In addition, federal executive agencies must report all payments  for services provided by vendors, including payments made to  corporations. The PMF is a database  that includes all entities that make payments subject to information return  reporting. If there is a match, the information is entered in the IRMF without the need  for additional action. This enables IRS to  determine whether the vendor has reported all of the income on the tax  return. 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. With Some Exceptions, Federal Agencies File Forms 1099 MISC

While most federal agencies filed information returns for vendors, some  did not. 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. 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. Federal Agencies Do Not Consistently Use IRS’s TIN- Matching Program

Although the TIN-matching program is available, most federal agencies do  not consistently use this program to ensure that the TINs included on  information returns are valid. IRS Has No Program to Identify Federal Agencies That Fail to File Forms 1099 MISC and the CCR Does Not Now Serve as a Central Source of Valid TINs

Although IRS can identify whether Forms 1099 MISC filed by federal  agencies include a valid TIN, IRS does not have a program to identify and  follow up with agencies that fail to file Forms 1099 MISC. Conducting a survey of all payers included in this file would be a way for  IRS to update this information, thus ensuring that all federal payers are  correctly coded as federal in the Payer Master File. We commend these efforts to address the long- standing problem of obtaining necessary vendor information from payment  card companies. Objectives, Scope, and Methodology

Our objectives were to determine (1) the extent to which federal agencies  file required Forms 1099 MISC, take steps to ensure that information on the  returns, particularly Taxpayer Identification Numbers (TIN), are valid, and  initiate backup withholding if vendors provide invalid TINs; (2) recent  actions the Internal Revenue Service (IRS) has taken to help improve  federal agency Form 1099 MISC (Miscellaneous Income) filing compliance;  and (3) whether any additional measures could further improve federal  agency compliance with Form 1099 MISC filing requirements. To determine whether federal agencies take steps to ensure that  information on the returns, particularly TINs, is valid, by using IRS’s TIN- matching program to validate vendor TINs or initiate backup withholding  on future payments to vendors that have submitted invalid TINs, we sent a  survey to the 14 federal departments about their policies and practices for  obtaining vendor TINs and filing Forms 1099 MISC.
Why GAO Did This Study

The Internal Revenue Service (IRS) matches information returns filed by third parties, including federal agencies, with taxpayers' income tax returns to determine whether taxpayers have filed a return and/or reported all of their income. A correct taxpayer identification number (TIN) is necessary to enable IRS to match these returns. Prior GAO reviews have shown that federal agency payment records often include invalid TINs, particularly for vendors. GAO was asked to study federal agencies' compliance with filing information returns for service payments made to vendors, IRS's efforts to improve agencies' compliance, and whether additional measures could improve their compliance.

What GAO Found

Federal agencies do not always adhere to information return reporting requirements. About $5 billion in payments to 152,000 payees made during 2000 and 2001 by agencies within three federal departments were not reported to IRS. About 8,800 of these payees had received $421 million in payments, yet had failed to file a tax return for these years. In addition, about $20 billion in payments that were reported to IRS on 170,000 information returns for 2000 and 2001 included invalid vendor TINs. This was due in part to the fact that few federal agencies use IRS's TIN-matching program, as use of this program is optional. IRS has acted to aid federal agencies in complying with annual information return filing requirements. In August 2003, IRS notified federal agencies about information returns filed for 2001 that included invalid vendor TINs and the need for agencies to withhold a portion of future payments if the vendors fail to provide a valid TIN. IRS is also in the process of making the TIN-matching program available online. IRS does not currently have a program to identify and follow up with federal agencies that fail to file required annual information returns for vendor payments. Improvements to IRS's Payer Master File, which contains general information on all payers who file information returns, would be necessary for such a program. In addition, although the Central Contractor Registration is intended for use as a central source of valid vendor information by all federal agencies, it contains some invalid TINs. Due to statutory restrictions, all vendor TINs in this database cannot currently be validated through the IRS TIN-matching program, but options exist to address this problem.