Tax Gap: IRS Has Modernized Its Business Nonfiler Program but Could Benefit from More Evaluation and Use of Third-Party Data
Published: 2010-08-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Internal Revenue Service (IRS) does not know how many businesses failed to file required returns, nor does it have an estimate of the associated lost tax revenue--the business nonfiling tax gap. Many cases it does investigate are unproductive because the business does not owe the return IRS expects. GAO was asked to assess (1) the data challenges of estimating the business nonfiler tax gap, (2) how recent program changes have affected IRS's capacity to identify and pursue business nonfilers, and (3) additional opportunities for IRS to use third-party data. GAO reviewed IRS's tax gap estimates, nonfiler program processes and procedures, and matched closed nonfiler cases with various other data.
section_title: What GAO Found
paragraphs: IRS cannot develop a comprehensive estimate of the business nonfiling rate and associated tax gap because it lacks data about the population of all businesses. However, IRS could develop a partial estimate using its business nonfiler inventory. IRS identifies several million potential business nonfilers each year, more than it can thoroughly investigate. IRS could take a random sample of its inventory, thoroughly investigate those cases, and use the results to estimate the proportion of actual nonfilers in its inventory of potential nonfilers. Until recently IRS has not had a way to prioritize cases in its large inventory. IRS modernized its business nonfiler program in 2009 by incorporating income and other data in its records indicating business activity. Active businesses generally have an obligation to file a return. IRS's Business Master File Case Creation Nonfiler Identification Process (BMF CCNIP) now assigns each case a code based on this data. IRS uses the code to select cases to work with the goal of securing tax returns from nonfilers and collecting additional revenue. This is a significant modernization, but IRS lacks a formal plan to evaluate how well the codes are working. IRS has performance information on its individual nonfiler program but less on its business nonfiler program. Key management reports needed to provide program data are under development but no deadline has been set. IRS could also use more information on why many nonfiler cases are unproductive. This could potentially lead IRS to identify actions that could reduce IRS resources used on these cases and associated taxpayer burden. GAO identified several opportunities including the following to enhance IRS's identification and pursuit of business nonfilers. (1) The new BMF CCNIP selection codes provide a quick way to verify taxpayer statements that a business has ceased operations and does not need to file a return. Collections staff have been instructed to use the codes when making case closure decisions. They were previously instructed to use other income data but GAO's analysis indicated this may not have been done in all cases. (2) Non-IRS data on businesses including federal contractors could be used to verify taxpayer statements about whether a tax return should have been filed. GAO's analysis of cases in two states that were closed as not liable to file a return found 7,688 businesses where non-IRS data showed business activity as measured by sales totaling $4.1 billion. GAO also found cases closed as not liable to file a return involving 13,852 businesses on the federal contractor registry. GAO's analyses illustrated the potential value of non-IRS data but GAO did not assess which non-IRS data would be most useful nor examine the capacity of IRS's systems to use such data on a large scale.
section_title: What GAO Recommends
paragraphs: GAO recommends that the Commissioner of Internal Revenue develop a partial business nonfiler rate estimate; set a deadline for developing performance data; develop a plan for evaluating the selection codes; reinforce the need to use income data and selection codes in verifying taxpayer statements; and study the feasibility and cost-effectiveness of using non-IRS data to verify taxpayer statements. In written comments on a draft of this report IRS agreed that identifying and pursuing active business nonfilers is key to enforcement efforts and acknowledged that our recommendations could assist these efforts. IRS agreed with four of GAO's recommendations and indicated some steps it would take to address the other four.

section_title: Letter
paragraphs: In fiscal year 2009, businesses filed 14 million income tax returns and   30 million employment tax returns and remitted over $1 trillion in federal  taxes. While the Internal Revenue Service (IRS) catches some nonfilers, it  does not know how many businesses failed to file returns that they should  have filed nor does it have an estimate of the business nonfiling tax gap,  which is the amount of tax revenue associated with returns that were not  filed. IRS’s most recent tax gap estimates for tax year 2001 include an  estimate of $25 billion in revenue loss due to nonfiling by individuals.
The lack of an estimate of the business nonfiling tax gap matters because  the tax gap estimate is routinely used as a measure of the total amount of  tax noncompliance IRS needs to address. Without a tax gap estimate for  business nonfiling, there is no way to know whether IRS’s strategy to  reduce the tax gap, including its resource allocation decisions, places  appropriate priority on this type of noncompliance relative to others.  Further, nonfiling of required tax returns and nonpayment of taxes owed  is not fair to businesses and individuals who do file returns and pay their  taxes.
Historically, IRS has identified more potential business nonfilers than it  can thoroughly investigate through its enforcement programs. For tax year  2007, IRS had identified almost 2 million businesses as potential nonfilers  whose cases had not been resolved as of June 2009. Until recently IRS has  not had a way to prioritize the millions of potential nonfiler cases it  identifies each year. After several years of study IRS modernized its  business nonfiler program in 2009 by incorporating data about businesses  indicating business activity and a likely filing requirement. IRS’s Business  Masterfile Case Creation Nonfiler Identification Process (BMF CCNIP)  now assigns each case a code based on these data. IRS uses the code to  select cases to work with the goal of securing tax returns from nonfilers  and collecting additional revenue.
Because of your interest in IRS’s business nonfiler program and IRS’s use  of information returns, you asked us to assess (1) the data challenges of  estimating the business nonfiler tax gap, (2) how recent program changes  in IRS’s processes and procedures have affected its capacity to identify  and pursue business nonfilers, and (3) what opportunities exist for IRS to  improve its use of third-party information returns or other sources to  identify and pursue business nonfilers.
To meet our report’s objectives, we conducted an evaluation involving  multiple elements including document review, data analysis, and  interviews. To assess the data challenges of estimating the business  nonfiler gap, we reviewed GAO and Treasury Inspector General for Tax  Administration (TIGTA) reports, IRS documents on the tax gap, past  research on the tax gap and business nonfilers; analyzed IRS operational  data; and interviewed IRS research officials. To assess how recent  program changes in IRS’s processes and procedures have affected its  capacity to identify and pursue business nonfilers, we reviewed program  documents pertaining to IRS’s new business nonfiler program, portions of  the Internal Revenue Manual, and IRS documents on its Nonfiler Strategy  and its implementation. We also observed IRS’s collections functions at  IRS’s Philadelphia service center, and interviewed officials involved in the  program. To assess what opportunities exist for IRS to improve its use of  third-party information returns or other sources to identify and pursue  business nonfilers, we identified non-IRS data sources—including  government contractor data and private third-party data—that could have  information on business nonfilers and assessed the potential of this  information to help IRS better identify and pursue business nonfilers. We  matched closed nonfiler cases from businesses located in California and  Illinois against Dun and Bradstreet (D&B) data to determine whether  private sector data could be useful for IRS. The data we include in our  analysis are IRS data from BMF records, the Central Contractor  Registration (CCR) database, and D&B data. Detailed information about  our methodology can be found in appendix I.
We conducted this performance audit from March 2009 through         August 2010 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.
subsections: section_title: Background
subsections: section_title: IRS Requires Various Types of Tax Returns from Business Entities Depending on Their Form and Activities
paragraphs: Many businesses, including corporations, partnerships, and any business  that has employees, are required to request an Employer Identification  Number (EIN) from IRS to be used in filing returns. Entities that must file  business returns include corporations, partnerships, trusts, estates of  decedents, and government agencies. On its EIN application, a business  gives IRS information about its structure and whether or not it has  employees. Based on this information, IRS establishes an account for the  business, notifies the business of its EIN and filing requirement, and  records its filing requirement on IRS’s BMF. The filing requirements on the  BMF are the basis for IRS’s efforts to ensure that businesses file their  required returns. Businesses may have to file several types of returns. A  business that does not file the return in IRS’s records by the due date  including any extensions is considered by IRS to be a potential nonfiler.  This is the case including where the business has filed a different return  than the one IRS expects, e.g., where a partnership has restructured itself  as a corporation and filed a corporate return. (For more information on  selected business returns and restructuring, see app. II.)
Employment taxes from employers and employees account for the largest  share of revenue collected from businesses. Employment tax returns  report income taxes withheld on behalf of employees, the employees’  share of Federal Insurance Contribution Act (FICA) taxes, that is, Social  Security and Medicare taxes, and the employer’s matching share of FICA  taxes. A business with employees, regardless of its structure, is generally  required to file employment tax returns. In fiscal year 2009, IRS collected  an estimated $792.8 billion in FICA taxes and $880.8 billion in individual  income tax withholding, or 71.4 percent of all federal tax collections.
Businesses also may be required to file an annual return reporting income  and losses. Businesses structured as C corporations are generally  required to file annual income tax returns including when they did not  have taxable income. C corporations pay the corporate income tax. Other  types of businesses including businesses structured as S corporations and  partnerships are required to also file annual returns, but their income is  not taxable at the business level. Rather, income and losses are generally  passed through to others, e.g., to the shareholders of an S corporation or  the partners of a partnership.
Many businesses are also required to file third-party information returns  about various payments they make. Payments subject to information  reporting include interest earned from banks, mortgage interest paid,  wages paid, and some payments to contractors.
Over 30 types of information returns are filed on businesses. For tax year  2008, IRS received 421.5 million such returns. Of these, about                 347.5 million, or about 80 percent of all information returns filed on  businesses, reported broker and barter transactions (Form 1099B). IRS  also receives information returns on the amount of federal contract  obligations made to businesses awarded federal contracts.
section_title: Recent IRS Actions Seek to Address Long-Standing Business Nonfiler Issues
paragraphs: GAO, TIGTA, and IRS itself have documented long-standing issues with  IRS’s business nonfiler compliance activities. Each year IRS identifies a  large number of potential business nonfiler cases, more than IRS has the  capacity to work. Many cases go unresolved, and many that IRS does  pursue are closed with a determination that the business does not owe IRS  a return—a generally unproductive use of IRS’s enforcement resources.
In 2005 TIGTA found that IRS’s nonfiler efforts for individuals and  businesses were fragmented and recommended that IRS develop a  coordinated national strategy. Following TIGTA’s report, in August 2007  IRS adopted a Servicewide Nonfiler Strategy, governed by the IRS  Enforcement Committee. The Strategy recognized that large inventories  and pursuit of unproductive business nonfiler cases continued to present  challenges. The Strategy further noted that IRS did not apply resources to  more productive business nonfiler cases but rather to cases closed with a  determination that the taxpayer did not owe IRS a tax return. As one of  several goals, the Strategy proposed to expand the use of third-party  information and research tools to enhance identification, selection and  resolution of nonfiler cases. The Strategy also set a goal of developing and  implementing consistent Servicewide performance and outcome measures  to determine the impact of its initiatives on filing compliance.
To provide Servicewide oversight for all IRS nonfiler initiatives and  actions, IRS established the Nonfiler Executive Advisory Council  (NFEAC), a Servicewide body chartered by the IRS Enforcement  Committee and consisting of representatives from all IRS divisions. The  NFEAC was to coordinate nonfiler initiatives across IRS’s operating  divisions. In addition, its mission included developing, monitoring, and  measuring the effectiveness of the Strategy across all IRS divisions.
Following adoption of the Nonfiler Strategy, IRS developed several  nonfiler initiatives affecting how it identifies and pursues nonfilers. The  initiative aimed at addressing long-standing business nonfiler issues is the  Business Master File Case Creation Nonfiler Identification Process (BMF  CCNIP). This project, implemented in April 2009, uses third-party  information data and IRS account data to select potential business nonfiler  cases for pursuit based on the likelihood of securing returns and revenue.  This change represents a modernization of IRS’s business nonfiler  compliance activities as well as the introduction of a concept—use of  information return data—we have long endorsed. (For additional  information on IRS’s process for identifying and pursuing business  nonfilers, see app. III.)
The Nonfiler Strategy also envisioned that IRS would use state data in its  nonfiler activities. IRS officials told us that IRS originally planned to  expand BMF CCNIP to include use of state tax information in its business  nonfiler activities, ultimately from IRS’s State Reverse File Match Initiative  (SRFMI), an initiative aimed at matching state and federal taxpayer data to  identify noncompliance with federal tax law by individual and business  taxpayers. Another expansion was to develop business rules that would  close cases where filing requirements no longer existed. At the time we  finished our work, no documentation was available on the planned  expansions, and IRS officials told us that these were on hold pending  funding.
section_title: A Comprehensive Estimate of the Business Nonfiling Tax Gap May Be Infeasible, but IRS Operational Data Could Provide Partial Information
paragraphs: According to IRS, the primary challenge for IRS in developing a business  tax gap estimate is a lack of data. IRS officials told us IRS has no plans to  develop a business nonfiler estimate due to a lack of the necessary data.  They said that IRS’s tax gap estimates for individual and estate nonfiling  were comprehensive, but data similar to that used in those estimates do  not exist for businesses. According to IRS officials we spoke with and an  expert on tax gap estimation issues we consulted, no comparable  population data set of all U.S. businesses exists and developing one would  be very expensive. IRS officials we spoke with identified a number of  alternative methods for conducting a comprehensive study of the business  nonfiler tax gap, but also stated that these studies would be costly, overly  complex, or inconsistent with other estimates.
We agree that a comprehensive approach may not be feasible, but there  may be ways IRS could build a partial estimate of business nonfilers. A  partial estimate could be based on IRS’s inventory of over 40 million  potential nonfiler cases. IRS does not know what share of its inventory  represents instances of actual nonfiling. On the basis of IRS’s historical  experience, many of the businesses in the inventory do not have a current  filing requirement. For example, they may have closed, merged with  another business, no longer have employees, or filed under a different  EIN. Table 1 shows IRS’s inventory for selected business return types.
IRS could estimate the extent of actual nonfiling among businesses with  EINs by taking a sample of each type of return, such as C and S  corporation returns, from this inventory and thoroughly investigating  them. The results would not be comparable to IRS’s estimate for individual  nonfiling because they would not include businesses not already in the  inventory, but this study would begin to quantify the extent of business  nonfiling and could give IRS a better basis to decide what priority it should  place on this type of noncompliance. Despite its limitations, this type of  estimate could give IRS information that would be useful in its long-term  strategic planning. If done with a sufficient sample size, IRS could  determine the characteristics of nonfiling entities and use this information  to make changes to its nonfiler compliance activities as appropriate. On  the basis of the results of this work, IRS could then decide whether the  benefits of a larger study to quantify the revenue impact of business  nonfiling would outweigh the costs.
section_title: More Performance Information and Evaluation Is Needed to Measure the Success of IRS’s Business Nonfiler Program
paragraphs: As previously noted, IRS has already taken actions to address the long- standing issues presented by business nonfilers. The BMF CCNIP  represents a significant modernization of IRS’s business nonfiler  compliance program. BMF CCNIP’s use of information return and account  data for the first time gives IRS a way to identify those potential nonfilers  most likely to be active businesses. Prioritizing business nonfiler cases  based on information return and account data could increase productivity  without any increase in resources. In addition to the BMF CCNIP, IRS has  developed overall performance measures that could be used to gauge the  success of the full range of its business nonfiler compliance activities,  from identification through case selection through pursuit by IRS’s  collections functions. However, IRS does not have all the information it  needs to know how well the new initiative is working.
subsections: section_title: Information on the Results of IRS’s New Modernized Business Nonfiler Program Is Not Yet Available
paragraphs: As the BMF CCNIP was being designed, IRS developed goals and measures  that could be used to assess its progress. A key goal for the BMF CCNIP  was a 50-percent reduction in the number of unproductive cases. This  was based on an IRS research finding that where businesses had  information return data, closures of cases as “not liable to file a return”  were reduced by 50 percent. In 2006, IRS developed a Performance  Management Plan for the BMF CCNIP which established performance  measures aligned to the IRS Strategic Plan and identified sources of data  that could be used to monitor the goals. This plan stated that baseline data  to track progress towards goals would be from 2005.
IRS officials told us that BMF CCNIP management reports and data  needed to gauge program performance were not yet available. A key  report that will show information on resolution type for each case,  selection code, return type, whether the return was secured, and revenue  collected with the return was planned. IRS plans to use the report in  assessing the effectiveness of the selection codes and tracking the volume  of cases closed as not liable to file a return. Officials did not know when  the report would be available. As of June 2010, BMF CCNIP staff were  working on developing the specifications for this report, and no deadline  for its completion had been set. BMF CCNIP management reports that  were operational at the time we finished our work were being used to  monitor workload, for example, by return type, selection code, and the IRS  service center that processed the case. In discussing plans to assess the  BMF CCNIP, officials also said that using data from before the start of the  CCNIP would be difficult and baseline program data to track progress  would come from 2010.
IRS officials said that until additional BMF CCNIP management reports are  developed they were using other routine reports to monitor the response  rate to business nonfiler notices as an indicator of BMF CCNIP  effectiveness. Officials said the response rate to notices had doubled since  the start of BMF CCNIP, increasing from about 15 percent to about            30 percent. Officials interpreted this increase as showing that the new  system is having a positive impact but noted that it was too soon to  identify a trend.
section_title: IRS Has Performance Information for Its Individual Nonfiler Program but Not for Its Business Nonfiler Program
paragraphs: In addition to measures specific to the BMF CCNIP, IRS has also  developed four Servicewide performance and outcome measures for IRS’s  nonfiler activities overall. As of December 2009 IRS had data for its four  performance measures for its individual nonfiler program including trend  data going back to fiscal year 2005. At the time we finished our work, IRS  did not have comparable information on business nonfilers it could use to  identify trends, assess how well the new initiative is working, or decide  whether adjustments needed to be made.
Voluntary filing rate. The voluntary filing rate is defined as the total  number of required returns filed on time divided by the estimated  number of returns required to be filed. At the time we finished our  work IRS had not estimated a voluntary filing rate for business  nonfilers. As discussed earlier in this report, no data set for the  population of all U.S. businesses exists that could be used to estimate  the tax gap for businesses or the total number of business returns that  should have been filed.
Percentage of returns secured. This measure is calculated by dividing  the total number of nonfiler returns secured during the fiscal year by  the total number of nonfiler cases closed. IRS originally planned to  develop management reports on business nonfiler cases comparable to  the management reports it uses to calculate this measure for individual  nonfiler cases. Developing the business reports, however, presented  technical difficulties. At the time we finished our work IRS was  planning to use BMF CCNIP management reports not yet developed as  the data source.
Repeater rate. Under the Servicewide definition established by the  NFEAC, a repeat nonfiler is defined as a current-year nonfiler that was  also a nonfiler in any year of a 2-year look-back period. IRS’s  automated systems do not track repeat nonfiling by businesses. IRS  has identified recidivism as a significant problem among individual  nonfilers but has no way to know if this is also a problem among  businesses. If it is, IRS will not be able to assess the effect of current  and planned changes to its business nonfiler compliance activities on  repeat business nonfiling due to a lack of baseline data.
Efficiency rate. The efficiency rate is calculated by summing all  individual and business nonfiling closed cases and dividing by the  number of staff-years expended. IRS officials told us efficiency is  calculated on a combined basis because IRS does not differentiate  between individual and business cases when tracking staff time  expended. IRS’s Servicewide nonfiler efficiency measure does include  data on business nonfilers, but without separate business and  individual measures, IRS has no way to compare the relative efficiency  of the two types of cases.
At the time we finished our work IRS officials told us they planned to put  BMF measures on the agenda for the September 2010 NFEAC meeting.  However, it is not clear whether the meeting will include setting a deadline  for developing such measures.
section_title: IRS Is Monitoring the Use of Selection Codes but Does Not Yet Have a Formal Plan to Evaluate Them
paragraphs: Selection codes are a key feature of the BMF CCNIP because they distill  the business information that IRS has on a case into a prioritized code.  Since IRS seeks to reduce the number of cases closed as “not liable to file  a return,” the design and priority order of the codes are important to  program success. If selection codes do not accurately identify businesses  with a greater potential for securing delinquent returns and generating  more revenue, the proportion of unproductive cases may not decline.
IRS did not test or evaluate the selection codes prior to the beginning of  the BMF CCNIP in April 2009. Rather, IRS developed the selection codes  using input from those in the agency with knowledge of business nonfiler  activity. According to those involved in the process, selection codes were  developed through discussions among IRS staff working on business  nonfiler programs and included representation from multiple IRS business  operating divisions. However, IRS did not conduct a formal study or pilot  test to aid in designing the selection codes.
Since BMF CCNIP implementation, IRS has been monitoring the selection  codes including changes in the number of taxpayer responses to notices.  According to IRS officials, BMF CCNIP issues are discussed at two annual  meetings. One meeting concerns coordinating workflow for both business  and individual nonfiler programs, and the other is a meeting of BMF  CCNIP stakeholders where work plans are reviewed and any changes to  the system including to the selection codes are discussed. IRS has made  some changes to refine the selection codes but has not formally evaluated  them. As a result, IRS does not know if the changes improved the codes,  nor do they have a basis for knowing whether they now have an optimum  set. A more formal and extensive evaluation could give IRS data to identify  any need to change selection code priority, or create new or redefine  existing selection codes. Our past work has shown that evaluations are  beneficial in generating information to guide program decisions. IRS’s  Performance Measures Plan for the program identifies many of the  components of an evaluation including goals for the program and potential  data sources to monitor it. However, this plan does not present a method  for conducting an evaluation or a timeline for its completion.
IRS officials told us they plan to revisit the selection codes and evaluate  the BMF CCNIP in the future, but they have no formal evaluation plan or  timetable. They told us that it was too early to evaluate the BMF CCNIP  due to the time needed for a case to go through all the stages of pursuit.  According to the officials, the earliest date when complete information  would be available to analyze the effectiveness of the BMF CCNIP would  be 2011. Those directly involved with the BMF CCNIP said that choices of  selection codes in weekly case selection were being made with an  evaluation in mind, so they attempt to select cases for pursuit from a wide  variety of selection codes. In our analysis of fiscal year 2009 management  report data, we found that cases had been selected from across most  selection codes. This practice may provide useful data but without a  formal evaluation, IRS will not know how the selection codes are affecting  the program outcomes.
section_title: Refinements to Closing Codes Could Provide More Information on Why Businesses That Did Not Owe a Return Were Identified as Potential Nonfilers
paragraphs: When a nonfiler case is closed, IRS collections staff use a two-digit closing  code that in some instances provides information on why a case was  closed. For some types of cases closed as not liable to file a return, the  closing code may explain why. For example, a case can be closed as not  liable to file for the period in question because the business was identified  as a subsidiary and the parent company filed the return. A case may also  be closed as not liable to file if IRS determines that little or no tax is due  from the business. Each of these situations has a separate and distinct  two-digit closing code. In contrast, there are other closing codes that do  not specify why the case was closed as not liable to file. These types of  closing codes specify which collections function closed the case but do  not provide any additional information. Our analysis of IRS management  data shows that of the cases closed as not liable to file in fiscal year 2009,  65 percent were assigned closing codes that do not indicate the reason the  case was closed.
More detailed closing code information could be useful to IRS by  providing information on business nonfiler cases that it currently lacks.  IRS’s closing codes do not specify many of the reasons that a case could  be closed as not liable to file. For example, a business may no longer be  operational but may have failed to indicate to IRS that its last return was a  final return. IRS does not have closing codes for other types of situations,  such as when a business has changed its structure but failed to notify IRS  or where a business does not have employees for a given tax period but  failed to indicate on its last filed employment tax return that it is a  seasonal employer. Because there are no closing codes indicating these  reasons for case closure, IRS does not know the extent to which these  situations are a problem and it cannot begin to identify actions that might  reduce their frequency.
Developing more detailed closing codes could provide data that would be  valuable in program evaluation. Depending on results, the data might also  lead to education and outreach activities targeted at reducing the number  of identified business nonfilers. For example, better information on case  closing decisions might identify a need to improve guidance or forms.
section_title: IRS Could Improve Business Nonfiler Case Closure Decisions through Additional Use of Information Returns and External Data
subsections: section_title: Selection Codes Can Help Verify Business Activity When Closing Cases
paragraphs: Under BMF CCNIP, information returns play an important role in selecting  potential nonfiler cases for investigation because they are good indicators  of business activity. Information returns also play an important role in  making case closure decisions on whether a business is liable to file a  return. The Internal Revenue Manual (IRM) requires that, before closing a  case as not liable to file a return, IRS collection staff are to do a full  compliance check including checking whether information returns and  other IRS records indicate business activity. For example, where a  business taxpayer claims to not be operational for the tax period under  investigation, collections staff are to review information returns to  determine if there was business activity. If this check of information  returns showed that there was business activity, staff is not to close the  case until more research is performed.
BMF CCNIP selection codes are concise indicators of what IRS knows  about a business’s activity including its information return income. For  this reason, the codes have potential to be helpful to collections staff when  closing cases. Selection codes are readily available on the computer  screens that IRS collections staff use to research cases and record case  closings. Selection codes can therefore be used to check taxpayers’ claims  that they do not owe a return. If the selection code indicates business  activity, this could help guide IRS enforcement staff in doing the full  compliance check. In December 2009 IRS updated the IRM to include a  statement that staff should refer to the selection code to assist them in  determining whether a taxpayer is liable to file a return. A 2008 tax  examiner training manual also provided guidance on how to effectively  use selection codes.
Our analysis of nonfiler cases that were selected for work prior to the  implementation of BMF CCNIP and that were mostly closed in 2008 and  2009 suggests that full compliance checks may not have been done to the  fullest extent possible, since cases with information return income were  closed as not liable to file a return. As shown in table 2, 39,931 tax year  2007 partnership and corporation cases with information return income  totaling over $193 billion were closed as not liable to file returns.
It is difficult to determine whether knowing that a business had  information return income would have led to different case closure  decisions. About 90 percent of the cases shown in table 2 were closed  without any explanation. Although these results in table 2 do not indicate  that these cases were closed inaccurately, they do call into question the  extent to which IRS staff took into consideration information return  income data when making decisions to close cases. While information  return income does not indicate the amount of tax due, it does indicate  business activity, meaning that some of these businesses may have been  required to file returns and pay taxes.
Our observations shortly after BMF CCNIP implementation and prior to  the IRM update at one of the five IRS service centers that process business  nonfiler cases suggest selection codes were not being used in closing  cases. Tax examiners we spoke with had mixed awareness of the BMF  CCNIP and selection codes. Although the staff was able to view the codes,  tax examiners we observed during our site visits did not use selection  codes nor view information returns when making decisions to close cases.
With the December 2009 revisions to the IRM, tax examiners are  instructed to use selection codes as indicators of business activity when  doing their full compliance checks. However, in the past they were  instructed to use information returns for these checks. Our analysis shows  that cases were closed in spite of the fact that information returns showed  business activity. To the extent that staff do not make full use of the  potential of selection codes and information returns, opportunities may  likely be missed to secure tax returns and collect revenue from business  nonfilers.
section_title: Private Sector Data on Business Activity May be Useful in Deciding Whether Businesses Are Liable for Filing Delinquent Returns
paragraphs: As discussed earlier, information return data are good indicators of  business activity, but not all payments for goods and services are subject  to information return reporting and not all businesses receive information  return income. According to IRS data, about 19 percent of its business  nonfiler inventory had selection codes that reflect third-party information.  This number should increase once information return requirements for  reporting businesses credit card payments go into effect in 2012 and  requirements for reporting service payments made to corporations go into  effect in 2013. Even after these payments are reported to IRS, certain other  payments made with cash or by check will not be subject to information  reporting. However, there are a number of private sector companies that  maintain business activity data, such as data on a business’s gross sales  and number of employees, which might help IRS identify business  nonfilers and help it determine whether a business is required to file tax  returns. While IRS does not use private sector data to help it determine  whether a business should file a tax return, it does have contracts with  private sector companies for locating taxpayers’ assets and obtaining  credit reports on taxpayers that can be used by its collection field staff  during their investigations.
To test whether private sector data on business activity could be useful for  determining whether businesses are liable for filing tax returns, we  matched tax year 2007 nonfiler cases that IRS closed as not liable to file  returns with a calendar year 2007 Dun & Bradstreet (D&B) database of  businesses located in California and Illinois. Our test results showed that  there were a total of 40,223 cases in those two states that IRS closed as not  liable to file returns where there was a match on name and address  between IRS and D&B records. Of the 40,223 cases, 9,740 were for  corporation and partnership delinquent returns and the remaining 30,483  were for delinquent employment tax returns. Of the 9,740 partnership and  corporation cases, 7,688 cases had either little or no information return  income but, as shown in table 3, had D&B total sales of about $4.1 billion.
Since these 7,688 cases had little or no information return income, IRS  would have had little if any business activity data on which to make  decisions on whether the businesses were liable to file returns. Private  sector data, such as the D&B sales data, could fill that void.
Of the 30,483 employment tax cases that were closed as not liable to file  employment (Form 941) and unemployment (Form 940) tax returns, 4,523  cases had employees according to D&B data. Table 4 shows that these  4,523 businesses had a total of 11,418 employees in calendar year 2007,  which indicates that they may have been required to file employment tax  returns.
Under BMF CCNIP, IRS identifies potential nonfilers when the Business  Master File records for the businesses indicate that they have a  requirement to file returns. If the BMF does not indicate a filing  requirement, then a potential nonfiler case would not be developed. To  determine whether businesses with no BMF filing requirements may be  liable for filing returns, we matched business entities that had been  established on IRS’s Business Master File in 2006 that had no filing  requirements to D&B calendar year 2007 records of businesses that had  California and Illinois addresses. The results of the match showed that  39,920 cases matched the names and addresses on both the IRS and D&B  records. Table 5 shows that 39,920 cases had total sales of $29.5 billion and  4,185 of the 39,920 cases had a total of 16,869 employees.
These data indicate that the businesses were active in 2007 and that the  businesses might have been liable for filing income tax or employment tax  returns. Taxpayer contact would have to be made in order to determine  whether the businesses were liable to file returns.
section_title: Federal Contract Data May Be Useful in Identifying Federal Contractors Who Owe Tax Returns
paragraphs: In addition to examining potential private sector data, we also examined  the Central Contractor Registration (CCR) file, which contains self- reported revenue and employment data on businesses that register  annually to be awarded federal contracts, to determine whether it could be  used by IRS in its business nonfiler program. This database generally dealt  with federal contracts so its usefulness would be limited to the subset of  the total business nonfiler population that had registered for federal  contract consideration.
We matched the calendar year 2007 CCR file, which contained over  400,000 registrants nationwide, to the tax year 2007 partnership,  corporation, and employment tax cases that were closed as not liable to  file returns. This match showed that there were 3,589 entities on the CCR  file with reported revenue that were closed as not liable to file partnership  (1,210 cases) or corporation (2,379 cases) returns. The match also found  that 10,263 entities on the CCR file reported that they had employees that  were closed as not liable to file either Forms 941 (8,694 cases) or Forms  940 (1,569 cases).
The above data show that there are a number of federal contractors with  income that IRS closed as not liable to file returns. As noted earlier, in  many cases IRS’s records do not indicate the specific reason for closing a  nonfiler case; therefore, we do not know why these cases were closed  when the CCR data indicate that they may have been required to file  returns because they had indications of business activity.
IRS does not give a high priority to potential business nonfilers that  receive federal contracts when it selects business nonfiler cases for review  but does so for federal workers and retirees who fail to file tax returns  under its Federal Employee/Retiree Delinquency Initiative (FERDI)  program. This program was developed in 1993 by IRS to promote federal  tax compliance among current and retired federal employees. FERDI  cases are given a specific priority selection code and are subject to the full  range of compliance treatments, including return delinquency notices and  field investigations. According to IRS data, in fiscal year 2009, IRS closed  over 100,000 FERDI cases.
IRS recognizes that businesses receiving federal contracts should be  identified and that appropriate and timely actions should be taken to  ensure they remain in full compliance with federal tax laws. IRS also has  delinquent return procedures that address federal contractors. IRS has  special procedures for investigating federal contractors who have been or  will be awarded a contract by the IRS and who owe both outstanding taxes  and tax returns. These procedures do not apply to federal contractors who  only have unfiled returns. Also, according to IRS, during field return  delinquency investigations, revenue officers are instructed to determine on  initial contact with all taxpayers if the taxpayer is a federal contractor and,  if so, to take prompt action to secure any delinquent business returns  including their delinquent taxes.
Also, unlike federal employees and retirees covered by the FERDI  program, federal contractor cases do not have a specific nonfiler selection  code, which could give them a priority ranking at the beginning of the  investigation process. Currently, IRS has an indicator on its Business  Master File that identifies businesses that have federal contracts, but it is  not used to prioritize federal contractor nonfiler cases. The source of the  BMF federal contractor indicator is Form 8596 (Information Return for  Federal Contracts), which certain federal executive agencies are required  to file quarterly to report information about persons with whom they have  entered into contracts.
Since IRS already has a federal contractor indicator on its Master File  records, it may be able to cost-effectively develop a specific nonfiler  selection code that would give these cases a higher priority in its nonfiler  program.
section_title: Conclusions
paragraphs: Identifying and pursuing nonfilers including businesses is a key part of  IRS’s enforcement efforts. Absent a robust nonfiler program, compliant  taxpayers will not have confidence that others are paying their fair share.  IRS has faced several challenges in its business nonfiler program. IRS  generally identifies more potential nonfilers than it can thoroughly  investigate, and many of those it does investigate turn out not to owe the  return IRS expects based on its records. Our analyses suggest IRS cannot  be sure these types of cases are all being closed correctly.
IRS has significantly improved its business nonfiler efforts by developing  and implementing the BMF CCNIP. This initiative gives IRS for the first  time a way to set priorities among its voluminous inventory by making use  of information return and other IRS data to predict the likelihood that IRS  will secure additional returns and revenue. This initiative should help IRS  choose cases to work, but without an estimate of the business nonfiler tax  gap, IRS does not have a data-driven basis for allocating resources to its  business nonfiler efforts.
While IRS has made good progress in implementing BMF CCNIP, it has not  calculated the performance measures or planned the evaluations it would  need to assess success. IRS also has little data on why it identifies millions  of potential business nonfilers only to find that many of them do not owe  IRS the return IRS is expecting based on its records. Absent better  information on cause, IRS may continue to expend resources on too many  unproductive cases, leading to unnecessary taxpayer burden. Until and  unless IRS has better information, it will not be able to measure its success  or identify the best ways to continue to move in the right direction.
While IRS is gathering data needed to manage the program, it can also  explore opportunities to build on what it has already achieved. IRS could  leverage the information in the BMF CCNIP selection codes by using them  to help verify taxpayers’ claims that they do not owe a return because they  have gone out of business. IRS could also explore adding non-IRS data to  the BMF CCNIP. Private sector and federal contractor data on business  activity would give IRS more third-party information and enlarge the  capacity of the BMF CCNIP to identify active businesses, thereby  potentially leading to fewer cases being closed as not liable to file a return.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Commissioner of Internal Revenue take the  following eight actions:  Understanding the Scope of the Business Nonfiler Population    Estimate the magnitude of business nonfiling among businesses  registered with IRS, using data from its operational files to select cases  for further investigation. Based on the results of this work IRS should  develop a tax gap estimate for the impact of business nonfiling insofar  as doing so is cost-effective.
Monitoring the Performance of Business Nonfiler Activities    Set a deadline for developing data that can be used to measure the  performance of the BMF CCNIP and its business nonfiler compliance  activities overall.
Develop a separate efficiency measure for business nonfilers insofar as  doing so is cost-effective.
Develop an evaluation plan for the BMF CCNIP selection codes,  including both an initial evaluation and an ongoing monitoring plan,  and conduct an evaluation based on this plan. Results from the study  and the ongoing monitoring could be used to refine the selection codes  to improve the effectiveness of the program.
Identifying Additional Actions to Help Achieve the Goal of Fewer  Unproductive Cases    Add closing codes that would better indicate all known causes for “not  liable to file” determinations and use this information to analyze  causes of unproductive cases and use them as appropriate to identify  any actions IRS could take either administratively or through  education and outreach that could reduce the number of business  nonfiler cases where the filing requirement in IRS’s records is not  applicable.
Ensuring That IRS Does Not Inappropriately Close Cases as Not Liable  to File Returns    Reinforce to collections staff the need to check for business activity  using information return data and selection codes.
Study the feasibility and cost-effectiveness of using private sector  business activity data and federal contract data to make a  determination of whether federal contractors and other businesses are  liable for filing tax returns.
Ensuring Federal Contractors Comply with Filing Requirements    Establish a process similar to the FERDI program for federal workers  and retirees that will give a high priority to businesses identified as  potential nonfilers that have federal contracts.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Commissioner of Internal  Revenue. We received written comments from the Deputy Commissioner  which are reprinted in appendix IV. IRS agreed that identifying and  pursuing active business nonfilers is key to enforcement efforts and  acknowledged that our recommendations could assist these efforts. IRS  agreed with four of our eight recommendations and indicated as discussed  below some steps it would take to address the other four.
With respect to our recommendation that IRS should estimate the  magnitude of business nonfiling by selecting cases from its operational  files for further investigation, IRS agreed to collect and report additional  data on the number of delinquent business returns identified by its  operational programs and the dollars assessed. IRS indicated that such  data may overstate the extent of nonfiling because they would include  cases such as businesses that filed returns under a parent entity. The  intent of our recommendation, however, was to have IRS develop an  estimate of the number of businesses that were actually liable for filing  returns, which would exclude businesses that were not liable to file  returns. It is not clear from IRS’s response whether it intends to do the  study we recommended or if IRS plans to report only the results currently  available from its business nonfiler program. Our recommendation was  that IRS draw a sample of potential business nonfilers and thoroughly  investigate those cases to estimate the number of actual business nonfilers  in IRS’s business nonfiler inventory.
With respect to our recommendation that IRS develop an evaluation plan  for the BMF CCNIP selection codes, IRS identified monitoring activities  for its new BMF CCNIP report as well as additional information that could  be used to evaluate the program. IRS also said that data should not be  studied until they are complete and available, which IRS estimates to be by  the end of fiscal year 2011. We acknowledged many of IRS’s monitoring  activities in our report but these do not constitute an evaluation plan that  would identify a method for conducting an evaluation and a timeline for its  completion. We recognize that time will be needed for cases to complete  the collections process and did not propose a timeline for IRS to complete  its evaluation. Our recommendation addressed the need for IRS to develop  an evaluation plan for the BMF CCNIP selection codes, including both an  initial evaluation and an ongoing monitoring plan, and conduct a study  based on this plan.
With respect to our recommendation that IRS should study the feasibility  and cost-effectiveness of using private sector business activity data and  federal contract data, IRS agreed to evaluate the effectiveness of data  mining using the Central Contractor Registration database but did not  agree to study the feasibility of using private sector data. IRS stated that a  study initiated in fiscal year 2009—which IRS did not provide to us during  the course of our audit work—concluded that it would be difficult to  quantify benefits because there is not an automated way to effectively  match Taxpayer Identification Numbers to purchased lists of business  names. IRS’s response, however, does not address our analysis illustrating  the use of private sector data in our report, which showed that using such  data was not only possible but potentially beneficial. While we cannot  determine the revenue implications of these cases including whether  potential revenue would exceed IRS’s threshold, our analysis shows that  private data can provide information not now available to IRS on the  business activity of potential nonfilers. For this reason, we continue to  recommend that IRS further explore the feasibility and cost-effectiveness  of private sector business activity data.
With respect to our recommendation that IRS establish a process for  federal contractors similar to the process established by its FERDI  program for individuals, IRS agreed to explore the feasibility of  establishing a system for prioritizing and routing federal contractor  nonfiler cases through its current Inventory Delivery System. IRS also  stated that it is working on further actions—including implementing  legislative changes—that will identify noncompliant federal contractors.  IRS stated that a federal contractor with an unfiled employment tax return  is a high priority in the case selection process. While employment tax  cases are prioritized in IRS’s case selection process, federal contractors do  not receive higher priority than nonfederal contractors because there is no  selection code specifically aimed at federal contractors. Since IRS already  has a federal contractor indicator on its Master File records, our  recommendation was based on the assumption that IRS could cost  effectively develop a specific nonfiler selection code that would give these  cases a higher priority.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from its  issue date. At that time, we will send copies to the Chairman and Ranking  Member, House Committee on Ways and Means; the Secretary of the  Treasury; the Commissioner of Internal Revenue; and other interested  parties. This report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff have any questions, please contact me at (202) 512-9110  or whitej@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  Key contributors to this report are listed in appendix V.
section_title: Appendix I: Scope and Methodology
paragraphs: The objectives of this report were to assess (1) the data challenges of  estimating the business nonfiler tax gap, (2) how recent program changes  in the Internal Revenue Service’s (IRS) processes and procedures have  affected its capacity to identify and pursue business nonfilers, and            (3) what opportunities exist for IRS to improve its use of third-party  information returns or other sources to identify and pursue business  nonfilers.
To assess the data challenges of estimating the business nonfiler tax gap,  we reviewed IRS documents and prior GAO and Treasury Inspector  General for Tax Administration (TIGTA) reports that dealt with tax gap  measurement and IRS’s National Research Program, which develops data  for use in making estimates of the tax gap relating to tax reporting  noncompliance. We analyzed Business Master File Case Creation Nonfiler  Identification Process (BMF CCNIP) inventory data to determine the  number of potential business nonfilers IRS identifies and analyzed IRS’s  fiscal year 2009 Collection Activity Reports to determine the number of  business nonfiler cases IRS closed as not liable to file returns. We  interviewed IRS research officials from the Small Business/Self-Employed  (SBSE) and the Research, Analysis, and Statistics (RAS) Divisions on the  types of data that would be needed to develop a business nonfiler tax gap  estimate and the problems associated with obtaining such data.
To assess how recent program changes in IRS’s processes and procedures  have affected its capacity to identify and pursue business nonfilers, we  reviewed program documents pertaining to BMF CCNIP. These documents  dealt with the cost and benefits of the program; program evaluation and  performance measurement processes; and procedures for identifying,  prioritizing, selecting, working, and closing business nonfiler cases. We  also reviewed Internal Revenue Manual (IRM) sections dealing with  handling taxpayer responses to delinquent return notices and procedures  for closing business nonfiler cases and IRS documents on its Nonfiler  Strategy and its implementation. We interviewed IRS officials from SBSE  to understand the various operational features and processes associated  with the BMF CCNIP. To understand how IRS handles responses to  delinquent return notices from businesses, we observed IRS’s collections  functions at IRS’s Philadelphia service center.
To assess what opportunities exist for IRS to improve its use of third-party  information returns or other sources to identify and pursue business  nonfilers, we identified non-IRS data sources—including government  contractor data and private sector data—that could have information on  business nonfilers and assessed the potential of this information to help  IRS better identify and pursue business nonfilers. To test whether  information return income could be useful in making case closure  decisions under BMF CCNIP, we matched IRS’s calendar year 2007  Aggregated Information Return (AIR) file, which is used in BMF CCNIP  and contained summaries of information returns that were received by  IRS, to IRS’s Nonfiler Measurement file that contained data on all tax year  2007 cases that were closed as not liable to file partnership (Form 1065)  and corporation (Form 1120) returns. We limited our analysis to tax year  2007 cases that had information return income of $1,000 or more.  According to IRS officials, tax year 2007 business nonfiler cases were  selected prior to the implementation of BMF CCNIP. Our analysis showed  that about 96 percent of the cases were closed in 2008 and 2009 while the  remaining 4 percent were closed in 2007 and 2010. In doing this match we  eliminated all cases that were closed because they were subsidiaries of  other businesses and thus would not have been required to file returns  under their Employer Identification Numbers (EIN). We did not follow up  on any of the closed cases to determine whether using the information  return income data would have resulted in a closure different than not  liable to file a return. To determine whether these businesses would have  been liable to file returns would have required IRS to reinvestigate the  cases. To determine whether the data in IRS’s Nonfiler Measurement file  were of sufficient reliability for our analysis, we reviewed the program  documentation associated with the file and discussed the various data  elements with the IRS staff responsible for the file. As a result of our  review and discussions, we determined that the data in this file were of  sufficient reliability to be used in our analysis.
To test whether private sector data on business activity could be useful for  determining whether businesses may be required to file partnership,  corporation, and employment tax returns, we matched IRS’s tax year 2007  Nonfiler Measurement file of nonfiler cases that IRS closed as not liable to  file returns to a Dun and Bradstreet (D&B) file of businesses located in  California and Illinois. We judgmentally selected these two states to get a  geographic mix of states that had sufficient cases that were closed as not  liable to file tax year 2007 returns to test the viability of using private  sector data. The D&B file contained various data on business activity  including name, address, sales, and employment information. Combined,  California and Illinois had 130,336 or about 14.3 percent of the 914,505  corporations, partnerships, and employment tax cases that were closed as  not liable to file tax year 2007 returns. Since the D&B files did not include  the businesses’ EINs, the match was made on the businesses’ name and  address, which included the street address, state, and ZIP code. To make  the name and address matches, we used D&B’s onsite matching software  program, which can be used to associate records with differences in name  and addresses to a particular entity. Each match is assigned a confidence  code from 0 to 10, with 10 being the highest confidence score and 0 the  lowest or no match. According to D&B documents, scores of 8 to 10 are  considered high-quality matches and were the matches we used for our  analysis. Our match of the 130,336 California and Illinois cases resulted in  40,223 high-quality matches (9,740 corporations and partnerships and  30,483 employment tax cases). Of the 9,740 partnership and corporation  cases, 7,688 cases had either little or no information return income. Of the  30,483 employment tax cases, 4,523 had employees.
Also, to determine whether private sector data could be useful in  identifying active businesses that IRS had not identified as nonfilers, we  matched the D&B data files of California and Illinois businesses to a  Business Master File (BMF) extract of 176,061 entities on the BMF that  had been established in calendar year 2006 but had no filing requirements  as of September 2009, which was when IRS produced the extract for us. As  a data reliability check on this no filing requirement extract, both GAO and  IRS staff spot checked selected output from this extract to IRS’s National  Accounts Profile (NAP) file, which contains all valid taxpayer names,  addresses, taxpayer identification numbers, and filing requirements. These  checks showed that the names were valid and that the businesses did not  have any filing requirements. The match of D&B data to the no filing  requirement extract produced 39,920 cases that were considered to be  high-quality matches (i.e., they had confidence scores of 8 to 10) and were  the ones we used for our analysis. Since D&B is a commercial business,  we were not able to validate the sales and employment data contained in  the file. However, according to data D&B officials provided to us, D&B  collects its data through direct investigations, such as phone calls to  businesses, and reviews of trade records on payment and financial data,  public records, and government registries, and Web sources and  directories. Also, since D&B data are used by various federal agencies, we  determined that the data were of sufficient reliability to be used in our  analysis.
To test whether other federal data sources could be useful for identifying  business nonfilers, we analyzed the 2007 Central Contractor Registration  (CCR) file, which we received from the General Services Administration,  which contains data on businesses that must register at least annually to  compete for federal contracts. We tested this file because it contains  various entity data such as name, address, and EIN, which could be readily  matched to IRS’s records. Businesses that want to vie for federal contracts  must submit a valid EIN for inclusion onto the CCR. The EINs are  validated against IRS’s records before they are included in the CCR. Also,  the CCR file contains various self-reported data on business activity data,  such as total revenue and number of employees for each business, which  could be useful for making decisions on whether a business would be  required to file returns. We matched the calendar year 2007 CCR file,  which consisted of 441,467 records, to IRS’s tax year 2007 Nonfiler  Measurement file of cases that were closed as not liable to file returns to  determine whether CCR data would identify potential federal contractors  that had business activity data that would indicate that they may have  been required to file returns. The match identified 3,589 entities on the  CCR file with reported revenue that were closed as not liable to file  partnership (1,210 cases) or corporation (2,379 cases) returns. The match  also found that 10,263 entities on the CCR file reported that they had  employees that were closed as not liable to file either Form 941 (8,694  cases) or Form 940 (1,569 cases). We did not verify the accuracy of the  data on the CCR file because these data are self-reported by businesses  entering the data onto the CCR database. However, since the EINs on the  CCR are validated to IRS’s records, we determined that the CCR data we  used for our analysis were sufficiently reliable to use in our assessment.
We conducted this performance audit from March 2009 through August  2010 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.
section_title: Appendix II: Additional Information on Businesses’ Filing Requirements
subsections: section_title: Businesses with one or more employees that paid at least $1,500 in wages in a calendar quarter and businesses that had one or more employees for at least some part of a day in any 20 or more different weeks during the calendar year must file Form 940 to report Federal Unemployment Tax Act tax. Household employers that paid at least $1,000 in wages in a calendar quarter must file Form 940.
paragraphs: Annually. Return due on February  1st after the end of the calendar  year. Those who made full  payments prior to filing may file by  February 10.
An extension may be  requested via letter.  Extensions are not to  exceed 90 days.
Businesses with one or more employees  file Form 941 to report information on  employees including wages paid, federal  income tax withheld, and Social Security  and Medicare taxes paid by employers  and employees.
Quarterly. Return due the last day  of the month following the end of  the quarter.
Extension requests are not  allowed. Form 941 has a   10-day extended due date if  100% of the tax amount has  been deposited on time.
Domestic corporations—unless  corporation meets the criteria and has  elected to be treated as an                      S corporation. The return is used to  report income, gains, losses, deductions,  credits, and to figure the income tax  liability of a corporation.
Annually. Return due by the 15th  day of the third month following  end of corporation’s tax year. For  example, if tax year is equivalent  to calendar year, filing would be  due March 15.
Business can file IRS Form  7004 to be granted a 6- month extension.
S corporations. An eligible domestic  corporation can avoid double taxation  (once to the shareholders and again to  the corporation) by electing to be treated  as an S corporation.
Annually. Return due by the 15th  day of the third month following  end of corporation’s tax year. For  example, if tax year is equivalent  to calendar year, filing would be  due March 15.
Business can file IRS Form  7004 to be granted a           6-month extension.
Partnerships. A partnership is the  relationship existing between two or  more persons who join to carry on a  trade or business. A partnership must file  an annual information return to report the  income, deductions, gains, losses, etc.,  from its operations, but it does not pay  income tax. Instead, it generally “passes  through” any profits or losses to its  partners.
Annually. Return and Schedule   K-1 information returns (which  report income shares to partners)  due on the 15th day of the 4th  month following the close of its  tax year.
Business can file IRS Form  7004 to be granted a           5-month extension.
When a business changes its structure or hires employees, the business is  required to notify IRS and in some cases may need a new EIN.
A business is required to notify IRS if its structure changes, for  example if it restructures as an S corporation, a partnership, or a  subsidiary of another company. A subsidiary that elects to have its  income, losses, and deductions included in the parent business’s  consolidated income tax return is not required to file an annual return.
A business that ceases to operate is expected to inform IRS including  by sending a letter and checking a “final return” box on its income tax  return. A business is also required to notify IRS if it stops paying  wages or is a seasonal employer.
A business that fails to notify IRS of a change affecting its filing  requirement risks being identified as a potential nonfiler by IRS when it  matches its records against returns filed.
section_title: Appendix III: How IRS Identifies and Pursues Business Nonfilers
paragraphs: IRS identifies potential business nonfilers primarily using its return  delinquency check process. Under its new Business Master File Case  Creation Nonfiler Identification Process (BMF CCNIP), IRS prioritizes  which of these potential business nonfilers will be pursued using  information return and historical account data in IRS’s records on the  business entity. Once a case has been selected for pursuit, IRS mails the  taxpayer a notice of delinquency. If IRS is not successful in resolving a  case through this taxpayer correspondence, the case may proceed to one  of IRS’s collections functions. Figure 1 shows IRS’s process for business  nonfiler cases through the notice stage.
IRS’s return delinquency program checks the filing requirement of each  business against the returns filed by that business for a given tax period.  This process is completed every week for all return types. If IRS identifies  a business that has not filed a return for a filing requirement on IRS’s BMF  a specified number of weeks after the due date for the return including any  extensions, a delinquency module is created for the missing return.  Previously, the program identified as delinquent only those businesses tha had filed in the past and then ceased filing or had made payments to IRS.  However, since the introduction of the BMF CCNIP, IRS now includes  some entities that have an income tax filing requirement but have never  filed.
subsections: section_title: Prioritization
paragraphs: The BMF CCNIP has changed IRS’s business nonfiler activities by usin several types of IRS taxpayer data provided by businesses and about  businesses to create indicators of business activity and prioritize these  businesses for pursuit based on the likelihood of generating revenue. T goal of the BMF CCNIP is for IRS to pursue more productive cases by  reducing the number of these cases it pursues where the business is not  liable to file a return, e.g., because it is no longer active. In this way, IRS  aims to better use its limited resources for pursuing business nonfilers.
Selection codes are the feature of the BMF CCNIP that assists IRS in  prioritizing the inventory and determining which cases should be pursued.   to  Specifically, selection codes are used to determine which cases are sent IRS’s campuses, which are the locations of the IRS service centers tha handle initial pursuit activities. The campuses will send a taxpayer a  notice of delinquency. This notice details the delinquent tax form and  period and requests the taxpayer file the form.
The third-party infor from three sources:  mation IRS uses to assign the selection codes comes    The Aggregated Information Return (AIR) file contains data fro forms such as the Form 1099 series. This file is  information return  updated annually.
The Payer Master File (PMF) contains information on those who  these information ret information returns. urns and make payments documented by the    The Combined Annual Wage Reporting (CAWR) file contains  information on business payme Social Security and Medicare. nts for employment taxes including  Selection codes range from 01 to 99 and represent IRS’s priority for  working cases. Cases with a lower number selection code have a higher  priority. Each code indicates characteristics of the information IRS has  about the case. Examples of selection codes are “high dollar credits,” “hi information return income without broker sales,” and “broker sales.”  Selection codes 97 through 99—the lowest priority codes—are typically  for those cases with no indication of business activity.
In addition to a selection code, a primary code is also assigned to each case. These codes indicate the number of delinquency notices a case  should receive once it has been selected and whether the case will be  pursued further after the notice stage. Primary codes are determined  based upon compliance history and the type of return.
section_title: Selection
section_title: Pursuit
paragraphs: At the first stage of the collections process, the notice stage, IRS firs attempts taxpayer contact by mailing a delinquency notice. This notice  informs the taxpayer of the identified delinquency, and provides  information on how to respond to the delinquency. According to IRS data,  in fiscal year 2009, IRS issued 2.6 million initial notices to business  nonfiler cases.
If a response (either a return or an explanation of why no return is due) i s  received from the taxpayer, the response is forwarded to a tax examiner in IRS’s Compliance Services Collection Operations (CSCO) function. The  tax examiner is responsible for verifying that a return filed matches the  filing requirement or that the response otherwise justifies closure of the  case. In some cases where taxpayers claim that they do not owe a return,  tax examine method to verify the taxpayer’s response and to ensure that there are no  other outstanding modules. If the taxpayer response does not resolve the  rs are required to perform a full compliance check, which is a  delinquency, tax examiners will sometimes contact the taxpayer to discu the matter.
The primary code assigned to the case determines what happens next if  the taxpayer does not respond. Business nonfiler ca Primary Code B, A, or X.
If the case r before being forwarded for further pursuit. eceived a Primary Code A, it will receive another notice    Primary Code X cases receive one notice and if IRS receives no  response, the case is forwarded for further pursuit after 6 weeks.  Primary Code X is reserved for employment tax cases where the tax  due by the business for the previous year was above a certain  threshold.
In some instances, if a delinquent module is identified and the taxpayer  already has other modules further along in the pursuit process, the new identified delinquent module is moved after receiving the first not collection function with other modules from the same business; this  process is called “association.”
If the notice or notices do not elicit a response from the taxpayer, IRS guidelines and a routing program are used to determine the next  destination for the case.
If a case meets criteria established in the Internal Revenue Manu (IRM), it will go directly to the destination prescribed. One example of  the criteria for a case to use the rules is where the last return  amount—the tax liability from the last return—is above a certain  threshold.
Alternatively, a case is routed further by the Inventory Delivery System (IDS). IDS governs movement to, from, and between IRS pursuit  functions. The system makes these determinations based on risk and  business rules. These rules include a set of criteria used to score a case  based on the following factors: age of case, balance due, number of  modules for the entity, the type of return, credit balances, the tax due  from the prior year’s tax return, and prior year net tax. In addition to  these risk scores, IDS also uses predictive models to generate  probability scores. These models predict the likelihood of certain  outcomes, including securing a return and securing the full amount money due.
IDS moves cases to one of the following functions after a predetermined  number of weeks from when the notice was sent:    The Automated Collection System (ACS) is responsible for making  telephone contact with taxpayers who have not responded to notices In some cases, the call site operators who make this contact must  research contact information for the delinquent taxpayer. .
The automated 6020(b) (a6020(b)) program can be used to prepare a substitute return for business nonfilers without the intervention ACS or the field. This program is limited to employment tax cases with  an amount below a certain threshold.  This program automatically  prepares a return for certain businesses that have not filed based on  information that IRS has. The automatically prepared return is then  sent to the entity, which has the ability to respond with its own return  if it does not accept the prepared return. If no response is received,  IRS has the authority to create an assessment for all taxes and  penalties due.
The Queue is a holding area f or cases. Cases can move from the Queue  to the field. In certain circumstances, cases have been routed from the  Queue to a6020(b) or CSCO.
Revenue officers in the Collection Field Function (the field) make in- person contact with delinquent taxpayers in efforts t o secure returns.
In addition, if IDS criteria determine that the case is of low enough  priority, IDS can close the case.
Revenue officers and some call-site operators have the ability to use the 6020(b) program  to prepare a return for business nonfilers as well. does not send it to a6020(b), the case may then be moved to the Queue where it will be available for the field to pursue further.
When a case goes to the Queue, it is assigned a level of risk and a  probability score. The risk level—high, medium, or low—takes into  account dollar amount, age of case, and type of return. Cases are assign ed  to one of four priority groups in the Queue based upon these scores. Those cases that a greater likelihood of collecting revenue—become the highest priority  cases. The other groups—high risk, medium risk, and low risk—are based  solely on risk scores. When group managers need cases for the field, they  review cases based on priority for potential selection to t he field. If a case  remains in the Queue for 52 weeks, it is reevaluated by IDS. Based on this  e case has become a low-risk case based on the reevaluation—the case can  be closed.  re “high risk” and have a high probability score—indicating a  valuation, it can be sent back to ACS, remain in the Queue, or—if the  Figure 2 provides an overview of the coding systems and automated  systems that govern the path of a business nonfiler case that proceeds  beyond the notice stage into IRS’s collections functions.
section_title: Appendix IV: Comments from the Internal Revenue Service
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, Ralph Block, Assistant Director;  Linda Baker; Amy Spiehler; Donna Miller; Jeffrey Niblack; A.J. Stephens;  James Ungvarsky; and John Zombro made key contributions to this report.