Tax Administration: Changes to IRS's Schedule K-1 Document Matching Program Burdened Compliant Taxpayers
Published: 2003-05-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: About $1 trillion in income was distributed in 2001 by flow-through entities such as partnerships and trusts. These entities do not pay taxes on flow-through income. They report it to the Internal Revenue Service (IRS) on a Schedule K-1 and their partners or beneficiaries pay any tax. Concerned about underreporting, IRS began matching the flow-through income reported on Schedule K-1s with that reported on individuals' returns. In 2002, IRS began sending notices to taxpayers about suspected noncompliance. After complaints that many notices were going to compliant taxpayers, IRS stopped sending notices. Concerned about the burden, Congress asked GAO to, among other things, (1) describe the burden caused by the notices and IRS's rationale for stopping them, (2) assess IRS's management of the program, and (3) describe the steps IRS will take to address any problems.
section_title: What GAO Found
paragraphs: IRS stopped issuing Schedule K-1 notices after complaints about the burden the program imposed on compliant taxpayers. Originally, IRS intended to focus the program on two categories of income--interest and dividends--wherein matching was straightforward, and therefore the number of notices sent to compliant taxpayers could be minimized. However IRS changed the matching program to cover additional categories of flow-through income without clearly informing taxpayers and tax preparers. Matching these additional categories of income was less straightforward. As a result, IRS sent notices about suspected noncompliance to more compliant taxpayers than it intended. In fact, about two-thirds of the notices were sent to taxpayers later determined to be compliant. After taxpayers complained, and after sending out about 70 percent of the planned notices, IRS responded by stopping the notices. IRS has assessed about $41.4 million in additional tax from the notices that were sent and approximately $26.9 million was directly attributable to Schedule K-1 underreporting. IRS did not timely implement two parts of the plans for managing the Schedule K-1 matching program. First, IRS did not test the feasibility of focusing the program on interest and dividend income until after recommending such a focus and communicating the recommendation to taxpayers, preparers, and other stakeholders. Second, after changing the plan, IRS did not clearly communicate the changes. IRS is taking steps to improve communications and reduce the burden on compliant taxpayers. However, neither IRS nor GAO knows whether these changes will improve communications and reduce burden while maintaining the effectiveness of the Schedule K-1 matching program as a compliance tool.

section_title: Letter
paragraphs: Approximately $1 trillion in income was distributed for tax year 2001,  according to Internal Revenue Service (IRS), by flow-through entities such  as partnerships, S-corporations, estates, and trusts. These entities, many of  which are small businesses, do not pay taxes on income they pass through,  whether or not the income is actually distributed to their partners,  shareholders, or beneficiaries. The partners, shareholders, or beneficiaries  report the income or losses received on their individual tax returns and  pay any applicable tax.
To facilitate compliance, the tax law requires flow-through entities to  report the income passed through on Schedule K-1 and to send one copy  of the schedule to IRS and another to partners, shareholders, or  beneficiaries. While the law requires such reporting of flow-through  income, IRS estimates that between 6 and 15 percent of such income is not  reported on individuals’ returns.
Because of the significant amount of income being distributed and the  estimated noncompliance, IRS began in 2001 to match the tax year 2000  Schedule K-1 information provided by flow-through entities against the  flow-through income reported on individuals’ tax returns. IRS began  notifying taxpayers of potential discrepancies between income reported  on K-1 and individual tax returns in April 2002. However, after receiving  complaints that notices were being sent to compliant taxpayers, IRS  stopped sending notices in August 2002.
Because of concerns about the burden the Schedule K-1 matching program  was imposing on compliant taxpayers, including the time and expense of  responding to the notices, you asked us to review IRS’s implementation of  the program and determine what happened and why. Specifically, as  agreed with your office, our objectives were to (1) describe the  implementation of the Schedule K-1 matching program, the extent of the  burden caused by the notices, IRS’s rationale for stopping the notices, and  any results the program achieved, (2) assess IRS’s management of the  Schedule K-1 matching program, and (3) describe the steps IRS is planning  to take to address any identified problems and improve Schedule K-1  reporting and matching.
To describe IRS’s Schedule K-1 matching program implementation, the  burden caused by the notices, IRS’s rationale for suspending the program,  and any results, we interviewed IRS officials and analyzed IRS data. To  assess IRS’s management of the program, we compared IRS’s management  plan to what was implemented. Finally, to describe the steps IRS plans to  take to improve the program, we reviewed IRS’s plans for continuing the  program in 2003 and reducing the burden on compliant taxpayers.
subsections: section_title: Background
paragraphs: Partnerships, S-corporations, trusts, and estates are collectively known as  “flow-through entities,” because they have the legal capacity to pass net  income or loss through to their partners, shareholders, and beneficiaries  untaxed. As shown in figure 1, these flow-through entities file tax returns  with IRS that report the entities’ income and expenses with schedules  showing all partners’, shareholders’, or beneficiaries’ shares of net income  or loss.  Flow-through entities also are required to provide each partner,  shareholder, or beneficiary with a Schedule K-1 stating the individual  share of net income or loss to be reported. These partners, shareholders,  or beneficiaries are then responsible for reporting this income or loss on  their individual income tax returns and paying any tax.  According to IRS  in tax year 2001, over 9 million flow-through entities reported passing  through $998 billion to approximately 24 million partners, shareholders, or  beneficiaries.
For reporting purposes flow-through income is broken into several  categories. These include income or loss from trade and business  activities, rental real estate, other rental activities, interest, dividends,  royalties and capital gains.
The purpose of the Schedule K-1 matching program is to compare the  information provided by flow-through entities to that reported by  individuals on their tax returns in order to ensure compliance. The  Schedule K-1 matching program is part of IRS’s general matching program,  the underreporter program. As shown in figure 2, the underreporter  program identifies potentially noncompliant taxpayers using information  from two primary data sources:  income reported to IRS by taxpayers on their individual tax  returns and  income reported to IRS from third parties, such as employers,  banks and other financial institutions, partnerships, S- corporations, estates, and trusts on forms such as the W-2,  1099, and Schedule K-1.
section_title: Scope and Methodology
paragraphs: In order to describe IRS’s implementation of its Schedule K-1 matching  program, reasons for suspending the issuance of notices, impact/burden  on taxpayers, and results of the program, we:  reviewed and analyzed IRS management plans, risk  assessments, and other discussions of how the matching  program would operate, including work group meeting minutes;  interviewed IRS officials regarding the efforts required to plan  and implement the program, including preliminary program  testing, early plans for the program, changes made in program  plans, problems with stakeholder communication, and the  suspension of notices related to Schedule K-1 income;  reviewed documents issued by external parties regarding  concerns with the Schedule K-1 matching program;  interviewed stakeholders from outside IRS, including enrolled  agents and members of professional organizations, IRS advisory  committees; and  reviewed data and statistics resulting from the Schedule K-1  matching program, including number of taxpayers sent notices  and tax revenue assessed.
We assessed IRS’s management of the Schedule K-1 matching program by  reviewing the plans and risk assessment developed by IRS and then  comparing IRS’s implementation of the program to these plans.
To describe the steps IRS is taking to reduce burden and improve the  matching program, we:  interviewed IRS officials regarding the changes being  implemented for continuation of the Schedule K-1 matching  program, including changes to reduce taxpayer burden;  reviewed external stakeholder documents that offered  suggestions for the future of the Schedule K-1 matching  program;  interviewed stakeholders from outside IRS regarding their  suggestions for the Schedule K-1 matching program; observed a public meeting of the Information Reporting  Program Advisory Committee (IRPAC); and observed a working group session of IRS and external program  stakeholders.
The underreporter data presented in this report was produced by IRS, and  we did not independently verify its accuracy. However, we have used  underreporter program data in past reports and have found underreporter  summary statistics of the type used in this report to be reasonably  accurate. We performed our work from June 2002 through May 2003 in  accordance with generally accepted government auditing standards.
section_title: IRS Stopped Issuing Schedule K-1 Notices after Complaints about Burden Imposed by Program Changes
paragraphs: In its original plan for the Schedule K-1 matching program, IRS intended to  focus on two categories of income: interest and dividends. IRS officials  believed that such a focus would enable IRS to minimize the number of  notices sent to compliant taxpayers. However, information system  limitations, along with a desire to direct resources towards K-1  underreporter cases, caused IRS to expand this focus and include more  categories of income in the program. This change was not clearly  communicated to taxpayers or preparers and led to more compliant  taxpayers receiving underreporter notices. In the face of complaints about  the burden imposed on compliant taxpayers, IRS stopped sending K-1  underreporter notices.
subsections: section_title: The Types of Income Covered by the Schedule K-1 Matching Program Changed from IRS’s Original Plan
paragraphs: Originally, IRS planned the Schedule K-1 matching program to focus on  two categories of flow-through income: interest and dividends. The plan  called for identifying underreporter cases with discrepancies between  interest and dividend income reported on a K-1 and what was reported on  an individual’s tax return. Notices would then be sent to the taxpayers  asking them to explain the discrepancies or pay the additional tax.
IRS chose to focus the Schedule K-1 matching program on interest and  dividend income to minimize the chances of compliant taxpayers receiving  notices about K-1 discrepancies. IRS based its decision on a risk matrix  that summarized the risk of sending a notice to a compliant taxpayer for  the various categories of flow-through income. Interest and dividend  income were identified as low risk because they are easily identified on  individuals’ tax returns. Short and long-term capital gains and royalties  were considered a moderate risk because the K-1 information was less  likely to be accurate or the income could be harder to locate on  individuals’ returns. Income from trade or business activities, rental real  estate, other rental activities, and guaranteed payments was considered  high risk because it could be much harder to isolate on individuals’  returns. For example, some taxpayers would reduce or net their flow- through income in these four categories by subtracting carryover losses or  expenses. Although IRS’s tax form instructions caution against such  netting, some taxpayers still do so, which can make flow-through income  appear to be underreported.
Starting in 2001, IRS began briefing representatives from stakeholder  groups on its plan for the Schedule K-1 matching program. IRS met with  two of its advisory committees, composed primarily of tax practitioners,  the Internal Revenue Service Advisory Committee (IRSAC) and the  Information Reporting Program Advisory Committee (IRPAC), and other  practitioner groups. During these discussions with stakeholders, IRS  informed them that underreported K-1 interest and dividend income would  be the focus of the K-1 matching program.
In October of 2001, IRS discovered during testing that the underreporter  computer system could not distinguish underreported K-1 interest and  dividend income from other interest and dividend income reported on  information returns such as Form 1099s. Because of a desire to direct the  69 FTEs allocated for screening K-1 underreporter cases to K-1 cases, IRS  decided to expand the focus of the K-1 matching program. IRS officials  told us they had wanted to direct the resources to K-1 cases exclusively in  order to be able to determine the results achieved with those resources.  The revised program included flow-through income from trade or business  activities, rental real estate, other rental activities, and guaranteed  payments. These four categories contained K-1 reported income  exclusively. As will be discussed in more detail later, IRS did not clearly  communicate the change to taxpayers, tax preparers, and other  stakeholders.
Under the revised matching program, IRS selected for screening by the 69  dedicated FTEs a total of 141,000 underreporter cases that appeared to  have only underreported K-1 income from the four categories as shown in  figure 3. In addition IRS selected another 237,000 cases that appeared to  have both underreported K-1 income and underreported income from  other sources. After manual screening, IRS determined that 97,200 cases  raised sufficient questions about the accuracy of the amount reported on  the individual tax returns to merit sending a notice of the potential  discrepancy to the taxpayers. IRS began sending notices about the  discrepancies to taxpayers in April 2002.
section_title: The Revised Schedule K-1 Matching Program Burdened More Compliant Taxpayers Than Originally Intended
paragraphs: Because of the change in focus of the program, more compliant taxpayers  received underreporter notices than IRS had originally intended. As shown  in figure 3, of the over 63,000 cases closed through March 2003, about 62  percent or 39,153 were closed with no change to the tax liability. The  compliant taxpayers or their preparers who responded to the notices were  required to submit information to IRS in writing or via telephone that  explained how they reported the flow-through income on their tax return.
Some of these compliant taxpayers were burdened because they  improperly reported net amounts on their returns. As discussed  previously, IRS instructions tell taxpayers to list K-1 income without  netting. Nevertheless, according to IRS, many taxpayers reported net  amounts, making it appear that they had underreported. After the  discrepancies were explained to IRS, about 62 percent of the notices  resulted in no change in the tax liability.
section_title: Because of Taxpayer Complaints, IRS Stopped Sending Schedule K-1 Underreporter Notices
paragraphs: Taxpayers, tax preparers, and various external stakeholder groups  complained about the notices for two reasons. First, as discussed  previously, the notices imposed a burden on compliant taxpayers. Though  some of these taxpayers may have improperly reported net amounts on  their returns, the taxpayers argued that they had been filling out their  returns this way for years without incident. Second, they were not  expecting underreporter notices related to flow-through income about  trade or business activities, rental real estate, other rental activities, and  guaranteed payments.
IRS responded by stopping the K-1 matching program notices as of August  1, 2002.  As shown in figure 3, IRS sent 69,097 notices to taxpayers before  that date.
section_title: IRS Followed Up on Schedule K-1 Program Notices Sent to Taxpayers
paragraphs: As of March 2003, IRS data shows that nearly 92 percent or 63,084 of the  Schedule K-1 notices issued were closed, or resolved to IRS’s satisfaction,  as shown in figure 3. In nearly 38 percent or 23,931 of the closed cases,  taxpayers agreed that the notices were correct, that the Schedule K-1  income was misreported, and that they owed more taxes. These cases  resulted in about $41.4 million of additional taxes assessed of which   $26.9 million related exclusively to Schedule K-1 income. IRS estimates  that about 90 percent of the assessed tax will be collected.
In addition to the revenue resulting directly from the notices, IRS expects  that K-1 matching will have a psychological impact on taxpayers,  encouraging voluntary compliance. IRS did not have data at the time the  program was being planned to allow it to estimate the likely impact on  voluntary compliance. Nor does IRS have any data on the actual impact on  voluntary compliance. IRS did project that a one percent improvement in  K-1 reporting levels would result in approximately $1.7 billion in additional  tax reported.
section_title: IRS Did Not Timely Test Its Plans or Communicate Plan Changes to Stakeholders
paragraphs: IRS developed a plan for the Schedule K-1 matching program that,  according to IRS, relied on established project management principles.  However, IRS did not timely implement two parts of the plan. First, IRS  did not test the feasibility of focusing the program on interest and dividend  income until after recommending such a focus and communicating the  recommendation to taxpayers, tax preparers, and other stakeholders.  Second, after changing the plan, IRS did not clearly communicate with  taxpayers, tax preparers or other stakeholders about the changes. Failure  to timely implement these two parts of the plan led to compliant taxpayers  being surprised and burdened by the notices they received and ultimately  resulted in IRS halting the Schedule K-1 notification process before all  97,200 notices were sent to taxpayers.
subsections: section_title: IRS Developed Plans for Testing and Communicating about the Schedule K-1 Matching Program
paragraphs: In planning the Schedule K-1 matching program, IRS officials said they  relied on established principles from its Enterprise Life Cycle (ELC)  project management approach, the same strategy IRS has used for  planning and implementing its ongoing information systems modernization  efforts. IRS developed a series of K-1 matching program management  plans including those covering transcription and compliance management,  risk management, and internal and external stakeholder communications.  The K-1 compliance management plan called for performing two tests  before selecting cases for the K-1 matching program. The first test was of  underreporter program procedures and was intended to determine needs  such as computer system and training updates in order to accommodate  Schedule K-1 data. The second test was a review of underreporter program  processes more generally. The K-1 communication plan called for  communicating with internal and external stakeholders about the project  status in order to address questions and concerns and manage  expectations.
section_title: IRS Did Not Test the Schedule K-1 Case Selection Process before Recommending It
paragraphs: IRS did not test whether its original case selection process, focused on  interest and dividend income, was feasible before recommending it. As  shown in figure 4, IRS began planning the Schedule K-1 matching program  in January 2001. As previously discussed, in July 2001, IRS recommended  selecting for review by tax examiners all underreporter cases with K-1  interest and dividend income. An IRS official told us that internal  discussions led IRS to believe that this was possible--that the  underreporter computer system could distinguish cases with interest and  dividend income reported on K-1s from that reported on other information  returns. Consequently, the feasibility of focusing the K-1 program on  interest and dividend income was not tested before the recommendation  was made.
The second test in IRS’s plan was conducted in October 2001 and revealed  that system limitations would prevent IRS from focusing the K-1 program  on interest and dividend income. IRS discovered that the underreporter  computer system could not distinguish K-1 interest and dividend income  from interest and dividend income reported on other information returns  such as Form 1099s. As a result, the focus of the Schedule K-1 matching  program was changed. As discussed earlier, the revised program covered  underreported trade or business, rental real estate, other rental activity,  and guaranteed payment flow-through income.
section_title: IRS Did Not Communicate Matching Program Changes to Taxpayers and External Stakeholders
paragraphs: Although the program communication plan called for communicating with  internal and external stakeholders, IRS failed to inform taxpayers, tax  preparers, and other stakeholders of the changes it made to the matching  program and the potential for the changes to increase burden on  compliant taxpayers. An IRS official responsible for the K-1 program  stated that a communication breakdown resulted in mixed messages being  shared with stakeholders about the type of cases that would be selected  for the K-1 matching program. IRS officials were unable to show us any  documentation in which they communicated the changes to the plan. An  IRSAC member told us they only became aware of the change to the  program after taxpayers began receiving notices.
Tax preparers and stakeholders were critical of the fact that IRS failed to  inform them of the changes made in the Schedule K-1 matching program  and the effect those changes would have on compliant taxpayers. They  believed compliant taxpayers were unfairly burdened by having to respond  to K-1 notices since, according to an IRSAC member, preparers had not  been required to submit any explanatory documents with their tax returns  in the past.
section_title: IRS Is Taking Steps Intended to Improve the Schedule K-1 Matching Program in 2003
paragraphs: As was the case with the revised Schedule K-1 matching program in 2002,  for 2003, interest and dividend income reported on K-1s will be included in  the underreporter program; however, the 69 FTEs devoted to K-1 matching  will again focus on the four flow-through income categories including  income from trade or business activities, rental real estate, other rental  activities, and guaranteed payments. As of April 2003, IRS has started  issuing notices related to discrepancies in tax year 2001. Also this year,  IRS is taking steps intended to reestablish communication with external  stakeholders and reducing the burden on compliant taxpayers. At this  time, the effectiveness of these steps is unknown.
subsections: section_title: IRS Is Working to Reestablish Communications with External Stakeholders
paragraphs: For 2003, the Schedule K-1 matching program will have the same focus as  the revised program in 2002. Therefore, during the 2003 Schedule K-1  matching effort, it is no longer necessary for IRS to test this case selection  approach in the underreporter system.
IRS is working to reestablish clear communications with external  stakeholders. Since notices were stopped in August 2002, IRS has kept  external stakeholders informed of program developments and held  meetings with these stakeholders to consider a number of suggestions for  improving the Schedule K-1 matching program. For example, in the 2  months following the notice stoppage, IRS briefed both IRSAC and its own  Oversight Board on reasons for notice suspension, data collected, and  plans for continuing the program with external stakeholder input.
IRS also held public meetings with IRSAC in October 2002 and IRPAC in  November 2002 during which it obtained the committees’ comments and  suggestions for the Schedule K-1 matching program. In addition, IRS held a  meeting in December 2002 with representatives of various practitioner and  other stakeholder groups to discuss various aspects of the program. In this  meeting, IRS presented results of the case studies it conducted after  suspension of the notices and solicited from the stakeholders ideas for  improving the program in the areas of forms, matching, education and  outreach, tax preparation software, and legislative changes.
section_title: IRS Is Taking Other Steps Intended to Reduce Taxpayer Burden
paragraphs: At least in part as a result of the stakeholder meetings discussed above,  IRS has begun implementing steps intended to improve Schedule K-1  matching and clarify reporting requirements. IRS has adopted a new goal  of eliminating as many no-change notices as possible and increasing the  overall effectiveness of the Schedule K-1 matching program. IRS’s strategy  for reducing no-change notices relies on more rigorous screening of cases  by examiners before notices are sent. IRS estimates that the program  changes discussed below should reduce the number of no-change notices  by about 50 percent from the 2002 levels. At this time, IRS does not have  an estimate of the number of notices to be sent out or of what it expects  the no-change rate to be.
For 2003, IRS has adopted a revised set of standards for screening cases  for review in its Schedule K-1 matching program, with the intent of  minimizing taxpayer burden by reducing the number of no-change notices  sent. In particular, IRS will issue notices to taxpayers if K-1 income  information is completely missing from a return. Also, if a taxpayer  received a notice in 2002 for tax year 2000 K-1 items and agreed with the  changes proposed by that notice, the taxpayer will receive a notice for any  underreported K-1 income identified this year in the tax year 2001 return.  If income appears underreported for a taxpayer who received a notice that  resulted in a no-change last year, that taxpayer will not receive a notice  this year, with the possible exception of particularly large discrepancies.  In addition, if a taxpayer received no notice last year or received a notice  that contained no K-1 items, this taxpayer will be sent a notice if a large  discrepancy is identified. The revised screening standards will be applied  to all K-1 flow-through income discrepancies.
IRS is also trying to educate taxpayers and practitioners about the proper  way of reporting flow-through income, carryover losses, and deductions in  order to reduce the need to send notices to compliant taxpayers about  apparent mismatches. For example, in March 2003, IRS issued a news  release that provided tips and reminders for K-1 filing. These tips covered  topics such as proper reporting of Schedule K-1 income on individual  returns, avoiding netting of income and expenses, reporting losses carried  forward, and steps for reporting income when the Schedule K-1 has not yet  been received.
Also in March 2003, an IRS official participated in a webcast program  geared to the practitioner community to discuss requirements of Schedule  K-1 reporting and field questions from practitioners. In addition, the  agency will present sessions on how to report flow-through items at each  of its tax forums during the summer of 2003. The agency also seeks to  further educate taxpayers through outreach programs to be run by the  Taxpayer Education and Communication unit, a part of IRS’s Small  Business/Self-Employed operating division.
Further, IRS is changing certain forms and/or schedules in order to make  reporting compliance easier for the taxpayer. In a report issued March  2003, the Treasury Inspector General for Tax Administration (TIGTA)  stated the lack of detailed information reported by taxpayers and/or  practitioners may have been a significant reason for the number of K-1- related notices that were sent. TIGTA then recommended that IRS revise  Form 1040 Schedule E to classify and report flow-through income in a  manner that would allow an easier comparison with Schedule K-1. In  response, an IRS official has stated that, for the 2003 filing season, the  agency would issue a revised Form 1040 Schedule E that would alert  practitioners to pay special attention to the written instructions on the  reporting of certain losses and expenses. The desired effect of this change  is to make taxpayers less likely to improperly net income and expenses  being reported on Schedule E.
Finally, an IRS task force is studying the possibility of simplifying the  Schedule K-1 and its instructions for different tax situations. The intent  would be to reduce both pre- and postfiling burden. However, the analysis  needed for the form redesign will likely not be completed until mid-2003,  and it would take about 2 years total for the redesign to actually be  implemented.
By fiscal year 2005, through the outreach efforts and Form 1040 Schedule  E revisions discussed in the previous paragraphs, IRS believes that it can  eliminate the need for the special screening procedures instituted this  year. In addition to the outreach efforts and form changes mentioned  above, IRS has also discussed other efforts that could be used to help  make the program more automated, such as working with software  vendors to make any necessary changes to electronic tax preparation  programs.
While IRS intends that these changes will reduce the number of no-change  notices regarding flow-through income, at this time the effectiveness of  the changes is unknown. More specifically, it is not known how ambitious  IRS’s goal to reduce notices sent to compliant taxpayers by at least 50  percent is nor is it known whether IRS can reduce notices sent to  compliant taxpayers while maintaining the ability to act against  noncompliant taxpayers.
For the K-1 matching notices being sent in 2003, IRS will be able to track  the number closed with no-change through tracking reports issued every 2  weeks. These tracking reports also contain the number of notices with an  assessment that the taxpayer agreed to, unreported income identified  through notices, and additional taxes assessed through the notices. The  reports, which IRS has begun preparing for its tax year 2001 K-1 data  match, are prepared for IRS management. Officials told us that they would  also be made available to outside stakeholders.
The tracking reports should give IRS management information before all  notices are sent out about the effectiveness of the changes made to the  program. With respect to the overall effectiveness of the K-1 matching  program, one IRS official told us that he sees the level of voluntary  compliance with K-1 reporting requirements as a key measure of the  program’s effectiveness. This official also told us that IRS plans to  annually review the number of K-1 returns filed to determine if more K-1  income is being reported. He said that more reporting of K-1 income could  be seen as a measure of program effectiveness. Our ongoing work for the  Senate Committee on Finance will assess IRS’s efforts to detect and  address noncompliance by taxpayers receiving flow-through income.
section_title: Conclusion
paragraphs: Better targeting the Schedule K-1 matching program notices on  noncompliant taxpayers matters for two reasons. Sending underreporter  notices to compliant taxpayers wastes taxpayers’ time and money.  Similarly, IRS’s scarce enforcement resources are wasted to the extent  they are used to resolve notices sent to compliant taxpayers.
While no compliance program can perfectly target noncompliant  taxpayers, IRS’s goal of reducing the number of Schedule K-1 matching  program underreporter notices sent to compliant taxpayers is laudable.  However, at this time, no one--neither IRS nor external stakeholders-- knows how effective IRS’s proposed actions will be. Consequently, IRS’s  tracking of the no-change rate is very important, both for internal  management and congressional oversight. Because IRS has begun tracking  the no-change rate every 2 weeks, we are not making recommendations in  this report. As noted earlier, we will be looking at opportunities to  improve the overall effectiveness of the Schedule K-1 matching program in  our ongoing work for the Senate Committee on Finance.
section_title: Agency Comments
paragraphs: We asked IRS to provide comments on a draft of our report but did not  receive a response in time to include it with this report.  However, IRS  officials responsible for the program told us that they agree with the facts  presented in this report.
As arranged with your office, we will not distribute this report until 30  days from its issue date unless you publicly announce its contents earlier.   After that period, we will send copies to the Chairman and Ranking  Minority Member, House Committee on Ways and Means; Chairman and  Ranking Minority Member, House Subcommittee on Oversight, House  Committee on Ways and Means; Chairman and Ranking Minority Member,  House Committee on Small Business; Chairman and Ranking Minority  Member, Senate Committee on Finance; and the Ranking Minority  Member, Senate Committee on Small Business and Entrepreneurship. We  will also send copies to Secretary of the Treasury, the Commissioner of  Internal Revenue, and other interested parties. We will make copies  available to others on request. In addition, the report will be available on  the GAO web site at http://www.gao.gov.
If you have any questions, please contact me at (202) 512-9110.  Key  contributors to this report are acknowledged in appendix I.
section_title: Appendix I: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contact above, Marvin McGill, Adam Couvillion,  Amy Rosewarne, and Joseph Jozefczyk made key contributions to  this report.