GAO Calls for Improvement in Use of Information Returns

The Government Accountability Office (GAO) has published a snapshot report which concluded that the IRS can improve its use of information returns to enhance tax compliance (GAO-24-107095).

According to the report, the IRS received more than five billion Form W-2s and other information returns — such as Form 1099-NEC and Form 1099-K — in 2022. These returns are filed by third parties and the agency uses them to verify self-reported income and tax on returns filed by taxpayers. They are also used to identify taxpayers who fail to file tax returns but should have.

“When there is little or no third-party information reporting, taxpayers report their incomes incorrectly about 50% of the time,” GAO said. For example, the report cited “gaps” in information reporting on rental real estate income.

A key problem identified by GAO is that the IRS “lacks centralized leadership to make strategic decisions related to the use of information returns across the agency.” For example, it has not analyzed information returns comprehensively to determine if the returns’ characteristics meet the agency’s needs.

Another potential problem is that the new Form 1099-K reporting threshold “may exacerbate taxpayer confusion,” the report said. Beginning in 2023, reporting is required if a taxpayer has total annual payments exceeding $600, it noted, adding that many taxpayers who will receive the form did not in the past. The IRS has said it expects to receive about 44 million Form 1099-Ks in 2024, an increase of about 30 million. “However, this estimate may change as the IRS receives more information from large filers and states,” GAO said.

The report concluded by stating “it is important that the IRS implement” the following recommendations to:

• Develop a collaborative mechanism to coordinate among the internal information return stakeholders;
• Research and develop potential recommendations to expand third-party information reporting on sole proprietors’ income and expenses;
• Develop a plan to systematically evaluate information returns to improve compliance, and reduce fraud and reporting burden;
• Work to determine the most appropriate thresholds for payment information reporting, including Form 1099-K; and
• Analyze existing and forthcoming 1099-K data to acquire a better understanding of noncompliance and taxpayer burden to make enforcement and outreach decisions.

In addition, GAO recommended that Congress consider “requiring all taxpayers with rental real estate activity to be subject to the same information reporting requirements as other taxpayers operating a trade or business.”

Article originally appeared in Federal Tax Update news.