Section 6041A of the Internal Revenue Code requires any service recipient, including federal agencies, to file an annual information return with IRS for payments made to any person for services totaling $600 or more during a calendar year. Payments to corporations for certain services provided must also be reported, such as attorneys’ fees and medical and health care payments. In addition, federal executive agencies must report all payments for services provided by vendors, including payments made to corporations. Specific information required on the annual information return—an IRS Form 1099 MISC—includes the name, address, and TIN of both the payer and payee, as well as the total amounts paid during the year for the various types of services provided. The purpose of the Form 1099 MISC filing requirement is to enable IRS to identify taxpayers who fail to file an income tax return as well as those who fail to report all of their income on their tax return for the related year. IRS enters Form 1099 MISC information in both a Payer Master File (PMF) and an Information Returns Master File (IRMF). The PMF is a database that includes all entities that make payments subject to information return reporting. The PMF includes general information on the total number and dollar value of information returns, including Forms 1099 MISC, filed by each payer for each year. The IRMF is a database that includes specific information on the type and amount of payments made to each payee, including whether the payee TIN was valid upon receipt of the information return and if the TIN was invalid, whether it was subsequently corrected by IRS. Both the PMF and IRMF include the payer’s TIN. Upon receipt of a Form 1099 MISC, basic information is entered into a temporary IRS database. IRS compares the payee TIN/name combination with TIN/name combinations in its records to determine if there is a match. If there is a match, the information is entered in the IRMF without the need for additional action. If there is not a match, IRS will try to validate the TIN/name combination via a TIN “validation” process, which entails matching the TIN and name control—the first four characters of an individual’s last name or the first four characters of a business name—on the Form 1099 MISC with (1) a file which contains all social security numbers ever issued and all name controls ever associated with them and (2) a file that contains all employer identification numbers ever issued and all name controls ever associated with them. If IRS is able to match the TIN and name control through this process, the information is entered in the IRMF with a code indicating that the TIN was corrected and is valid. If IRS is unable to match the TIN and name control, the information is entered in the IRMF with a code indicating that the TIN is invalid. If the vendor TIN included on the Form 1099 MISC is initially valid or subsequently corrected by IRS, and the vendor files a tax return for the corresponding year, IRS can electronically match the TIN, name control, and amount entered in the IRMF with the amount reported on the vendor’s tax return via the Document Matching Program. This enables IRS to determine whether the vendor has reported all of the income on the tax return. Alternatively, if there is no corresponding return with the same TIN and name control as that entered in the IRMF, IRS can determine that the vendor is a potential nonfiler. However, if the TIN entered in the IRMF is invalid, IRS is unable to use the information to detect either underreporting or nonfiling on the part of a vendor. Since 1997, IRS has had a TIN-matching program that federal agencies can use to verify the accuracy of TIN/name combinations furnished by federal payees. This program was intended to reduce the number of notices of incorrect TIN/name combinations issued for backup withholding by allowing agencies the opportunity to identify TIN and name discrepancies and to contact payees for corrected information before issuing an annual information return, such as a Form 1099 MISC. Monthly, federal agencies can submit a batch of TIN/name combinations to IRS for verification. IRS then matches each record submitted and informs the agency whether the TIN and name combination submitted matches its records. In order to encourage vendors to provide a valid TIN and to ensure that taxes are paid when they do not, Internal Revenue Code Section 3406 requires payers, including federal agencies, to initiate backup withholding of a federal payment if a payee, including a vendor, fails to provide a TIN or provides an invalid TIN, and upon notice fails to provide a correct TIN. IRS considers a TIN to be missing if it is not provided, has more or less than nine numbers, or has an alpha character in one of the nine positions. IRS considers the TIN to be invalid if it is in the proper format, but the TIN/name combination doesn’t match or cannot be found in IRS or Social Security Administration files. Payments subject to backup withholding include various types of income reportable on a Form 1099 MISC, including compensation paid to individuals that are not employees. The current rate for backup withholding is 30 percent of the payment. Federal agencies are not always adhering to Form 1099 MISC filing requirements. For 2000 and 2001, about 152,000 information returns for federal payments totaling about $5 billion were not filed with IRS, while about 170,000 information returns, including $20 billion in federal payments that were filed, included invalid TINs. Few agencies are taking advantage of IRS’s TIN-matching program to validate vendor TINs prior to submitting information returns to IRS. Similarly, few agencies are initiating backup withholding on payments made to vendors that have provided invalid TINs. While most federal agencies filed information returns for vendors, some did not. For both 2000 and 2001, the 14 federal departments collectively filed over 600,000 Forms 1099 MISC in which they reported over $100 billion in payments each year. (See app. II for the number and dollar value of Forms 1099 MISC filed individually by the 14 federal departments.) Although the 14 federal departments collectively filed a substantial number of Forms 1099 MISC over this 2-year period, we found some significant exceptions, as the following examples illustrate. About $5 billion in payments to about 152,000 payees made collectively by the Departments of Agriculture, Commerce, and Justice for 2000 and 2001 combined were not reported to IRS on Forms 1099 MISC. About 8,800 of these payees who collectively received payments totaling about $421 million dollars—an average of about 48,000 each—failed to file an income tax return for these 2 years, according to IRS’s records. If information returns had been filed and IRS had this information, it would have provided a basis for IRS to assess the appropriate taxes against these payees. Almost $3.0 billion in payments made via purchase cards by DOD between 2000 and 2001 had not been reported to IRS due to incorrect or missing vendor TINs. DOD officials indicated that obtaining vendor information needed for Forms 1099 MISC from payment card companies has been a long-standing problem. They estimated that they could have filed as many as 40,000 additional Forms 1099 MISC for 2000 and 2001 if they had received the necessary vendor information from payment card companies. According to the Department of Transportation, Forms 1099 MISC were not filed for services if the vendor was a corporation that provided both goods and services, as their vendor payment system cannot distinguish between the two for the purpose of issuing Forms 1099 MISC. As a result, only about $8 million of $92 million in service payments for tax years 2000 and 2001 were reported to IRS on Forms 1099 MISC. One Department of Housing and Urban Development agency that made payments to vendors for services totaling over $73 million for 2000 and 2001, failed to file any Forms 1099 MISC for these 2 years. According to a Department of Housing and Urban Development official, because the agency is a wholly owned corporation within HUD and is therefore quasi-federal, agency officials were not aware that they were required to file Forms 1099 MISC. They further indicated that the agency had subsequently issued Forms 1099 MISC to its vendors for payments made for 2002. In response to our survey of departmental policies and practices for filing Forms 1099 MISC, department officials cited various reasons for not filing a Form 1099 MISC for vendor payments. Not having a valid vendor TIN was the foremost reason cited. Other reasons included the inability to distinguish between goods and services provided by a vendor, as cited above, and problems obtaining necessary vendor information, namely TINs, from payment card companies for vendors that are paid via government purchase cards. Even when federal agencies do file Forms 1099 MISC, they often include an invalid vendor TIN. As a result, IRS has to expend resources in an attempt to identify a correct TIN via its TIN validation process and, in most cases, IRS is unable to use the information returns to determine whether vendors had either underreported their income or failed to file a tax return. As shown in figure 1, the 14 federal departments filed almost 170,000 Forms 1099 MISC with invalid vendor TINs for tax years 2000 and 2001 combined. Almost $20 billion in vendor payments were included on these information returns. Overall, for the 2 years combined, about 13 percent of all Forms 1099 MISC filed by the 14 federal departments included an invalid TIN when they were submitted to IRS. (See app. III for the number and percentage of Forms 1099 MISC filed individually by the 14 federal departments with invalid TINs.) As also shown in figure 1, IRS was subsequently able to correct about 32 percent of the invalid vendor TINs through its TIN validation process.