data-sharing arrangement, IRS officials noted that the arrangement 

resulted in high revenues relative to costs.17 In order to get some 

perspective on how this data-sharing arrangement compares with other 

 

16The amounts of collections and cost dollars are expressed in 2009 dollars. 

17In 2009, we reported that IRS was unable to readily determine the costs of its direct 

activities and programs and did not have cost-based performance information. GAO, 

Financial Audit: IRS’s Fiscal Years 2008 and 2007 Financial Statements, GAO-09-119

(Washington, D.C.: Nov. 10, 2008). 

Page 9 GAO-09-569 Tax Compliance
 

IRS enforcement efforts, we developed an estimate of the costs of the 

arrangement using cost categories provided and confirmed by IRS 

officials.18 The cost categories we considered included personnel costs and 

nonpersonnel costs, such as computers, telephones, and fax machines. 

We estimated that IRS incurred about $331,348 to operate the data-sharing 

arrangement in calendar years 2006 and 2007. Our cost estimate included 

personnel costs of about $202,125 in pay and about $61,042 in benefits for 

one General Schedule (GS) 5 clerk and two GS 7 tax examiners. We also 

included about $10,197 for three computers, $1,237 for one dedicated 

printer, $313 for one fax machine with a dedicated line and two dedicated 

phone lines with voice mail boxes, and approximately $56,435 for supplies, 

facilities, utilities, and supervision.19 These costs may be somewhat 

overstated because, for instance, we used approximate purchase costs for 

equipment and did not spread those costs over the useful life of the 

equipment or other uses of the equipment. 

Using our estimate, the ROI for this data-sharing arrangement is 22:1.20 IRS 

has not tracked the cost data needed to do a study comparing the ROI of 

the IRS Ogden/DLSE enforcement activity with those of other current 

enforcement activities to determine how the IRS Ogden/DLSE data-sharing 

arrangement ROI compares with those of IRS’s other enforcement 

activities. However, IRS has developed ROI estimates for five new direct 

revenue-producing enforcement initiatives it proposed in its fiscal year 

2009 budget submission.21 IRS estimates that the average ROI for these 

activities at full performance (at the end of their second year of 

implementation) will be 7.1:1. IRS projects the highest ROI for one of the 

five new initiatives (expanded document matching) at 11.4:1. IRS officials 

told us that IRS calculates the ROI each year for the revenue-producing 

 

18The estimate includes costs for calendar year 2006 and 8 months in calendar year 2007 to 

correspond with data from the IRS Ogden spreadsheets on amounts IRS collected in 

calendar years 2006 and 2007. All costs are expressed in 2009 dollars. 

19To develop our cost estimates, we used the guidance for preparing agency budgets in 

Executive Office of the President, Office of Management and Budget Circular A-11, 

Preparation, Submission, and Execution of the Budget, and GAO, GAO Cost Estimating 

and Assessment Guide: Best Practices for Developing and Managing Capital Program 

Costs, GAO-09-3SP (Washington, D.C.: March 2009). 

20Our ROI estimate does not take into account several factors that could decrease or 

increase the estimate. Those factors are discussed on page 14. 

21Internal Revenue Service, FY 2009 Congressional Budget Submission. 

Page 10 GAO-09-569 Tax Compliance
 

initiatives included in the President’s budget request. They also said that 

these ROI calculations are based on historical information in the 

Enforcement Revenue Information System and the annually updated unit 

cost rates used in budget formulation.22 We did not verify the accuracy of 

the data IRS provided or its estimate of the revenues and costs of its five 

new enforcement activities, including the estimated ROI of these activities. 

Tax Compliance among 

Businesses Showed 

Improvement after They 

Applied for State Business 

Licenses 

We identified the 2,017 businesses that applied for business licenses in 

calendar year 2006 only,23 and found that 315 of these businesses had 

unpaid assessments at the time of applying and that tax compliance 

improved for these 315 businesses. We identified the businesses that 

applied for a California business license in 2006 only so that we could 

follow the tax compliance of this set of specific businesses over time. We 

matched data of California business license applicants for calendar year 

2006 from the IRS Ogden Access database with IRS’s Unpaid Assessments 

file at two points in time—for the week of September 18, 2006, and the 

week of August 18, 2008. 

Our analysis of California business license applicants matched against the 

IRS Unpaid Assessments file database showed that 315 businesses owed 

employment taxes as of September 18, 2006, and by August 18, 2008, 165 of 

those businesses had resolved or lowered their unpaid assessment debt.24

The 165 businesses resolved or lowered their 2006 unpaid assessments in 

either calendar year 2007 or 2008. Our analysis also revealed that 150 

businesses had not resolved or reduced unpaid assessment debt by August 

18, 2008. Table 2 shows business license applicants with unpaid 

assessments as of September 18, 2006, and businesses that resolved/did 

not resolve their debt by August 18, 2008. 

 

22IRS computed the ROI of the five new direct revenue–producing enforcement initiatives it 

proposed in its fiscal year 2009 budget submission by dividing the projected enforcement 

revenue for each new enforcement initiative by the total cost of the initiative. 

23Businesses that applied in calendar year 2006 only are those that applied in calendar year 

2006 and not again in 2007 or in the 10 months in 2008 for which we have IRS Ogden DLSE 

Access database data. 

24We use the term resolved to include situations where the taxpayer paid all or some of the 

assessment, IRS abated the assessment, IRS reclassified the debt as currently not 

collectible, or IRS agreed to write off part of the debt in accepting an offer in compromise. 

We say that businesses “lowered their unpaid assessment debt” when the amounts of the 

businesses’ unpaid assessment were less in calendar year 2008 than in calendar year 2006. 

Page 11 GAO-09-569 Tax Compliance
 

Table 2: Number of California Business License Applicants with Unpaid Employment Tax Assessments in Calendar Year 2006 

and Status in Calendar Year 2008 

Number with unpaid 

assessments as of week

of September 18, 2006

Number that

resolved or lowered debt as

of week of August 18, 2008 

Number with unresolved

or unreduced debt as of

week of August 18, 2008 

Calendar year 

2006 business 

applicants 315 165 150 

Source: GAO analysis of IRS data. 

Note: Data on business license applicants for calendar year 2007 include 10 months. Data were 

available through October at the time we obtained the data in November 2007. 

The 165 businesses resolved or lowered their unpaid assessments by 

nearly $2 million—$1,925,162—from the weeks of September 18, 2006, 

through August 18, 2008. The 115 business license applicants that 

completely resolved their debt before August 18, 2008, resolved nearly 

$800,000 in unpaid tax assessments in calendar years 2007 and 2008.25

These applicants, in total, had a nearly $800,000 tax liability as of 

September 18, 2006, but the unpaid assessments file showed no tax 

liability for them as of the week of September 18, 2008. Fifty additional 

businesses lowered their tax assessments from the weeks of August 18, 

2006, through September 18, 2008, by $1,135,216. However, the 165 

businesses may have resolved more than $1,925,162 because these 

taxpayers may have had additional taxes assessed after the week of 

September 18, 2006, and may have resolved them before the week of 

August 18, 2008. Our analysis compares unpaid assessments at two points 

in time since the data file we used did not allow us to track weekly 

changes in the businesses’ unpaid assessments. Table 3 shows the amount 

of unpaid tax assessments as of the week of September 18, 2006, and as of 

the week of August 18, 2008, and the amount of unpaid employment tax 

assessments resolved by the 165 businesses. 

 

25Our analysis of unpaid assessments includes unpaid taxes assessed plus accrued interest 

and penalties. 

Page 12 GAO-09-569 Tax Compliance
 

Table 3: Amount of Unpaid Employment Tax Assessments and Debt Resolved for 165 Business Applicants 

Number of business applicants 

Amount of unpaid 

assessments as of

week of September 18, 2006

Amount of unpaid 

assessments as of 

week of August 18, 2008 

Amount of debt

resolved as of week

of August 18, 2008a

115 business applicants in 2006 $789,946 $0 $789,946

50 business applicants in 2006 7,158,680 6,023,464 1,135,216

Total $7,948,626 $6,023,464 $1,925,162

Source: GAO analysis of IRS data. 

a

Unpaid assessments and unresolved tax debt include accrued interest and penalties. 

All but 1 of the 350 businesses that had unpaid assessments when they 

applied for business licenses in calendar year 2006 were small businesses. 

The remaining business was a medium or large business. According to IRS, 

“small businesses” includes businesses with assets of less than $10 million. 

The IRS Ogden/California DLSE data-sharing arrangement can be a 

valuable compliance tool because the requirement to renew business 

licenses annually provides a motivation to resolve tax debts timely. The 

arrangement may help flag unpaid tax assessments when they are recent 

and have a greater likelihood of collection. Our previous work found that 

the age of the unpaid assessment is an indicator of the extent to which the 

outstanding amounts owed are likely to be collected.26 This work showed 

that the older an unpaid assessment the lower the probability it will be 

paid. In another report, we found that the IRS records we examined 

showed that 70 percent of all unpaid payroll taxes—estimated at $58 

billion as of September 30, 2007—were owed by businesses with more 

than a year (4 tax quarters) of unpaid federal payroll taxes. Over a quarter 

of unpaid federal payroll taxes were owed by businesses that accumulated 

tax debt for more than 3 years (12 tax quarters).27 One reason why older 

debts may not be collected is that they lead to large and increasing 

amounts of accrued interest and penalties. The requirement that annual 

business license renewals depend on resolving unpaid employment tax 

assessments may help businesses avoid the pyramiding of interest and 

penalties. 

 

26GAO, Internal Revenue Service: Composition and Collectibility of Unpaid Assessments, 

GAO/AIMD-99-12 (Washington, D.C.: Oct. 29, 1998). 

27GAO, Tax Compliance: Businesses Owe Billions in Federal Payroll Taxes, GAO-08-617

(Washington, D.C.: July 25, 2008). 

Page 13 GAO-09-569 Tax Compliance
 

The ROI for these enforcement activities can vary depending on factors 

such as the efficiency of operating the data-sharing arrangements and 

whether the data-sharing arrangements experience higher collections in 

the early years of operation. For example, an IRS official suggested that 

there may be a way to more efficiently operate this type of data-sharing 

arrangement and thereby obtain a higher ROI. Applying an automated 

filter to isolate business applicants with no taxes due, IRS staff would only 

need to manually review data on businesses with balances due or that 

have not filed required returns, and fewer IRS staff may be needed to 

operate the data-sharing arrangement. An IRS official in Ogden told us that 

the taxes collected by the IRS Ogden/California DLSE data-sharing 

arrangement about 10 years ago were substantially higher because there 

was very little compliance when the data-sharing arrangement first started. 

This official recalled that when the program was transferred to Ogden the 

numbers of noncompliant applicants were at least three or four times 

higher than they are now. In this official’s view, consistency in enforcing 

the business tax compliance requirement of the three industries has 

steadily improved compliance and has resulted in fewer business 

applicants that are noncompliant with their employment tax obligations 

when they apply for business licenses. 

A More Complete 

Evaluation Could Further 

Isolate and Quantify the 

Benefits and Costs of the 

Business Licensing 

Requirement 

Given that our analysis indicates that the California business licensing 

requirement likely has a higher ROI than the direct revenue-producing 

enforcement initiatives IRS proposed in its 2009 Congressional budget 

submission, a fuller examination is warranted. A more complete 

evaluation could address some potential factors that could reduce or 

increase the ROI we calculated. For example, it could evaluate whether 

IRS had taken other enforcement actions against the California businesses 

at the same time as they were applying for licenses. If IRS had sent 

collection notices to the businesses or taken other enforcement action at 

or close to the time the businesses went through the licensing reviews, the 

resolution of their debts might be attributable to those enforcement 

actions. A more complete evaluation could also compare the results of this 

enforcement approach to the results for similar businesses that were not 

subject to the business licensing requirement. Such an analysis could help 

demonstrate how well the business licensing requirement fares compared 

to the “normal” enforcement actions that would be taken by IRS with 

similarly situated businesses. A more complete evaluation could take into 

account the resolution of debts that may have been incurred before a 

business applied for a license. Since the affected businesses know they 

must resolve their employment tax debts in order to receive business 

licenses, some may pay or otherwise resolve their debts in anticipation of 

Page 14 GAO-09-569 Tax Compliance
 

the licensing review by IRS. Any such advance payments or resolutions 

could be included. 

Similarly, although our tracing of businesses’ compliance from calendar 

years 2006 to 2008 shows improvement in the resolution of many firms’ 

debt, a more complete evaluation could compare their improvement to 

similarly situated businesses that were not subject to the licensing 

requirement. Such a comparison would help show whether this continued 

improvement in the delinquent debts was better than what could have 

occurred absent the licensing requirement. 

During the period we reviewed, Ogden staff responsible for the business 

licensing reviews discarded older operational data when they were no 

longer needed for their purposes. Further, a few months of data were lost 

even before they would have normally been discarded. Although these 

data may not be needed to administer the program, they are needed to 

support a more complete review of the program’s ROI. 

We contacted revenue officials in every state and the District of Columbia 

to ask whether their states have business licensing requirements and, if so, 

whether they require demonstration of state tax compliance before 

business licenses are granted.28 Of the 47 states and the District of 

Columbia that responded, 20 revenue officials told us that the states 

require demonstration of compliance with one or more state taxes for 

businesses to qualify for state business licenses, and these requirements 

exist for one or more industries.29 Based on these responses, the tax 

compliance requirement is typically limited to a few industries, requires 

compliance with selected taxes, and varies on the amount of 

documentation required to show compliance with tax requirements. Table 

4 summarizes responses on the number of states that require businesses to 

Many Opportunities 

Exist to Require 

Federal Tax 

Compliance to Qualify 

for State Business 

Licenses, but 

Challenges Exist 

 

28We also asked state revenue officials about compliance with federal taxes to qualify for 

state business licenses to determine if there were any additional states with federal tax 

compliance beyond those in the information IRS had on federal tax compliance and state 

business licenses. Not surprisingly, the state revenue officials did not provide any 

additional information since that type of data-sharing arrangement is typically between IRS 

and state licensing functions. 

29Kansas, Massachusetts, and Ohio did not respond to our request on whether their states 

have business licensing requirements and, if so, whether they require demonstration of 

state tax compliance before business licenses are granted. 

Page 15 GAO-09-569 Tax Compliance
 

be tax compliant to qualify for state business licenses in one or more 

industries as of April 6, 2009. 

Table 4: Number of States That Require Businesses to Be Compliant with Certain 

State Taxes to Qualify for State Business Licenses in One or More Industries 

Tax compliance requirement 

Number

of states

Require state tax compliance 20

Do not require state tax compliance 20

Do not have a business license requirement at the state level 8

No response 3

Total 51

Sources: Revenue agencies from the 50 states and the District of Columbia. 

Of the 19 states and the District of Columbia that require business 

applicants to be compliant with state taxes, only the District of Columbia 

requires applicants in all industries to be state tax compliant to qualify for 

business licenses. Nineteen states require business license applicants in 

one or more industries to be state tax compliant to qualify for business 

licenses. 

Most of the states that responded do not require compliance with three 

types of taxes, employment, income, or sales and use, except for the 

District of Columbia, which requires compliance with all three types of 

taxes. Of the 19 states that identified compliance with state taxes to 

qualify for a state business license, 15 identified the specific type of tax or 

taxes being reviewed. Seven states require compliance with their 

employment taxes, 8 states require compliance with state sales and use 

taxes, and 10 states require compliance with state income taxes. State 

requirements also vary in the amount and kind of documentation required 

to prove compliance with tax requirements. For example, Rhode Island 

allows businesses to self-certify that they are in compliance with state tax 

requirements. Pennsylvania requires licensing agencies to request 

verification of state tax compliance from the state tax agency when a 

business owner applies for or renews a license. 

Federal Tax Compliance 

Requirements to Qualify 

for State Business Licenses 

Differ by State 

IRS maintains information on data-sharing arrangements that include 

requirements for federal tax compliance to qualify businesses for state 

business licenses. According to an IRS document, 13 data-sharing 

arrangements exist that require compliance with federal taxes to qualify 

Page 16 GAO-09-569 Tax Compliance
 

for state business licenses. For example, the State of Oregon requires 

farm/forest labor contractors comply with federal and state taxes to 

qualify for state business licenses. Each farm/forest labor contractor 

applicant must submit IRS Form 8821 with the application. In addition, 

applicants can be denied licenses if state and federal taxes are owed. 

Similarly, the State of Connecticut requires applicants for gaming licenses 

to be compliant with federal and state income taxes to qualify for business 

licenses. Applicants for gaming licenses must submit complete copies of 

their most recent federal and state income tax returns and certify that 

there are no outstanding tax delinquencies or unresolved disputes. 

Officials See Benefit in 

Requiring Tax Compliance 

to Qualify for Business 

License but Acknowledge 

That Challenges Exist 

While most states told us that they do not track tax collections and 

program costs associated with these data-sharing arrangements, those 

revenue officials that provided comments and participate in data-sharing 

arrangements requiring state tax compliance told us that the state 

arrangements improve state tax collections and promote voluntary 

compliance. For example, a revenue official said that data sharing is used 

as another tool to collect outstanding taxes due the state. This official also 

said that the data-sharing arrangement has been very effective in 

furthering the state’s tax collection efforts. He added that without a 

license, a business cannot operate. Another state revenue official told us 

that the individual or business must keep all state tax obligations current 

in order to prevent the denial or revocation of the applicable license. In 

this official’s view, this causes the affected individuals or businesses to be 

less likely to have delinquent returns and outstanding tax bills that are not 

on payment agreements. Our analysis shows that 19 states and the District 

of Columbia allow the taxpayer to obtain a business license if the taxpayer 

sets up a payment agreement with the state’s revenue agency. 

IRS staff in Ogden told us that requiring tax compliance makes the 

businesses think about the consequences of not being tax compliant. They 

added that the data-sharing arrangement itself becomes a deterrent after a 

while, since businesses, for which IRS is checking compliance, learn that 

they cannot get licenses without being compliant. 

While some state revenue officials see benefit in requiring tax compliance 

to qualify for a business license, they recognize certain challenges their 

agencies face from linking state business licensing with tax compliance. 

One of the challenges is coordination between state agencies. For 

example, a revenue official said that obtaining key information from state 

agencies, such as tax identification numbers and licensee names, and 

acting on her agency’s request to suspend the licenses are ongoing 

Page 17 GAO-09-569 Tax Compliance
 

challenges. A 2008 state study noted that agency coordination is crucial to 

the success of any tax clearance program. In order for the program to be 

effective, each agency must be prepared to share information with other 

agencies and to act on information received from other agencies.30 Finally, 

states also face technical issues with linking tax compliance with business 

licensing. For example, a revenue official said that her state does not have 

electronic linking between its Division of Alcoholic Beverages and 

Tobacco and the Department of Revenue for verification of applicant sales 

and use tax information. This official also said that the challenge would be 

to link their present licensing computer system with the Department of 

Revenue system. Another official said that her agency’s computer 

programs vary, are outdated, and are not integrated. 

Some challenges identified by states likely would be especially important 

for any expansion of requirements for federal tax compliance to obtain 

state business licenses. For example, some of the revenue officials we 

contacted identified legal issues relating to data sharing. A state revenue 

official said that various licensing statutes do not permit the revocation or 

threat of action against a licensee due to tax noncompliance. An additional 

revenue official said that with limited resources, implementing the legal 

requirement to review licenses is difficult. 

Opportunities Exist to 

Expand Federal Tax 

Compliance Requirements 

to Qualify for State 

Business Licenses 

The potential to increase data-sharing opportunities between IRS and state 

business licensing entities exists, but pinpointing the exact number of 

opportunities is difficult. According to the Small Business Administration, 

business licensing requirements vary from state to state. For example, a 

state “business license” is the main document required for tax purposes 

and conducting other basic business functions. However, some states have 

separate licensing requirements based on the product sold, such as 

licenses to sell liquor, lottery tickets, gasoline, or firearms. Ultimately, it is 

up to each state to determine what industries, occupations, and 

professions must be licensed and the licensure requirements that 

applicants must meet. 

Some states and some business types may represent more of an immediate 

opportunity for establishing arrangements that require federal tax 

compliance to qualify for state business licenses. States that currently 

 

30Virginia Department of Taxation, Tax Clearance Study to the Governor and the General 

Assembly of Virginia, Senate Document No. 7 (Richmond, Va., 2008). 

Page 18 GAO-09-569 Tax Compliance
 

require compliance with state taxes for selected business license 

applicants may be more amenable to requiring federal tax compliance than 

states that do not even require state tax compliance since they already 

recognize tax compliance as important for the businesses. For example, 

North Carolina, Texas, and Missouri have a requirement for tax 

compliance with state taxes for retail sales businesses. These states do not 

require compliance with federal taxes. In addition, states that currently 

require compliance with federal employment taxes may be amenable to 

extending the requirement to include federal income taxes. For example, 

California’s DLSE requires applicants for the three industries requiring 

licensing to be compliant with federal employment taxes only. California’s 

garment manufacturing, farm labor contracting, and car washing and 

polishing license applicants have no requirement to be in compliance with 

federal income taxes to qualify for business licenses. 

Increasing data sharing between IRS and state governments to help reduce 

the tax gap can be beneficial to IRS when such data-sharing arrangements 

demonstrate firm compliance value. Data-sharing arrangements requiring 

tax compliance among business license applicants show real potential to 

be a valuable tool to improve tax compliance among certain businesses. 

Our estimated ROI of the data-sharing arrangement between IRS Ogden 

and California DLSE suggests that requiring tax compliance to qualify for 

state business licenses can be a cost-effective way of collecting tax debt. 

In fact, the data-sharing arrangement’s estimated ROI is higher than the 

estimated ROI for the new direct revenue–producing tax enforcement 

initiatives in IRS’s fiscal year 2009 budget submission.31 However, a more 

complete evaluation could take into account all the factors that could 

affect ROI. To be in a better position to evaluate these data-sharing 

arrangements, IRS needs to ensure that program data are retained. 

We recommend that the Commissioner of Internal Revenue take the 

following three actions: 

• Collect and retain the cost and revenue data needed to develop ROI 

estimates for programs requiring businesses to demonstrate federal 

tax compliance to obtain state business licenses. 

Conclusions 

Recommendations for 

Executive Action 

 

31Internal Revenue Service, FY 2009 Congressional Budget Submission. 

Page 19 GAO-09-569 Tax Compliance
 

• Evaluate the ROI of existing arrangements where states require federal 

tax compliance to qualify for state business licenses to determine 

whether the ROI of these programs is sufficient to merit their 

expansion. 

• To the extent that existing data-sharing arrangements have a 

sufficiently high ROI, coordinate with states to expand requirements to 

comply with federal taxes to qualify for state business licenses and 

monitor the ROI of these expansions to gauge their success. 

On behalf of the Commissioner of Internal Revenue, the Deputy 

Commissioner for Services and Enforcement provided written comments 

on a draft of this report in a June 8, 2009, letter. The Deputy Commissioner 

agreed with our recommendations. IRS plans to gather appropriate data to 

develop ROI estimates for this program, evaluate the results to determine 

whether these programs merit expansion, and if so, work with states to 

expand the programs. 

Agency Comments 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 from the report 

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

Commissioner of Internal Revenue, and other interested parties. This 

report will also be available at no charge on GAO’s Web site at 

http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me 

at (202) 512-9110 or brostekm@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 are listed in appendix II. 

Michael Brostek 

Director, Tax Issues 

Strategic Issues Team 

Page 20 GAO-09-569 Tax Compliance
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

Our objectives were to analyze (1) the extent to which requiring a 

demonstration of federal tax compliance to qualify for a state business 

license has the potential to improve federal tax compliance and (2) what 

opportunities exist for increasing arrangements that require federal tax 

compliance to qualify for state business licensing. This report focuses on 

data-sharing arrangements that require compliance with federal or state 

tax obligations to qualify for state business licensing. We did not include 

licensing requirements at the local level or licensing for professions or 

occupations. 

To provide background on data-sharing arrangements that require 

compliance with tax obligations to qualify for state business licensing, we 

reviewed relevant Internal Revenue Service (IRS) and California 

Department of Industrial Relations, Division of Labor Standards 

Enforcement (DLSE) documents and interviewed IRS and California 

officials. We also reviewed laws and regulations related to taxpayer 

disclosure. 

To determine the extent to which requiring a demonstration of federal tax 

compliance to qualify for a state business license has the potential to 

improve federal tax compliance, we used the IRS and State of California 

data-sharing arrangement as a case study. To determine the potential for 

improving federal tax compliance, we estimated the return on investment 

(ROI) for the IRS Ogden/California DLSE data-sharing arrangement. To 

determine the amount collected, we used IRS Ogden/California DLSE 

spreadsheets that record the number of federal tax returns filed by 

applicants for business licenses in the three industries and the amount IRS 

collected from businesses that were notified by IRS that they were not in 

compliance with federal employment taxes covering calendar year 2006 

and 8 months in calendar year 2007.1

 Spreadsheet data for calendar year 

2007 excluded 4 months. Ogden misplaced data for July and August, and 

data for November and December were not available when we obtained 

the data in November 2007. We also reviewed agency agreements and 

memoranda, regulations, and reports covering the data-sharing 

arrangement between IRS and California DLSE and interviewed IRS and 

California officials about the value of the data-sharing arrangement to IRS 

and the state. 

 

1

We applied an inflator factor derived from the Department of Labor’s Bureau of Labor 

Statistics Databases, Tables & Calculators by Subject to capture collections for calendar 

year 2009. See http://data.bls.gov/PDQ/servlet/SurveyOutputServlet (accessed Apr. 24, 

2009). 

Page 21 GAO-09-569 Tax Compliance
Appendix I: Scope and Methodology 

To determine the cost of operating this data-sharing arrangement, we 

estimated the costs of collecting the amounts owed by noncompliant 

businesses using actual cost categories provided by IRS Ogden officials. 

We used the guidance for preparing agency budgets in Executive Office of 

the President, Office of Management and Budget, Circular A-11, 

Preparation, Submission, and Execution of the Budget, and our Cost 

Estimating and Assessment Guide: Best Practices for Developing and 

Managing Capital Program Costs, GAO-09-3SP (Washington, D.C.: March 

2009). We estimated personnel costs using the Office of Personnel 

Management Salary Table 2009-RUS, for the locality pay area “of rest of 

U.S.,” effective January 2009, for General Schedule (GS) 5 and 7 personnel 

at step 5. We used step 5 to capture the midpoint of the GS 5 and 7 grade 

levels so as not to bias pay in the direction of a low or high estimate. We 

estimated the cost of benefits for these employees using the Department 

of Labor’s Bureau of Labor Statistics 30.2 percent average compensation 

cost for calendar year 2008.2

 We estimated the cost of fax machines and 

printers by averaging the costs for these items as shown on the Web sites 

for federal government customers of two leading manufacturers of these 

products. We shared our estimates with IRS officials to obtain 

concurrence with our estimates of nonpersonnel costs. We did not analyze 

the taxes IRS may collect or the costs it may incur after the noncompliant 

cases leave Ogden. We then compared the ROI ratio for this data-sharing 

arrangement to IRS’s estimates for five revenue-producing enforcement 

initiatives in the IRS fiscal year 2009 budget submission.3

 The Ogden 

Service Center sends information on the taxpayers that have unpaid 

assessments 90 days after Ogden first receives their application materials 

to the Fresno Service Center for collection. 

To determine whether California businesses remained in compliance over 

time, we matched data on California business applicants from an Access 

database maintained by IRS Ogden with taxpayers in IRS’s Business 

Master File Unpaid Assessments file. We selected the businesses that 

according to the Access database, applied for California DLSE business 

licenses in calendar year 2006 only—that is, applied in calendar year 2006 

and did not reapply in calendar year 2007 or in the 10 months in 2008 for 

which we have IRS Ogden DLSE Access database data. The Access 

 

2

Department of Labor, Bureau of Labor Statistics, NEWS: Employer Costs for Employee 

Compensation—December 2008 (Washington, D.C.: Mar. 12, 2009). See 

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet (accessed Apr. 24, 2009). 

3

Internal Revenue Service, FY 2009 Congressional Budget Submission. 

Page 22 GAO-09-569 Tax Compliance
Appendix I: Scope and Methodology 

database contained January 2006 through October 2007 data on business 

license applicants in the three covered industries. For our analysis, we 

matched records of the California businesses that we selected from the 

Access database because they applied in calendar year 2006 only with 

IRS’s Unpaid Assessments file as of the weeks of September 18, 2006, and 

August 18, 2008; identified the number of businesses with unpaid 

assessments and the amounts of their tax debt as of the week of 

September 18, 2006; and identified the applicants for business licenses in 

2006 only that had resolved their unpaid assessments as of August 18, 

2008, and the amounts of their tax debt they resolved. Our analysis 

compares unpaid assessments at two points in time since the data file we 

used did not allow us to track weekly changes in the businesses’ unpaid 

assessments. We could not follow the tax compliance of earlier applicants 

into the present because IRS Ogden purged data from the Access database 

for calendar years earlier than 2006. Unpaid assessments in this report 

include the total tax assessment plus interest and penalties where these 

exist. 

To determine what opportunities exist for increasing data sharing for 

arrangements that require federal tax compliance to qualify for state 

business licensing, we (1) analyzed and summarized which states and the 

District of Columbia have data-sharing arrangements that require state tax 

compliance to qualify for state business licensing, which states do not 

have such arrangements, and which states do not require businesses to 

obtain business licenses on the state level; (2) contacted revenue officials 

in 50 states and the District of Columbia via e-mail with structured 

questions about the extent to which their states engage in data-sharing 

arrangements that require demonstration of tax compliance before 

business licenses are granted; and (3) sent a follow-up e-mail to 21 state 

revenue officials who confirmed that their states require applicants to be 

compliant with state taxes to qualify for business licenses, by requesting 

information on the amount of taxes collected, the costs associated with 

operating the data-sharing arrangements, and benefits of these datasharing relationships to the states. Three states did not respond to our 

structured questions about the extent to which their states engage in datasharing arrangements that require demonstration of tax compliance before 

businesses qualify for business licenses. We also (1) summarized IRS 

information on existing data-sharing arrangements between IRS and state 

agencies that require compliance with federal taxes to qualify for state 

business licensing, (2) interviewed IRS officials to determine which states 

have state licensing requiring federal tax compliance, and (3) reviewed IRS 

documentation on data-sharing arrangements between IRS and state 

Page 23 GAO-09-569 Tax Compliance
Appendix I: Scope and Methodology 

agencies that require businesses to demonstrate federal tax compliance to 

qualify for state business licensing. 

Our review was subject to some limitations. We did not verify the accuracy 

of the data IRS provided or its estimate of the revenues and costs of its 

five new enforcement activities, including the estimated ROI of these 

activities. IRS Ogden’s Access database on California business applicants 

did not contain data prior to calendar year 2006 because IRS Ogden 

purged these historical data. While data from previous years would be 

useful for evaluating the data-sharing arrangement, we believe that the 

Ogden records that were available were sufficient to attain an 

understanding of the potential value of this arrangement as a compliance 

tool. The IRS Ogden spreadsheet used to track the number of federal tax 

returns filed by noncompliant California business license applicants and 

the amount IRS collected from these businesses attributable to the datasharing arrangement did not contain data for the months of July, August, 

November, and December 2007. We acknowledge that data for the entire 

calendar year of 2007 would affect the number of tax returns filed and the 

amount IRS collected from applicants during those months. Our estimate 

of the cost of IRS and California’s data-sharing arrangement may be 

somewhat overstated because, for instance, we used approximate 

purchase costs for equipment and did not spread those costs over the 

useful life of the equipment or other uses of the equipment and used 

calendar year 2009 costs. Additionally, our analysis did not address some 

other potential factors that could reduce, or increase, the ROI we 

calculated. We did not verify the responses from the states about tax 

compliance to qualify for state business licenses. We recognize that the 

state revenue officials may not be knowledgeable about all of their states’ 

requirements for tax compliance to qualify for business licenses, but they 

are a credible source of information about state tax compliance to qualify 

for state business licenses. 

We conducted this performance audit from June 2007 through June 2009 in 

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

Page 24 GAO-09-569 Tax Compliance
Appendix II: 

A

GAO Contact and Staff 

cknowledgments 

Page 25 GAO-09-569 

Appendix II: GAO Contact and Staff 

Acknowledgments 

Michael Brostek, (202) 512-9110 or brostekm@gao.gov 

In addition to the contact named above, Signora J. May, Assistant Director; 

Amy R. Bowser; Jennifer K. Echard; Amy C. Friedlander; Arthur L. James, 

Jr.; Stuart M. Kaufman; Edward J. Nannenhorn; Lou V. B. Smith; Jessica 

Thomsen; and James J. Ungvarsky made key contributions to this report. 

Tax Compliance

GAO Contact 

Acknowledgments 

(450594) 
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