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. 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. 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. 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. 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.