IRS records sole proprietor information on a third file, the Cross-Reference Entity File (CREF). Objectives, Scope, and Methodology

As agreed with the Joint Committee, our objectives were to determine whether IRS (1) accurately cross-references sole proprietor identification numbers on the Individual Master File, Business Master File, and CREF and (2) needs to take any actions to improve the accuracy of its cross-reference files. IRS Problems in Cross-Referencing Sole Proprietors’ Accounts

IRS cross-references the SSN and EIN that a sole proprietor reports. However, we found that the cross-references were not always correct. IRS’ computer screening process prevented certain erroneous identification numbers from being posted to CREF. Erroneous Cross-References Can Lead to False Underreporter Leads

IRS collects tax information by taxpayer identification number and decides whether to contact a taxpayer for potentially underreporting income on the basis of the information collected. The Social Security Administration uses EINs to track employers’ contributions to the Social Security trust funds. Recommendations

We recommend that the Commissioner of Internal Revenue establish returns-processing and compliance-screening procedures to help remove erroneous cross-referenced taxpayer identification numbers from sole proprietors’ tax records, and evaluate the feasibility of eliminating the requirement that sole proprietors use EINs for filing business returns. Our draft report had already noted that computer programs and computer files would have to be changed. Additional copies are $2 each.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed whether the Internal Revenue Service (IRS): (1) accurately cross references the two identification numbers that self-employed individuals report on their tax returns; and (2) needs to take any actions to improve the accuracy of its cross-reference files.

What GAO Found

GAO found that IRS: (1) uses information from different computer files to identify sole proprietors that may have tax compliance problems; (2) requires certain taxpayers to have a valid social security number (SSN) and employer identification number (EIN) so that it can cross-reference the taxpayers' accounts from one file to another; and (3) records a sole proprietor's identification numbers on three computer files and uses the SSN to establish an account on the Individual Master File. In addition, GAO found that: (1) the identification numbers that IRS records for cross-referencing purposes are not always reliable and cause IRS to generate false underreporter leads; (2) the IRS computerized screening process limits the number of false underreporter leads created by the Cross-Reference Entity File; and (3) if IRS and the Social Security Administration eliminate sole proprietors' EIN, they will have to modify their computer programs to accept SSN instead of EIN.