Payees are responsible for reporting payments they received from payers  on the appropriate lines of their tax returns. Without an estimate of payers’ 1099-MISC noncompliance,  IRS does not know to what extent such noncompliance allows payees to  underreport their income without being detected. Although IRS Does Not Know the Extent of 1099- MISC Payer Noncompliance, Available Evidence Points to the Possibility of a Significant Problem

Our analysis of 1099-MISC submission patterns by small businesses as well  as past studies of federal, state and local government agencies suggests  that payer noncompliance with 1099-MISC reporting requirements may be  potentially significant. However, if  even a small proportion of the almost 46 million small businesses that did  not submit 1099-MISCs in 2005 improperly failed to report as required,  there could be millions of missing 1099-MISC information reports. At this  time, IRS has not studied the extent to which payers failed to submit 1099- MISCs, but the future NRP results could be useful for this purpose. For  perspective, payers reported $6 trillion in 1099-MISC payments for tax year  2006, so a one percent increase in reported payments could result in an  additional $60 billion reported to payees and IRS. Some  options to change 1099-MISC reporting requirements require legislative  action, and other options would be costly for IRS to implement. IRS Aims to Improve AUR Efficiency but Lacks a Systematic Process for Learning about the Causes of Mismatches

Adopting strategies, discussed above, to promote voluntary compliance  with 1099-MISC reporting requirements and to better monitor payer  noncompliance would likely increase the number of 1099-MISCs IRS  receives from payers. Additionally,  IRS does not routinely collect data on the screen-out process, so IRS does  not have information on the nature and cause of recurring 1099-MISC  discrepancies. Matter for Congressional Consideration

To simplify the burden that the corporate exemption places on payers to  distinguish payees’ business status and also provide greater information  reporting, Congress should consider requiring payers to report payments  to corporations on the form 1099 MISC, as we previously suggested and as  proposed in the Bush Administration’s budget. To help payers better understand their 1099-MISC reporting  responsibilities, we recommend that the Commissioner of Internal  Revenue    add a general reminder to Publication 535 Business Expenses to  highlight 1099-MISC reporting responsibilities;    assess whether adding a checkbox to business tax returns, inquiring  whether all 1099-MISCs have been submitted, to serve as a reminder to  payers would help increase 1099-MISC payer compliance; and  include a chart on the Form 1099-MISC as well as business income tax  instructions for distinguishing reportable from non-reportable  payments and for calculating whether reportable payments reached the  1099-MISC reporting threshold. Appendix I: Scope and Methodology

The objectives of this report were to determine: (1) what IRS knows about  1099-MISC reporting noncompliance by payers; (2) how IRS detects and  pursues 1099-MISC reporting noncompliance by payers; (3) what  impediments payers encounter in preparing and submitting accurate 1099- MISC forms and what options could help IRS address these impediments;  and (4) what opportunities exist to enhance IRS’s use of 1099-MISC  information to both detect payee noncompliance and promote voluntary  compliance. While we could  not isolate which businesses were required to submit a 1099-MISC but did  not, we determined the data were sufficiently reliable to show how many  small businesses submitted 1099-MISCs to IRS. Tax Administration: Costs and Uses of Third Party Information  Returns. Tax Administration: Federal Agencies Should Report Service Payments  to Corporations. GAO/GGD-92-130.
Why GAO Did This Study

Third party payers, often businesses, reported $6 trillion in miscellaneous income payments to IRS in tax year 2006 on Form 1099- MISC information returns. Payees are to report this income on their tax returns. Even a small share of payers failing to submit 1099-MISCs could result in billions of dollars of unreported payments. IRS data suggest that payees are more likely to report income on their tax returns if IRS receives payers' information returns. GAO was asked to examine 1099- MISC reporting including the extent to which payers fail to submit 1099-MISCs; impediments to payers to submitting1099-MISCs; and whether IRS could better use the 1099-MISCs it currently receives. GAO reviewed IRS documents and compliance data and interviewed officials from IRS, its advisory groups, and others who advise 1099-MISC payers.

What GAO Found

The Internal Revenue Service (IRS) does not know to what extent payers fail to submit required 1099-MISCs, but various sources point to the possibility of a significant problem. For tax year 2005, 8 percent of the approximately 50 million small businesses with assets under $10 million submitted 1099-MISCs, but IRS does not know how many of the other 92 percent were required to report payments but did not. Many business payments, such as payments to corporations, are not subject to 1099-MISC reporting. If even a small share of the businesses that did not submit a 1099-MISC should have, millions of 1099- MISCs could be missing with significant amounts of unpaid taxes by payees. GAO's prior work in 2003 found significant 1099-MISC payer noncompliance by some federal agencies. IRS could mitigate costs for research on payer noncompliance by building on its existing research programs. Payers face a variety of impediments that may contribute to 1099-MISC noncompliance, including complex reporting requirements and an inconvenient submission process. For example, certain payments to unincorporated persons or businesses are subject to 1099-MISC reporting, but payments to corporations generally are not, requiring payers to determine the status of their payees. GAO in the past determined that the benefits in terms of increased tax revenue and improved taxpayer compliance justify eliminating this distinction. IRS agrees, and the Bush Administration's proposal to do so would have required legislative action. Other options to remind payers about their reporting obligations include adding a tax return checkbox asking if payers submitted required 1099-MISCs and adding a chart to help payers navigate the detailed instructions for the Form 1099-MISC. IRS matches what the payees report on their tax returns to what payers report on 1099-MISCs to detect payees underreporting income and taxes. But IRS does not pursue all mismatches its computers detect. If IRS were to increase payer compliance with 1099-MISC requirements, the number of mismatches would likely increase. However, IRS does not systematically collect information on the causes of mismatches or whether they could be prevented.