Tax Administration: More Can Be Done to Ensure Federal Agencies File Accurate Information Returns
Published: 2003-12-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Internal Revenue Service (IRS) matches information returns filed by third parties, including federal agencies, with taxpayers' income tax returns to determine whether taxpayers have filed a return and/or reported all of their income. A correct taxpayer identification number (TIN) is necessary to enable IRS to match these returns. Prior GAO reviews have shown that federal agency payment records often include invalid TINs, particularly for vendors. GAO was asked to study federal agencies' compliance with filing information returns for service payments made to vendors, IRS's efforts to improve agencies' compliance, and whether additional measures could improve their compliance.
section_title: What GAO Found
paragraphs: Federal agencies do not always adhere to information return reporting requirements. About $5 billion in payments to 152,000 payees made during 2000 and 2001 by agencies within three federal departments were not reported to IRS. About 8,800 of these payees had received $421 million in payments, yet had failed to file a tax return for these years. In addition, about $20 billion in payments that were reported to IRS on 170,000 information returns for 2000 and 2001 included invalid vendor TINs. This was due in part to the fact that few federal agencies use IRS's TIN-matching program, as use of this program is optional. IRS has acted to aid federal agencies in complying with annual information return filing requirements. In August 2003, IRS notified federal agencies about information returns filed for 2001 that included invalid vendor TINs and the need for agencies to withhold a portion of future payments if the vendors fail to provide a valid TIN. IRS is also in the process of making the TIN-matching program available online. IRS does not currently have a program to identify and follow up with federal agencies that fail to file required annual information returns for vendor payments. Improvements to IRS's Payer Master File, which contains general information on all payers who file information returns, would be necessary for such a program. In addition, although the Central Contractor Registration is intended for use as a central source of valid vendor information by all federal agencies, it contains some invalid TINs. Due to statutory restrictions, all vendor TINs in this database cannot currently be validated through the IRS TIN-matching program, but options exist to address this problem.

section_title: Letter
paragraphs: Federal agencies pay billions of dollars each year to vendors for services,  such as compensation paid to individuals that are not employees and  medical and health care payments.  At the same time, some vendors fail to  pay their taxes and have accrued billions of dollars in delinquent federal  taxes.  The Internal Revenue Service’s (IRS) ability to ensure vendors are  properly paying their taxes hinges on having complete and accurate reports  from federal agencies on their vendor payments.
The Internal Revenue Code requires any service recipient, including federal  agencies, to report service payments to IRS if the services total $600 or  more during a calendar year.  An IRS Form 1099 MISC (Miscellaneous  Income) information return is used to report service payments to IRS and  must include the vendor’s name, address, and taxpayer identification  number (TIN).
IRS matches information returns with income tax returns to determine  whether taxpayers have filed a return and/or reported all of their income.   For fiscal year 2002, IRS used information returns to detect about 1.5  million taxpayers that underreported their income by about $2.5 billion and  also identified about 2 million taxpayers with tax liabilities of $2.4 billion  that failed to file tax returns.  However, when the TIN on an information  return is invalid and IRS cannot ascertain the correct TIN, IRS is unable to  match the information return data with tax return data and is thus unable  to detect either whether a taxpayer underreported income or failed to file a  tax return.
To help federal agencies identify whether vendor TINs are valid, in 1997  IRS initiated a TIN-matching program that agencies can use, prior to filing  their information returns, to determine whether vendors have provided a  correct TIN/name combination.  If a vendor either fails to provide a TIN or  provides a TIN/name combination that does not match information in IRS’s  records, and the vendor subsequently fails to provide a correct TIN/name  combination upon request, the federal agency is required to initiate backup  withholdingof future payments for services.
Despite these efforts, our reviews of IRS’s Federal Payment Levy Program  showed that federal agency payment records often contained invalid or  missing TINs and, therefore, could not be used to levy vendors’ federal  payments to recover delinquent federal taxes.  As a result, you asked us to  assess whether federal agencies in general have been submitting complete  and accurate annual information returns to IRS for service payments to  vendors.  Specifically, our objectives were to determine (1) the extent to  which federal agencies file required Forms 1099 MISC, take steps to ensure  that information on the returns, particularly TINs, are valid, and initiate  backup withholding if vendors provide invalid TINs; (2) recent actions IRS  has taken to help improve federal agency Form 1099 MISC filing  compliance; and (3) whether any additional measures could further  improve federal agency compliance with Form 1099 MISC filing  requirements.
To meet our objectives, we requested and obtained vendor payment  information for service payments made by the agencies and bureaus within  the 14 federal departments for calendar years 2000 and 2001 and compared  this information to vendor payment information included in IRS’s Payer  Master File and Information Returns Master File for the same 2-year  period.  We also surveyed the 14 federal departments on their policies and  practices for obtaining vendor TINs and filing required Forms 1099 MISC.   In addition, we discussed with IRS officials actions recently taken or  pending for assisting federal agencies in filing complete and accurate  Forms 1099 MISC for service payments to vendors.  Finally, we discussed  with both IRS and Office of Management and Budget (OMB) officials  additional measures that could further improve federal agency compliance  with Form 1099 MISC filing requirements.  Our work was done from June  2002 through September 2003 in accordance with generally accepted  government auditing standards.  (App. I describes our overall objectives,  scope, and methodology.)
subsections: section_title: Background
paragraphs: Section 6041A of the Internal Revenue Code requires any service recipient,  including federal agencies, to file an annual information return with IRS for  payments made to any person for services totaling $600 or more during a  calendar year.  Payments to corporations for certain services provided  must also be reported, such as attorneys’ fees and medical and health care  payments. In addition, federal executive agencies must report all payments  for services provided by vendors, including payments made to  corporations.  Specific information required on the annual information  return—an IRS Form 1099 MISC—includes the name, address, and TIN of  both the payer and payee, as well as the total amounts paid during the year  for the various types of services provided.  The purpose of the Form 1099  MISC filing requirement is to enable IRS to identify taxpayers who fail to  file an income tax return as well as those who fail to report all of their  income on their tax return for the related year.
IRS enters Form 1099 MISC information in both a Payer Master File (PMF)  and an Information Returns Master File (IRMF).  The PMF is a database  that includes all entities that make payments subject to information return  reporting.  The PMF includes general information on the total number and  dollar value of information returns, including Forms 1099 MISC, filed by  each payer for each year.  The IRMF is a database that includes specific  information on the type and amount of payments made to each payee,  including whether the payee TIN was valid upon receipt of the information  return and if the TIN was invalid, whether it was subsequently corrected by  IRS.  Both the PMF and IRMF include the payer’s TIN.
Upon receipt of a Form 1099 MISC, basic information is entered into a  temporary IRS database.  IRS compares the payee TIN/name combination  with TIN/name combinations in its records to determine if there is a match.   If there is a match, the information is entered in the IRMF without the need  for additional action.  If there is not a match, IRS will try to validate the  TIN/name combination via a TIN “validation” process, which entails  matching the TIN and name control—the first four characters of an  individual’s last name or the first four characters of a business name—on  the Form 1099 MISC with (1) a file which contains all social security  numbers ever issued and all name controls ever associated with them and  (2) a file that contains all employer identification numbers ever issued and  all name controls ever associated with them.  If IRS is able to match the  TIN and name control through this process, the information is entered in  the IRMF with a code indicating that the TIN was corrected and is valid. If  IRS is unable to match the TIN and name control, the information is  entered in the IRMF with a code indicating that the TIN is invalid.
If the vendor TIN included on the Form 1099 MISC is initially valid or  subsequently corrected by IRS, and the vendor files a tax return for the  corresponding year, IRS can electronically match the TIN, name control,  and amount entered in the IRMF with the amount reported on the vendor’s  tax return via the Document Matching Program.  This enables IRS to  determine whether the vendor has reported all of the income on the tax  return.  Alternatively, if there is no corresponding return with the same TIN  and name control as that entered in the IRMF, IRS can determine that the  vendor is a potential nonfiler.  However, if the TIN entered in the IRMF is  invalid, IRS is unable to use the information to detect either underreporting  or nonfiling on the part of a vendor.
Since 1997, IRS has had a TIN-matching program that federal agencies can  use to verify the accuracy of TIN/name combinations furnished by federal  payees.  This program was intended to reduce the number of notices of  incorrect TIN/name combinations issued for backup withholding by  allowing agencies the opportunity to identify TIN and name discrepancies  and to contact payees for corrected information before issuing an annual  information return, such as a Form 1099 MISC.  Monthly, federal agencies  can submit a batch of TIN/name combinations to IRS for verification.  IRS  then matches each record submitted and informs the agency whether the  TIN and name combination submitted matches its records.
In order to encourage vendors to provide a valid TIN and to ensure that  taxes are paid when they do not, Internal Revenue Code Section 3406  requires payers, including federal agencies, to initiate backup withholding  of a federal payment if a payee, including a vendor, fails to provide a TIN or  provides an invalid TIN, and upon notice fails to provide a correct TIN.  IRS  considers a TIN to be missing if it is not provided, has more or less than  nine numbers, or has an alpha character in one of the nine positions.  IRS  considers the TIN to be invalid if it is in the proper format, but the  TIN/name combination doesn’t match or cannot be found in IRS or Social  Security Administration files.  Payments subject to backup withholding  include various types of income reportable on a Form 1099 MISC, including  compensation paid to individuals that are not employees.  The current rate  for backup withholding is 30 percent of the payment.
section_title: Not All Federal Agencies File Required Information Returns or Take Steps to Ensure That Information Provided Is Valid
paragraphs: Federal agencies are not always adhering to Form 1099 MISC filing  requirements.  For 2000 and 2001, about 152,000 information returns for  federal payments totaling about $5 billion were not filed with IRS, while  about 170,000 information returns, including $20 billion in federal  payments that were filed, included invalid TINs.  Few agencies are taking  advantage of IRS’s TIN-matching program to validate vendor TINs prior to  submitting information returns to IRS.  Similarly, few agencies are initiating  backup withholding on payments made to vendors that have provided  invalid TINs.
subsections: section_title: With Some Exceptions, Federal Agencies File Forms 1099 MISC
paragraphs: While most federal agencies filed information returns for vendors, some  did not.  For both 2000 and 2001, the 14 federal departments collectively  filed over 600,000 Forms 1099 MISC in which they reported over   $100 billion in payments each year. (See app. II for the number and dollar  value of Forms 1099 MISC filed individually by the 14 federal departments.)
Although the 14 federal departments collectively filed a substantial number  of Forms 1099 MISC over this 2-year period, we found some significant  exceptions, as the following examples illustrate.
About $5 billion in payments to about 152,000 payees made collectively  by the Departments of Agriculture, Commerce, and Justice for 2000 and  2001 combined were not reported to IRS on Forms 1099 MISC.  About  8,800 of these payees who collectively received payments totaling about  $421 million dollars—an average of about 48,000 each—failed to file an  income tax return for these 2 years, according to IRS’s records.  If  information returns had been filed and IRS had this information, it  would have provided a basis for IRS to assess the appropriate taxes  against these payees.
Almost $3.0 billion in payments made via purchase cards by DOD  between 2000 and 2001 had not been reported to IRS due to incorrect or  missing vendor TINs.  DOD officials indicated that obtaining vendor  information needed for Forms 1099 MISC from payment card companies  has been a long-standing problem.  They estimated that they could have  filed as many as 40,000 additional Forms 1099 MISC for 2000 and 2001 if  they had received the necessary vendor information from payment card  companies.
According to the Department of Transportation, Forms 1099 MISC were  not filed for services if the vendor was a corporation that provided both  goods and services, as their vendor payment system cannot distinguish  between the two for the purpose of issuing Forms 1099 MISC.  As a  result, only about $8 million of $92 million in service payments for tax  years 2000 and 2001 were reported to IRS on Forms 1099 MISC.
One Department of Housing and Urban Development agency that made  payments to vendors for services totaling over $73 million for 2000 and  2001, failed to file any Forms 1099 MISC for these 2 years.  According to  a Department of Housing and Urban Development official, because the  agency is a wholly owned corporation within HUD and is therefore  quasi-federal, agency officials were not aware that they were required to  file Forms 1099 MISC.  They further indicated that the agency had  subsequently issued Forms 1099 MISC to its vendors for payments made  for 2002.
In response to our survey of departmental policies and practices for filing  Forms 1099 MISC, department officials cited various reasons for not filing a  Form 1099 MISC for vendor payments.  Not having a valid vendor TIN was  the foremost reason cited.  Other reasons included the inability to  distinguish between goods and services provided by a vendor, as cited  above, and problems obtaining necessary vendor information, namely  TINs, from payment card companies for vendors that are paid via  government purchase cards.
section_title: Forms 1099 MISC Often Include Missing or Incorrect TINs
paragraphs: Even when federal agencies do file Forms 1099 MISC, they often include an  invalid vendor TIN.  As a result, IRS has to expend resources in an attempt  to identify a correct TIN via its TIN validation process and, in most cases,  IRS is unable to use the information returns to determine whether vendors  had either underreported their income or failed to file a tax return.  As  shown in figure 1, the 14 federal departments filed almost 170,000 Forms  1099 MISC with invalid vendor TINs for tax years 2000 and 2001 combined.   Almost $20 billion in vendor payments were included on these information  returns.  Overall, for the 2 years combined, about 13 percent of all Forms  1099 MISC filed by the 14 federal departments included an invalid TIN  when they were submitted to IRS.  (See app. III for the number and  percentage of Forms 1099 MISC filed individually by the 14 federal  departments with invalid TINs.)
As also shown in figure 1, IRS was subsequently able to correct about 32  percent of the invalid vendor TINs through its TIN validation process.   However, IRS was unable to correct the invalid TINS included on about  116,000 of the Forms 1099 MISC filed by the 14 departments, which were  valued at almost $9 billion, an average of about $77,000 per return.  As a  result, IRS would be unable to match this income with income reported on  income tax returns for the same period to determine whether these  vendors had either underreported the income or failed to file a tax return.
One reason cited by department officials for filing Forms 1099 MISC with  invalid TINs was the lack of a means for validating vendor TINs.  This was  cited, in particular, by those departments whose agencies were not using  IRS’s existing TIN-matching program.
In addition to negatively affecting IRS’s ability to ensure that vendors  report all required income on their tax returns, invalid vendor TINs also  impede the Department of the Treasury’s ability to offset federal tax debts  through the Federal Payment Levy Program, as well as its ability to offset  other debts through the Treasury Offset Program.  Each program requires  a match of the payee’s TIN and name control on both the payment record  submitted to the Financial Management Service (FMS) and the debt  information included in the FMS database, in order for the payment to be  offset against the debt.
section_title: Federal Agencies Do Not Consistently Use IRS’s TIN- Matching Program
paragraphs: Although the TIN-matching program is available, most federal agencies do  not consistently use this program to ensure that the TINs included on  information returns are valid.  From our survey of federal department  policies and practices for obtaining vendor TINs and filing required Forms  1099 MISC we found the following.
Officials from only 2 of the 14 federal departments—Labor and Housing  and Urban Development—said their agencies were currently using IRS’s  TIN-matching program departmentwide.  Even so, we noted that  according to IRS’s records, agencies within both departments had filed  some Forms 1099 MISC for tax years 2000 and 2001 with invalid vendor  TINs.
Three other federal departments—Health and Human Services, Interior,  and Justice—indicated that IRS’s TIN--matching program is used, but  only by some of the agencies or bureaus within the respective  departments.
While officials from some federal departments said they were unaware of  the TIN-matching program, others thought the program was currently  unavailable.  DOD officials stated that they rely on the CCR for validating  vendor TINs and thus do not use the IRS TIN-matching program.  A  Department of the Interior official indicated that it is in the process of  implementing use of the CCR by its bureaus and agencies as of October  2003 at the direction of OMB.
section_title: In General, Federal Agencies Do Not Initiate BackupWithholding as Required
paragraphs: Although backup withholding is required if vendors fail to provide a valid  TIN to a federal payer, most federal agencies do not initiate backup  withholding.  From our survey of federal department policies and practices  for obtaining vendor TINs and filing required Forms 1099 MISC we found  the following.
Officials from only 2 of the 14 federal departments—Energy and  Transportation—said that their agencies initiate backup withholding  departmentwide.
Three other federal departments—Health and Human Services, Interior,  and Justice—indicated that backup withholding is initiated only by  some of the agencies or bureaus within the respective departments.
The main reason cited by officials from several of the federal departments  for not initiating backup withholding was the lack of a process in place  within their respective financial management systems for accomplishing  backup withholding of vendor payments.  Some department officials also  indicated that they had no way of knowing when a vendor’s TIN is invalid  and therefore subject to backup withholding.  An official with one of the  agencies within the Department of Health and Human Services indicated  that they deny payment to vendors who fail to provide a valid TIN in lieu of  backup withholding.
section_title: IRS Has Acted to Improve Form 1099 MISC Reporting Compliance
paragraphs: IRS has taken some recent actions and has other actions planned to assist  federal agencies in complying with Forms 1099 MISC filing requirements,  as the following  examples illustrate.
In August 2003, for the first time, IRS sent a specific notice (Notice 1313)  to federal agencies identifying Forms 1099 MISC filed for 2001 in which  the vendor’s TIN was invalid and reminding the agencies of their  responsibility to ensure that TINs are valid and to initiate backup  withholding for any vendors who subsequently fail to provide the  agency with a correct TIN upon notification by the agency.  Sending  these notices annually may address agency concerns about not having a  way to determine that a vendor’s TIN is invalid and that backup  withholding should be initiated.
By the end of 2003, IRS plans to expand its TIN-matching program to  enable federal agencies to submit online up to 100,000 TIN/name  combinations at a time and to receive a response from IRS within 24  hours concerning whether the TIN/name combinations submitted match  the TIN/name combinations in IRS’s records.  As an interim step, IRS  plans to have an interactive computer application available that will  allow federal agencies to submit up to 25 TIN/name combinations and  receive feedback within 5 seconds on whether these match the  TIN/name combinations in IRS’s records.  As with the existing TIN- matching program, IRS will not be able to provide an agency with the  correct TIN or name if they do not match IRS’s records due to the  disclosure laws.  Instead, the agencies will continue to be responsible  for contacting a vendor for the correct TIN/name combination.   However, the online TIN-matching program should make it easier for  federal agencies to identify vendors that are to be contacted to obtain a  valid TIN and thus prevent the agencies from filing Forms 1099 MISC  that include invalid TINs.
In February 2003 IRS issued a proposed revenue procedure that would  enable payment card companies to act on behalf of cardholders/payers,  such as federal agencies, in soliciting, collecting, and validating vendor  information, including TINs.  This procedure would enable payment  card companies to use IRS’s TIN-matching program to validate the  TIN/name combinations provided by vendors for which a Form 1099  MISC is to be filed.  Once adopted, this procedure may help to eliminate  some of the problems agencies have experienced in getting necessary  vendor information related to purchase card payments.
In addition, IRS has initiated meetings with various federal agencies,  including the Departments of Defense and Agriculture, to identify specific  problems associated with obtaining valid vendor TINs and filing accurate  Forms 1099 MISC, particularly problems related to purchase card  payments.  In November 2003, IRS plans to present a federal agency  seminar covering various topics related to filing Forms 1099 MISC,  including use of the TIN-matching program, information reporting  requirements, and the previously mentioned proposed revenue procedure.
section_title: IRS Has No Program to Identify Federal Agencies That Fail to File Forms 1099 MISC and the CCR Does Not Now Serve as a Central Source of Valid TINs
paragraphs: Although IRS can identify whether Forms 1099 MISC filed by federal  agencies include a valid TIN, IRS does not have a program to identify and  follow up with agencies that fail to file Forms 1099 MISC.  In addition, the  CCR does not, as OMB intends, serve as a central source of valid TIN data  that federal agencies can use.
subsections: section_title: At Present, IRS Has No Program to Detect Federal Agencies That Do Not File Forms 1099 MISC
paragraphs: IRS does not have a program to periodically identify and follow up with  federal agencies that fail to file Forms 1099 MISC for vendor payments.  IRS  officials indicated that their emphasis has been on identifying Forms 1099  MISC filed with invalid TINs by nonfederal payers.  This is because Internal  Revenue Code section 6721 authorizes IRS to assess a penalty of $50  against a nonfederal payer for each information return filed with an invalid  TIN, up to a maximum penalty of $250,000 per calendar year.  IRS proposed  just over $204 million in penalties against nonfederal payers for  information returns with invalid TINs for tax years 2000 and 2001  combined.  IRS estimated that an additional $6.9 million in penalties could have been proposed against federal agencies for filing information returns  with invalid TINs, if IRS had the authority to do so.
A complete and accurate Payer Master File, which includes general payer  information, such as the payer name and TIN, as well as the total number  and dollar value of various types of Forms 1099 filed by each payer, would  enable IRS to identify federal agencies that fail to file Forms 1099 MISC.   IRS could then contact these agencies to ascertain why these returns were  not filed.  IRS initially indicated to us that federal payers are specifically  coded as such in the Payer Master File to distinguish them from nonfederal  payers.  However, we found that 96 of 147 federal agencies and bureaus for  which we needed information concerning Forms 1099 MISC they filed with  IRS for 2000 and 2001 were not coded as federal payers in the Payer Master  File.  IRS officials agreed that there is a need to update the Payer Master  File to ensure that all federal payers are properly coded as federal.   Conducting a survey of all payers included in this file would be a way for  IRS to update this information, thus ensuring that all federal payers are  correctly coded as federal in the Payer Master File.
section_title: TINs in the CCR Are Not Validated
paragraphs: OMB has instructed federal agencies to begin using the CCR as of October  2003, as the single validated source of information about vendors doing  business with the federal government, but CCR vendor TINs are not  validated with IRS’s TIN-matching program. The CCR, which is maintained  by DOD, includes information on over 234,000 vendors that have registered  to do business with DOD, including the vendors’ TIN and name.  The  accuracy and completeness of information listed in this database is the  responsibility of the individual vendors and must be updated annually.  According to CCR officials, vendor TINs are not validated via IRS’s TIN- matching program.  Instead, CCR does an edit check to ensure that a  vendor’s TIN is in the correct format, namely that it contains nine numbers.
At the time of our review and resulting July 2001 report mentioned earlier,  we found that there were a substantial number of invalid vendor TINs in  the CCR.  In addition, during our current review, we found that the CCR  included about 7,000 vendor employer identification numbers that were not  included in IRS’s Business Master File.
Due to the lack of validated TINs in the CCR, agencies’ use of this  centralized database as a source of TINs for vendors in and of itself would  not ensure that the agencies include valid TINs on Forms 1099 MISC  submitted to IRS.  As noted earlier, in line with OMB’s expectations, DOD  relies on the CCR as a source of valid TINs and therefore does not use IRS’s  TIN-matching program; Interior officials say they also plan to use the CCR.
If the name and TIN of vendors recorded in the CCR were validated by  DOD initially and then periodically thereafter through IRS’s TIN-matching  program, the CCR could become a central source of valid vendor TINs for  all agencies to use for their Forms 1099 MISC submitted to IRS.  However,  because agencies are restricted to using the TIN-matching program only for  validating TINs for which an information return is required, DOD would not  be able to validate all vendor TINs included in the CCR because not all  vendors in the CCR actually receive DOD contracts to provide services.   This restriction could be addressed through a change to the disclosure  laws, thus authorizing DOD to use the TIN-matching program for all  vendors that have registered with the CCR.  Alternatively, individual  vendors could be asked to agree to have their TIN and name matched to  IRS data when they apply to do business with the government.  Section  6103 of the Internal Revenue Code protects taxpayer information, including  TINs, from disclosure.  However, taxpayers can waive this protection.  This  would enable IRS to provide more information than can currently be  provided under the TIN-matching program, such as the correct TIN/name  combination.
Given that the CCR is not currently a valid source of vendor TINs, agencies  cannot rely on the CCR as OMB intends.  Therefore, each agency would  need to use IRS’s online TIN-matching program as the only way to  independently verify vendor TINs necessary to include on their Forms 1099  MISC.  However, at the present time agency use of the TIN-matching  program is optional.
section_title: Conclusions
paragraphs: Some federal agencies’ failure to file required annual Forms 1099 MISC and  other agencies’ failure to file returns with valid vendor TINs adversely  affects IRS’s efforts to detect unreported vendor income and vendors that  fail to file income tax returns.  In addition, invalid TINs in federal agency  payment records negatively affect Department of the Treasury efforts to  offset federal tax debts through the Federal Payment Levy Program and  other federal debts through the Treasury Offset Program.
Although IRS has taken some positive actions to improve federal agency  compliance with Form 1099 MISC filing requirements, additional steps  could be taken. IRS could identify and follow up with federal agencies that  fail to file required Forms 1099 MISC if it had a complete and accurate  Payer Master File.  In addition, the CCR could become, as OMB intends, a  central source for valid vendor information, including TINs.  Currently,  CCR TIN data are not always accurate.  Except for current statutory  restrictions on the use of IRS’s TIN-matching program, the CCR’s  administrator, DOD, could use IRS’s new online TIN-matching program to  routinely verify the TINs of all vendors as they are added to the CCR and  then periodically thereafter.  This would carry out OMB’s desire for the  CCR to be a central source of valid vendor information and would thereby  avoid each agency independently verifying TINs for some of the same  vendors.  Asking vendors to permit DOD to routinely verify their TINs  when they register to do business with the federal government would be  one option to enable DOD to verify TINs in the CCR against IRS’s records.   Alternatively, OMB and IRS could determine whether an exception to  section 6103 of the Internal Revenue Code should be requested.
In the absence of the CCR as a valid source of TINs, agencies must  individually and voluntarily use IRS’s TIN-matching program to validate  vendor TINs.  Agencies have not consistently used the TIN-matching  program in large part because they say they were unaware of it.  IRS’s new  online TIN-matching program and publicity IRS plans as it launches the  new system later this year may make officials more aware of the program  and increase their use of it.  However, until OMB is able to realize its intent  of having the CCR be a valid source of information for federal vendors,  additional assurance could be gained that agencies would use the matching  program if OMB required them to do so.  Because IRS has made the system  available online, fulfilling such a requirement should now be easier than in  the past.
section_title: Recommendations for Executive Action
paragraphs: To ensure that federal agencies file Forms 1099 MISC for payments to  vendors for services provided, we recommend that the Commissioner of  Internal Revenue   ensure the accuracy of identification information concerning federal  payers in IRS’s Payer Master File and   develop a program to periodically identify federal agencies that fail to  file Forms 1099 MISC and follow up to determine why the forms were  not filed.
To minimize duplicate agency effort in validating vendors’ TINs and to  reinforce the anticipated role of the Central Contractor Registration as the  single validated source of vendors doing business with the federal  government, we also recommend that the Commissioner of Internal  Revenue and the Director of the Office of Management and Budget  consider options to routinely validate all vendor TINs in the CCR and to  then require all agencies to use vendor and TIN information from the CCR  for their Forms 1099 MISC.  If this proves to be infeasible, OMB should  require each agency to validate TINs for vendors who provide services  through IRS’s TIN-matching program.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from the  Commissioner of Internal Revenue (see app. IV) and the Under Secretary of  Defense (Comptroller) (see app. V).
The Commissioner agreed with our recommendations.  However, he also  emphasized that agencies may not wish to spend the resources to  effectively use IRS’s TIN-matching program and that IRS cannot compel  agencies to meet their Form 1099 MISC reporting responsibilities.
To ensure the accuracy of identification information concerning federal  payers included in IRS’s Payer Master File, the Commissioner agreed to  perform periodic reviews of the database to ensure its accuracy.  In  addition, as part of an education-compliance program geared to federal  agencies that IRS is in the process of developing, the Commissioner stated  that IRS plans to contact federal agencies to identify and verify that all TINs  used by each agency have been properly identified, thus compiling an  accurate list of all federal agency payer TINs.
To identify federal agencies that fail to file Forms 1099 MISC and the  reasons why the forms were not filed, the Commissioner agreed to  compare the above mentioned list of federal agency payer TINs to the  Payer Master File to identify agencies that did not file Forms 1099 MISC  and to then contact the agencies to determine if Forms 1099 MISC were  required.
To minimize duplicate agency effort in validating vendors’ TINs and to  reinforce the role of the CCR as the single validated source of vendors  doing business with the federal government, the Commissioner agreed that  IRS will work with DOD to ensure that vendor TINs on the CCR are  accurate, to include exploring the expanded use of the TIN-matching  program to validate all TINs included in the CCR.
In addition to commenting on the report recommendations, the  Commissioner pointed out that IRS Policy Statement P-2-4, which provides  that federal agencies are not subject to penalties and interest for failure to  comply with Form 1099 MISC filing requirements, is based on a 1978 GAO  Comptroller General Decision (B-161457).  This decision states that agency  appropriations are not available for payment of interest and penalties.  The  Commissioner noted that if an agency does not wish or is unable to comply  with its Form 1099 MISC reporting responsibilities, there is nothing that  IRS can do but rely on voluntary compliance on the part of the agency.
Although we agree that IRS cannot compel agencies to meet their Form  1099 MISC reporting responsibilities, we believe implementing our  recommendations will better ensure that agencies do so.  For instance, by  bringing to agencies’ attention that they are not filing the required  information returns, IRS can help educate agencies about their reporting  responsibilities.  Further, by improving the validity of TINs in the CCR, IRS,  working with OMB, can make it easier for agencies to comply.
The Commissioner also stated that a number of federal agencies indicated  that they have been unable to use IRS’s TIN-matching program because  their financial reporting systems were incompatible with the TIN-matching  program and that the cost to make agency systems compatible would be  prohibitive.  If IRS and DOD are able to arrange validation of TINs included  in the CCR via the TIN-matching program as we recommend, this would  eliminate the need for individual agencies to use the TIN-matching  program.  In the event that IRS and DOD are unable to work out such an  arrangement, IRS’s online TIN-matching program, which can be accessed  via the Internet using a desk-top workstation, may be an effective  alternative to agencies making substantial changes to their financial  accounting systems.
The Under Secretary of Defense (Comptroller) did not directly say he  agreed with our recommendation, but indicated that efforts currently  underway to improve the accuracy of TINs in the CCR for both DOD and all  other federal agencies mirror our recommendation for IRS and OMB to  consider options to routinely validate all vendor TINs in the CCR and to  require all agencies to use vendor and TIN information from the CCR for  their Forms 1099.  The Under Secretary pointed out that the mandated use  of the CCR throughout the federal government coupled with IRS’s online  TIN-matching program should enable DOD to establish a basic level of  validation in the near term, perhaps as soon as the second quarter of fiscal  year 2004.
The Under Secretary also pointed out that the Defense Finance and  Accounting Service has been working with payment card companies, such  as VISA and Master Card, to improve the process for reporting payments  made via payment cards.  As a result, DFAS expects a significant increase  in the number and dollars reported for the card programs on Forms 1099  for calendar year 2003.  We commend these efforts to address the long- standing problem of obtaining necessary vendor information from payment  card companies.  Coupled with IRS’s proposal to enable payment card  companies to act on behalf of cardholder/payers in soliciting, collecting,  and validating vendor information, including TINs, these efforts should go a  long way in addressing this problem.
On November 26, 2003, we also received oral comments from  representatives of OMB's Offices of Federal Procurement Policy and  Federal Financial Management.  OMB generally agreed with our  recommendation.  Accordingly, OMB agreed to develop and issue a  memorandum to federal agencies directing them to validate TINs by using  the TIN-matching program or the CCR.  In addition, OMB agreed to work  with IRS and the CCR to ensure agencies are provided the necessary  information to use either of the methods recommended.  Although we  believe that either using IRS’s TIN-matching program or validating TINs in  the CCR can be effective means for ensuring that agencies include valid  TINs on their Forms 1099 MISC, using the CCR as the primary source of  valid TINs would reinforce OMB’s intention that the CCR become the  government’s central source of contractor data and would minimize  duplicate effort among agencies in validating TINs.  Therefore, we  encourage OMB to pursue use of the CCR as the primary option for  agencies to obtain valid TINs.
We are sending copies of this report to the Ranking Minority Member,  House Committee on Ways and Means; Ranking Minority Member,  Subcommittee on Oversight, House Committee on Ways and Means; and  the Chairman and Ranking Minority Member, Senate Committee on  Finance.  We will also send copies to the Commissioner of Internal  Revenue, the Director of the Office of Management and Budget, the  Secretary of Defense, and other interested parties.  Copies of this report  will also be made available to others upon request.  The report will also be  available at no charge on GAO’s Web site at http://www.gao.gov.
If you have any questions concerning this report, please contact me at (202)  512-9110 or Ralph Block at (415) 904-2150.  Key contributors to this report  are listed in appendix VI.
section_title: Objectives, Scope, and Methodology
paragraphs: Our objectives were to determine (1) the extent to which federal agencies  file required Forms 1099 MISC, take steps to ensure that information on the  returns, particularly Taxpayer Identification Numbers (TIN), are valid, and  initiate backup withholding if vendors provide invalid TINs; (2) recent  actions the Internal Revenue Service (IRS) has taken to help improve  federal agency Form 1099 MISC (Miscellaneous Income) filing compliance;  and (3) whether any additional measures could further improve federal  agency compliance with Form 1099 MISC filing requirements.
subsections: section_title: Scope and Methodology
paragraphs: To determine whether federal agencies annually file required Forms 1099  MISC with IRS, we requested and obtained vendor service payment  information from the 14 federal departments for calendar year 2000 and  2001.  We specifically asked for the vendor name, TIN, and total dollar  value of all payments made by the various agencies and bureaus within  these departments for services provided during calendar years 2000 and  2001.  However, we were unable to verify whether they fully complied with  our request, such as only providing payments for services and not for  goods.   We compared the information we obtained from the 14 federal  departments with vendor payment information included in IRS’s Payer  Master File (PMF) and Information Returns Master File (IRMF) for the  same 2-year period.  On the basis of our review of IRS's procedures for  processing information returns and our testing of database extracts  obtained from IRS's Payer Master File and Information Returns Master  File, we determined that the data were sufficiently reliable to enable us to  determine whether Forms 1099 MISC had been filed by the agencies and  bureaus within the 14 federal departments and, if so, whether they included  valid vendor TINs.
We obtained vendor payment information from the following federal  departments:Agriculture  Commerce  Defense  Education  Energy  Health and Human Services  Housing and Urban Development  Interior  Justice  Labor  State  Transportation  Treasury  In an effort to gauge the potential result of not filing Forms 1099 MISC, we  selected payment information provided to us by the agencies within 3 of  the 14 federal departments for 2000 and 2001 and identified the amounts  paid to individual payees that were not included on IRS’s IRMF, thus  indicating that a Form 1099 MISC had not been filed.  We then compared  the payee information to an IRS file of nonfilers to determine whether the  individual payees had filed federal income tax returns for the comparable  years.
To determine whether Forms 1099 MISC filed with IRS by federal agencies  include valid vendor TINs, we analyzed IRS’s IRMF for calendar years 2000  and 2001.  We identified the number and dollar value of Forms 1099 MISC  filed by the 14 federal departments that, according to the IRMF, contained  invalid TINs.  Of these, we further identified the number and dollar value  associated with invalid TINs that IRS was able to correct via its TIN  validation program, as well as those that remained invalid because IRS was  unsuccessful in correcting them.
To determine whether federal agencies take steps to ensure that  information on the returns, particularly TINs, is valid, by using IRS’s TIN- matching program to validate vendor TINs or initiate backup withholding  on future payments to vendors that have submitted invalid TINs, we sent a  survey to the 14 federal departments about their policies and practices for  obtaining vendor TINs and filing Forms 1099 MISC.  We asked whether they  validate vendor TINs through IRS’s TIN-matching program and if not, why  not.  We also asked whether they initiate backup withholding if it is  determined that a vendor has provided an invalid TIN.  We then  summarized the overall department responses.
To identify recent actions IRS has taken to help improve federal agency  Form 1099 MISC filing compliance, we discussed with IRS officials any  actions that were either recently implemented or pending.  We also tracked  the progress of IRS’s pending on-line TIN-matching program, which is  expected to be available to federal agencies in the latter part of 2003.
To identify any additional measures that could further improve federal  agency compliance with Form 1099 MISC reporting requirements, we  discussed this issue with IRS and the Office of Management and Budget  (OMB) officials and analyzed both recent and pending actions that would  affect such compliance.
We did our work at IRS and OMB headquarters in Washington, D.C., from  June 2002 through September 2003 in accordance with generally accepted  government auditing standards.
We obtained written comments on a draft of this report from the  Commissioner of Internal Revenue (see app. IV) and the Secretary of  Defense (see app. V).  We also obtained oral comments from  representatives of the Office of Management and Budget.
section_title: Forms 1099 MISC Filed by 14 Federal Departments for Tax Years 2000 and 2001
paragraphs: This appendix provides details concerning the specific number and dollar  value of Forms 1099 MISC filed by each of the 14 federal departments for  tax years 2000 and 2001.
As table 1 shows, the Department of Defense filed the greatest number and  dollar value of Forms 1099 MISC each year, while the Department of  Transportation filed the least.  With a few exceptions, most departments  filed more Forms 1099 MISC in 2001 than in 2000.
section_title: Forms 1099 MISC Filed with IRS with Invalid TINs for Tax Years 2000 and 2001
paragraphs: This appendix provides details concerning the specific number and  percentage of Forms 1099 MISC filed by each of the 14 federal departments  for tax years 2000 and 2001 that included invalid TINs when received by  IRS.
As table 2 shows, the Departments of Defense and Veterans Affairs filed the  greatest number of Forms 1099 MISC with invalid TINs each year, while the  Departments of Transportation and Education filed the least.  The  Departments of Transportation and Agriculture filed the greatest  percentage of Forms 1099 MISC with invalid TINs each year, while the  Department of Health and Human Services filed the least.
section_title: Comments from the Internal Revenue Service
section_title: Comments from the Department of Defense
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to those named above, Tom Bloom, Janet Eackloff, Evan  Gilman, Shirley Jones, Bob McKay, and James Ungvarsky made key  contributions to this report.
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