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TIN MATCHING API


Real Time TIN Match Pro API - version 2.6
FREE TIN CHECK TRIAL ~ LIMITED TIME TRIAL OFFER

March, 2015
New Bulk Batch-match & Real Time API System: Breakthrough in 1099 TIN Verification API by Realsearch.com - National Leader in ID Verification & EIN / TIN Matching.


If you are interested in TIN Matching, Finding Tax ID Numbers, Federal EIN Numbers and TIN Matching, Take a look at developer.realsearch.com

and the brochures on www.realsearch.com

This is not an IRS system. Realsearch.com & Feinsearch.com are privately owned by Liberty Data, Inc.With 17 years of collecting Employer Identification Numbers and 550,000 registered members - we can offer you the USA's largest private source for EIN Verification ~ more than 16.8 million EINs, and 350 million TIN/SSNs to help you locate and verify unique very small DBA business’ TINs. Over 50% of requests match our massive internal TIN database, the rest call the IRS system in real time.


Realsearch.com TIN Match Premium  system will process a large batch in (internal + IRS verified )  minutes against our in house file, and run XML real time calls with re-sults in as little as 1/10 of one second. We have no downtime like the IRS. We pride ourselves on providing data security, max uptime, and the best hardware equipment and data centers available.

We can also correct a wrong TIN or input name. This is an upcoming feature soon to be available for a small fee for clients who participate in FREE bulk tin matching offer.

Avoid 1099 fines; comply with US Federal laws regarding verification of EIN & SSN. Match against our in-house database of nearly 1 billion name & TIN combinations that include 85% of all adult registered SSN numbers, as well as over 16 million EIN Employer Identification Numbers.


Match against ½ Billion TIN records & IRS e-Services Directly by API

Direct API Data Pipe Access ! NOT IRS dependent

Fastests Response Speed anywhere . Fast 1/10 second return

Improve 1099 filing accuracy

FREE TIN BATCHING (over 100k) ~ Small fee to append and Locate EIN (TIN) numbers. Save Time - integrate right into your system or software

Ready made easy API plugins, or easy to access bulk `batch-match’ service

TIN Matching API or Batch-match TIN Matching API


Separate TIN Look ups & TIN Corrections -Look up & Search for missing EIN / SSNs - system allows you access to 16.8 million FEINs, and 350 million more SSNs that may be used by small DBA businesses. Quickly check TIN Name and ID number combinations

Sources:


Realsearch.com is the nation’s premier source of EINs, business information, background facts and assessment on the companies that are important to your clients. Nationwide sources (quarterly updates) Sec. of State, domain registration registries, federal and state sources, public records, B2B, UCC liens judgments and filings, updated monthly US federal bankruptcy files. Our 60 Business Validation APIs services have endless applications for various industries.


TIN MATCHING Input: Entity name & 9 digit TIN

Speed: 1/10 second on API calls & 15 minutes, or less on batches of 100,000


Response Match Codes Description: (same as IRS )

0 - TIN and company name provided did not match

1 - TIN and company name exactly matched

2 - TIN matched BUT company/lastname partially matched

10 - Unknown TIN (within our system)

99 - Connection/Query Error

If interested, please register at:

www.realsearch.com then call for set up and API specs


Get Started - its Free & Easy


Save manual processing & EIN/ SSN verifications

Big Benefits - Save on IRS 1099-B Fines

Eliminate manual Labor e-Services work

Sidestep the IRS system headaches

Free Trial - Yes !   Free Setup Help  - Yes !

Get in better Compliance

Faster Response times than the IRS e-Services

Increase KYC & Due Diligence

Get full Business Credit Reports


Requirements:

Tax purposes only, API Service Level Agreement required after the Trial

Take 5 & Register & Set up your account on Realsearch.com

Call & Discuss with Robin lahiri, MS, ACFE,  888-996-6253 & get Activated

Upload Compliance Documents, Get API specs, Have IT Install the simple  API, Test it, evaluate, complete SLA Agreement & start enjoying Real TIME TIN Matching. For more information, or, if you would like to discuss how this or how any of our

APIs can help you with your business requirements please call today, or email Robin@realsearch.com  offer call : Robin Lahiri, CTO 888-996-6253

800-299-8280 ext. 110 | or cell phone: 888-996-6253  text is best | Desk 386-246-4204

FREE TIN MATCHING & low cost EIN append service


**** more TIN Matching info on 

IRS eServices TIN Match and TIN Matching





The Internal Revenue Service (IRS) issued final regulations requiring that, starting with transactions in calendar year 2011, the gross amount of payment card transactions be reported annually to merchants and the IRS. These final regulations contain rules to implement reporting of credit card, debit card and similar transactions. Beginning in January 2012, every payment settlement entity will file a 1099-K form with the IRS reporting the gross amount of each merchant’s card transactions for the 2011 year, as well as provide a corresponding statement to each merchant.

The new regulations require that the merchant’s Taxpayer Identification Number (TIN) and legal name, as listed in its 1099-K, match what is on file with the IRS. If a merchant fails to provide its TIN, or if there is a discrepancy between the TIN and/or legal name the merchant previously provided and the TIN and/or legal name on file with the IRS, then the IRS may require the reporting entity to withhold a portion of the merchant’s future payments from card transactions (the withholding rate is currently set at 28%). This withholding provision goes into effect for payments starting in 2013.

This withholding provision goes into effect for payments starting in 2013. Compliant merchants (those whose TIN and legal name match the IRS database) will be charged additional fees for the issuance of annual information reports, known as 1099-Ks. This report, which is issued to both the IRS and the merchant, identifies the merchant's gross card transaction payments. In addition, we will charge non-compliant merchants (those whose TIN and legal name do not match IRS database) fees while we try to resolve discrepancies that may exist between the information we have on file, and the information on file with the IRS.

To help you understand and comply with the new regulations, we have provided a list of Frequently Asked Questions.


How to Update Your TIN

As an additional benefit to you, we compare TINs and legal names in our records to the information in the IRS database. If the information we have does not match the IRS database, we will notify you, provide you a Security Key, and the opportunity to update your information with us.

To avoid a disruption in your merchant funding, we ask that you review your TIN and legal name as they were originally filed with the IRS and as provided to us and ensure that both are accurate and consistent. If you need to update your information on file with us, please perform one of the following options:


Update Online

To update your TIN in our records now, have your Security Key ready and click the button below. You will be taken to a secure site where you may enter your information to be validated with the IRS database.


**News from the IRS ****



This is the accessible text file for GAO report number GAO-04-74 entitled 'Tax Administration: More Can Be Done to Ensure Federal Agencies File Accurate Information Returns' which was released on December 05, 2003. This text file was formatted by the U.S. General Accounting Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. Report to Congressional Requesters: December 2003: TAX ADMINISTRATION: More Can Be Done to Ensure Federal Agencies File Accurate Information Returns: GAO-04-74: GAO Highlights: Highlights of GAO-04-74, a report to congressional requesters 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. What GAO Recommends: To improve federal agency compliance with annual information reporting requirements for vendor payments, GAO is making recommendations to ensure that (1) IRS identifies and follows up with federal agencies that fail to file annual information returns for vendor service payments and (2) IRS and the Office of Management and Budget (OMB) ensure that vendor TINs are validated using IRS’s online TIN-matching program. IRS and OMB agreed to implement our recommendations. www.gao.gov/cgi-bin/getrpt?GAO-04-74. To view the full product, including the scope and methodology, click on the link above. For more information, contact Michael Brostek at (202) 512-9110 or brostekm@gao.gov. [End of section] Contents: Letter: Results in Brief: Background: Not All Federal Agencies File Required Information Returns or Take Steps to Ensure That Information Provided Is Valid: IRS Has Acted to Improve Form 1099 MISC Reporting Compliance: 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: Conclusions: Recommendations for Executive Action: Agency Comments and Our Evaluation: Appendixes: Appendix I: Objectives, Scope, and Methodology: Appendix II: Forms 1099 MISC Filed by 14 Federal Departments for Tax Years 2000 and 2001: Appendix III: Forms 1099 MISC Filed with IRS with Invalid TINs for Tax Years 2000 and 2001: Appendix IV: Comments from the Internal Revenue Service: Appendix V: Comments from the Department of Defense: Appendix VI: GAO Contacts and Staff Acknowledgments: GAO Contacts: Acknowledgments: Tables: Table 1: Number and Dollar Value of Forms 1099 MISC Filed with IRS for Tax Years 2000 and 2001: Table 2: Number and Percent of Forms 1099 MISC Filed with Invalid TINs for Tax Years 2000 and 2001: Figure: Figure 1: Forms 1099 MISC Submitted to IRS by Federal Agencies for Vendor Payments, Including Those with Invalid Vendor TINs That IRS Was Unable to Correct - Tax Years 2000 and 2001 Combined: Letter December 5, 2003: The Honorable Bill Thomas: Chairman, Committee on Ways and Means: House of Representatives: The Honorable Amo Houghton: Chairman, Subcommittee on Oversight: Committee on Ways and Means: House of Representatives: Federal agencies pay billions of dollars each year to vendors for services, such as compensation paid to individuals that are not employees and medical and health care payments. At the same time, some vendors fail to pay their taxes and have accrued billions of dollars in delinquent federal taxes. The Internal Revenue Service's (IRS) ability to ensure vendors are properly paying their taxes hinges on having complete and accurate reports from federal agencies on their vendor payments. The Internal Revenue Code requires any service recipient, including federal agencies, to report service payments to IRS if the services total $600 or more during a calendar year. An IRS Form 1099 MISC (Miscellaneous Income) information return is used to report service payments to IRS and must include the vendor's name, address, and taxpayer identification number (TIN).[Footnote 1] IRS matches information returns with income tax returns to determine whether taxpayers have filed a return and/or reported all of their income. For fiscal year 2002, IRS used information returns to detect about 1.5 million taxpayers that underreported their income by about $2.5 billion and also identified about 2 million taxpayers with tax liabilities of $2.4 billion that failed to file tax returns. However, when the TIN on an information return is invalid[Footnote 2] and IRS cannot ascertain the correct TIN, IRS is unable to match the information return data with tax return data and is thus unable to detect either whether a taxpayer underreported income or failed to file a tax return. To help federal agencies identify whether vendor TINs are valid, in 1997 IRS initiated a TIN-matching program that agencies can use, prior to filing their information returns, to determine whether vendors have provided a correct TIN/name combination. If a vendor either fails to provide a TIN or provides a TIN/name combination that does not match information in IRS's records, and the vendor subsequently fails to provide a correct TIN/name combination upon request, the federal agency is required to initiate backup withholding[Footnote 3]of future payments for services. Despite these efforts, our reviews of IRS's Federal Payment Levy Program[Footnote 4] showed that federal agency payment records often contained invalid or missing TINs and, therefore, could not be used to levy vendors' federal payments to recover delinquent federal taxes.[Footnote 5] As a result, you asked us to assess whether federal agencies in general have been submitting complete and accurate annual information returns to IRS for service payments to vendors. Specifically, 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 TINs, are valid, and initiate backup withholding if vendors provide invalid TINs; (2) recent actions IRS has taken to help improve federal agency Form 1099 MISC filing compliance; and (3) whether any additional measures could further improve federal agency compliance with Form 1099 MISC filing requirements. To meet our objectives, we requested and obtained vendor payment information for service payments made by the agencies and bureaus within the 14 federal departments[Footnote 6] for calendar years 2000 and 2001 and compared this information to vendor payment information included in IRS's Payer Master File and Information Returns Master File for the same 2-year period. We also surveyed the 14 federal departments on their policies and practices for obtaining vendor TINs and filing required Forms 1099 MISC. In addition, we discussed with IRS officials actions recently taken or pending for assisting federal agencies in filing complete and accurate Forms 1099 MISC for service payments to vendors. Finally, we discussed with both IRS and Office of Management and Budget (OMB) officials additional measures that could further improve federal agency compliance with Form 1099 MISC filing requirements. Our work was done from June 2002 through September 2003 in accordance with generally accepted government auditing standards. (App. I describes our overall objectives, scope, and methodology.): Results in Brief: Federal agencies are not always filing required Forms 1099 MISC or taking steps to ensure that information on the returns is valid. For example, we found that about $5 billion in payments to about 152,000 payees made by agencies within three federal departments during 2000 and 2001 were not reported to IRS on Forms 1099 MISC, and about 8,800 of the payees failed to file an income tax return for these years. In addition, about $20 billion in service payments on almost 170,000 Forms 1099 MISC--13 percent of the information returns filed by agencies within the 14 federal departments for 2000 and 2001 combined--included invalid TINs. IRS was unable to correct the TINs on about 116,000 of these returns (68 percent) valued at almost $9 billion, thus rendering them unusable for determining whether the vendors had reported this income. In response to our survey, only two federal departments indicated that their agencies were either using IRS's TIN-matching program to validate vendor TINs or initiating backup withholding if vendors failed to provide valid TINs departmentwide. While officials from some federal departments said they were unaware of IRS's TIN- matching program, others thought the program was currently unavailable. The main reason cited for not initiating backup withholding was the lack of a process in place within their respective financial management systems for accomplishing backup withholding of vendor payments if vendors failed to provide valid TINs. IRS has taken recent action and has other actions planned to assist federal agencies in complying with Form 1099 MISC filing requirements. For example, in August 2003 IRS sent a specific notice to federal agencies for the first time, identifying Forms 1099 MISC filed by the agencies for 2001 that included invalid vendor TINs and reminding the agencies of their responsibility to ensure that valid vendor TINs are provided and to initiate backup withholding of subsequent payments for vendors who fail to provide a valid TIN. Also, in late 2003 IRS plans to expand its TIN-matching program to enable federal agencies to submit online up to 100,000 TIN/name combinations at one time and to receive a response from IRS within 24 hours concerning whether these combinations match the TIN/name combinations in IRS's records. IRS does not identify agencies that fail to file Forms 1099 MISC and IRS and OMB have not taken steps to realize the potential of the Central Contractor Registration (CCR)--a Department of Defense (DOD) database of vendors that have registered to do business with DOD--to better ensure that agencies include accurate TINs on their Forms 1099 MISC for federal vendors. IRS does not currently have a program to identify and follow up with federal agencies that fail to file Forms 1099 MISC. Although such a program would be beneficial, it would require that IRS's Payer Master File, which IRS could use to identify federal agencies that do not file Forms 1099 MISC, be complete, accurate, and up to date. We found that 96 out of 147 federal agencies for which we had requested information from IRS were not specifically identified as federal payers in the Payer Master File. Further, although IRS's online TIN-matching program has the potential to assist federal agencies in reducing the number of Forms 1099 MISC submitted to IRS with invalid TINs, as of October 2003 OMB began requiring all federal agencies to use the CCR as the single validated source of information about vendors doing business with the federal government. However, TINs recorded in the CCR are not validated via IRS's TIN- matching program, there are no current plans to require such validation, and our work has raised concerns about the validity of TINs contained in the CCR. Having DOD validate vendor TINs recorded in the CCR through IRS's TIN-matching program would eliminate the need for each individual federal agency to do so and would further OMB's goal of having the CCR be a central source of valid vendor data. DOD cannot validate all vendor TINs under current law, but could if vendors gave it permission to do so or if the law was changed. We are making recommendations to ensure that IRS identify and follow up with federal agencies that fail to file annual information returns for vendor service payments and that IRS and OMB ensure that vendor TINs are validated using IRS's TIN-matching program. Both IRS and OMB generally agreed with our recommendations. DOD also indicated that actions were underway that should eventually enable vendor TINs in the CCR to be validated via IRS's TIN-matching program. Background: Section 6041A of the Internal Revenue Code requires any service recipient, including federal agencies, to file an annual information return with IRS for payments made to any person for services totaling $600 or more during a calendar year. Payments to corporations for certain services provided must also be reported, such as attorneys' fees and medical and health care payments. In addition, federal executive agencies must report all payments for services provided by vendors, including payments made to corporations. Specific information required on the annual information return--an IRS Form 1099 MISC-- includes the name, address, and TIN of both the payer and payee, as well as the total amounts paid during the year for the various types of services provided. The purpose of the Form 1099 MISC filing requirement is to enable IRS to identify taxpayers who fail to file an income tax return as well as those who fail to report all of their income on their tax return for the related year. IRS enters Form 1099 MISC information in both a Payer Master File (PMF) and an Information Returns Master File (IRMF). The PMF is a database that includes all entities that make payments subject to information return reporting. The PMF includes general information on the total number and dollar value of information returns, including Forms 1099 MISC, filed by each payer for each year. The IRMF is a database that includes specific information on the type and amount of payments made to each payee, including whether the payee TIN was valid upon receipt of the information return and if the TIN was invalid, whether it was subsequently corrected by IRS. Both the PMF and IRMF include the payer's TIN. Upon receipt of a Form 1099 MISC, basic information is entered into a temporary IRS database. IRS compares the payee TIN/name combination with TIN/name combinations in its records to determine if there is a match. If there is a match, the information is entered in the IRMF without the need for additional action. If there is not a match, IRS will try to validate the TIN/name combination via a TIN "validation" process, which entails matching the TIN and name control--the first four characters of an individual's last name or the first four characters of a business name--on the Form 1099 MISC with (1) a file which contains all social security numbers ever issued and all name controls ever associated with them and (2) a file that contains all employer identification numbers ever issued and all name controls ever associated with them. If IRS is able to match the TIN and name control through this process, the information is entered in the IRMF with a code indicating that the TIN was corrected and is valid. If IRS is unable to match the TIN and name control, the information is entered in the IRMF with a code indicating that the TIN is invalid. If the vendor TIN included on the Form 1099 MISC is initially valid or subsequently corrected by IRS, and the vendor files a tax return for the corresponding year, IRS can electronically match the TIN, name control, and amount entered in the IRMF with the amount reported on the vendor's tax return via the Document Matching Program.[Footnote 7] This enables IRS to determine whether the vendor has reported all of the income on the tax return. Alternatively, if there is no corresponding return with the same TIN and name control as that entered in the IRMF, IRS can determine that the vendor is a potential nonfiler. However, if the TIN entered in the IRMF is invalid, IRS is unable to use the information to detect either underreporting or nonfiling on the part of a vendor. Since 1997, IRS has had a TIN-matching program that federal agencies can use to verify the accuracy of TIN/name combinations furnished by federal payees. This program was intended to reduce the number of notices of incorrect TIN/name combinations issued for backup withholding by allowing agencies the opportunity to identify TIN and name discrepancies and to contact payees for corrected information before issuing an annual information return, such as a Form 1099 MISC. Monthly, federal agencies can submit a batch of TIN/name combinations to IRS for verification. IRS then matches each record submitted and informs the agency whether the TIN and name combination submitted matches its records.[Footnote 8] In order to encourage vendors to provide a valid TIN and to ensure that taxes are paid when they do not, Internal Revenue Code Section 3406 requires payers, including federal agencies, to initiate backup withholding of a federal payment if a payee, including a vendor, fails to provide a TIN or provides an invalid TIN, and upon notice fails to provide a correct TIN. IRS considers a TIN to be missing if it is not provided, has more or less than nine numbers, or has an alpha character in one of the nine positions. IRS considers the TIN to be invalid if it is in the proper format, but the TIN/name combination doesn't match or cannot be found in IRS or Social Security Administration files. Payments subject to backup withholding include various types of income reportable on a Form 1099 MISC, including compensation paid to individuals that are not employees. The current rate for backup withholding is 30 percent of the payment. Not All Federal Agencies File Required Information Returns or Take Steps to Ensure That Information Provided Is Valid: Federal agencies are not always adhering to Form 1099 MISC filing requirements. 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. Few agencies are taking advantage of IRS's TIN-matching program to validate vendor TINs prior to submitting information returns to IRS. Similarly, few agencies are initiating backup withholding on payments made to vendors that have provided invalid TINs. With Some Exceptions, Federal Agencies File Forms 1099 MISC: While most federal agencies filed information returns for vendors, some did not. For both 2000 and 2001, the 14 federal departments collectively filed over 600,000 Forms 1099 MISC in which they reported over $100 billion in payments each year. (See app. II for the number and dollar value of Forms 1099 MISC filed individually by the 14 federal departments.): Although the 14 federal departments collectively filed a substantial number of Forms 1099 MISC over this 2-year period, we found some significant exceptions, as the following examples illustrate. * About $5 billion in payments to about 152,000 payees made collectively by the Departments of Agriculture, Commerce, and Justice for 2000 and 2001 combined were not reported to IRS on Forms 1099 MISC. 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. If information returns had been filed and IRS had this information, it would have provided a basis for IRS to assess the appropriate taxes against these payees. * 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. DOD officials indicated that obtaining vendor information needed for Forms 1099 MISC from payment card companies has been a long-standing problem. They estimated that they could have filed as many as 40,000 additional Forms 1099 MISC for 2000 and 2001 if they had received the necessary vendor information from payment card companies. * According to the Department of Transportation, Forms 1099 MISC were not filed for services if the vendor was a corporation that provided both goods and services, as their vendor payment system cannot distinguish between the two for the purpose of issuing Forms 1099 MISC. As a result, only about $8 million of $92 million in service payments for tax years 2000 and 2001 were reported to IRS on Forms 1099 MISC. * One Department of Housing and Urban Development agency that made payments to vendors for services totaling over $73 million for 2000 and 2001, failed to file any Forms 1099 MISC for these 2 years. According to a Department of Housing and Urban Development official, because the agency is a wholly owned corporation within HUD and is therefore quasi- federal, agency officials were not aware that they were required to file Forms 1099 MISC. They further indicated that the agency had subsequently issued Forms 1099 MISC to its vendors for payments made for 2002. In response to our survey of departmental policies and practices for filing Forms 1099 MISC, department officials cited various reasons for not filing a Form 1099 MISC for vendor payments. Not having a valid vendor TIN was the foremost reason cited. Other reasons included the inability to distinguish between goods and services provided by a vendor,[Footnote 9] as cited above, and problems obtaining necessary vendor information, namely TINs, from payment card companies for vendors that are paid via government purchase cards. Forms 1099 MISC Often Include Missing or Incorrect TINs: Even when federal agencies do file Forms 1099 MISC, they often include an invalid vendor TIN. As a result, IRS has to expend resources in an attempt to identify a correct TIN via its TIN validation process and, in most cases, IRS is unable to use the information returns to determine whether vendors had either underreported their income or failed to file a tax return. As shown in figure 1, the 14 federal departments filed almost 170,000 Forms 1099 MISC with invalid vendor TINs for tax years 2000 and 2001 combined. Almost $20 billion in vendor payments were included on these information returns. Overall, for the 2 years combined, about 13 percent of all Forms 1099 MISC filed by the 14 federal departments included an invalid TIN when they were submitted to IRS. (See app. III for the number and percentage of Forms 1099 MISC filed individually by the 14 federal departments with invalid TINs.): Figure 1: Forms 1099 MISC Submitted to IRS by Federal Agencies for Vendor Payments, Including Those with Invalid Vendor TINs That IRS Was Unable to Correct - Tax Years 2000 and 2001 Combined: [See PDF for image] Note: GAO analysis of IRS data. [End of figure] As also shown in figure 1, IRS was subsequently able to correct about 32 percent of the invalid vendor TINs through its TIN validation process. However, IRS was unable to correct the invalid TINS included on about 116,000 of the Forms 1099 MISC filed by the 14 departments, which were valued at almost $9 billion, an average of about $77,000 per return. As a result, IRS would be unable to match this income with income reported on income tax returns for the same period to determine whether these vendors had either underreported the income or failed to file a tax return. One reason cited by department officials for filing Forms 1099 MISC with invalid TINs was the lack of a means for validating vendor TINs. This was cited, in particular, by those departments whose agencies were not using IRS's existing TIN-matching program. In addition to negatively affecting IRS's ability to ensure that vendors report all required income on their tax returns, invalid vendor TINs also impede the Department of the Treasury's ability to offset federal tax debts through the Federal Payment Levy Program, as well as its ability to offset other debts through the Treasury Offset Program.[Footnote 10] Each program requires a match of the payee's TIN and name control on both the payment record submitted to the Financial Management Service (FMS) and the debt information included in the FMS database, in order for the payment to be offset against the debt. 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. From our survey of federal department policies and practices for obtaining vendor TINs and filing required Forms 1099 MISC we found the following. * Officials from only 2 of the 14 federal departments--Labor and Housing and Urban Development--said their agencies were currently using IRS's TIN-matching program departmentwide. Even so, we noted that according to IRS's records, agencies within both departments had filed some Forms 1099 MISC for tax years 2000 and 2001 with invalid vendor TINs. * Three other federal departments--Health and Human Services, Interior, and Justice--indicated that IRS's TIN--matching program is used, but only by some of the agencies or bureaus within the respective departments. While officials from some federal departments said they were unaware of the TIN-matching program, others thought the program was currently unavailable. DOD officials stated that they rely on the CCR for validating vendor TINs and thus do not use the IRS TIN-matching program. A Department of the Interior official indicated that it is in the process of implementing use of the CCR by its bureaus and agencies as of October 2003 at the direction of OMB. In General, Federal Agencies Do Not Initiate BackupWithholding as Required: Although backup withholding is required if vendors fail to provide a valid TIN to a federal payer, most federal agencies do not initiate backup withholding. From our survey of federal department policies and practices for obtaining vendor TINs and filing required Forms 1099 MISC we found the following. * Officials from only 2 of the 14 federal departments--Energy and Transportation--said that their agencies initiate backup withholding departmentwide. * Three other federal departments--Health and Human Services, Interior, and Justice--indicated that backup withholding is initiated only by some of the agencies or bureaus within the respective departments. The main reason cited by officials from several of the federal departments for not initiating backup withholding was the lack of a process in place within their respective financial management systems for accomplishing backup withholding of vendor payments.[Footnote 11] Some department officials also indicated that they had no way of knowing when a vendor's TIN is invalid and therefore subject to backup withholding. An official with one of the agencies within the Department of Health and Human Services indicated that they deny payment to vendors who fail to provide a valid TIN in lieu of backup withholding. IRS Has Acted to Improve Form 1099 MISC Reporting Compliance: IRS has taken some recent actions and has other actions planned to assist federal agencies in complying with Forms 1099 MISC filing requirements, as the following examples illustrate. * In August 2003, for the first time, IRS sent a specific notice (Notice 1313) to federal agencies identifying Forms 1099 MISC filed for 2001 in which the vendor's TIN was invalid and reminding the agencies of their responsibility to ensure that TINs are valid and to initiate backup withholding for any vendors who subsequently fail to provide the agency with a correct TIN upon notification by the agency. Sending these notices annually may address agency concerns about not having a way to determine that a vendor's TIN is invalid and that backup withholding should be initiated. * By the end of 2003, IRS plans to expand its TIN-matching program to enable federal agencies to submit online up to 100,000 TIN/name combinations at a time and to receive a response from IRS within 24 hours concerning whether the TIN/name combinations submitted match the TIN/name combinations in IRS's records. As an interim step, IRS plans to have an interactive computer application available that will allow federal agencies to submit up to 25 TIN/name combinations and receive feedback within 5 seconds on whether these match the TIN/name combinations in IRS's records. As with the existing TIN-matching program, IRS will not be able to provide an agency with the correct TIN or name if they do not match IRS's records due to the disclosure laws. Instead, the agencies will continue to be responsible for contacting a vendor for the correct TIN/name combination. However, the online TIN- matching program should make it easier for federal agencies to identify vendors that are to be contacted to obtain a valid TIN and thus prevent the agencies from filing Forms 1099 MISC that include invalid TINs. * In February 2003 IRS issued a proposed revenue procedure that would enable payment card companies to act on behalf of cardholders/payers, such as federal agencies, in soliciting, collecting, and validating vendor information, including TINs. This procedure would enable payment card companies to use IRS's TIN-matching program to validate the TIN/ name combinations provided by vendors for which a Form 1099 MISC is to be filed. Once adopted, this procedure may help to eliminate some of the problems agencies have experienced in getting necessary vendor information related to purchase card payments. In addition, IRS has initiated meetings with various federal agencies, including the Departments of Defense and Agriculture, to identify specific problems associated with obtaining valid vendor TINs and filing accurate Forms 1099 MISC, particularly problems related to purchase card payments. In November 2003, IRS plans to present a federal agency seminar covering various topics related to filing Forms 1099 MISC, including use of the TIN-matching program, information reporting requirements, and the previously mentioned proposed revenue procedure. 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. In addition, the CCR does not, as OMB intends, serve as a central source of valid TIN data that federal agencies can use. At Present, IRS Has No Program to Detect Federal Agencies That Do Not File Forms 1099 MISC: IRS does not have a program to periodically identify and follow up with federal agencies that fail to file Forms 1099 MISC for vendor payments. IRS officials indicated that their emphasis has been on identifying Forms 1099 MISC filed with invalid TINs by nonfederal payers. This is because Internal Revenue Code section 6721 authorizes IRS to assess a penalty of $50 against a nonfederal payer for each information return filed with an invalid TIN, up to a maximum penalty of $250,000 per calendar year. IRS proposed just over $204 million in penalties against nonfederal payers for information returns with invalid TINs for tax years 2000 and 2001 combined. IRS estimated that an additional $6.9 million in penalties could have been proposed against federal agencies for filing information returns with invalid TINs, if IRS had the authority to do so.[Footnote 12] A complete and accurate Payer Master File, which includes general payer information, such as the payer name and TIN, as well as the total number and dollar value of various types of Forms 1099 filed by each payer, would enable IRS to identify federal agencies that fail to file Forms 1099 MISC. IRS could then contact these agencies to ascertain why these returns were not filed. IRS initially indicated to us that federal payers are specifically coded as such in the Payer Master File to distinguish them from nonfederal payers. However, we found that 96 of 147 federal agencies and bureaus for which we needed information concerning Forms 1099 MISC they filed with IRS for 2000 and 2001 were not coded as federal payers in the Payer Master File. IRS officials agreed that there is a need to update the Payer Master File to ensure that all federal payers are properly coded as federal. 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. TINs in the CCR Are Not Validated: OMB has instructed federal agencies to begin using the CCR as of October 2003, as the single validated source of information about vendors doing business with the federal government, but CCR vendor TINs are not validated with IRS's TIN-matching program. The CCR, which is maintained by DOD, includes information on over 234,000 vendors that have registered to do business with DOD, including the vendors' TIN and name. The accuracy and completeness of information listed in this database is the responsibility of the individual vendors and must be updated annually. According to CCR officials, vendor TINs are not validated via IRS's TIN-matching program. Instead, CCR does an edit check to ensure that a vendor's TIN is in the correct format, namely that it contains nine numbers. At the time of our review and resulting July 2001 report[Footnote 13] mentioned earlier, we found that there were a substantial number of invalid vendor TINs in the CCR. In addition, during our current review, we found that the CCR included about 7,000 vendor employer identification numbers that were not included in IRS's Business Master File.[Footnote 14] Due to the lack of validated TINs in the CCR, agencies' use of this centralized database as a source of TINs for vendors in and of itself would not ensure that the agencies include valid TINs on Forms 1099 MISC submitted to IRS. As noted earlier, in line with OMB's expectations, DOD relies on the CCR as a source of valid TINs and therefore does not use IRS's TIN-matching program; Interior officials say they also plan to use the CCR. If the name and TIN of vendors recorded in the CCR were validated by DOD initially and then periodically thereafter through IRS's TIN- matching program, the CCR could become a central source of valid vendor TINs for all agencies to use for their Forms 1099 MISC submitted to IRS. However, because agencies are restricted to using the TIN-matching program only for validating TINs for which an information return is required, DOD would not be able to validate all vendor TINs included in the CCR because not all vendors in the CCR actually receive DOD contracts to provide services. This restriction could be addressed through a change to the disclosure laws, thus authorizing DOD to use the TIN-matching program for all vendors that have registered with the CCR. Alternatively, individual vendors could be asked to agree to have their TIN and name matched to IRS data when they apply to do business with the government. Section 6103 of the Internal Revenue Code protects taxpayer information, including TINs, from disclosure. However, taxpayers can waive this protection. This would enable IRS to provide more information than can currently be provided under the TIN-matching program, such as the correct TIN/name combination. Given that the CCR is not currently a valid source of vendor TINs, agencies cannot rely on the CCR as OMB intends. Therefore, each agency would need to use IRS's online TIN-matching program as the only way to independently verify vendor TINs necessary to include on their Forms 1099 MISC. However, at the present time agency use of the TIN-matching program is optional. Conclusions: Some federal agencies' failure to file required annual Forms 1099 MISC and other agencies' failure to file returns with valid vendor TINs adversely affects IRS's efforts to detect unreported vendor income and vendors that fail to file income tax returns. In addition, invalid TINs in federal agency payment records negatively affect Department of the Treasury efforts to offset federal tax debts through the Federal Payment Levy Program and other federal debts through the Treasury Offset Program. Although IRS has taken some positive actions to improve federal agency compliance with Form 1099 MISC filing requirements, additional steps could be taken. IRS could identify and follow up with federal agencies that fail to file required Forms 1099 MISC if it had a complete and accurate Payer Master File. In addition, the CCR could become, as OMB intends, a central source for valid vendor information, including TINs. Currently, CCR TIN data are not always accurate. Except for current statutory restrictions on the use of IRS's TIN-matching program, the CCR's administrator, DOD, could use IRS's new online TIN-matching program to routinely verify the TINs of all vendors as they are added to the CCR and then periodically thereafter. This would carry out OMB's desire for the CCR to be a central source of valid vendor information and would thereby avoid each agency independently verifying TINs for some of the same vendors. Asking vendors to permit DOD to routinely verify their TINs when they register to do business with the federal government would be one option to enable DOD to verify TINs in the CCR against IRS's records. Alternatively, OMB and IRS could determine whether an exception to section 6103 of the Internal Revenue Code should be requested. In the absence of the CCR as a valid source of TINs, agencies must individually and voluntarily use IRS's TIN-matching program to validate vendor TINs. Agencies have not consistently used the TIN-matching program in large part because they say they were unaware of it. IRS's new online TIN-matching program and publicity IRS plans as it launches the new system later this year may make officials more aware of the program and increase their use of it. However, until OMB is able to realize its intent of having the CCR be a valid source of information for federal vendors, additional assurance could be gained that agencies would use the matching program if OMB required them to do so. Because IRS has made the system available online, fulfilling such a requirement should now be easier than in the past. Recommendations for Executive Action: To ensure that federal agencies file Forms 1099 MISC for payments to vendors for services provided, we recommend that the Commissioner of Internal Revenue: * ensure the accuracy of identification information concerning federal payers in IRS's Payer Master File and: * develop a program to periodically identify federal agencies that fail to file Forms 1099 MISC and follow up to determine why the forms were not filed. To minimize duplicate agency effort in validating vendors' TINs and to reinforce the anticipated role of the Central Contractor Registration as the single validated source of vendors doing business with the federal government, we also recommend that the Commissioner of Internal Revenue and the Director of the Office of Management and Budget consider options to routinely validate all vendor TINs in the CCR and to then require all agencies to use vendor and TIN information from the CCR for their Forms 1099 MISC. If this proves to be infeasible, OMB should require each agency to validate TINs for vendors who provide services through IRS's TIN-matching program. Agency Comments and Our Evaluation: We received written comments on a draft of this report from the Commissioner of Internal Revenue (see app. IV) and the Under Secretary of Defense (Comptroller) (see app. V). The Commissioner agreed with our recommendations. However, he also emphasized that agencies may not wish to spend the resources to effectively use IRS's TIN-matching program and that IRS cannot compel agencies to meet their Form 1099 MISC reporting responsibilities. To ensure the accuracy of identification information concerning federal payers included in IRS's Payer Master File, the Commissioner agreed to perform periodic reviews of the database to ensure its accuracy. In addition, as part of an education-compliance program geared to federal agencies that IRS is in the process of developing, the Commissioner stated that IRS plans to contact federal agencies to identify and verify that all TINs used by each agency have been properly identified, thus compiling an accurate list of all federal agency payer TINs. To identify federal agencies that fail to file Forms 1099 MISC and the reasons why the forms were not filed, the Commissioner agreed to compare the above mentioned list of federal agency payer TINs to the Payer Master File to identify agencies that did not file Forms 1099 MISC and to then contact the agencies to determine if Forms 1099 MISC were required. To minimize duplicate agency effort in validating vendors' TINs and to reinforce the role of the CCR as the single validated source of vendors doing business with the federal government, the Commissioner agreed that IRS will work with DOD to ensure that vendor TINs on the CCR are accurate, to include exploring the expanded use of the TIN-matching program to validate all TINs included in the CCR. In addition to commenting on the report recommendations, the Commissioner pointed out that IRS Policy Statement P-2-4, which provides that federal agencies are not subject to penalties and interest for failure to comply with Form 1099 MISC filing requirements, is based on a 1978 GAO Comptroller General Decision (B-161457). This decision states that agency appropriations are not available for payment of interest and penalties. The Commissioner noted that if an agency does not wish or is unable to comply with its Form 1099 MISC reporting responsibilities, there is nothing that IRS can do but rely on voluntary compliance on the part of the agency. Although we agree that IRS cannot compel agencies to meet their Form 1099 MISC reporting responsibilities, we believe implementing our recommendations will better ensure that agencies do so. For instance, by bringing to agencies' attention that they are not filing the required information returns, IRS can help educate agencies about their reporting responsibilities. Further, by improving the validity of TINs in the CCR, IRS, working with OMB, can make it easier for agencies to comply. The Commissioner also stated that a number of federal agencies indicated that they have been unable to use IRS's TIN-matching program because their financial reporting systems were incompatible with the TIN-matching program and that the cost to make agency systems compatible would be prohibitive. If IRS and DOD are able to arrange validation of TINs included in the CCR via the TIN-matching program as we recommend, this would eliminate the need for individual agencies to use the TIN-matching program. In the event that IRS and DOD are unable to work out such an arrangement, IRS's online TIN-matching program, which can be accessed via the Internet using a desk-top workstation, may be an effective alternative to agencies making substantial changes to their financial accounting systems. The Under Secretary of Defense (Comptroller) did not directly say he agreed with our recommendation, but indicated that efforts currently underway to improve the accuracy of TINs in the CCR for both DOD and all other federal agencies mirror our recommendation for IRS and OMB to consider options to routinely validate all vendor TINs in the CCR and to require all agencies to use vendor and TIN information from the CCR for their Forms 1099. The Under Secretary pointed out that the mandated use of the CCR throughout the federal government coupled with IRS's online TIN-matching program should enable DOD to establish a basic level of validation in the near term, perhaps as soon as the second quarter of fiscal year 2004. The Under Secretary also pointed out that the Defense Finance and Accounting Service has been working with payment card companies, such as VISA and Master Card, to improve the process for reporting payments made via payment cards. As a result, DFAS expects a significant increase in the number and dollars reported for the card programs on Forms 1099 for calendar year 2003. We commend these efforts to address the long-standing problem of obtaining necessary vendor information from payment card companies. Coupled with IRS's proposal to enable payment card companies to act on behalf of cardholder/payers in soliciting, collecting, and validating vendor information, including TINs, these efforts should go a long way in addressing this problem. On November 26, 2003, we also received oral comments from representatives of OMB's Offices of Federal Procurement Policy and Federal Financial Management. OMB generally agreed with our recommendation. Accordingly, OMB agreed to develop and issue a memorandum to federal agencies directing them to validate TINs by using the TIN-matching program or the CCR. In addition, OMB agreed to work with IRS and the CCR to ensure agencies are provided the necessary information to use either of the methods recommended. Although we believe that either using IRS's TIN-matching program or validating TINs in the CCR can be effective means for ensuring that agencies include valid TINs on their Forms 1099 MISC, using the CCR as the primary source of valid TINs would reinforce OMB's intention that the CCR become the government's central source of contractor data and would minimize duplicate effort among agencies in validating TINs. Therefore, we encourage OMB to pursue use of the CCR as the primary option for agencies to obtain valid TINs. : We are sending copies of this report to the Ranking Minority Member, House Committee on Ways and Means; Ranking Minority Member, Subcommittee on Oversight, House Committee on Ways and Means; and the Chairman and Ranking Minority Member, Senate Committee on Finance. We will also send copies to the Commissioner of Internal Revenue, the Director of the Office of Management and Budget, the Secretary of Defense, and other interested parties. Copies of this report will also be made available to others upon request. The report will also be available at no charge on GAO's Web site at [Hyperlink, http:// www.gao.gov] http://www.gao.gov. If you have any questions concerning this report, please contact me at (202) 512-9110 or Ralph Block at (415) 904-2150. Key contributors to this report are listed in appendix VI. Signed by: Michael Brostek: Director, Tax Issues: [End of section] Appendixes: Appendix I: 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. Scope and Methodology: To determine whether federal agencies annually file required Forms 1099 MISC with IRS, we requested and obtained vendor service payment information from the 14 federal departments for calendar year 2000 and 2001. We specifically asked for the vendor name, TIN, and total dollar value of all payments made by the various agencies and bureaus within these departments for services provided during calendar years 2000 and 2001. However, we were unable to verify whether they fully complied with our request, such as only providing payments for services and not for goods. We compared the information we obtained from the 14 federal departments with vendor payment information included in IRS's Payer Master File (PMF) and Information Returns Master File (IRMF) for the same 2-year period. On the basis of our review of IRS's procedures for processing information returns and our testing of database extracts obtained from IRS's Payer Master File and Information Returns Master File, we determined that the data were sufficiently reliable to enable us to determine whether Forms 1099 MISC had been filed by the agencies and bureaus within the 14 federal departments and, if so, whether they included valid vendor TINs. We obtained vendor payment information from the following federal departments:[Footnote 15] Agriculture Commerce Defense Education Energy Health and Human Services Housing and Urban Development Interior Justice Labor State Transportation Treasury Veterans Affairs: In an effort to gauge the potential result of not filing Forms 1099 MISC, we selected payment information provided to us by the agencies within 3 of the 14 federal departments for 2000 and 2001 and identified the amounts paid to individual payees that were not included on IRS's IRMF, thus indicating that a Form 1099 MISC had not been filed. We then compared the payee information to an IRS file of nonfilers to determine whether the individual payees had filed federal income tax returns for the comparable years. To determine whether Forms 1099 MISC filed with IRS by federal agencies include valid vendor TINs, we analyzed IRS's IRMF for calendar years 2000 and 2001. We identified the number and dollar value of Forms 1099 MISC filed by the 14 federal departments that, according to the IRMF, contained invalid TINs. Of these, we further identified the number and dollar value associated with invalid TINs that IRS was able to correct via its TIN validation program, as well as those that remained invalid because IRS was unsuccessful in correcting them. 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. We asked whether they validate vendor TINs through IRS's TIN- matching program and if not, why not. We also asked whether they initiate backup withholding if it is determined that a vendor has provided an invalid TIN. We then summarized the overall department responses. To identify recent actions IRS has taken to help improve federal agency Form 1099 MISC filing compliance, we discussed with IRS officials any actions that were either recently implemented or pending. We also tracked the progress of IRS's pending on-line TIN-matching program, which is expected to be available to federal agencies in the latter part of 2003. To identify any additional measures that could further improve federal agency compliance with Form 1099 MISC reporting requirements, we discussed this issue with IRS and the Office of Management and Budget (OMB) officials and analyzed both recent and pending actions that would affect such compliance. We did our work at IRS and OMB headquarters in Washington, D.C., from June 2002 through September 2003 in accordance with generally accepted government auditing standards. We obtained written comments on a draft of this report from the Commissioner of Internal Revenue (see app. IV) and the Secretary of Defense (see app. V). We also obtained oral comments from representatives of the Office of Management and Budget. [End of section] Appendix II: Forms 1099 MISC Filed by 14 Federal Departments for Tax Years 2000 and 2001: This appendix provides details concerning the specific number and dollar value of Forms 1099 MISC filed by each of the 14 federal departments for tax years 2000 and 2001. As table 1 shows, the Department of Defense filed the greatest number and dollar value of Forms 1099 MISC each year, while the Department of Transportation filed the least. With a few exceptions, most departments filed more Forms 1099 MISC in 2001 than in 2000. Table 1: Number and Dollar Value of Forms 1099 MISC Filed with IRS for Tax Years 2000 and 2001: Dollars in millions (rounded): Agriculture; Number filed for 2000: 32,617; Amount filed for 2000: 1,183.1; Number filed for 2001: 42,440; Amount filed for 2001: 1,579.0. Commerce; Number filed for 2000: 7,369; Amount filed for 2000: 1,370.6; Number filed for 2001: 7,601; Amount filed for 2001: 962.2. Defense; Number filed for 2000: 245,917; Amount filed for 2000: 49,944.3; Number filed for 2001: 257,382; Amount filed for 2001: 60,974.1. Education; Number filed for 2000: 2,428; Amount filed for 2000: 906.1; Number filed for 2001: 2,686; Amount filed for 2001: 1,068.4. Energy; Number filed for 2000: 3,587; Amount filed for 2000: 6,066.4; Number filed for 2001: 3,381; Amount filed for 2001: 7,250.0. Health & Human Services; Number filed for 2000: 8,464; Amount filed for 2000: 41,735.4; Number filed for 2001: 8,859; Amount filed for 2001: 40,312.8. Housing & Urban Development; Number filed for 2000: 17,347; Amount filed for 2000: 1,118.5; Number filed for 2001: 15,522; Amount filed for 2001: 1,065.9. Interior; Number filed for 2000: 23,394; Amount filed for 2000: 1,292.5; Number filed for 2001: 26,197; Amount filed for 2001: 1,549.3. Justice; Number filed for 2000: 21,241; Amount filed for 2000: 1,705.5; Number filed for 2001: 22,868; Amount filed for 2001: 2,146.6. Labor; Number filed for 2000: 66,285; Amount filed for 2000: 965.4; Number filed for 2001: 66,245; Amount filed for 2001: 1,126.5. State; Number filed for 2000: 6,345; Amount filed for 2000: 1,195.6; Number filed for 2001: 6,411; Amount filed for 2001: 1,552.2. Transportation; Number filed for 2000: 93; Amount filed for 2000: 7.7; Number filed for 2001: 4; Amount filed for 2001: [A]. Treasury; Number filed for 2000: 5,846; Amount filed for 2000: 1,537.1; Number filed for 2001: 7,481; Amount filed for 2001: 1,767.7. Veterans Affairs; Number filed for 2000: 173,988; Amount filed for 2000: 6,301.1; Number filed for 2001: 186,309; Amount filed for 2001: 6,953.1. Total; Number filed for 2000: 614,921; Amount filed for 2000: 115,329.3; Number filed for 2001: 653,386; Amount filed for 2001: 128,307.8. Source: GAO analysis of IRS's Information Returns Master File. [A] Less than $1 million rounded. [End of table] [End of section] Appendix III: Forms 1099 MISC Filed with IRS with Invalid TINs for Tax Years 2000 and 2001: This appendix provides details concerning the specific number and percentage of Forms 1099 MISC filed by each of the 14 federal departments for tax years 2000 and 2001 that included invalid TINs when received by IRS. As table 2 shows, the Departments of Defense and Veterans Affairs filed the greatest number of Forms 1099 MISC with invalid TINs each year, while the Departments of Transportation and Education filed the least. The Departments of Transportation and Agriculture filed the greatest percentage of Forms 1099 MISC with invalid TINs each year, while the Department of Health and Human Services filed the least. Table 2: Number and Percent of Forms 1099 MISC Filed with Invalid TINs for Tax Years 2000 and 2001: Department: Agriculture; Number of invalid TINs 2000: 6,820; Percent of invalid TINs 2000: 20.9; Number of invalid TINs 2001: 9,518; Percent of invalid TINs 2001: 22.4. Department: Commerce; Number of invalid TINs 2000: 510; Percent of invalid TINs 2000: 6.9; Number of invalid TINs 2001: 788; Percent of invalid TINs 2001: 10.4. Department: Defense; Number of invalid TINs 2000: 27,246; Percent of invalid TINs 2000: 11.1; Number of invalid TINs 2001: 26,006; Percent of invalid TINs 2001: 10.1. Department: Education; Number of invalid TINs 2000: 352; Percent of invalid TINs 2000: 14.5; Number of invalid TINs 2001: 313; Percent of invalid TINs 2001: 11.7. Department: Energy; Number of invalid TINs 2000: 469; Percent of invalid TINs 2000: 13.1; Number of invalid TINs 2001: 531; Percent of invalid TINs 2001: 15.7. Department: Health & Human Services; Number of invalid TINs 2000: 503; Percent of invalid TINs 2000: 5.9; Number of invalid TINs 2001: 493; Percent of invalid TINs 2001: 5.6. Department: Housing & Urban; Development; Number of invalid TINs 2000: 3,397; Percent of invalid TINs 2000: 19.6; Number of invalid TINs 2001: 2,916; Percent of invalid TINs 2001: 18.8. Department: Interior; Number of invalid TINs 2000: 2,986; Percent of invalid TINs 2000: 12.8; Number of invalid TINs 2001: 3,319; Percent of invalid TINs 2001: 12.7. Department: Justice; Number of invalid TINs 2000: 3,949; Percent of invalid TINs 2000: 18.6; Number of invalid TINs 2001: 4,005; Percent of invalid TINs 2001: 17.5. Department: Labor; Number of invalid TINs 2000: 9,086; Percent of invalid TINs 2000: 13.7; Number of invalid TINs 2001: 9,555; Percent of invalid TINs 2001: 14.4. Department: State; Number of invalid TINs 2000: 1,021; Percent of invalid TINs 2000: 16.1; Number of invalid TINs 2001: 1,053; Percent of invalid TINs 2001: 16.4. Department: Transportation; Number of invalid TINs 2000: 20; Percent of invalid TINs 2000: 21.5; Number of invalid TINs 2001: 1; Percent of invalid TINs 2001: 25.0. Department: Treasury; Number of invalid TINs 2000: 999; Percent of invalid TINs 2000: 17.1; Number of invalid TINs 2001: 1,132; Percent of invalid TINs 2001: 15.1. Department: Veterans Affairs; Number of invalid TINs 2000: 25,781; Percent of invalid TINs 2000: 14.8; Number of invalid TINs 2001: 26,609; Percent of invalid TINs 2001: 14.3. Department: Totals; Number of invalid TINs 2000: 83,139; Percent of invalid TINs 2000: 13.5; Number of invalid TINs 2001: 86,239; Percent of invalid TINs 2001: 13.2. Source: GAO analysis of IRS's Information Returns Master file. [End of table] [End of section] Appendix IV: Comments from the Internal Revenue Service: DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C. 20224: COMMISSIONER: November 25, 2003: Mr. Michael Brostek: Director, SI/Tax Issues: United States General Accounting Office: Washington DC 20548: Dear Mr. Brostek: We appreciate the opportunity to review and provide comments on the draft report, titled "Tax Administration - More Can Be Done to Ensure Federal Agencies File Accurate Information Returns." We value the input of the General Accounting Office on the information return reporting issues affecting federal agencies. As you know, we are working to improve compliance by federal agencies. However, as noted below, we lack the means to enforce effectively these provisions due to a lack of compliance tools. Along with the general comments we provided your staff, we would like to address your recommendations. Under "Recommendations for Executive Action," you suggest that the IRS take the following steps to ensure that federal agencies file appropriate informational returns for payments to vendors who provide services to the respective agency: RECOMMENDATION: Ensure the accuracy of identification information concerning federal payers in the IRS's Payer Master File (PMF). We agree that the entity coding in the PMF needs to be accurate, and we will make every effort to ensure its accuracy by performing periodic reviews of the database. Prior to your recommendation, we were in the process of developing an education-compliance program to address specifically federal agencies as taxpayers. As part of this initiative, we will contact federal agencies to identify and verify that all Taxpayer Identification Numbers (TINs), used by each agency, have been properly identified. This list of TINs will be used to identify federal agencies that do not file Forms 1099-MISC, as described below. RECOMMENDATION: Develop a program to identify periodically federal agencies that fail to file Forms 1099-MISC and follow up to determine why the forms were not filed. Currently, there is an annual extract of the PMF to identify those taxpayers who have filed incorrect Forms 1099-MISC. As mentioned in your report, starting in August 2003, federal agencies are now notified of any erroneous TINs and are requested to get the correct TINs for their vendors. We will also compare the list of TINs obtained from the federal agencies to the PMF and identify agency TINs that did not file Forms 1099-MISC. We will then contact the federal agency to determine if Forms 1099-MISC were required for those TINs with no reported Forms 1099-MISC filings. RECOMMENDATION: Consider using the Department of Defense (DOD) Central Contractor Registry (CCR) as the central depositary for all vendor Taxpayer Identification Numbers (TIN) and require all federal agencies to use vendor and TIN information from the CCR for Forms 1099-MISC. The IRS and Office of Management and Budget (OMB) should annually validate all vendor TINs on the CCR. Alternatively, OMB should require that all federal agencies use the IRS TIN matching program to validate vendor TINs. We will work with the DOD to ensure that the vendor TINs on the CCR are accurate. If the DOD agrees, we will explore expanding use of our TIN matching program to validate all of the TINs on the CCR, and notify the DOD when a vendor TIN is invalid. As you mentioned in your report, we can only notify the DOD that a vendor TIN is invalid, and cannot give them the correct TIN without violating tax disclosure laws. We will also explore expanding the TIN matching program in connection with the CCR to cover all vendors in the database and not just those who are currently receiving payments. Two additional items mentioned in your report need to be emphasized. First, a number of federal agencies have told us that they cannot identify all the taxpayers that should receive Forms 1099-MISC. They are also unable to use the IRS TIN matching program because their financial reporting systems are incompatible with the TIN matching program. The cost and resources involved in making the agencies' financial accounting systems compatible with the TIN matching program could run into the tens of millions of dollars. Even though our TIN matching program seems to be a reasonable solution to the problem of incorrect TINs, the agencies may not wish to spend the resources necessary to accomplish this work. Finally, IRS Policy Statement P-2-4 provides that federal agencies are not subject to interest and penalties if they fail to file Forms 1099- MISC. This policy statement is based on Comptroller General's Opinion Federal Agency Payment of Penalties and Interest on Federal Employment Taxes, B-161,457,1978 WL 9910 that provides that federal agencies do not have the authority to assess penalties or interest against one another. If an agency does not wish to or is unable to comply with its tax responsibilities, including Forms 1099-MISC reporting responsibilities, there is nothing the IRS can do. Voluntary compliance is the only way to get federal agencies to file Forms 1099-MISC for vendors who provide services to the agencies. If you need any additional information, please contact me or a member of your staff may contact Floyd Williams, Director, Office of Legislative Affairs, at (202) 622-3720. Sincerely, Signed for: Mark W. Everson: [End of section] Appendix V: Comments from the Department of Defense: UNDER SECRETARY OF DEFENSE 1 100 DEFENSE PENTAGON WASHINGTON, OC 20301- 1100: COMPTROLLER: Mr. Michael Brostek: Director, Tax Issues: U.S. General Accounting Office: Washington, DC 20548: Dear Mr. Brostek: This is the Department of Defense (DoD) response to the General Accounting Office (GAO) Draft Report (04-74), "TAX ADMINISTRATION: More Can be Done to Ensure Federal Agencies File Accurate Information Returns," dated November 3, 2003, (GAO: Code 440132). Our comments are at the enclosure. The Department appreciates the opportunity to comment on the subject report. Mr. Summers will be available to help resolve the issue outlined in this report. He may be contacted by e-mail: tom.summers@osd.mil or by telephone at (703) 697-3193. Sincerely, Signed by: Dov S. Zakheim: Enclosure: As stated: GAO DRAFT REPORT DATED NOVEMBER 7, 2003, GAO-04-74 (GAO CODE 440132): "TAX ADMINISTRATION: MORE CAN BE DONE TO ENSURE FEDERAL AGENCIES FILE ACCURATE INFORMATION RETURNS": DEPARTMENT OF DEFENSE COMMENTS: Since its operational implementation in 1998, the Central Contractor Registration (CCR) program office has endeavored to work with the Internal Revenue Service (IRS) to accomplish an automated validation of the Taxpayer Identification Numbers (TINS) for vendors that register in the database. However, the IRS has not allowed any type of validation to be performed, as it would not accept that the CCR could act as an authorized system to perform this function on behalf of the Department. Additionally, the IRS has not been able to support, until very recently, the automation necessary to accomplish these validations without manual intervention. The effort to validate TINS was revived as a part of the Federal eGov Integrated Acquisition Environment (IAE) initiative, under which the CCR program now is mandated for use throughout the federal government. The Office of Management and Budget (OMB) and the IAE program office were able to facilitate CCR becoming an authorized system to perform these validations with IRS. As IRS' on-line TIN matching program now appears robust enough to handle the automation necessary, the two programs are working to establish a basic level of validation in the very near term (anticipated in the second quarter of fiscal year 2004). This will improve the accuracy of TINS not only for DoD, but all Federal Agencies, as they now incorporate the use of CCR information for their contract vendor payment activities. These efforts mirror the GAO's recommendation that the IRS and the OMB consider options to validate all vendor TINs in the CCR routinely, and for the OMB to then require all agencies to use the CCR vendor and TIN information for their Form 1099s. The obligation to obtain TINs from card accepting merchants resides with the banks that accept and process the merchants' transactions. VISA has a relationship with these banks and the processor of the transactions as does MasterCard. Working with these organizations, the Defense Finance and Accounting Service (DFAS) has improved the card program reporting process. Further, the DFAS' efforts have resulted in a better mutual understanding of data file formats which, in turn, has assisted the Department in helping to locate the data needed to comply with the IRS reporting requirements. While the DFAS expects a significant increase in both the number of Form 1099s produced and the related dollars for the card programs, the actual impact will not be known until the Form 1099s for calendar year 2003 are produced in January 2004. Enclosure: [End of section] Appendix VI: GAO Contacts and Staff Acknowledgments: GAO Contacts: Michael Brostek, (202) 512-9119 Ralph T. Block, (415) 904-2150: Acknowledgments: In addition to those named above, Tom Bloom, Janet Eackloff, Evan Gilman, Shirley Jones, Bob McKay, and James Ungvarsky made key contributions to this report. (440132): FOOTNOTES [1] The TIN is a unique nine-digit number, usually a social security number (SSN) for an individual, an employer identification number (EIN) assigned by IRS for a partnership or corporation, and either an SSN or EIN if the vendor is a sole proprietor. [2] In this report, an invalid TIN refers to a missing TIN, a TIN with more or less than nine numeric characters, a TIN that includes an alpha character, or a TIN/name combination that does not match or cannot be found in IRS's records. [3] Section 3406 of the Internal Revenue Code requires that payers withhold and forward to IRS a predetermined percentage of certain payments if a payee fails to provide the payer with a correct TIN; this is known as backup withholding. [4] The Federal Payment Levy Program, authorized by the Taxpayer Relief Act of 1997 and conducted jointly by IRS and the Department of the Treasury's Financial Management Service, enables IRS to levy up to 15 percent of certain federal payments to collect delinquent federal taxes, including payments made to vendors. [5] U.S. General Accounting Office, Tax Administration: IRS' Levy of Federal Payments Could Generate Millions of Dollars, GAO/GGD-00-65 (Washington, D.C.: Apr. 7, 2000) and Tax Administration: Millions of Dollars Could Be Collected If IRS Levied More Federal Payments, GAO-01- 711 (Washington D.C.: July 20, 2001). [6] The Department of Homeland Security had not been established at the time this review began. [7] The Document Matching Program matches information on selected tax issues (usually income) reported on tax returns by individual taxpayers and reported on information returns by third parties, such as employers, banks, and other payers of income. [8] IRS cannot tell an agency what the correct TIN, name, or both TIN and name should be if the records do not match, as to do so would violate tax disclosure laws. [9] We did not review the capabilities of individual agency and department vendor payment systems to distinguish between goods and services, as this was beyond the scope of our review. [10] The Debt Collection Improvement Act of 1996 requires federal agencies to obtain a valid TIN from federal payees, including vendors, to facilitate federal debt collection via the Treasury Offset Program. The Treasury Offset Program involves a centralized database of delinquent federal nontax debts that have been referred by federal agencies for offset against federal payments processed by the Department of the Treasury's Financial Management Service. [11] As indicated earlier, we did not review the capabilities of individual agency and department vendor payment systems, as this was beyond the scope of our review. [12] IRS Policy Statement P-2-4 states "penalties and interest will not be assessed against agencies or instrumentalities of the United States." [13] GAO-01-711. [14] The Business Master File is an IRS database that contains tax return filing histories for business entities. [15] The Department of Homeland Security had not been established at the time this review began. GAO's Mission: The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. Obtaining Copies of GAO Reports and Testimony: The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO's Web site ( www.gao.gov ) contains abstracts and full-text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as "Today's Reports," on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select "Subscribe to e-mail alerts" under the "Order GAO Products" heading. Order by Mail or Phone: The first copy of each printed report is free. Additional copies are $2 each. A check or money order should be made out to the Superintendent of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a single address are discounted 25 percent. Orders should be sent to: U.S. General Accounting Office 441 G Street NW, Room LM Washington, D.C. 20548: To order by Phone: Voice: (202) 512-6000: TDD: (202) 512-2537: Fax: (202) 512-6061: To Report Fraud, Waste, and Abuse in Federal Programs: Contact: Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov Automated answering system: (800) 424-5454 or (202) 512-7470: Public Affairs: Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800 U.S. General Accounting Office, 441 G Street NW, Room 7149 Washington, D.C. 20548:

TIN Matching
IRS e-Services TIN Matching API & Batch service - Information & Details
TIN MATCHING API OR BATCH - MATCH
Bulk Batch-match & Real Time API System
Breakthrough in 1099 TIN Verification

This is not an IRS system. Realsearch.com & Feinsearch.com are privately owned by Liberty Data, Inc.  With 17 years of collecting Employer Identification Numbers we can offer you the USA's largest private source for EIN Verification ~ more than 16.8 million EINs, and 350 million TIN/SSNs to help you locate and verify unique, very small DBA business’ TIN

Unlike the IRS, which does batching overnight, our system will process a large batch in minutes against our in house file, and run XML real time calls with results in as little as 1/10 of one second. Virtually we have no downtime.

We pride ourselves on providing data security, max uptime, and the best hardware equipment and data centers available.

We can also correct a wrong TIN or input name. This is an upcoming feature soon to be available for a small fee for clients who participate in FREE bulk tin matching offer.

Call Now 888-996-6253
GET INSTANT ACCESS TO THE DATA ON BUSINESSES AND PEOPLE TO MEET YOUR INFORMATION NEEDS, INCLUDING:

EIN Searches 1099 Validation TIN Matching API Business EIN Credit Reports EIN/TIN Batching

   [irs logo]


Direct Access API under IRS

Avoid 1099 fines; comply with US Federal laws regarding verification of EIN and SSN.

Match against our in-house database of nearly 1 billion name & TIN combinations

that include 85% of all adult registered SSN numbers, as well as over 16 million Employer Identification Numbers (EIN).




NOT IRS dependent

Fast 1/10 second return

Improve 1099 filing accuracy

FREE TIN CHECKING ~ Small fee to append and Locate EIN (TIN) numbers.

Save Time — Ready made easy API plugins, or easy to access bulk 'batch-match' service.

FREE TIN MATCHING & low cost append service

TIN Matching API

allows you access to 16.8 million FEINs, and 350 million more SSNs that may be used by small DBA businesses

Quickly check TIN name and ID number combinations

Sources: Realsearch.com is the nation’s premier source of EINs, business information, background facts and assessment on the companies that are important to your clients. Nationwide sources (quarterly updates), Sec. of State, domain registration registries, federal and state sources, public records, B2B data, UCC liens, judgments, filings, and updated monthly US federal bankruptcy files. Our API services have endless applications for various industries.




TIN MATCHING Input: Entity name and 9 digit TIN

SPEED: 1/10 second on API calls and15 minutes or less on batches of 100,000

Response Match Codes Description:

0 = TIN and Name combination matches IRS records.

1 = TIN was missing or TIN not 9-digit numeric.

2 = TIN entered is not currently issued.

3 = TIN and Name combination does not match IRS records.

4 = Invalid TIN Matching request.

5 = Duplicate TIN Matching request.

6 = TIN and Name combination matches IRS SSN records.

7 = TIN and Name combination matches IRS EIN records.

8 = TIN and Name combination matches IRS SSN and EIN records.

99 - Connection/Query/Miscellenious Error




If interested, please register for a free account at:

www.realsearch.com then call for set up and API specs

Call Now 888-996-6253


For more information, or, if you would like to discuss how this or any of our APIs can help you with your business requirements please call today or email Robin@realsearch.com


Read more...


For FREE TIN CHECK offer call : Robin Lahiri, CTO 888-996-6253

800-299-8280 ext. 110 | or cell phone: 888-996-6253 | Desk 386-246-4204

or Business Development 800-299-8280 ext. 119

About RealSearch.com

As the nation's largest online portal for investigative data with over 40 different databases and growing, we provide businesses with instant access to data from sources that include the U.S. government, state and private resources. We are the only company offering instant TIN matching, and we offer a variety of in-depth reports that are designed to help you access the data you need.

Instant access to over 40 databases and 16 million Tax ID numbers

FINES & PENALTIES

Tier    New Penalty    Old Penalty    New Maximum    

Tier 1 30 days    $30 per form    $15 per form    $250,000    

Tier 3 60 days    $60 per form    $30 per form    $500,000    

Tier 3 August    $100 per form    $50 per form    $1,500,000    

Intentional Disregard to file    $250 per form    $100 per form    No Limit    


How to Submit a Tin/Name match

On September 27, 2010 President Obama signed the "Small Business Jobs Act" H.R. 5297 into law. Section 2102 more than doubled the penalties for 1099 Series Forms starting in 2011. This includes late filings, mis-matched TaxID/Name combinations, missing SSNs, failure to e-File, and much more etc). See the new penalties section in IRS Publication 1586.


Tier

New Penalty

Old Penalty

New Maximum

Tier 1 30 days

$30 per form

$15 per form

$250,000

Tier 3 60 days

$60 per form

$30 per form

$500,000

Tier 3 August

$100 per form

$50 per form

$1,500,000

Intentional Disregard to file

$250 per form

$100 per form

No Limit


If you file 1099 forms, there is a good chance you will fall victim to mis-matched Tax ID/Name combinations, and not even know it. You will not be notified by the IRS until the following year. By that time you will have a Tier 3 penalty of $100 per form. For just 10 mis-matched names the penalty will be $1000.00, for 80 forms $8,000 penalty, and so on. If you are missing Tax-ID numbers, and intentionally decide not to file, there could be a penalty of $250 per form if you are caught, for example in an audit.


With huge Federal Deficits, it's likely the IRS, armed with this higher tax, will step up enforcement. So what is the solution? What can you do if you can't get the information? How can you avoid these insidious, delayed penalties? You can't force the vendor/payee to sign a W-9 form! You can't force the payee to give you the correct Name or Tax ID!


But you do not have to pay it! Don't find out the hard way. Many businesses will pay this new increased penalty tax because they are not aware of the solution.


THE SOLUTION


The solution is to solicit a W-9 form from all payees as described IRS Publication 1586. This simple act will give you the "reasonable cause" defense against the delayed Tier 3 penalty notice, even if the W-9 is not returned, or has incorrect information, but it will not stop IRS penalty notices.


A better solution, that will stop IRS notices, is to run a Bulk Tin/Name match of your 1099 payees on the IRS database. This allows you to concentrate on just the errors and get them fixed. This tells you, in advance, which payees are mis-matches. With our SECURE SERVICE BUREAU, the cost is only $74.00 for up to 10,000 names/TINs. See TinMatch Frequently Asked Questions for how to get started. RealSearch.com can also perform "solicitation mailings" for you with the correct statutory language to establish "reasonable cause". Please call 361-884-1500 for details and pricing.


It's best to perform your TinMatch BEFORE filing to the IRS. It can also be done AFTER filing (if you file corrections). It's never too late to perform bulk Tin/Name matching. We supply a list of all your know mis-matches (potential penalties) based on the results from the IRS database.


So, your first step after a Tin/Match is to SOLICIT a W-9 from each mis-matched payee by mail. Or have 1099 Express Service Bureau follow up and do this service for you immediately after your Tin/Match. This will establish REASONABLE CAUSE, and should get you out of any penalty, even if the W-9 is NOT RETURNED by the payee. It is not necessary to have a correct name and correct matching TIN to establish the "reasonable cause" defense against the IRS penalty notices. To better understand what the IRS means by SOLICIT and REASONABLE cause, please read IRS Publication 1586.  


Here is a direct quote from Publication 1586:


The penalty may be waived by showing the failure(s) was due to reasonable cause and not to willful neglect.


III. REASONABLE CAUSE


To support the showing that the failure was due to reasonable cause and not willful neglect, the filer must establish that s/he acted in a responsible manner both before and after the failure occurred, and that:

• there were significant mitigating factors (for example, an established history of filing information returns with correct TINs), or

• the failure was due to events beyond the filer’s control (for example, a payee did not provide a correct name/TIN in response to a request for the corrected information).

Acting in a responsible manner includes making an initial solicitation (request) for the payee’s name and TIN and, if required, an annual solicitation. Upon receipt of this information, it must be used on any future information returns filed.


Therefore:


Using the IRS Tin/Name matching program is additional positive PROOF that you acted in a responsible manner. Thus, you should be immune from penalties by the IRS definition, assuming you file 1099s timely, and other compliance is met. Keep your 1099 Express mis-match list as proof.


It is not necessary to worry, telephone each person, or repeatedly contact each payee. One SOLICITATION per payee (as explained in Publication 1586) will do it.


If the payee does not respond (or returns the same faulty W-9) you can file your imperfect 1099s as they are to the IRS (even with no SSN), and rely on reasonable cause defense, especially if you have used the IRS Tin/Name matching program. Keep good records for the future. Because the IRS might send a "Notice 972CG, Notice of Proposed Civil Penalty".


If payees return a corrected W-9, then obviously change your records, and file your 1099s with new information.


If you have missing tax ID numbers, you should SOLICIT, as explained above, to get protection from penalties, then file your 1099s with an empty TaxID before the deadline, to avoid late filing penalties and willful disregard problems.


To increase CORRECT W-9 response, you might wish to remind your payees in your solicitation:


1. About the $500 IRS penalty to the Payee for false data (see IRS Form W-9 Page 2).

2. That the Name and TaxID must match the payee's tax return, to avoid the "dba problem".

3. Payees with a NAME CHANGE (from marriage, etc.) must change their NAME at the SSA, if using the new surname.


Some positive side-effects of Tin/Name matching are:


1. You only need to solicit those payees who are mis-matches, saving time and money.

2. You may avoid Backup Withholding if mis-matches are cleaned up, see IRS Publication 1281 backup withholding.

3. Once your payees are correct, the IRS will stop sending the penalty notices.



Also See:


Tin Matching General

Tin Matching Frequently Asked Questions

Tin Matching Sample Report



Are you taking advantage of Bulk TIN/NAME Matching Services to Avoid IRS Penalties?


The IRS Bulk TIN/Name Matching program has been a spectacular success. Many companies are using this service to avoid receiving notice from the IRS that the payer may be responsible for backup withholding and/or certain penalties.


When you file Forms 1099-Misc, DIV, INT, B, OID or PATR, the IRS checks each Social Security Number or Company EIN (the Tax ID Number) to see if it matches the Name, according to the IRS database. Each mismatch can result in a $100 Tier 3 penalty. Even if you file with the red, Copy A scanable paper forms, the IRS checks for mis-matches.


Most 1099 files have a mismatch rate of over 20 percent. Mis-matches are more likely with NEW SSNs and names. Even the best of us make accidental typing errors or use the wrong name on the W-9. The IRS treats each mismatch as a missing or incorrect SSN, and assumes the worst (as if someone is cheating, and not reporting that income).


Now, with the Bulk TIN Matching program, you can find and correct these errors before filing to the IRS. As the saying goes "An ounce of prevention is worth a pound of cure". The Bulk TIN Matching Program through the IRS is free of charge to anyone. It takes the IRS one or two months to certify your application, and at least one person must also submit his or hers personal tax returns to the IRS for 3 years, then be approved for a security clearance. You must also have special filtering software to submit the data free of duplicates to the IRS, remove illegal characters, and format the data. If duplicates are present, the IRS will consider this "Phishing" and cancel your ability to perform Bulk Tin/Name matching.


As an alternative to this application process, RealSearch.com can provide this service for $74 per file submitted to the IRS. Each file can contain up to 10,000 records. You can take advantage of this service to correct any errors before filing to the IRS or AFTER filing to the IRS and submitting corrections.


For more information, see our Service Bureau. Because your goal is to reduce B-Notices and associated penalties from the IRS. It’s simple and easy! Call today! We will show you how to send your files to our Service Bureau with the utmost security. We also format the data to IRS specifications, perform the uploads, downloads, and send you a formatted report via a secure connection.













Frequently Asked Questions about Name/TIN matching:


Q. How do we perform a Tin/Name Match?


A: Prepare an Excel Spreadsheet with TWO columns: Name and Tax ID for a Tin Match. If we are also mailing your W-9 solicitations, include the address (as shown below).


Name your spreadsheet must have a UNIQUE filename; something like Jones-Corp-from-Mary-Smith-2011-Tin-Match.xls. Do not send a spreadsheet named TinMatch.xls or other common generic name.


Q: Will the IRS tell us the correct name if we have a SSN or EIN?

A: No, the IRS only say Match or No-Match.


Q: Will the IRS tell us the correct TIN if we have a name?

A: No, same as above. Only if its a match or not.


Q: Will the IRS tell us if it's a SSN or an EIN?

A: Yes! If you score a match, they will tell you it came from either the IRS database or the SSN database. See Sample Tin Match Report


Q: What do you need for TIN/Name matching only?

A: If we are performing just a Tin/Name match, then all we need is the payees names and tax ID numbers. Nothing else is required. It can look like this:

John Doe

72-3456789

John K. Doe

723456789

Doe, John

723-45-6789

Dr. John Doe

72-3456789

AJax Co, LLC

73-3456789


Q: What format should names and TINs be in?

A: The data can be in an Excel spreadsheet, with the 2 required columns: Name and TIN. Columns can be in any order. If dashes are present in your data, just leave them. It is not necessary to remove dashes. Dashes are ignored. If there are no dashes, that's OK, do not add them. First and Last name can be in any order.


Q: That's all? What about the vendor number?

A: Yes, you can give us the vendor number, account number, etc. if this helps you. Again columns can be in any order.


John Doe

72-3456789

78333

John K. Doe

723456789

34722A

Doe, John

723-45-6789

3788

Dr. John Doe

72-3456789

A227Z34

AJax Co, LLC

73-3456789

K224


Q: What if we want you to automatically perform the "solicitation" to establish the "reasonable cause" defense against penalties?

A: In that case, include the address too, for example:


John Doe

72-3456789

78333

215 Main St.

Tulsa

OK

67433

John K. Doe

723456789

34722A

PO Box 477

Austin

TX

75344

Doe, John

723-45-6789

3788

388 WestHeimer Suite 344

Houston

TX

77001

Dr. John Doe

72-3456789

A227Z34

3344 First Ave. Suite 477

New York

NY

10001

AJax Co, LLC

73-3456789

K224

385 Selma

Atlanta

GA

54322


Q: How does the IRS possibly match the Name to the TaxID, if this Name Field is so unorganized?

A: Simply put, IRS software looks at each word. If it begins with the first 4 letters of the last name, it's a match! This matching process is based on the so called "Name Control". This matching process is explained in Publication 1586 in detail at this link: http://www.irs.gov/pub/irs-pdf/p1586.pdf See section 9 IX about the IRS Matching Process and Name Controls.


Q: What about vendor number? We like to do our lookups by a special number?

A: You may give us another column (a 3rd column) for the vendor or other number, if you wish. That number will be in the final report along side the Name and TIN to help.


Q: Can we use formats, other than Excel?

A: Yes! You may send any format Excel can open! This includes files such as CSV, tab delimited text, fixed length text, and many others.

Q: How do we send you the data?

A: Almost everybody knows not to use e-Mail for Sensitive Personal Information (SPI), such as names, Tax ID numbers, addresses, etc.

Q: How can I be sure this site is really secure?

A: Notice the "gold lock" in the bottom of your Microsoft Internet Explorer window. We use the same type ASPX internet code and SSL encryption technology used by the IRS for e-Filing at the IRS F.I.R.E web site.


Q: After we click "SEND FILE", how do we know you received our file?

A: You should see a link "CLICK HERE TO NOTIFY US". Please enter the information asked for. We are then automatically notified by e-Mail.


Q: What is the problem with duplicates and special characters?

A: The IRS does not like duplicate SSNs. They will reject the entire file if any duplicates are found. They consider it "Phishing", or hacking for the correct name. For this reason our special software removes all duplicates you may have unknowingly inserted. It's OK if you have IRS "illegal" characters like pound signs, asterisks, carets, pipes, etc. These will be filtered out by our special software.


Q: What happens when you receive our spreadsheet? What do you do with it?

A: First, we download it to our workstation via the secure web site. We import your data into special software, developed just for this purpose. We convert your data to the required IRS format. The software also sorts it, removes duplicates, and special characters. We then must manually submit your data file to the IRS using the IRS secure server. The IRS processes the data and notifies us that it is ready, sometimes within hours, often with in 24 hours. We then must manually download the IRS data, convert it to a special report format you can read and understand, and put the report up on our secure server. This is not an automated process, and takes time. We then notify you by e-Mail and provide the filename. You then go to our secure server and RECEIVE the file. You can then save the data file. The file will be a text file. Double click the file to open it into Microsoft Notepad. The file can also be opened with WordPad or Microsoft Word.


Q: Can you convert the final report back into an Excel spreadsheet that's easier to work with?

A: Yes, you can open the report into Excel with the Open wizard using fixed width text.


Q: Is our data secure with you?

A: Yes! We we never disclose data like this to anyone outside our company. Only our key employees, perform this service. We will sign a non-disclosure agreement (NDA) if requested.


Q: What is the cost?

A: The cost is $74 per file. We don't charge by the person. The maximum is 10,000 persons per file.


Q: How long does it take to receive the report?

A: Usually the same or next day turnaround. Rarely, but sometimes it can take longer, if the IRS web site is down or too busy to receive the data. Tin/Name matching is conducted by the IRS campus in Austin, Texas on I-35, south of downtown Austin.


Q: After we receive the TIN/Name report, what do we do about the no-matches?

A: You should "solicit" each no-match for the correct Name/Tin combination by sending a W-9 (in accordance with Publication 1586) to each no-match payee on the list we provide. RealSearch.com can also perform this service automatically for you for a fee.


This "solicitation" will establish REASONABLE CAUSE, which should insulate you from no-match penalties, but not other penalties such as late filing, not e-Filing, etc. For more information see TinMatch.asp Here is a link for a severe warning letter. You may also wish to review Publication 1586 about Reasonable Cause.


Return to Service Bureau Page






TIN Matching

TIN matching is a service implemented by the IRS that allows a 1099 filer to check the TIN (Taxpayer Identification Number) and a specific name to ensure that there is a match for it in the IRS database. This process helps filers avoid IRS penalties and notices for missing TINs or incorrect Name/TIN combinations.

The IRS created TIN matching to increase compliance and to reduce the costs associated with sending notices and the additional processing. Greatland's automated TIN matching service, available in Yearli Performance and Yearli Desktop, integrates with the IRS database for hassle-free and accurate validation. Greatland's TIN matching service is the best in the industry. We interpret the results for you, delivering an easy-to-understand TIN matching report in one to three business days.

Available immediately; no enrollment process required

Matches the payee name and TIN with IRS records.

Decreases CP2100/CP2100A notices and penalty notices.

Prohibits invalid requests, increasing efficiency by reducing the number of mismatches to be addressed.

Reduces the time and effort required to deal with backup withholding and penalty notices.

Reduces the likelihood of paying penalties because IRS will consider a penalty waiver if the payer used TIN matching and received a positive match response.

Provides Email notifications when TIN matching request is submitted to the IRS and when the TIN matching report is ready.

Penalties can be costly and B-Notices take time. Avoid both by using the Greatland TIN matching service.




Penalties

Penalties are imposed for each of the following infractions related to information returns:

Filed with a missing/incorrect information

Filed untimely

Filed on incorrect media

Filed in an incorrect format

Any combination of the above

Internal Revenue Code (IRC) section 6721 imposes a:

$30 per information return if you correctly file within 30 days

$60 per information return if you correctly file more than 30 days after the due date but by August 1

$100 per information return if you file after August 1 or you do not file required information returns

Maximum penalties to payers for furnishing an incorrect name/TIN to IRS = $1.5 million/year ($500,000 for small businesses); $250/return for intentional disregard with no maximum penalty.




Notices

If the IRS sends you a CP2100 or CP2100A Notice indicating an incorrect payee TIN/name combination, you are required to send the "B" Notice within 15 days from the date you received it, or the date of the CP2100/2100A, whichever is later. See Publication 1281 for details.

CP2100 or CP2100A: "Notice of Possible Payee TIN Discrepancy" - Notice sent from IRS to the payer listing name/TIN combinations on information returns that do not match IRS records.

B Notice: "Backup Withholding Notice" - Notice sent from payer to payee requesting correct name/TIN. There are two B notices - a First B Notice and a Second B Notice. The text on the two notices is different.

Notice 972CG: "Proposed Penalty Notice" - Notice sent from IRS to the payer notifying the payer of potential penalties. Payers have 45 days to respond to abate proposed penalties.

CP15/215: "Balance Due Notice" - A bill from IRS to the payer informing the payer of the amount of penalties due.





The IRS TIN Matching service is a valuable tool that every A/P manager should know about. This free-of-charge e-service allows ‘authorized payers’, defined by the IRS as one who has filed information returns with the IRS in at least one of the two past tax years, to match 1099 payee information against IRS records prior to filing information returns.

By integrating the TIN Matching program into your processes, you can reduce errors in validating TINs and decrease your backup withholding and penalty notices. In addition, it’s a control to aid in the prevention of fraudulent activity.

The IRS offers two methods to match: interactive TIN matching that will accept up to 25 TINs and Bulk TIN matching which accepts up to 100,000 TINs, submitted as a txt file, to be matched at one time.

The following link takes you to the IRS website and will get you started http://www.irs.gov/taxpros/article/0,,id=109646,00.html.

Before you get started with the IRS TIN Matching service, you may wish to review publication 1281 from the IRS that covers Backup Withholding for Missing and Incorrect Name/TIN(s). It contains frequently asked questions on the topic, how to handle missing and incorrect name/TIN combinations (and even provides flowcharts for further clarification), explains the IRS matching process, and more.

Here is the latest publication http://www.irs.gov/pub/irs-pdf/p1281.pdf



TINCheck provides real-time list matching/verification services such as: IRS TIN/Name matching, SSA EIN/Name Lookup System, Office of Foreign Asset Control (OFAC) list matching, Death Master File (DMF) list matching, Foreign Sanction Evaders list matching, Denied Persons list matching, Excluded Parties List System matching, Excluded Individuals and Entities list matching, Designated Foreign Terrorist Organizations list matching, Politically Exposed People list matching, FBI Wanted list matching, Casino Banned Patron list matching, and even address validation services…all with a single mouse-click.


To find out more about how TINCheck’s services work, try using our free trial service!




ENFORCEMENT & SANCTION ACTIONS


ENFORCEMENT INFORMATION FOR March 6, 2014 Information concerning the civil penalties process is discussed in OFAC regulations governing the various sanctions programs and in 31 CFR part 501. On November 9, 2009, OFAC published as Appendix A to part 501 Economic Sanctions Enforcement Guidelines. See 74 Fed. Reg. 57,593 (Nov. 9, 2009). The Economic Sanctions Enforcement Guidelines, as well as recent final civil penalties and enforcement information, can be found on OFAC’s Web site at www.treasury.gov/ofac/enforcement. ENTITIES – 31 CFR 501.805(d)(1)(i) Ubiquiti Networks, Inc. Settles Potential Civil Liability for Apparent Violations of the Iranian Transactions and Sanctions Regulations: Ubiquiti Networks, Inc. (“Ubiquiti”), San Jose, CA, has agreed to pay $504,225 to settle potential civil liability for apparent violations of the Iranian Transactions and Sanctions Regulations (the “ITSR”). From on or about March 24, 2008, to in or around February 2010, Ubiquiti appears to have violated §§ 560.206 and 560.208 of the ITSR by engaging in transactions related to the exportation, reexportation, sale or supply, directly or indirectly, of goods for broadband wireless connectivity1 to Iran, and facilitating the reexportation, sale or supply of such goods to Iran, when it entered into an agreement granting a distributor in the United Arab Emirates (“U.A.E.”) exclusive rights to distribute Ubiquiti’s goods in Iran, then subsequently sold to the U.A.E. distributor and exported or shipped to the U.A.E. goods that were reexported to Iran. Additionally, from on or about December 1, 2009, to on or about February 25, 2011, Ubiquiti appears to have violated § 560.204 of the ITSR by engaging in 13 exports of goods for broadband wireless connectivity to a distributor located in Greece, with knowledge or reason to know that the goods were intended specifically for supply, transshipment, or reexportation, directly or indirectly, to Iran. OFAC determined that Ubiquiti did not voluntarily disclose the apparent violations, and that the conduct constitutes a non-egregious case. The base penalty for the apparent violations was $560,250. The settlement amount reflects OFAC’s consideration of the following facts and circumstances, pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, app. A: Ubiquiti demonstrated reckless disregard for U.S. sanction requirements; Ubiquiti was on notice in February 2010 that the conduct at issue constituted a violation of U.S. law; members of Ubiquiti’s senior management knew or had reason to know that Ubiquiti products were reexported to Iran; Ubiquiti’s conduct resulted in the provision of goods related to broadband wireless connectivity, worth at least $588,938, to entities located in Iran; Ubiquiti engaged in a pattern of conduct over five years that resulted in several apparent violations during that period; Ubiquiti had no OFAC compliance program in place at the time of the apparent violations; Ubiquiti has no prior sanctions history, including not being the subject of a penalty notice or Finding of Violation; Ubiquiti cooperated with OFAC during its investigation 1 On May 13, 2013, OFAC issued General License D, superseded on February 7, 2014 by General License D-1, authorizing, inter alia, the sale and export of certain goods and services incident to personal communications. The transactions described above occurred prior to the issuance of this general license and the majority of the products supplied to Iran are not within the scope of this general license. of the apparent violations; and Ubiquiti took remedial action in response to the apparent violations. For more information regarding OFAC regulations, please go to: www.treasury.gov/ofac.






6-2-2014: NEW! IRS FATCA - Global Intermediary Identification Number (GIIN) validator

4-28-2014: New list added. Dept. of Treasury. Foreign Sanctions Evaders (FSE) List.

3-6-2014: Treasury assesses $504,225 penalty against Ubiquiti Networks for OFAC violations.

1-23-2014: Treasury assesses $151,902,000 penalty against Clearstream Banking for OFAC violations.

5-24-2013: New Security Feature added. TINCheck now supports two-factor authentication for account login.

5-17-2013: New lists added. All FBI lists have been added. White Collar Crimes, Violent Crimes, Fugitives, etc.

5-10-2013: New list added. State Dept. Designated Foreign Terrorist Organizations (FTO).

5-9-2013: Treasury assesses $348,000 penalty against The American Steamship Owners Mutual Protection and Indemnity Associati on, Inc. for OFAC violations.

5-6-2013: New list added. CIA Politically Exposed People (PEP), foreign diplomats.

2-21-2013: Treasury assesses $404,100 penalty against American Optisurgical, Inc. for OFAC violations.

12-11-2012: Treasury assesses $375,000,000 penalty against HSBC Holdings for OFAC violations.

7-10-2012: Treasury assesses $1,347,750 penalty against Great Western Malting Co. for OFAC violations.

6-12-2012: Treasury assesses $619,000,000 penalty against ING Bank for OFAC violations.

4-23-2012: State regulators assesses $478,000,000 penalty against MetLife for failure to use Death Master File validation.




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On-Line Taxpayer Identification Number (TIN) MATCHING PROGRAM PUBLICATION 2108A INTENDED AUDIENCE The intended audiences for this Publication are members of the Third- Party Payor Community, and Their Authorized Agents, Issuing Form 1099 Statements of Income for Recipients of Proceeds from: » Real Estate Brokers and Barter Exchange Transactions (1099-B) » Dividends and Distributions (1099-DIV) » Interest Income (1099-INT) » Merchant Card Third Party Network Payments (1099-K) » Miscellaneous Income (1099-MISC) » Original Issue Discount (1099-OID) » Taxable Distributions Received from Cooperatives (1099-PATR) This Publication describes the acceptance criteria for participation in the IRS e-services TIN Matching Program, and the operations and procedures of the program. Guidelines and Instructions for the Interactive and Bulk On-Line Taxpayer Identification Number (TIN) Matching Programs2 TABLE OF CONTENTS Section 1: PURPOSE 3 Section 2: AUTHORITY 3 Section 3: BACKGROUND 3 Section 4: DISCLOSURE AND PRIVACY 3-4 Section 5: PROGRAM ACCESS AND FEES 4 Section 6: PROGRAM TERMS DEFINED 4-5 Section 7: REQUIREMENTS FOR PARTICIPATION IN PROGRAM 5 Section 8: e-services TIN MATCHING PROGRAMS 5 Section 9: INTERACTIVE AND BULK TIN MATCHING APPLICATION 5 Section 10: INTERACTIVE AND BULK TIN MATCHING PROCESS 6 Section 11: BULK TIN MATCHING FILE FORMAT 6-7 Section 12: PENALTY ABATEMENT DUE TO REASONABLE CAUSE 7 Section 13: WHERE TO GET HELP 7 Section 14: FREQUENTLY ASKED QUESTIONS 7-11 Section 15: EXHIBITS 12-17 Section 16: TROUBLESHOOTING 18-203 GENERAL PROGRAM GUIDELINES AS ESTABLISHED UNDER REVENUE PROCEDURE 2003-9 SEC. 1. PURPOSE 1. These guidelines provide procedures for the Internal Revenue Service’s Taxpayer Identification Number (TIN) Matching Program. The program is established for payers of Form 1099 income subject to the backup withholding provisions of section 3406(a)(1)(A) and (B) of the Internal Revenue Code. Prior to filing an information return, a Program participant may check the TIN (Taxpayer Identification Number) furnished by the payee against the name/TIN (Taxpayer Identification Number) combination contained in the Internal Revenue Service database maintained for the Program. 2. The IRS will maintain a separate name/TIN (Taxpayer Identification Number) database specifically for the program and will inform the payor whether or not the name/TIN (Taxpayer Identification Number) combination furnished by the payee matches a name/TIN (taxpayer Identification Number) combination in the database. 3. The matching details provided to participating payors, and their authorized agents, will help avoid TIN (Taxpayer Identification Number) errors and reduce the number of backup withholding notice required under Section 3406(a)(1)(B) of the Internal Revenue Code. SEC. 2. AUTHORITY 1. The Interactive and Bulk TIN (Taxpayer Identification Number) Matching Programs are established under the authority of Revenue Procedure 2003-9. Revenue Procedure 2003-9 and IRC Section 6050W expand the IRS authority provided under Revenue Procedure 97-31, to allow the on-line matching of taxpayer identifying information as provided by payers of income reported on Forms 1099 B, DIV, INT, K, MISC, OID and PATR. SEC. 3. BACKGROUND 1. Section 3406(a) (1) of the Internal Revenue Code (IRC) provides, in part, that the payor shall deduct and withhold income tax from a reportable payment if either: a) The payee fails to furnish the payee’s TIN (taxpayer identification number) to the payor in the required manner, or b) The Secretary of the Treasury notifies the payor that a TIN (taxpayer identification number) furnished by the payee is incorrect. 2. Section 31.3406(j) – 1(a) of the Employment Tax Regulations provides that the Commissioner has the authority to establish TIN Matching Programs and may prescribe, by revenue procedure or other guidance, the scope, terms and conditions for participating in such programs. 3. Section 31.3401(j) – 1(b) provides that none of the matching details received by a payor through a TIN Matching Program will constitute a notice regarding an incorrect name/TIN combination under §31.3406(d) – 5(c) for the purpose of imposing backup withholding under §3406(a)(1)(B). 4. Section 31.3406(j) – 1(c) provides that §3406(f), relating to confidentiality of information, applies to any matching details received by a payor through a TIN Matching Program. A payor may not take into account any such matching details in determining whether to open or close an account with a payee. 5. Section 6721 provides that a payor may be subject to a penalty for failure to file a complete and correct information return with the Internal Revenue Service. 6. Section 6722 provides that a payor may be subject to a penalty for failure to furnish a complete and correct information statement (payee statement) to a payee. Not including the correct payee TIN on an information return or payee statement is a failure subject to §§6721 and 6722 penalties. SEC. 4. DISCLOSURE AND PRIVACY 1. IRC 3406 permits the disclosure of taxpayer name/TIN combinations to certain third-party payers. Such disclosure is allowed for reportable payments subject to backup withholding only.4 2. IRC 6103 protects the confidentiality of TINs. 3. Third-party payers, and their authorized agents, who participate in the TIN Matching Program must sign an on-line Terms of Agreement (TOA) clause stating they will only attempt to match name/TIN combinations for the types of reportable payments listed in Revenue procedure 2003-9. (See exhibit 3) 4. Failure to adhere to the stated TOA may constitute an unauthorized disclosure and/or violation of the Computer Security Act of 1987. 5. Unauthorized use of the Program could cause payers, their agents and authorized users to become liable for civil penalties under Internal Revenue Code, Section 7431. SEC. 5. PROGRAM ACCESS AND FEES 1. The TIN Matching Program is accessible via the eServices Registration home page, located at https://la1.www4.irs.gov/e-services/Registration/index.htm. 2. Except for scheduled maintenance, users will be allowed to access the system 24 hours a day to submit TINs for matching. 3. The IRS does not currently charge a fee to access the name/TIN database maintained specifically for the TIN Matching Program. 4. The IRS does not currently charge a fee to participate in the TIN Matching Program. SEC. 6. PROGRAM TERMS DEFINED For the purpose of the TIN Matching Program, the following terms will be defined: 1. “Participant” – means a person that is either a payor, or a payors’ authorized agent and, that has applied and been accepted to participate in the Program. 2. “Participating Payor” – means a payor that is participating in the Program either on its own behalf or through an authorized agent that is a participant. 3. “Payee” – means a person with respect to whom a reportable payment, as defined in §3406(b), has been made or is likely to be made by a participating payor. 4. “Account” - means any account, instrument, contract, or other relationship with a payee with respect to which a payer is likely to make a reportable payment. (See section 3406-3(e) of the Temporary Employment Tax Regulations). 5. “Reportable Payment” – means interest and dividend payments as defined in IRC section 3406(b)(2), and other reportable payments as defined in IRC section 3406(b)(3). 6. “TIN” – means the taxpayer identification number that a payee is required to furnish to a payor. The TIN may be an Employer Identification Number (EIN), a Social Security Number (SSN), or an Internal Revenue Service Individual Taxpayer Identification Number (ITIN), per IRC section 6109. 7. “Principal” – means a partner or an individual who owns at least five percent (5%) of the firm that is applying to participate in the TIN Matching Program. The “Principal” may also be a corporate officer of a publicly traded firm, such as President, Vice- President, Secretary or Treasurer. The “Principal” must be the person who can legally bind the firm in matters before the IRS and must complete the original Application to TIN Match on behalf of the firm. 8. “Responsible Official” – means an individual who holds a supervisory position within the firm. A “Responsible Official” has the authority to update an application on behalf of their listed firm and firm “Principal”. The “Responsible Official” may also assign/disable “authorized agent” and “delegated user” roles, update locations and perform TIN Matching. 9. “Authorized Agent” – means a person or firm that, with the payor’s authorization, transmits specific information Returns (IRP) documents to the IRS on behalf of the firm and may match name/TIN combinations on behalf of the payor. An “Authorized Agent” may assign/disable user access within their 5 assigned location, update their location address information and perform TIN Matching. 10.“Delegated User” – means an individual who will utilize the TIN Matching session options on behalf of the firm. A “Delegated User” may not assign or disable users or update applications on behalf of their assigned firm. A “Delegated User” may only perform TIN Matching on behalf of their assigned firm. 11.“Transmitter” - means the Federal agency sending in the magnetic tape cartridge containing the TINs for matching purposes. 12.“Transmitter Control Code - TCC” - means the IRS assigned code for each participant. 13.“Authorized Payor” - means a Payor who has filed Information Returns with the IRS in at least one of the two preceding tax years. SEC. 7. REQUIREMENTS FOR PARTICIPATION IN TIN MATCHING PROGRAMS The IRS offers e-services Interactive and Bulk TIN Matching Programs to allow for the matching of name/ TIN combinations on reportable income subject to backup withholding. Available to members of the third-party payor community, and their authorized agents, who make reportable payments subject to backup withholding. Participants in the e-services TIN Matching Programs must: a) Comply with all requirements of revenue procedure 2003-9; b) Transmit only name/TIN combinations relating to accounts with respect to which a reportable payment is made, or is likely to be made, on or after the effective date of revenue procedure 2003-9; c) Transmit only name/TIN combinations that have not been previously transmitted by that participant to the Service for matching; d) Maintain the confidentiality of information obtained through TIN solicitation activities in accordance with the requirements of §31.3406(f)-1 of the Employment Tax Regulations; e) Provide the Service with the information necessary to monitor the effectiveness of the Program. SEC. 8. E-SERVICES TIN MATCHING PROGRAMS 1. The IRS Office of Electronic Tax Administration (ETA) offers two TIN Matching options through the e-services project. a) Interactive TIN Matching and, b) Bulk TIN Matching 2. Prior to completing an Application to TIN Match, all prospective users of the TIN Matching Program must complete an on-line e-services registration process. Please see the e-services home page for information regarding the registration process. SEC. 9. INTERACTIVE AND BULK TIN MATCHING APPLICATION PROCEDURES 1. An authorized payor of income subject to backup withholding may complete an on-line Application to TIN Match. Please see Section 6 of this publication for a definition of an “Authorized Payor”. 2. The “Principal”, on behalf of the firm and/or organization holding the payee account information, must complete the Application to TIN Match. Please see Section 6 of this publication for a definition of a “Principal”. 3. The “Principal” will assign user roles to others within the firm and/or organization that will have a need to access the TIN Matching Program. Please see Section 6 of this publication for definitions of additional user roles such as “authorized agent”, “delegated user” and “responsible official”. 4. Please see Exhibits 1 and 2 on pages 12 and 13 of this publication to review the TIN Matching Application.6 SEC. 10. INTERACTIVE AND BULK TIN MATCHING REQUEST PROCEDURES 1. Participants must agree to the stated Terms of Agreement (TOA) prior to accessing any TIN Matching applications. Please see Exhibit 3 on page 14 of this publication. 2. Participants will logon to e-services using the Username and Password selected during the registration process. 3. The Interactive TIN Matching process will accept up to 25 input name/TIN combination requests online. Results will be returned to the user in real time. Please see Exhibit 4 on page 15 of this publication. 4. The results returned to the user will be in a numerical format as follows: a) “0” – indicates the name/TIN combination matches IRS records. b) “1” - indicates TIN was missing or TIN is not a 9 digit number. c) “2” – indicates TIN entered is not currently issued. d) “3” – indicates the name/TIN combination do not match IRS records. e) “4” - indicates an invalid TIN Matching request. f) “5” – indicates a duplicate TIN Matching request. g) “6” - (matched on SSN), when the TIN type is (3), unknown, and a Matching TIN and name control is found only on the NAP DM1 database. h) “7” - (matched on EIN), when the TIN type is (3), unknown, and a matching TIN and name control is found only on the EIN/NC database. i) “8” - (matched on EIN and SSN), when the TIN type is (3), unknown, and matching TIN and name control is found only on both the EIN/NC and NAP DM1 databases. 5. Interactive requests may only be input in groups of up to 25 name/TIN combinations. At this time, there is a limit of 999 on the number of interactive requests that may be input during a 24-hour period by one User ID. 6. Bulk TIN Matching will allow authorized users to submit up to 100,000 name/TIN combinations for matching. 7. Bulk TIN Matching requests will be submitted, via a secure mailbox, in a text file format. Each file submission will be assigned a tracking number. Please see Exhibits 6 and 7 on page 17 of this publication. 8. The Bulk TIN Matching file will be returned to the user within 24 hours via a secure mailbox. User files will include the numerical response as indicated above for each name/TIN combination submitted. SEC. 11. BULK TIN MATCHING FILE FORMATS 1. Bulk TIN Matching requests must be prepared by the user in a .txt file format as follows: TIN TYPE; TIN NUMBER; NAME; ACCOUNT NUMBER (OPTIONAL) c) TIN TYPE – means a one digit number where “1” represents and Employer Identification Number (EIN), “2” represents a Social Security Number (SSN) and, “3” represents an unknown TIN type. d) TIN Number is the 9 - digit SSN or EIN for the taxpayer. e) TIN Name is the taxpayer’s full name or business name. Note - Users should omit any special characters that are part of the business name with the exception of hyphens (-) and ampersands (&). Enter a minimum of 1 and a maximum of 40 alphanumeric characters.7 f) Account Number - is an optional field that may contain payor provided information such as a bank account number. Enter a maximum of 20 alphanumeric characters. 2. Bulk TIN Matching files may contain up to 100,000 name/TIN combinations. SEC. 12. ABATEMENT OF PENALTIES DUE TO FAILURE TO PROVIDE ACCURATE AND COMPLETE TIN ON INFORMATION RETURNS 1. Section 6721 of the Internal Revenue Code provides that a payor may be subject to a penalty for failure to file a complete and correct information return. Section 6722 of the Internal Revenue Codes provides that a payor may be subject to a penalty for failure to furnish a complete and correct information statement (payee statement) to a payee. 2. Not including the correct payee TIN on an Information Return or payee statement is a failure subject to the §§6721 and 6722 penalties. 3. Section 6724 of the Internal Revenue Code provides that the Service may waive the penalties under §§6721 and 6722 if the filer (payor) shows that the failure was due to reasonable cause and not due to willful neglect. The regulations under §6724 provide that a filer (payor) may establish reasonable cause by showing, among other things, that the failure arose due to an event beyond the filer’s control. 4. Section 31.3405(j)-1(d) provides that the Service will not use a payor’s decision not to participate in the TIN Matching Program as a basis to assert that the payor lacks reasonable cause under §6724(a) for failure to file a correct Information Return under §6721 or to furnish a correct payee statement under §6722. 5. Participating payors may cite a payee name and TIN match as reasonable cause under §6724(a), if the Service asserts a penalty under §6721 or §6722 of the Internal Revenue Code. 6. The Service will consider a penalty waiver if the participating payor presents documentation of the match in the following manner: a) Payors must provide to the Service a legible copy of the original match transaction for the name/TIN combination on which the penalty has been assessed. b) Penalties must have been assessed after the date of the original match transaction for the name/TIN combination in question. c) Payors must request the abatement of penalty, in writing, citing the use of the TIN Matching Program resulting in a positive match response. d) Payors may only request the abatement of penalties assessed due to a failure to file a correct Information Return. Other penalties assessed under the Information Returns program are not eligible for these abatement procedures. SEC. 13. WHERE TO GET HELP 1. Participants in the Interactive and Bulk TIN Matching Programs may receive assistance in two ways: a) Via the e-services on-line tutorials at https://la1.www4.irs.gov/eservices/Registration/index.htm. b) Via the e-Help Desk. Callers in the United States may dial 1-866-255-0654. This toll – free number is operational Monday through Friday, 7:30 AM – 7:00 PM (EST). International callers may dial 01-512-416-7750. SEC. 14.TIN MATCHING FREQUENTLY ASKED QUESTIONS (FAQ’S) 1. What is a TIN? The term “TIN” is defined as the identifying number assigned to a person under Internal Revenue Code, Section 6109. Specifically, a TIN may be a Social Security Number (SSN), Employer Identification Number (EIN), Individual Taxpayer Identification Number (ITIN), or Adoption Taxpayer Identification Number 8 (ATIN). A valid Social Security Number may only be issued by the Social Security Administration. An EIN, ITIN or, ATIN may only be obtained through the Internal Revenue Service. 2. What are the requirements for providing a payee TIN to the IRS? Internal Revenue Code (IRC) Section 6109(a) (1) provides that any payer required to file an information return must include the payee’s correct TIN. IRC 6109(a) (2) requires the payee to furnish their correct TIN to the payer. IRC Section 6109(a) (3) requires a payer to request a payee’s TIN and include it in any returns filed with IRS. IRC Section 3406(a)(1)(A) provides that reportable payments are subject to backup withholding if the payee does not provide a correct TIN to the payer. The payer is required to withhold 28% of a reportable payment if the TIN is not provided at the time of the payment. IRS sends a CP2100 or CP2100A, “Notice of Possible Payee TIN Discrepancy”, to payers if the TIN/name combination on the information return does not match IRS tax records. Once a payer receives a “Notice of Possible Payee TIN Discrepancy”, for a payee, the payer is required to track whether or not another is received within 3 years. If another “Notice of Possible Payee TIN Discrepancy”, for that payee is received, the second notice requires the payer to backup withhold on any proceeds disbursed to the payee until IRS gives permission to stop, even if a Form W-9 is provided by a payee. Additional information regarding requirements to provide a payee TIN and, backup withholding guidelines, may be found in IRS Publication 1281 “Backup Withholding for Missing and Incorrect TINs – Including Instructions for Magnetic Tape and CD/DVD Formats ”. 3. What is a Form W-9? Form W-9, “Request for Taxpayer Identification Number and Certification”, certifies the payee’s name and TIN, that the payee is not subject to backup withholding, and they are a U.S. person, including a U.S. resident alien. 4. What is the penalty for a payer who furnishes an incorrect name/TIN to IRS? IRC Section 6721 provides a payer may be subject to a penalty for failure to file a complete and accurate information return, including a failure to include the correct payee TIN. The penalty is $50 per return, with a maximum penalty of $250,000 per year ($100,000 for small businesses). The penalty for intentional disregard is $100 per return, with no maximum penalty. 5. How does IRS differentiate between an ‘invalid’ and a ‘missing’ TIN? A missing TIN is either completely missing, or contains invalid characters such as alphas or hyphens. An invalid TIN is one that doesn’t match IRS records for that name/TIN combination. A TIN not currently issued cannot be found in either IRS or SSA records. 6. Who will be able to use the TIN Matching Program and how will it help me to reduce errors on my payee TINs? Payers or their authorized agents, who submit Forms 1099-INT, DIV, PATR, OID, MISC and/or B* to IRS may be eligible to enroll in the e-Services TIN Matching program. TIN Matching assists the payer in determining if the payee TIN/name combination contained on their Form W-9, matches the TIN/name combination contained in IRS tax filing records. NOTE: The TIN Matching program currently cannot enroll payers who do not submit at least one of these six forms, nor employers submitting Forms W-2, to use the TIN Matching system. Payers may only perform TIN Matching for the TIN/Name combinations for income subject to backup withholding and reported on Forms 1099-B, DIV, INT, MISC, OID and/or PATR. 7. What is an authorized agent? An individual or company contracted to transmit information returns to the IRS on behalf of the payer firm. This would include third party service providers, transmitters, service bureaus, etc. An authorized agent must perform TIN Matching research under the account established by the payer firm through eServices.9 8. How does TIN Matching over the Internet work? Enrolled users may TIN Match in one of two ways: a) Interactively – a user can submit up to 25 name/TIN combinations at a time during a session, and receive a response within 5 seconds. b) Bulk – users may download .txt files composed of up to 100,000 name/TIN combinations and receive a response from IRS within 24 hrs. 9. What type of response will users receive? The TIN Matching program provides a numerical response indicator for each match request. The potential responses include: ‘0’ - Name/TIN combination matches IRS records ‘1’ - Missing TIN or TIN not 9-digit numeric ‘2’ - TIN not currently issued ‘3’ - Name/TIN combination does NOT match IRS records ‘4’ - Invalid request (i.e., contains alphas, special characters) ‘5’ - Duplicate request ‘6’ - (Matched on SSN), when the TIN type is (3), unknown, and a matching TIN and name control is found only on the NAP DM1 database. ‘7’ - (Matched on EIN), when the TIN type is (3), unknown, and a matching TIN and name control is found only on the EIN N/C database. ‘8’ - (Matched on SSN and EIN), when the TIN type is (3), unknown, and a matching TIN and name control is found on both the NAP DM1 and the EIN N/C databases. 10.What happens if the name/TIN combination matches IRS records, and I still receive a CP2100 or CP2100A Notice for a specific payee TIN? IRC Section 6724 provides any penalties under Section 6721 may be waived if the payer shows the failure to file a correct TIN on an information return was due to reasonable cause and not willful neglect. Payers who use the TIN Matching system may establish due diligence and reasonable cause if the information contained in their records matches IRS records. 11.Are there any costs to the payer using TIN Matching? No. At the present time, the IRS does not impose any monetary charges for use of the TIN Matching system. 12.How do I apply to TIN Match? Application for the TIN Matching program may be made after successful completion of the two-step eServices Registration process. Detailed information about how to register for eServices, and apply for TIN Matching, is available at, https://la.www4.irs.gov/e-services/Registration/index.htm. 13.Is use of the TIN Matching program mandatory? TIN Matching is a free assistance tool developed by eServices as a service to our customers. The use of the program is completely voluntary and, payers do not face the possibility of increased penalties if they do not participate in the program. 14.What are the hours of operation for the TIN Matching system? Payers will have access to the TIN Matching system 24 hrs a day, 7 days a week. There may be short time 10 periods during the evening or night hours while data files are updated that TIN Matching may be briefly unavailable. 15.How does Interactive TIN Matching work? Once you have been established as a user on the TIN Matching system, you will log in with the username and password you established during the registration process. Upon login, users must accept the TIN Matching Terms of Agreement. You will then be prompted to enter a TIN Type, TIN, and Name to be matched against IRS records. You may enter up to 25 TIN/Name combinations during each session. Once you enter “Submit”, the system will return the TIN/Name combinations along with the “Match Indicator” to tell you whether or not the combination matched IRS records. You also have the option of entering each TIN/Name combination individually if you want to do a “Print Screen” and file each printout with the payee’s records in order to establish due diligence. 16.How does the Bulk TIN Matching work? In bulk TIN Matching, you may attach a .txt file with up to 100,000 TIN/Name combinations to be matched. The .txt file will be formatted as follows: TIN Type (1 = EIN, 2 = SSN, 3 = Unknown) TIN (9 digits Taxpayer Identification Number) Name * (up to 40 characters) Account Number (optional field for your use – up to 20 Alpha/numeric – NOTE: the system will not read this information) A semi-colon (;) will be the delimiter between fields. Each line of input will signify a new record. Example: TIN Type; TIN; Name; Account Number TIN Type; TIN; Name; Account Number TIN Type; TIN; Name; TIN Type; TIN; Name; Account Number TIN Type; TIN; Name; If you submit a record without the required fields (TIN Type, TIN, Name), the response you will receive will be Indicator 4, Invalid Request. If you don’t know the TIN Type, enter “3” and the system will check both the SSN and EIN master files. Within 24 hours, the response will be sent to a secure mailbox and an email notification will be sent to you indicating a response is waiting. You will have 30 days to access and download the results file. Once accessed, the results are retained for 3 days before being purged. The same information you sent in the .txt file will be returned with one additional field containing the results indicator. *The system will only accept limited special characters in the name line for Bulk TIN Matching. Hyphens and ampersands will be accepted. Commas, apostrophes and other special characters should be omitted from the name line. For instance, the name O’Malley & Sons should be input as OMalley & Sons. 17.What happens if I submit just the TIN or the name? Will IRS provide the correct name or TIN that is associated with the information I submit? You must submit a TIN/Name combination. If you leave either the TIN or name blank, the system will consider it invalid (Indicator 4). Due to privacy issues, IRS will not divulge an entity’s name or TIN.11 If you submit the same TIN with various names, or, the same name with various TINs, after four attempts, the system will automatically suspend your access to TIN Matching for 96 hours. This was done to prevent “phishing”. 18.Is there a limit to the number of bulk files I can upload each day? No. There is currently no limit. Once the system has been fully implemented, and there are many users logged in, the time it takes to upload files may slow somewhat. At this time, e-Services does not plan to restrict the number of file uploads per day for any user. When naming your .txt file, do not use special characters in the file name. Type the file name in plain fonts, (Courier works best), and place the dot extension directly before the file name extension. Example, a file named TIN Match Vol2 should be saved as TIN Match Vol2.txt. Unacceptable file names, such as TIN.Match.Vol2.txt or TIN_Match_Vol2.txt, may cause your file to be rejected by the system. 19.What is the process for enrolling in TIN Matching? Initially, users must register on -line with e-Services and will create a User Name, Password and PIN that will allow them to access the system electronically. Once the on-line registration is completed, users receive, at their home address, a confirmation token that they must validate on-line within 28 days of the initial registration. All users within a firm must complete their own registration to have an eServices account established for their individual username and password. Once users are confirmed , the Principal, (person at your firm responsible for completing the TIN Matching application and assigning user roles), will complete the application and all confirmed users may begin using Interactive or Bulk TIN Matching that same day. 20.I am a registered ERO (Electronic Return Originator) with the IRS. After I successfully completed the e-services registration process, I attempted to complete an Application to TIN Match. Why did I receive a message that I was not authorized to use the TIN Matching system? The TIN Matching Program is solely intended to assist those members of the Third-Party Payor community, and their authorized agents, with meeting their obligation for filing accurate and complete annual Information Return documents. At this time, the program is not available to any individual, firm or organization that does not fall into the category of a Payor or an authorized Payor agent. 21.When will TIN Matching be expanded to include other Form 1099 or Form W2 payment instruments? Plans for program expansion are actively being pursued. At the present time, payers of Form W-2 income, wishing to validate employee SSNs, should contact the Social Security Administration (SSA) for information on their SSNVS (Social Security Number Verification Service). Interested parties may find more information about this service by visiting: https://www.ssa.gov/bso/bsowelcome.htm 22.How may I find out more about the TIN Matching Program? Potential users are encouraged to review the e-Services home page at, https://la.www4.irs.gov/e-services/ Registration/index.htm. An On-Line Tutorial provides a full range of information for Interactive and Bulk TIN Matching, as well as other e-Services products. 23.What should I do to secure an accurate TIN from my Payee? It would be useful to refer to the Instructions for Form SS-4, lines 1 and 2, (http://www.irs.gov/pub/ irs-pdf/iss4.pdf) to determine what name may have been submitted to the IRS. Ultimately, the name submitted for TIN Matching should be the legal name from line 1 or the trade name from line 2 if a return using this name has already been filed and accepted. The legal name of the entity will create the best potential to match because IRS maintains prior name controls for an EIN even after a name change has been made.12 SEC. 15. TIN MATCHING ON-LINE SCREEN EXHIBITS Exhibit 1. Sample pages of the TIN Matching on-line application screens.13 Exhibit 2. Sample pages of the TIN Matching on-line application screens.14 Exhibit 3. On-line TIN Matching Terms of Agreement (TOA) screen.15 Exhibit 4. On-line Interactive TIN Matching request screen.16 Exhibit 5. On-line Interactive TIN Matching results screen.17 Exhibit 6. On-line Bulk TIN Matching Request screen. Exhibit 7. On-line Bulk TIN Matching Acknowledgement screen.18 MY PROBLEM IS WHAT THIS MEANS WHAT YOU CAN DO “I’ve already confirmed my registration but when I sign onto the system, I don’t see a link for TIN Matching.” Firms’ Principal has not completed and submitted the application on behalf of the firm. User may not have been added to the application with a designated role. Advise the Principal that the application must be completed and submitted before users will see the TIN Matching link. Advise your Principal or Responsible Official to check to see if you have been added and assigned a user role that will allow you to perform TIN Matching. If none of the above works, contact the e-Help desk for assistance or referral. “The system will not allow me to add other users to our firm’s application.” The role you have been assigned does not allow you to update or make changes to the TIN Matching application on behalf of your firm. All TIN Matching application changes must be completed by the Principal or Responsible Official. Authorized Agents may add users for their location only. Delegated Users may not make any changes to the TIN Matching application for their firm. If you are still having problems, contact the e-Help desk for assistance or referral. “I am trying to add users from another office location but I keep getting a message that I cannot delegate any users.” The location address is different from the primary location established on the application. Before adding users who will perform TIN Matching duties from a different office location, you must first establish that location. From the TIN Matching revise application screen, select “Establish Location”. After you have added the secondary location, the system will allow you to add other users and delegate their roles for the secondary location. After all changes have been input on-screen, be sure to select the ‘Submit’ button to ensure your changes are recorded. “I am receiving an Error Code 25000 message.” This usually indicates that there are incomplete or missing data fields on your input screen. Review the data and make necessary corrections. Refer to the HELP page for assistance with formats and data input fields. “My TIN Matching account access has been locked for 96 hours because of a security violation.” This message indicates you have activated the internal security system designed to protect against shopping for a TIN/Name combination. See item # 18 of this document for more information on this feature. User access to TIN Matching will be blocked until the 96 hour period has expired, or, until the account can be reviewed by the TIN Matching analyst staff. SEC. 16. TROUBLESHOOTING THINGS TO TRY BEFORE CONTACTING THE HELP DESK19 MY PROBLEM IS WHAT THIS MEANS WHAT YOU CAN DO “I submitted a .txt file for Bulk TIN matching. It’s been more than 24 hours and I still do not have a response from the IRS in my mailbox. What can I do?” 1. The file did not transmit to IRS servers. 2. The file transmitted to the IRS servers but, the response was unable to be deposited in your secure mailbox. 1. If you did not receive a confirmation and a tracking number at the end of your transaction, this means the file was never received by the IRS and you will need to re-submit the file. 2. If you have received a tracking number for your transmitted files, attempt to resubmit. 3. If the second attempt results in no response: a) Contact the e-Help desk Monday through Friday at 1-866-255-0654 between 7:30 AM and 7:00 PM, EST. b) Provide the assistor with the TIN/EIN for the firm or organization, the file tracking number, file size, date and approximate time the file was transmitted, a contact name, the e-services USERNAME for the transmitter, a phone number and email address for contact purposes. The assistor will notify e-Services to initiate an investigation which could take 5-7 business days. “When using Bulk TIN matching, I receive a message that not enough storage is available to complete this operation”. What does this mean?” Bulk Tin file cannot be transmitted or uploaded. 1. Contact the e-Help desk Monday through Friday at 1-866- 255-0654 between 7:30 AM and 7:00 PM, EST. 2. Provide the assistor with the TIN/EIN for the firm or organization, the file tracking number, file size, date and approximate time the file was transmitted, a contact name, the e-services USERNAME for the transmitter, a phone number and email address for contact purposes. The assistor will notify e-Services to initiate an investigation which could take 5-7 business days. SEC. 16. TROUBLESHOOTING CONTINUED20 MY PROBLEM IS WHAT THIS MEANS WHAT YOU CAN DO “I am receiving a message that the firm/EIN entered does not qualify for TIN Matching. Is there some other way I can enroll my firm?” The firm you are attempting to enroll does not meet basic qualifying criteria. To be eligible to apply for TIN Matching, firms must: 1. be a payer of income reported on Forms 1099 B, DIV, INT, MISC, OID or PATR and, 2. have filed an Information Return with the IRS in one of the two past tax years. If your firm/organization does not meet these basic requirements, regretfully, you will be unable to participate in the TIN Matching program at the present time. If you believe your firm does meet the minimum requirements, check the EIN you are using to enroll in the program. Be certain the EIN is the same as used to file your annual Information Returns for the Forms 1099 proceeds you paid out. “Page cannot be displayed.” Usually indicates an overall problem with browser connectivity or routing. Before calling the e-Help desk: 1. Check your browser configuration. You should be using Netscape Navigator 4.0 or higher or Internet Explorer 4.0 or higher. If necessary, update your browser to a version that will support JavaScript and Cascading Style Sheets. 2. Log off of e-Services, close your browser completely and then, sign back on. If you are still experiencing problems, contact the e-Help desk for assistance. “My Bulk TIN request keeps coming back with a message that the first line input must be 4 fields and 4 fields only.” Configuration of input lines is incorrect. Review your file to ensure it follows the .txt input format as shown in item #17 of this document. Make certain to review for any special characters that are prohibited and, be certain you are using a semi-colon (;) as the field separator. A maximum of 3 semi-colons per line of data is acceptable. Resubmit the file once all data has been corrected. See CAUTION on pg 18 of P. 2108A You may access the on-line tutorials page for additional assistance with Bulk TIN file formats. SEC. 16. TROUBLESHOOTING CONTINUED PUBLICATION 2108APublication 2108A (Rev. 1-2013) Catalog Number 37966F Department of the Treasury Internal Revenue Services www.irs.gov


Taxpayer Identification Number (TIN) On-Line Matching

TIN Matching is part of a suite of Internet based pre-filing e-services that allows “authorized payers” the opportunity to match 1099 payee information against IRS records prior to filing information returns.

An authorized payer is one who has filed forms 1099-B, 1099-DIV, 1099-INT, 1099-K, 1099-MISC, 1099-OID or 1099-PATR with the IRS in at least one of the two past tax years.

Interactive TIN Matching will accept up to 25 payee TIN/Name combinations on-screen while Bulk TIN Matching will allow up to 100,000 payee TIN/Name combinations to be matched via a text file submission.

Both programs will:

match the payee name and TIN with IRS records;

decrease backup withholding and penalty notices; and

reduce the error rate in TIN validation.

Individuals who are authorized to act for the federal, state, local, or tribal government must first register to use e-services and select a username, password and PIN. Then they can register to use TIN Matching from the suite of e-service products available.

The TIN Matching system is accessible 24 hours a day, seven days a week. Support services include on-line tutorials to assist customers with the registration, application and TIN Matching process. You do not need to be a registered user to access and view these tutorials. Customer assistance is also available toll-free at 1-866-255-0654, 7:30 a.m. to 7 p.m., EST, Monday through Friday.

Please also see - Pub 2108-A, On-Line Taxpayer Identification Number (TIN) Matching Program for more information.

You can also view a 2012 Federal, State, Local Government (FSLG) webinar that includes an illustration of the TIN Matching program.



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Form W-9 may seem simpler and more straightforward than other IRS forms, only requesting taxpayer identification information such as a name, address, and social security number, but it actually causes major problems for organizations of all industries. A small mistake such as misspelling or switching numbers can lead to hours of costly rework and significant penalties for organizations. Some even have to deal with hundreds of thousands of these mistakes. In fact, over 25% of W-9 forms are returned due to incorrect tax identification information. And if that isn’t burdensome enough, another 25% of B-Notices (a request for correct information) need to be resent a second time because they are incorrect. Talk about a major headache.

Consider online TIN Portal options to relieve the headaches of TIN verification at your organization. These solutions provide users with a seamless and secure online platform to acquire missing information from vendors, eliminating the long hours organizations put into tracking down payees, gathering accurate tax data, and manually updating internal records. Good online portals also come with the enhanced data accessibility and the security of respectable cloud-based solutions.

While the IRS does offer a TIN matching service online, making the service work can be timely and burdensome. First, an officer of the organization needs to sign up for eServices. This can take quite some time, as organizations need to create an account, fill out an application, and wait for a confirmation code to be sent via postal mail. And when finally in the system, users have also reported it is not intuitive or user friendly.

With a contemporary TIN Portal, you can avoid all the annoyances of the outdated system. There is no limit on the number of TINs or number of times a day you can access the service. Moreover, organizations can also eliminate the frustrations involved with tracking down TINs from payees. With some portals, vendors with incorrect data are automatically prompted via email or mail to update their information online, shifting the responsibility of providing correct information to your vendors instead of your organization. Responses are then verified before entering your system, eliminating the headache of continuously receiving incorrect identification information.

Convey Product Manager Neal Lefebvre is enthusiastic about the real-time aspect of TIN Portals. “Best-in-class TIN portal solutions allow recipients to electronically update their information and know in real-time if their information matches with the IRS.” To learn more about Convey TIN Portal services, clickhere.
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**Congressional Hearing on DOD contractors who Cheat on thier IRS Taxes **



<DOC> [108 Senate Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:92689.wais] S. Hrg. 108-493 DOD CONTRACTORS WHO CHEAT ON THEIR TAXES AND WHAT SHOULD BE DONE ABOUT IT ======================================================================= HEARING before the PERMANENT SUBCOMMITTEE ON INVESTIGATIONS of the COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED EIGHTH CONGRESS SECOND SESSION __________ FEBRUARY 12, 2004 __________ Printed for the use of the Committee on Governmental Affairs U.S. GOVERNMENT PRINTING OFFICE 92-689 WASHINGTON : DC ____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001 COMMITTEE ON GOVERNMENTAL AFFAIRS SUSAN M. COLLINS, Maine, Chairman TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas Michael D. Bopp, Staff Director and Chief Counsel Joyce A. Rechtschaffen, Minority Staff Director and Counsel Amy B. Newhouse, Chief Clerk ------ PERMANENT SUBCOMMITTEE ON INVESTIGATIONS NORM COLEMAN, Minnesota, Chairman TED STEVENS, Alaska CARL LEVIN, Michigan GEORGE V. VOINOVICH, Ohio DANIEL K. AKAKA, Hawaii ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas Raymond V. Shepherd, III, Staff Director and Chief Counsel Elise J. Bean, Minority Staff Director and Chief Counsel Mary D. Robertson, Chief Clerk C O N T E N T S ------ Opening statements: Page Senator Coleman.............................................. 1 Senator Levin................................................ 4 Senator Collins.............................................. 8 Senator Lautenberg........................................... 9 Senator Fitzgerald........................................... 26 Senator Akaka................................................ 29 WITNESSES Thursday, February 12, 2004 Gregory D. Kutz, Director, Financial Management and Assurance, U.S. General Accounting Office................................. 11 Steve Sebastian, Director, Financial Management and Assurance, U.S. General Accounting Office................................. 12 John J. Ryan, Assistant Director, Office of Special Investigations, U.S. General Accounting Office................. 12 Hon. Mark Everson, Commissioner, Internal Revenue Service, U.S. Department of the Treasury..................................... 33 Richard L. Gregg, Commissioner, Financial Management Service, U.S. Department of the Treasury................................ 35 Lawrence J. Lanzillotta, Principal Deputy Under Secretary (Comptroller), U.S. Department of Defense...................... 38 Alphabetical List of Witnesses Everson, Hon. Mark: Testimony.................................................... 33 Prepared statement........................................... 82 Gregg, Richard L.: Testimony.................................................... 35 Prepared statement with an attachment........................ 92 Kutz, Gregory D.: Testimony.................................................... 11 Combined prepared statement.................................. 53 Lanzillotta, Lawrence J.: Testimony.................................................... 38 Prepared statement........................................... 98 Ryan, John J.: Testimony.................................................... 12 Combined prepared statement.................................. 53 Sebastian, Steve: Testimony.................................................... 12 Combined prepared statement.................................. 53 EXHIBITS 1. GAO Report to Congressional Requesters [The Honorable Norm Coleman, Chairman, The Honorable Carl Levin, Ranking Minority Member, Permanent Subcommittee on Investigations, Committee on Governmental Affairs; and The Honorable Janice Schakowsky, House of Representatives], FINANCIAL MANAGEMENT: Some DOD Contractors Abuse the Federal Tax System with Little Consequence, February 2004, GAO-04-95.......................... 102 2a. GAO Chart: Potential Diversions of Payroll Taxes for Personal Gain.................................................. 174 2b. GAO Chart: Composition of the $246 Billion of Unpaid Assessments as of September 30, 2003........................... 175 3. IRS Chart: Increasing Tax Debts Available for Levy........... 176 4. Response for the record of Steven J. Sebastian, Director, GAO's Financial Management and Assurance Team regarding IRS proposed $300 million funding increase......................... 177 5. Responses to supplemental questions for the record submitted to Mark Everson, Commissioner, Internal Revenue Service........ 178 6. Responses to supplemental questions for the record submitted to Richard L. Gregg, Commissioner, Financial Management Service, Department of the Treasury............................ 189 7. Responses to supplemental questions for the record submitted to Lawrence J. Lanzillotta, Principal Deputy Under Secretary and Deputy Under Secretary for Management Reform (Comptroller), U.S. Department of Defense..................................... 192 8. SEALED EXHIBIT: List of Department of Defense contractors owing back taxes provided to the Permanent Subcommittee on Investigations by the Department of Defense.................... * * May be found in the fields of the Subcommittee. DOD CONTRACTORS WHO CHEAT ON THEIR TAXES AND WHAT SHOULD BE DONE ABOUT IT ---------- THURSDAY, FEBRUARY 12, 2004 U.S. Senate, Permanent Subcommittee on Investigations, Committee on Governmental Affairs, Washington, DC. The Subcommittee met, pursuant to notice, at 9:35 a.m. in room SD-342, Dirksen Senate Office Building, Hon. Norm Coleman, Chairman of the Subcommittee, presiding. Present: Senators Coleman, Levin, Collins, Lautenberg, Fitzgerald, and Akaka. Staff Present: Raymond V. Shepherd, III, Staff Director and Chief Counsel; Mary D. Robertson, Chief Clerk; Jay Jennings, Investigator; Elise J. Bean, Minority Staff Director and Chief Counsel; Brian C. Plesser, Counsel to the Minority; Andrew Plehal, Intern; Brian Kowalski, Intern; Alec Rogers (Senator Collins); and Marianne Upton (Senator Durbin). OPENING STATEMENT OF SENATOR COLEMAN Senator Coleman. This hearing is called to order. I would first like to note the presence of the Chairman of the Governmental Affairs Committee, Chairman Collins and I am pleased to have you here today. Also I'd like to recognize the Ranking Member, Senator Levin. I will note that during your tenure as Chairman of this Subcommittee, you certainly shined a light on instances where individuals were bringing in millions in one pocket but then were cheating the system. And this hearing today, I think, really is an offshoot of the focus that you have brought. Senator Levin. Thank you. Senator Coleman. And so, I thank you for the work you did and appreciate your cooperation in the work that we are doing together here. We are holding this hearing to address a continuing and growing problem at the Internal Revenue Service relating to the collection of delinquent taxes. In particular, our focus today is on the Department of Defense contractors who receive billions of dollars in contract payments each year and who currently owe $3 billion in unpaid taxes. Let me, if I can sum it up just very succinctly, we are talking about individuals, deadbeat taxpayers, who are being paid taxpayer dollars while they cheat the system, and the system is not doing enough to stop it. And hopefully, what we do today will move us in a direction to stop it. Under the Taxpayer Relief Act of 1997, the Internal Revenue Service has the authority to levy 15 percent of these contractors' payments, if the Department of Defense refers its contract payments to the Financial Management Service and the Internal Revenue Service has made these cases available for collection. However, the Department of Defense is not referring all of its payments and the Internal Revenue Service has not made all of these cases available for collection. These failures are costing the government over $100 million in lost tax revenue each year. No one likes to pay taxes. But taxes are a necessity because freedom is not free. Our taxes help to fulfill the American dream. They provide for the Nation's defense. They promote commerce and fair trade. They protect workers, promote health, and provide for education. They preserve our natural resources, advance research and preserve our culture. They feed the hungry and house the poor. They ensure justice and provide transportation. In short, taxes are the membership dues we pay to preserve our way of life. All Americans are beneficiaries of the Federal tax system. The focus of today's hearing is DOD's contractors who have abused the Federal tax system. Some of these abuses are appalling in their audacity and contemptible in their abject selfishness. They cannot and should not be tolerated. Those who are committed to the service of this Nation must bear their full responsibility in that service. I am especially concerned about DOD contractors who have withheld payroll taxes in trust for their employees and have failed to remit those taxes, cheating not only their own employees but the American people as well. The adverse impact on taxpayers' faith in the fairness of our tax system would be reason enough to remedy this problem. However, these employers' betrayal of their own employees demands our attention. An investigation recently completed by the General Accounting Office found that over 27,000 Federal contractors at the Department of Defense owed about $3 billion in unpaid taxes. If properly administered, the Debt Collection Act of 1996 would have provided DOD with the opportunity in fiscal year 2002 to collect at least $100 million from these contractors. However, because DOD has not fully implemented the provisions of the act, only $332,000 was collected. This problem has been further exacerbated by the IRS' failure to aggressively pursue collections against these contractors. Specifically, IRS' increasing collection workload and decreasing collection resources have led IRS to freeze collection activity in one of every three collection cases. Further, the IRS has allowed many cases to interminably languish in their antiquated collection process. In order to improve collections, DOD and the Internal Revenue Service must work with the Financial Management Service to identify delinquent contractors and levy their contract payments. I had a chance to meet with Commissioner Everson yesterday. I am pleased with his vision for an increased focus on investigative and collection efforts and by his commitment to expeditiously address the concerns raised by this Subcommittee and the GAO report. Let me outline some of the most egregious tax abuses that have occurred: <bullet> A business that provides snow removal and landscaping service at a military base was awarded contracts of over $1 million and owes over $1 million in unpaid payroll and employment taxes. During 2002, the contractor received over $200,000 from DOD. <bullet> An individual business that performs repair services on military vehicles owes over $500,000 in business and individual taxes. This contractor has contracts with the DOD that are worth over $60 million and recently received an annual payment of over $100,000. <bullet> IRS suspended collection activity against a contractor in 1999 because the IRS believed the contractor lacked the funds to pay their debt. However, between 1999 and 2002, DOD paid the contractor almost $700,000. <bullet> IRS initiated collection against a DOD contractor who owed about $270,000 in unpaid taxes. Because of its workload, IRS suspended collection activity against the contractor for 10 months. IRS then reinitiated collection against the contractor and placed the contractor's case in a queue of collection cases awaiting assignment. The contractor remained in the queue for 19 months. During this 29-month period, DOD paid the contractor at least $110,000. With the passage of the Debt Collection Improvement Act of 1996, Congress obligated DOD to levy their contractor payments to ensure that individuals and businesses who receive Federal payments and have failed to pay their just tax can have a portion of their payments forwarded to the IRS to satisfy their tax debt. The Federal Payment Levy Program, administered by the Financial Management Service, relies on computer matching of information provided by IRS and DOD. If the taxpayer identification information is incorrect or not provided, then, the Financial Management Service cannot match the DOD and IRS information. As a result, the IRS cannot effectively identify nonfilers, determine their full tax liability and levy contractors' payments to collect the taxes that are owed, and DOD will continue to fully pay tax scofflaws who are abusing the Federal tax system. When we find fraud and abuse, we must fix it and stop it from occurring again. As we begin this hearing, I want to reiterate my commitment to finding solutions to the problems in government. This morning, we will hear from representatives of the General Accounting Office on their recently completed investigation of DOD contractors who habitually abuse the Federal tax system. We will also hear from the Department of Defense, the IRS and the Financial Management Service concerning the actions that they have taken, or plan to take to ensure that DOD contractors pay the taxes that they owe. Senator Levin. OPENING STATEMENT OF SENATOR LEVIN Senator Levin. Thank you. Thank you for your leadership in this effort. You have been the leader in this investigation, and we have been delighted to be supportive of it. But the credit belongs to you, and the leadership has been very strong, and I think every taxpayer in this country is in your debt because of it. The men and women in our military are putting their lives on the line every day for our Nation. At the same time, the GAO is telling us that over 27,000 of the Department of Defense's contractors--that is about 10 percent of the Department's contractors--are dodging their tax bills and have outstanding tax debts to Uncle Sam totalling at least $3 billion--27,000 DOD contractors with $3 billions in unpaid taxes; I am not sure which figure is more shocking. Tax dodging by any Federal contractor is unfair, not only to the honest taxpayers left to make up the difference but also to the honest companies that have to compete against the tax dodgers for government contracts. Tax dodging by contractors taking taxpayers' dollars to support our military is not only unfair; it is unpatriotic. The General Accounting Office tells us that the vast majority of the 27,000 Department of Defense contractors with unpaid taxes, about 25,000 of them, have failed primarily to pay the payroll taxes which they have withheld and which they owe. That means these contractors have failed to send to the IRS sums that are withheld from employees' wages for Federal, State, Social Security, and Medicare taxes. When the GAO took a closer look at 47 of these Department of Defense contractors, it found that all 47 had evidence of tax avoidance, and in some cases, they unearthed unseemly tales of individuals and companies dodging taxes for years and using the money meant for payroll taxes on luxuries for themselves instead: Expensive homes, cars, boats, and vacations. One contractor with $10 million in unpaid taxes had been paid $3.5 million in taxpayers' dollars in fiscal year 2002 alone to provide the custodial services at military bases. This contractor had already defaulted on an IRS installment agreement; yet, it is unclear whether one dime of the $3.5 million was withheld to pay down the contractor's tax debt. Tax chiseling by Federal contractors is not a new story, and that is why Congress tackled this issue in 1996 and 1997 when they enacted the Taxpayer Relief Act, which, in part, authorized Federal agencies to withhold 15 percent of any Federal payment going to a person with an outstanding tax debt. The goal was to stop taxpayer dollars from being paid to a tax deadbeat unless 15 percent was withheld to reduce that person's tax debt. The Taxpayer Relief Act sought to apply a commonsense principle to government operations to offset the taxpayer dollars sent to people who have not paid their tax bills by directing a percentage of the total to reduce their tax debt. But this commonsense principle is not easy to apply in a government that pays hundreds of thousands of contractors to work on even more contracts; in essence, it requires the Federal Government to set up financial payment systems that make sure that the left hand knows what the right hand is doing, to make sure, for example, that contract payments do not go to a contractor with an outstanding tax debt unless a portion is withheld to satisfy a part of that debt. The first agency to begin implementation of that law was the Financial Management Service or FMS in the Treasury Department. That agency took until July 2000 to establish an automated tax levy program under a larger Treasury offset program, which handles offsets for a variety of reasons. Since then, FMS has sent about $76 million in tax levy money to the IRS. It took another 2 years, until December 2002, for the Department of Defense to follow suit. It set up its first automated tax levy program for its largest contractor payment system, MOCAS, which handles payments on the Department of Defense's major long-term contracts. Fifteen other payment systems, however, have not yet been automated. And so, we have a joint effort involving the Department of Defense, FMS, and the IRS which have to work together to match the people who are delinquent with the people who are being made payments by the Department of Defense. It is a very straightforward piece of technology. It just depends on willpower to be implemented; a decision made to implement this. So many much more miraculous technological feats are being performed within seconds on our computers these days--take a look at Google--that there is no excuse conceivably for not making this match. It is just simply a default on the part of our agencies, as far as I am concerned, to do what technology now allows them to do and the technology which is now in place. Senator Coleman, let me ask you if I could then put the balance of my statement in the record at this point. Senator Coleman. Without objection. Senator Levin. Thank you [The prepared opening statement of Senator Levin follows:] PREPARED OPENING STATEMENT OF SENATOR LEVIN 7 Men and women in our military are putting their lives on the line every day for our Nation. At the same time, GAO tells us that over 27,000 of DOD's contractors--more than 1 in 10--are dodging their tax bills and have outstanding tax debts to Uncle Sam totaling at least $3 billion. 27,000 DOD contractors with $3 billion in unpaid taxes. I'm not sure which figure is more shocking. Tax dodging by any federal contractor is unfair--not only to the honest taxpayers left to make up the difference, but also to the honest companies that have to compete against the tax dodgers for government contracts. Tax dodging by contractors taking taxpayer dollars to support our military is not only unfair, it is unpatriotic and unacceptable. GAO tells us the vast majority of the 27,000 DOD contractors with unpaid taxes, more than 25,600 of them, have failed primarily to pay payroll taxes. That means these contractors have failed to send to the IRS sums withheld from employees' wages for federal, state, Social Security, and Medicare taxes. When GAO took a closer look at 47 of these DOD contractors, GAO found that all 47 had evidence of tax avoidance and, in some cases, unearthed unseemly tales of individuals and companies dodging taxes for years and using the money meant for payroll taxes on luxuries for themselves instead--expensive homes, cars, boats, and vacations. One contractor with $10 million in unpaid taxes had been paid $3.5 million in taxpayer dollars in FY2002 alone to provide custodial services at military bases. This contractor had already defaulted on an IRS installment agreement, yet it is unclear whether a dime of the $3.5 million was withheld to pay down the contractor's tax debt. Tax chiseling by federal contractors isn't a new story. It's an old one. And it's one that Congress has tackled in the past to recoup unpaid taxes and prevent new tax abuses. In 1997, Congress enacted the Taxpayer Relief Act which, in part, authorized federal agencies to withhold 15 percent of any federal payment going to a person with an outstanding tax debt. The goal was to stop taxpayer dollars from being paid to a tax deadbeat, unless 15 percent was withheld off the top to reduce that person's tax debt. The Taxpayer Relief Act sought to apply a common sense principle to government operations: To offset the taxpayer dollars sent to people who haven't paid their tax bills by directing a small percentage of the total to reduce their tax debt. But this common sense principle isn't easy to apply in a government that pays hundreds of thousands of contractors to work on even more contracts. In essence, it requires the federal government to set up financial payment systems that make sure the left hand knows what the right hand is doing--to make sure, for example, that contract payments don't go to a contractor with an outstanding tax debt unless a portion is first withheld to satisfy a part of that debt. The first agency to tackle the problem was the Financial Management Service or FMS in the Treasury Department. That agency took until July 2000 to establish an automated tax levy program under a larger Treasury Offset Program, which handles offsets for a variety of reasons. Since then, FMS has sent about $76 million in tax levy money to the IRS, with about $60 million in FY2002 alone. It took another two years--until December 2002--for DOD to follow suit. Working with FMS, DOD set up its first automated tax levy program for its largest contractor payment system, called MOCAS, which handles payments on DOD's major, long-term contracts. In FY2002, MOCAS payments totaled about $95 billion, all of which is now reviewed for tax levies before the money goes out the door. DOD is planning to but has not yet extended its automated tax levy program to 15 other payment systems which, together, make contract payments totaling another $85 billion each year. As currently operated, the DOD tax levy program is a joint effort involving DOD, FMS and the IRS. It is a joint effort because, while FMS is authorized by law to review IRS data on unpaid taxes, DOD is not. So here's what happens. Each Monday morning, the Defense Financial and Accounting Service at DOD sends FMS an electronic file listing payments expected to be made to DOD contractors over the next few days. FMS immediately uses a computer match program to compare the names and taxpayer information numbers in the DOD payment data with data in IRS files listing persons with unpaid taxes. FMS compiles a list of the names that match and sends it to the IRS. The IRS then makes sure it has mailed a 30-day notice of intent to levy to each of the listed tax delinquent contractors. If the contractor does not respond within 30 days by paying up, protesting the tax debt, or offering to settle it, the IRS notifies FMS which, in turn, tells DOD to begin withholding the 15 percent from payments to the identified contractors. DOD does so and forwards any levied funds to FMS which, in turn forwards the fund to the IRS. GAO estimates that, in light of the huge DOD contract dollars and tax dollars at stake, DOD's tax levy program ought to be collecting at least $100 million each year. But last year, the first year of the DOD tax levy program, DOD collected less than $1 million, or less than 1 percent of the projected total. The GAO report spells out a number of reasons why. The good news is that many, if not all, of these problems can be fixed. First, there is DOD. Right now, DOD is sending FMS payment data on only one day per week for only one of its payment systems. It needs to send more frequent payment data from all 16 payment systems. Another problem is that the payment data DOD sends to FMS is currently tainted with thousands of incorrect or missing taxpayer identification numbers, which makes it nearly impossible to match many DOD contractors to IRS lists of tax delinquents. DOD needs to set up new procedures to get valid taxpayer identification numbers (TINs) from its contractors and stop sending payments to contractors with invalid or missing TINs. Finally, when faced with having to make a payment to a contractor without a valid TIN, DOD has never set up the system required by law to withhold 28% of each payment to that contractor until a valid TIN is supplied. DOD needs to set up that backup withholding system. Next is the IRS. One key problem here is that the IRS has caused DOD to miss imposing tax levies on numerous contract payments, because the IRS hadn't yet mailed the 30-day notice to the relevant contractors warning of an upcoming levy. The IRS needs to revamp its levy notice procedures to eliminate delays and missed levies. The IRS also needs to change tax collection policies that currently prevent DOD from using its tax levy program on many of its contractors. For example, the IRS needs to end its practice of waiting a year before approving use of the levy program for contractors waiting in an IRS queue for assignment to a revenue officer. I understand that the IRS is willing and may have already made this change. Another problem is the IRS' automatic bar on using tax levies on contractors who are negotiating to settle, reduce, or stretch out repayment of their tax debt or are in bankruptcy or experiencing financial hardship, especially in the case of contractors with defaults on prior repayment agreements or a history of nonpayment of tax. In essence, when it comes to contractors paid with federal taxpayer dollars, the IRS must become much less cautious in using the 15 percent tax levy authorized by law, and it must stop allowing tax delinquent DOD contractors to receive full payment in taxpayer dollars without having a dime directed toward the taxes they've dodged. The IRS also needs, for the first time, to assign full-time revenue officers to the tax levy programs aimed at federal contractors, so that these officers can develop expertise, improve the DOD and FMS programs, and cut down on the tax abuses committed by federal contractors. Senator Coleman and I have been working on developing recommendations to strengthen the DOD tax levy program based upon the GAO report and discussions our staffs have held with the three agencies. DOD and the IRS have already indicated their willingness to make reforms, have made some concrete changes, and are considering additional improvements as well. Here are some of my thoughts about key improvements to strengthen use of tax levies for federal contractors. Recommendations for DOD (1) 16 Payment Systems. DOD should meet its March 2005 deadline for automating tax levies in all 16 of its payment systems, thereby bringing $85 billion more payments under review each year in DOD's tax levy program. (2) More Frequent Payment Data. DOD should send its contractor payment data to the Financial Management Service more than once week and as often as practical to increase IRS matches and identify more tax delinquent contractors. (3) TIN Consent. DOD should require all registrants in the federal Central Contractor Registration (CCR) database to provide consent during the registration process for DOD to obtain IRS information to validate their taxpayer identification numbers (TINs), and DOD should work with the IRS to validate all TINs in the CCR. (4) TIN Requirement. DOD should prevent contract payments to any contractor with an invalid or non-existent taxpayer identification number. (5) Backup Withholding. In FY 2004, DOD should establish systems to require automatic backup withholding from payments to any contractor with an invalid TIN, as required by law, and notify CCR registrants that contract payments are subject to such withholding. Recommendations for IRS (1) Using Tax Levies Sooner, Not Later. The IRS should change its tax levy policies to use levies as a first resort, rather than a last resort, for tax delinquent federal contractors. (2) Dedicated Revenue Officers. The IRS should assign full- time revenue officers to specialize in collecting unpaid taxes from levies on federal contractors, and work with DOD and FMS to improve the efficiency and effectiveness of their tax levy programs. (3) Levy Notices. The IRS should revamp its procedures for issuing levy notices to federal contractors to eliminate delays, and consider such options as combining levy notices with delinquency notices and sending levy notices to tax delinquent CCR registrants with active contracts. (4) Queue Reform. The IRS should eliminate the policy automatically barring initiation of a tax levy for one year on any federal contractor waiting in the IRS queue for assignment to a revenue officer, and instead initiate tax levies on federal contract payments as a routine matter. (5) Recidivist Tax Abusers. The IRS should work with Congress to eliminate administrative and statutory barriers to initiating a tax levy on a federal contractor in negotiation to repay a tax debt, in bankruptcy, or undergoing financial hardship, if the contractor has defaulted on a prior IRS repayment agreement or has a history of repeated misconduct involving nonpayment of tax. Recommendation for OMB Study. OMB, working with DOD, FMS, IRS and others, should conduct a study on whether federal contractors with unpaid taxes should be barred under some or all circumstances from bidding on federal contracts, and whether federal contracting officers should be informed of contractors who have engaged in longstanding or egregious tax avoidance so they can assist in tax collection efforts. DOD contracts represent nearly two-thirds of all federal contracts and, in FY2002, DOD contract payments totaled about $180 billion. The recipients of DOD contracts, whether individuals or businesses, are given an unique opportunity to support the men and women in our military. Most DOD contractors provide valuable goods or services to DOD, and do so while paying their taxes. Other DOD contractors, however, take payment in taxpayer dollars, while dodging paying their taxes to Uncle Sam. This tax dodging hurts honest taxpayers, honest businesses, and our country as a whole. Effective use of the DOD tax levy program is necessary to help keep the tax dodger's hand out of the taxpayer's wallet. I commend Senator Coleman and Congresswoman Janice Schakowsky for their leadership on this important issue. I look forward to the testimony today. Senator Coleman. Chairman Collins. OPENING STATEMENT OF CHAIRMAN COLLINS Chairman Collins. Thank you very much, Mr. Chairman. First of all, let me commend you for calling this hearing to shed light on what the General Accounting Office has uncovered regarding the failure of some of our Nation's defense contractors to pay their taxes. The crux of the GAO's findings that more than 27,000 defense contractors owe the Federal Government some $3 billion in taxes and that the Pentagon is not doing all that it can to collect this money is very disturbing and raises many questions about the Federal procurement system. Federal procurement laws require contractors to demonstrate integrity in order to do business with the Federal Government. That obviously includes paying their taxes. That some of those who provide goods and services to our Nation's fighting men and women fall woefully short of these standards is of great concern to me. At a time of high deficits, it is also very troubling that the Pentagon appears to have been negligent in reporting tax information and payment information that could have helped the IRS collect taxes owed but not paid. Under Federal law, the government may withhold part of a contractor's payment to offset for taxes the contractor owes the government. In order to accomplish this, however, agencies must report contract payment information to the Financial Management Service. As we will hear today, the Pentagon has failed to use this tool in far too many cases. Adding to the problem, the Internal Revenue Service has sometimes failed to pursue those cases it did know about, according to the GAO. I am determined to learn why it has failed to do so, and I am interested to learn what steps the Defense Department and the IRS intend to take in order to ensure better performance in the future. For businesses that are inexcusably delinquent in meeting their tax obligations, another important question arises. That is, why is the Department of Defense continuing to do business with these companies? The names of the contractors today are being withheld because their tax data were an integral part of GAO's research. Because we value taxpayer privacy so highly-- and rightly so--we cannot know for certain the specific circumstances surrounding each contractor's failure to pay. Nevertheless, the GAO has singled out 47 companies as especially egregious offenders, and the Pentagon should evaluate whether or not these companies should continue to do business with the Federal Government. The Pentagon should look at whether they meet the standards under Federal law to qualify as responsible bidders. Mr. Chairman, simply put, the 27,000 defense contractors who owe approximately $3 billion in uncollected taxes need to be held accountable. The Pentagon needs to be held accountable. And the IRS needs to be held accountable. I very much appreciate your holding this hearing this morning so that we can get to the bottom of this very disturbing problem. Thank you. [The opening prepared statement of Senator Collins follows:] PREPARED OPENING STATEMENT OF SENATOR COLLINS Mr. Chairman, thank you for calling this hearing to shed light on what the General Accounting Office has uncovered regarding the failure of some of our Nation's defense contractors to pay their taxes and the Department of Defense's response. The crux of GAO's findings--that over 27,000 DOD contractors owe the Federal Government some $3 billion in taxes, and that the Department may not be doing all that it can to collect this money--is very disturbing to me. As Chairman of the Governmental Affairs Committee, which has jurisdiction over government procurement, I have made clear my belief that there should be high ethical standards for Federal contractors. That some of those who provide goods and services to our Nation's fighting men and women fall short of those standards is of great concern to me. At a time of high deficits, it is also disturbing that the Pentagon appears to have been negligent in reporting payment data to the Treasury that could have helped the IRS collect taxes owed but not paid. Under Federal law, the government may withhold part of a contractor's payment to offset for taxes the contractor owes the government. In order to accomplish this, however, agencies must report contract payment information to the Financial Management System. As we will hear today, the Pentagon has failed to use this tool in far too many cases. Adding to the problem, the Internal Revenue Service has sometimes failed to pursue those cases it did know about according to GAO. I am determined to learn why it failed to do so, and am very interested to learn what steps the Defense Department and the IRS intends to take to ensure better performance in the future. For businesses that are inexcusably delinquent in paying their taxes, another question arises. Why is the Department of Defense, which is among the most sophisticated purchasers of goods and services of all Federal departments, continuing to do business with these companies? The names of the contractors today are being withheld because their tax data were an integral part of GAO's research. Because we value taxpayer privacy so highly, and rightly so, we cannot know the exact circumstances surrounding each one's failure to pay. Still, GAO has singled out 47 companies as especially egregious offenders, and the Pentagon should evaluate whether or not these companies meet the standards under Federal law to continue as government contractors. Mr. Chairman, simply put, the 27,000 defense contractors who owe approximately $3 billion in uncollected taxes need to be held accountable. I appreciate your holding this hearing and shining a light on this problem. Thank you. Senator Coleman. Thank you very much, Senator Collins. Senator Lautenberg. OPENING STATEMENT OF SENATOR LAUTENBERG Senator Lautenberg. Thanks very much, Mr. Chairman. I, too, want to commend you for holding this hearing. This delinquency, in my view, is what I would describe as almost traitorous conduct. Much of these expenses, much of these charges are as a result of having our people exposed to danger fighting a war, and its relationship to that singles them out as particularly scandalous in their behavior. I am dumbfounded by GAO findings that the Department of Defense contractors owe the Treasury over $3 billion. I am equally concerned that IRS officials have not fully worked out payment systems so their debtors can be quickly identified and their payments of unpaid taxes collected. One of the things that I had to note as I heard about IRS' inability to pursue these deadbeats; it reminds me of the fact that IRS was the subject of a review that said there are just too many employees there. So, while they have successfully reduced the number of people working at IRS, we have lots of evidence about IRS' inability to pursue delinquent tax accounts. Although I believe that today's topic is both worthy and pressing, I register my disappointment that another similarly urgent issue involving DOD contracting transparency and oversight has yet to be discussed by either our Subcommittee here or the full Governmental Affairs Committee. Three times since May, I have written to the Committee requesting that we hold a hearing to investigate the controversial contracts awarded by the Pentagon for the reconstruction of the Iraqi oil industry. No luck so far. The specific accounting problems and contracting ethics involved in these particular contracts are numerous and varied, too numerous to recite here. But they have been documented extensively by the press and by Members of the Congress, including this Senator. And just as an example, I want to call attention to three particular examples of potentially fraudulent accounting with respect to one company that is receiving billions of dollars in Pentagon contract assignments to rebuild Iraq. The company is Halliburton, including its subsidiary, KBR. First, Halliburton was awarded a no-bid contract last March to extinguish oil fires, in the worst-case scenario that were ignited by Saddam and his crew during the battle. The initial contract was slated to be $50 million. Subsequently, although the worst-case scenario never materialized, this no-bid contract mutated into a $2.2 billion monstrosity over the course of 8 months, despite the protests of many Members of Congress. Second, we began learning this fall that Halliburton was dramatically overcharging taxpayers for the services it was providing. In December, DOD auditors found that Halliburton charged the government more than $61 million, too much, to bring gasoline into Iraq. And third, we learned that Halliburton's employees were engaged in illegal business transactions by accepting kickbacks from Kuwaiti firms, amounting to $6 million. I believe that we are not fulfilling our oversight responsibilities as legislators if we dismiss or neglect that kind of a business practice. So I am, therefore, pleased that we are going ahead with this but keeping in mind all the time that the system looks like it is out of control, and we ought to find a way to collect taxes due this country from earnings that were specifically directed by DOD. Today's hearing is an important one, and I look forward to hearing from both GAO and the administration witnesses about how to hold accountable those DOD contractors who are undermining national security by avoiding paying their fair share of the taxes. But I believe it is equally imperative that we also investigate how DOD contracts are awarded and filled, especially in Iraq and especially when they are being given to a company like Halliburton that has such a poor business track record but such close ties to the administration. And I thank you, Mr. Chairman. Senator Coleman. Thank you, Senator Lautenberg. I would now like to welcome today's first panel to our hearing: Gregory Kutz, a Director with the Financial Management and Assurance Team at the General Accounting Office; Steve Sebastian, a Director with the Financial Management and Assurance Team at GAO; and finally, John Ryan, an Assistant Director with the Office of Special Investigations at GAO. As I mentioned in my opening statement this morning, GAO is here to release the results of its investigation of the Department of Defense, whose contractors were abusing the Federal tax system by either failing to file tax returns or not paying their taxes. The purpose of the hearing is to identify the corrective actions that can be taken to ensure that the Department of Defense contractors pay the taxes they owe the Federal Government. I appreciate your attendance at today's important hearing. Before we begin, pursuant to Rule 6, all witnesses who testify before this Subcommittee are required to be sworn. At this time, I would ask you all to please stand and raise your right hand. [Witnesses sworn.] Senator Coleman. Before we begin, Senator Levin has reminded me that much of the focus of this investigation was initiated at the behest of Congresswoman Schakowsky, who we intended to have testify before the Subcommittee. I believe there was a personal emergency that made that impossible. But I do want to make note of her diligence and her efforts in this regard and we are sorry that she cannot be with us today. We will be using a timing system, and I think you gentlemen understand this system. About a minute before you should wrap up your remarks, a yellow light will come on. Please limit your remarks to no more than 10 minutes. I will ensure that your complete statement will be entered into the record. Mr. Kutz, I believe you and Mr. Sebastian will be presenting the GAO statement this morning. Please proceed. TESTIMONY OF GREGORY D. KUTZ,\1\ DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE Mr. Kutz. Mr. Chairman, Members of the Subcommittee and Chairman Collins, thank you for the opportunity to be here to discuss abuse and potential criminal activity by DOD contractors. The bottom line of our testimony is that DOD contractors are abusing the Federal tax system with little or no consequences. The end result, as you have mentioned, is that compliant American taxpayers must pay more. --------------------------------------------------------------------------- \1\ The combined prepared statement of Mr. Kutz, Mr. Sebastian, and Mr. Ryan appears in the Appendix on page 53. --------------------------------------------------------------------------- Our testimony has two parts. First, I will discuss DOD contractors with unpaid Federal taxes, and second, my colleague, Mr. Sebastian, will discuss why little has been done to deal with abusive contractors. First, as mentioned, we found that over 27,000 contractors had nearly $3 billion in unpaid Federal taxes. Over 25,000 of these contractors were businesses that owed primarily payroll taxes. These taxes include amounts withheld from an employee's wages for Federal income taxes, Social Security, and Medicare. For all 47 contractors that we investigated, we found abusive or potentially criminal activity related to the Federal tax system. The 34 businesses had severely delinquent payroll taxes, owing up to 62 quarters or 15 years of taxes. However, rather than fulfill their role as trustees of this money and pay it to the IRS, these contractors diverted the money for their businesses or for personal gain. The poster board shows several examples of potential diversion of payroll taxes for personal gain, including the owner of a contract with $10 million of unpaid taxes using corporate funds to buy a home in the Caribbean and a luxury boat; another owner taking $1 million from his company to buy a large home and a Mercedes. Other potential diversions were for homes, airplanes, and other luxury cars. The typical diversion scheme funneled money to the owners and officers of the company through substantial salaries or loans that were never repaid. In addition to these more flagrant offenders, other contractors were in financial trouble and used the money to pay the utility bill or the rent rather than forward the money to the IRS. Regardless of the cause, willful failure to remit payroll taxes is a felony. Other interesting cases include DOD awarding over $60 million in contracts to an individual with delinquent payroll taxes dating back to 1994; DOD paying a contractor to provide motivational speeches that has over $130,000 of unpaid taxes dating back to 1993; and a $400,000 contract award to a dentist who has substantial unpaid payroll and income taxes also dating back to 1993. Many of these contractors were also involved in other crimes of integrity. What was the reward for these 47 abusive contractors? Over $200 million of DOD contracts. These contractors are small and mid-sized businesses that provide basic services such as building maintenance, construction and catering; thus, DOD could get these services from legitimate, taxpaying contractors. Mr. Sebastian will now discuss why tax abusers can also be contractors and why there have been few consequences to date. TESTIMONY OF STEVEN J. SEBASTIAN,\1\ DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE, AND JOHN J. RYAN,\1\ ASSISTANT DIRECTOR, OFFICE OF SPECIAL INVESTIGATIONS, U.S. GENERL ACCOUNTING OFFICE Mr. Sebastian. Thank you, Mr. Kutz. --------------------------------------------------------------------------- \1\ The combined prepared statement of Mr. Kutz, Mr. Sebastian, and Mr. Ryan appears in the Appendix on page 53. --------------------------------------------------------------------------- Mr. Chairman, Members of the Subcommittee and Chairman Collins, Federal law presently does not prohibit contractors with unpaid taxes from receiving government contracts. However, tools exist to facilitate the collection of taxes for contractors. In 1996, the Congress passed legislation to improve the government's debt collection, and in 1997, granted IRS the authority to continuously levy up to 15 percent of Federal payments to collect outstanding taxes. Critical to the levy program is the matching of DOD disbursing records with Treasury's centralized database of Federal debt, including tax debt. Thus, with no legal prohibition, the government is dependent on DOD and IRS to ensure contractors pay their fair share. However, as our work shows, both agencies have been deficient in this regard. In the 6 years since Congress granted continuous levy authority, DOD has collected less than $700,000, and prior to December 2002, nothing had been collected for DOD contractors. Collections to date relate to DOD only recently providing information to Treasury for one payment system which had $86 billion in fiscal year 2002 disbursements. Contractors paid through this system owed $750 million in taxes. At present, DOD is not providing data to Treasury for other payment systems that disbursed $97 billion in fiscal year 2002. The potential benefits of an effective levy cannot be overstated. In reviewing disbursements for five DOD payment systems, we estimate that DOD could have levied contractors' payments and collected at least $100 million in fiscal year 2003 alone. As the Nation's tax collector, IRS plays a key role. As reflected on the poster board,\1\ with $246 billion in unpaid taxes, only 8 percent of which is deemed collectible, efficient and effective means of collecting taxes is critical to IRS' mission. However, restrictive policies and procedures as well as control deficiencies at IRS hinder the levy program's collection potential. --------------------------------------------------------------------------- \1\ See Exhibit No. 2b. which appears in the Appendix on page 175. --------------------------------------------------------------------------- Current IRS policies restrict which and at what stage in the collection process cases enter the levy program. For example, IRS excludes cases in the queue or holding tank from potential levy for at least 1 year. In one of our case studies involving a contractor that owed $270,000 in taxes, the account was placed in the queue, where it sat for 19 months with no attempts to collect the taxes. DOD paid this contractor over $110,000 in fiscal year 2002. Processing delays also prevent cases from entering the levy program. When a taxpayer offers to settle its tax debt for pennies on the dollar, called an offer in compromise, IRS is required to suspend any efforts to levy payments. Our work shows that IRS continues to experience significant delays in processing such offers. These delays, in turn, reduce potential collections. For example, in one case, a contractor with $400,000 in unpaid taxes proposed an offer in compromise. IRS took over a year before it finally rejected the offer and over 2 years to reject a second proposal. During this time, DOD paid the contractor over $200,000, $30,000 of which could have been collected. Additionally, inaccurate records impede IRS' collection efforts. In one case, a contractor proposed to pay by installment. At that time, IRS entered a code in its system to block the account from levy. IRS formally rejected the proposal 1 year later but never reversed the code. The account was thus erroneously excluded from levy action for 2 years. Finally, IRS attempts to work with contractors to achieve voluntary compliance, delaying more aggressive enforcement actions like levies until later. This results, however, in some contractors continuing to receive payments while making no effort to pay their taxes. In one case, a business with DOD contracts that generated $4 million had unpaid taxes of over $10 million. As the contractor's tax debt mounted, IRS continued working with the business, taking no enforcement action. During this time, as Mr. Kutz mentioned, the owner diverted funds for personal gain, shut the company down, and moved to the Caribbean, leaving the IRS with uncollectible taxes of over $10 million. In conclusion, allowing contractors to do business with the government while not paying their taxes creates an unfair competitive advantage for them at the expense of the vast majority of DOD contractors that fulfill their tax obligations. DOD's failure to fully comply with debt collection mandates and IRS' continuing challenges in collecting unpaid taxes have contributed to this unacceptable situation. As a result, the government has missed opportunities to collect hundreds of millions of dollars in unpaid taxes. We believe prompt implementation of the recommendations in our report, released today, will result in millions of dollars of immediate tax collections. Mr. Chairman, this concludes our statement. We would be pleased to answer any questions you or the other Senators may have. Senator Coleman. Thank you very much, Mr. Sebastian. Mr. Kutz, you have indicated--you started your testimony by talking about abusive and criminal activities, failure to pay these taxes is a crime; is that correct? Mr. Kutz. Yes, that is correct. Senator Coleman. And I believe it is a felony-level crime? Mr. Kutz. There is a felony-level for not remitting the taxes, and there is a misdemeanor for not properly segregating the taxes. Senator Coleman. We have heard that in one of the 47 cases that you reviewed, the individual involved is now living in the Caribbean. But do you have a sense of whether these cases are still prosecutable? Mr. Kutz. Well, Mr. Ryan could probably answer that from a legal standpoint. Senator Coleman. Or certainly the other cases also. Mr. Ryan. I believe that the 47 cases that we looked at, we took 12, and we dug down and looked at those cases. We believe that those cases have some additional elements for prosecution, and we have referred those to the IRS for whatever action they deem necessary. Senator Coleman. Very good, Mr. Ryan, and I will ask Commissioner Everson about those cases. Now, you identified 47 cases among the 27,100 contractors you identified as owing taxes. Are there more examples of potential criminal abuse among the 27,100 beyond the 47? I take it these 47 are just a small sampling. Mr. Kutz. That would be a small selection. They were not a sample. We did use some data mining techniques to get to them, but there are hundreds or potentially thousands of similar stories out there. Senator Coleman. Would the data mining techniques be such that you were looking at perhaps the worst abusers among the 47? Mr. Kutz. Yes, and we were also looking for cases where the taxpayer had agreed to the assessment. In some cases, there is an unagreed-to assessment, but for all of the cases we looked at, the taxpayer had agreed that they owe the money. Senator Coleman. I find the figure stunning in the report saying that DOD could have collected over $100 million in back taxes this past year if payments had been levied. Are you confident you have not overstated the collection potential of these cases? Mr. Kutz. Yes, in fact, I would say we probably understated it to be conservative. When we did a mechanical match of just what we had, we actually came up with a little over $300 million. But what we did was we assumed that certain cases would be collected in the normal course of business; some of these were not as delinquent as others. But we believe it is at least--that is why we said at least $100 million, to give an order of magnitude here. Also, keep in mind, we only looked at 72 percent of the DOD database. And so, you are talking about another $50 billion or $60 billion of business that we did not look at. And then, with respect to the data quality, the taxpayer information, the only time we would get a match here would be is if the taxpayer identification numbers in IRS' database matched those in the DOD database. So in some cases, we probably have other situations where there was erroneous information where we did not get a match. Senator Coleman. And the key here to get the match is the taxpayer identification number. Mr. Kutz. Correct. Senator Coleman. If you have the match, you can follow up, and the IRS can follow up. If there is not a match, then, it is problematic. There is a provision in law that provides that if there is something wrong with the taxpayer information number that one can withhold up to 28 percent of the contract? Mr. Kutz. Backup withholding; that is correct. Senator Coleman. So those provisions are in law. We do not need to change that. Mr. Kutz. Correct. Senator Coleman. What can be done to increase the number of matches? Because that seems to be a critical element here. Mr. Kutz. Well, I think that there are several things. There is the contract registry, which is now a database that DOD manages that includes contractors from all over the government. The data in that database needs to be validated. That would be step one. And step two would be to make sure that data is interfaced with all of the government's payment systems, because the payment systems are the ones that are turned over to Treasury for the actual match. And I would say just one other thing: There needs to be human capital involved in this, too. This is not simply a mechanical exercise. There are going to have to be people involved to make sure that once someone starts getting levied, they are going to figure out a way to get a new taxpayer identification number or change it so that they do not get levied anymore. Senator Coleman. The key, again, though, is to get the data flowing into the system. Am I correct in understanding that as we sit here today, less than half of DOD contractor data regarding taxpayer identification numbers is flowing into the system? I mean, one of their management systems, which is close to 50 percent, is flowing into the Financial Management Service. Mr. Kutz. That is correct; it is called the MOCAS system, which is for the large contract payments for multiyear weapons systems. Senator Coleman. But over half as we sit here today is not flowing into this system. Mr. Kutz. Nearly $100 billion is not being--yes. Senator Coleman. What I find so stunning here, reflecting on your testimony, Mr. Sebastian, is we have the greatest fighting force in the world. We have the most powerful, the most advanced, the most technologically savvy fighting force in the world, and thank God we do. We respect and we support and we hold up as a great example our great military capability. And yet, as I am listening to your testimony that says we have record systems that do not work. We have got information not being compiled. And I am very perplexed by all of that. And again, when you provided your testimony about processing delays and inaccurate records, we are just talking about the 47 cases here; is that correct, that you looked at? Mr. Sebastian. The examples that I spoke of in my oral statement came out of the 47 cases. Senator Coleman. So we have still got 27,053, at least, contractors who we have not even looked at the problems there. Mr. Sebastian. Yes, I would also point out that some of these issues are not new to us. In the course of conducting the annual audit of IRS' financial statements, we have identified issues such as inaccuracies in taxpayer records, delays in processing activities such as offers and installment agreements. So these are not new issues. We are not too surprised to see some of this in the 47 cases we looked at. Senator Coleman. One of the keys here is to get the Federal Payment Levy Program moving right away; in other words, if you identify a problem, you levy; you start to levy up to 15 percent. And then, you can work it out. The IRS can work things out. But you have got to initiate that as a first step. My understanding, as I review the report, that in these instances, it appeared that the levy was not the first step, that perhaps it was a last resort. Is that a correct reading of the report? Mr. Sebastian. Yes, that is correct. When we speak of the first step, we need to be cognizant of the fact that the first step could only take place after such time as IRS has followed its own statutory requirements to provide appropriate notice to the taxpayer, and gives the taxpayer the opportunity to appeal the assessment or come into the office to try to make a workout arrangement, such as an offer or an installment agreement. But short of that, the cases that we saw sitting in the holding tank or queue could have been subject to levy. Cases with the revenue officers could also have been subject to levy. Senator Coleman. Are there specific legislative changes that you believe have to be enacted to make sure that this system is working and is more accountable? Mr. Sebastian. Well, I think the only issue that creates some problem would be that IRS is also legally required to suspend any levy actions if a contractor were to come to the IRS to offer some type of payment arrangement, such as an offer to compromise on the tax debt or to enter into an installment agreement. At that time, IRS would have to discontinue any levy action they began. The intent there, ultimately, is that the taxpayer is trying to comply. The concern we have is that in the work we have done, not only on this job but in prior years, we have seen companies use this as a stall tactic: Enter into and then default on installment agreements on a number of occasions. So one possible alternative legislative area that might be pursued would be to take a look at that provision and see if there is some leeway such that the IRS could continue to levy during such time as these workout arrangements are underway and perhaps use the levy as the collecting mechanism for an offer in compromise or an installment agreement. Senator Coleman. But other than that, the system is there. Since 1996-97, we have got a system in place that provides for matching of taxpayer identification numbers, levy authority and an ability to be getting some payment back while you are involved in this process. The authority is there. Mr. Sebastian. Yes, short of the legal restrictions I noted, the delays or the lack of levy action on some of these accounts had been policy decisions up to this point. Senator Coleman. And, of course, no one is forced to take a government contract. You enter into a voluntary arrangement. So I presume, as part of that process, you could require--for instance, is there any question about getting taxpayer identification numbers? I believe that they are required for service contracts but not for supply contracts; is that correct? Mr. Ryan. That is correct, sir. Senator Coleman. But we could certainly, as a condition of signing the contract, require people to provide taxpayer identification numbers in any kind of contract. Mr. Sebastian. That would be true, especially if we could get the contractor, when they fill out in the central registry, to provide the correct and accurate information that could be checked with the IRS records. We have now gone to a system where all of the government contractors need to be registered in a central register. We need to expand possibly in that area so that all contractors can be checked, not just the DOD contractors but all contractors can be checked. It is important that we validate that information, because as Mr. Kutz says, we need to integrate that information into the pay systems. Because if the pay systems are going to provide the money to the contractors, it is a good means of identifying delinquent taxes. Senator Coleman. Again, the systems are in place since 1997. I believe, Mr. Kutz, was it your testimony that prior to September 2002, nothing had been collected? Mr. Kutz. Mr. Sebastian said it, but that is correct. Prior to 2002, nothing had been done with DOD's contract systems. Senator Coleman. Thank you. Senator Levin. Senator Levin. Thank you, Mr. Chairman. Let me go to the notices, those levy notices. The IRS is required by law to send out a notice of levy, as I understand it, before it levies. Mr. Sebastian. That is correct. Senator Levin. Could it, in its delinquency notice, notify the delinquent taxpayer that it will be subject to a levy on any contract payments, so that there does not have to be a second notice sent out? Mr. Sebastian. In fact, there are multiple notices that go to the taxpayers; depending on whether you are a business or an individual, up to four separate notices would be issued. Senator Levin. Does the delinquency notice contain that statement, that your payment is going to be subject to a levy? Mr. Sebastian. I do not know if the first notice does. I know when we get to the second and third notices, there is a reference to a levy. And then, the notice of intent to levy is clearly---- Senator Levin. Is there any reason why there has to be a notice of intent to levy if the taxpayer has already been notified that a future payment is subject to a levy? Is there any reason why there has to be an additional, separate notice? Mr. Sebastian. Other than legal requirements---- Senator Levin. No, is there a legal requirement, is there something in the law that says that? Mr. Sebastian. Yes, the IRS is required to issue a notice of intent to levy and give the taxpayer an additional 30 days before the levy action occurs. Senator Levin. Could we legally, do you believe, if you can give us advice on this, give the notice of an intent to levy in the delinquency notice, so we do not have to send out another notice? Mr. Sebastian. That would certainly be a policy option that the Congress could consider. Senator Levin. Well, I think we ought to take a look, surely, at that one. I mean, it seems to me that is fair notice, if somebody is told you are delinquent, and if you dispute this, you can come in and talk to us. That seems to me to be sufficient notice of an intent to levy if, in a delinquency notice, the taxpayer is told, hey, if you do not come in and work this thing out, you are subject to a levy on your payments. It seems to me--and I do not want to start giving legal advice, because I never made much money as a lawyer--but in any event, I do think that we ought to at least check with our legal counsel on that in terms of any legislation. Because if we are the ones in our law that says there has to be a separate notice of intent, then, it seems to me we probably could avoid that additional third notice by putting it right in the delinquency notice. If there is a proposal by the taxpayer to compromise, no matter how absurd the offer is, does that automatically stop a levy from occurring? Mr. Sebastian. No, if the IRS---- Senator Levin. So it has to be a reasonable offer in the law? Mr. Sebastian. If, on the surface, it appears to be fairly reasonable, and the IRS accepts it for processing, it is only at that point in time that you would suspend the levy action. Senator Levin. All right. So, if the IRS determines it is an unreasonable offer, they can reject it? Mr. Sebastian. Yes, and they have the opportunity to reject at a later stage, once they have gone through the process of checking the financial records, the background of the individual. Senator Levin. All right. So, it is basically up to the IRS as to whether or not it stops the levy from occurring, because they are the ones who decide there is a good faith offer. Mr. Sebastian. Yes. Senator Levin. Well, that seems to me to be reasonable. I mean, providing an unreasonable offer or an offer that is rejected does not stop the levy from occurring. Mr. Sebastian. I believe the term they use is frivolous offer. Senator Levin. That sounds reasonable at that point. The IRS is going to tell us this morning, apparently, that the 2005 budget of the administration includes a proposal that will allow the IRS to deal quickly with frivolous settlement offers and requests for hearings. If that already exists, as you have just testified, what more needs to be done in that area? Mr. Sebastian. Well, it may go beyond just the point of an offer that appears frivolous on the surface. As you get in and actually begin to work with the taxpayer, requesting additional records to determine the validity, you may, at that point in time, find you are talking about a frivolous offer. The same with respect to installment agreements---- Senator Levin. OK; stop there. Mr. Sebastian. Sure. Senator Levin. Under current practice or law, can they not at that point then say we are stopping these discussions; it is now frivolous; the levy is going to continue? Can they not do that now? Mr. Sebastian. At the point in time that they have determined that the offer is frivolous, yes, they could. Senator Levin. I am trying to figure out--I have not read the budget request, so I am not familiar with the exact language--but are you familiar with this request or proposal in the 2005 budget that will allow the IRS to deal more quickly with frivolous settlement offers? What more is needed that is not already in their power? Mr. Sebastian. Yes, I am familiar with the fact that it is in the proposal. I do not know to what extent it will effectively deal with the issue that we are talking about here. Senator Levin. Or that it is necessary. Mr. Sebastian. Or that it is necessary with respect to reviewing frivolous offers. Senator Levin. If you could give us a reaction to that proposal for the record,\1\ that would be helpful. --------------------------------------------------------------------------- \1\ See Exhibit No. 4 that appears in the Appendix on page 177. --------------------------------------------------------------------------- Now, on this queue rule, apparently, a tax levy cannot be initiated for a year if one is waiting to be assigned to a revenue officer. Do I have that correctly? Mr. Sebastian. By IRS policy, that is correct. There is no legal requirement. Senator Levin. Right; by IRS policy. I understand that policy has now been eliminated, by the way. Is that your understanding? Mr. Sebastian. Our understanding is that has occurred very recently. Senator Levin. OK. Perhaps as a result of the initiative of this Subcommittee, or of your GAO report, apparently, fairly recently, there has been this step taken by the IRS. And whether there is a cause-effect or not is not the point. It is a good step forward, I gather, in your view. Mr. Sebastian. Yes. Senator Levin. There is no longer that automatic withholding of a levy because you are waiting in line to see a revenue officer. Mr. Sebastian. Yes. Bear in mind, too, that the cases that are sitting in the queue are not being touched by anyone. But what is occurring is that the statutory period for the IRS to collect those taxes continues to run. IRS has, in general, 10 years from the time of the assessment to collect the taxes. After that point in time, the uncollected taxes come off the books. Senator Levin. On the queue, if there is a taxpayer who says look, I want to settle this, I want to do partial payments, or there is a dispute, and I want to resolve the dispute, if that person cannot see a revenue officer to discuss the settlement, why, then, should there be a levy? I want to now go at it from the opposite side, I want to go at it from the taxpayer's perspective. If there is an honest effort to make the payments or an honest effort to resolve a dispute, if that person is unable to talk to the IRS, why should he or she be levied on? Mr. Sebastian. Well, I believe if the taxpayer is coming forward with an attempt to try and make a workout arrangement, they will be able to contact the IRS. They have phone lines, customer service representatives that would assist them. Senator Levin. Well, then, what was the queue rule before it was eliminated? Mr. Sebastian. The case was not being worked by anyone, nor was the taxpayer coming forth and making any attempt to repay their tax debt. Senator Levin. You are assuring us, however, that if there is an effort being made under new policy with no queue rule, and a good faith effort is being made by the taxpayer to work out a problem that the levy will not occur. Mr. Sebastian. I am fairly certain of that. Senator Levin. OK. One last question, if I am not out of time, and that is were you surprised, Mr. Kutz, by the extent of the problem that you uncovered, by the 27,000 figure? Did that surprise you? Mr. Kutz. Not necessarily. Mr. Sebastian and I testified on this several years ago, looking at all of unpaid payroll taxes, and we saw significant evidence there that there were government contractors that were involved in this. So it is not that surprising to us that this has happened. Senator Levin. Thank you. Thank you, Mr. Chairman. Senator Coleman. Thank you. Chairman Collins. Chairman Collins. Thank you, Mr. Chairman. Mr. Ryan, back in 2001, you and I worked together on an important investigation where we examined the security of the transportation of missiles and ammunition--Mr. Kutz was involved also--to storage sites by the Department of Defense. As part of that investigation, we concluded that there were serious security lapses and vulnerabilities of missiles that were held at contractor facilities. Today, you have identified contractors that not only abuse the Federal tax system but are also involved in other ``crimes of integrity''. I am concerned that in addition to the problem of tax-dodging that some of these companies may represent a security threat. If they are not paying their taxes, and you have found kinds of diversions and evidence of possible crimes, this raises serious questions in my mind. I have two questions for you: First of all, did the 47 contractors whom you did in depth investigations of perform work on weapons systems or on military bases? And second, based on what you saw about the possible criminal activity and the lack of integrity of these contractors, do you think we are dealing also with a potential security risk in addition to tax evasion? Mr. Ryan. Thank you, Senator. It was good working with you back then. In this particular case, we did find that there were, in the 12 particular contractors that we jumped into, we tried to pull back all the layers. Some of the things or questionable actions, from the background work that we did, we found that there were, with these 12 contractors, product substitution problems, false statements to Federal agents, money laundering, submitting false statements to insurance companies, paying employees in cash to avoid payroll taxes, establishing shell companies to avoid the IRS getting hold of any government payments, the issuing of payroll checks to their employees where the accounts were closed. All of these issues add up to, as you say, crimes, I call, of integrity, based on my experience. When we talk about the security of our military installations, we spend an awful lot of time talking about ensuring who it is that is coming into the facilities. Just short of the biometric system, we have to try to establish something. There has to be some kind of a risk analysis done. We obviously do not want embarrassing situations at our military installations. We do not want government contractors coming in and conducting criminal activities on military installations and buildings. So I think it is absolutely necessary that we do something to ensure that the contractors that we are bringing into our installations and to our buildings, that security has to be put in place. There has to be backgrounds. There has to be determined what the minimum standard is, and then, based on the exposure of those type of contractors to the facility, that needs to rise. There needs to be a gradual increase. Mr. Kutz. Some of these contracts were also dealing with weapons programs, major weapons programs. Chairman Collins. That is what concerns me. Is there any evidence that these bad actors, and they certainly appear to be bad actors, were referred by Federal contracting officials for possible debarment or suspension? In other words, did you come across any indications that Federal procurement officials were taking a look at the question of whether these companies should even be doing business with the Federal Government in the first place? Mr. Kutz. There was no evidence of that. In fact, there is a concern that they do not really know who they are dealing with here. In one of the cases that the individual basically stole the money and went to the Caribbean, the business was turned over to a relative of that individual, and the Department, I think, still thought it was doing business with the person who was gone to the Caribbean. That is where the payments were being made to. Chairman Collins. It is extraordinary to me that Federal contracting officials are not looking at tax delinquencies when they are making responsibility determinations, when they are determining whether or not a company is a responsible bidder. We are supposed to have safeguards in our procurement laws to ensure that the Federal Government is only doing business with companies that demonstrate ethics and a certain level of business integrity. And I am at a loss to see how that is the case with the contracts that you investigated. But you have found no evidence that Federal procurement officials were even looking at this evidence? Mr. Kutz. No. Mr. Ryan. No. Chairman Collins. In the year 2000, the GAO testified in support of legislation that would have amended the Debt Collection Improvement Act to prohibit delinquent Federal debtors, including Federal taxpayers, from being eligible to contract with Federal agencies. Mr. Kutz, could you tell me if that is still GAO's position? Would you like to see legislation that would prohibit a company that has a serious tax delinquency from being eligible to do business with the Federal Government? Mr. Kutz. As we noted back in 2000, it is a valid policy consideration for the Congress to look at, and it is something that--there are some implementation issues, such as data reliability; how quickly you can actually get a response from the IRS as to whether someone has tax debt. For example, if it would take 2 or 3 weeks, you would slow down the procurement process. If you could get one-day turnaround, it might be something feasible. So at that point in time, there were serious implementation issues related to automated systems that still exist today, to some extent. But from a policy perspective, that is something that could be very well considered, like it was back then. Chairman Collins. It occurs to me that companies that are failing to remit their payroll taxes can enjoy lower labor costs. And ironically, that gives these scofflaws a competitive advantage in bidding on Federal contracts. If you are a company that remits your fair share of Social Security and Medicare taxes to the Federal Government as well as the employee's share, your costs are about 15 percent higher. If you are a company that is not remitting these payroll taxes, you are able to show lower labor costs. Do you think that is an issue as well, Mr. Kutz? Mr. Kutz. Absolutely, and Mr. Ryan has a case that he can mention to you. But it gives you a 15.3 percent advantage on your wage base, and almost all the 47 that we looked at are wage-based-type companies providing services. So that is a substantial difference. Plus, many of these contractors were not paying their income taxes. So, on top of the payroll taxes, the income taxes give you a substantial advantage. And I think Mr. Ryan's case is quite interesting. Chairman Collins. Mr. Ryan. Mr. Ryan. Yes, Senator, I met a retired contractor who is not part of this job; I just met a retired contractor; we were talking. And he was explaining to me that several years ago, he bid on government contracts. He paid his employees; paid his payroll taxes; and was taking care of his State responsibilities. And what he was finding was that other contractors were coming in, fly-by-nights, getting government contracts, staying in existence for a short period of time, doing away with that company, changing the name. In one case, he said that they had magnetic signs that they put on the truck. And when the contract was done, they would take it off and put another one on. And they were able to get away, because no one ever followed up. They got a new EIN, and they just kept bidding on government contracts. Mr. Kutz. In 1999, we found that individuals were doing this with dozens of companies. We had some individuals that were involved in 40 or more companies that would run another into the ground; start them up; run them into the ground. And so, this is something that is an issue out there. Chairman Collins. Thank you very much. Thank you, Mr. Chairman. Senator Coleman. Thank you. Senator Lautenberg. Senator Lautenberg. Thanks, Mr. Chairman. I must say our friends at the witness table offered some pretty interesting testimony. Enough to kind of wonder what is happening with the review of a contractor's ability and who they are before these contracts are issued. It sounds like it is kind of a conspiratorial thing to find these systems that permit you to go ahead, get a contract and get out of town. And I think one of the worst violations of all is to not remit the employee withholding. It is employee money that they are stealing. They are stealing from the government, but they are also stealing from those employees, who should have those amounts credited to their Social Security and so forth. I noticed your report said what GAO recommends--and thank you for this excellent report. Now, it says embargoed. I assume that embargo is off now that it is in the record. Mr. Kutz. Right. Senator Lautenberg. Now, it says GAO makes recommendations to DOD for complying with statutory guidance supporting IRS efforts in collecting unpaid taxes. It was recommended to the office of OMB to develop options for prohibiting Federal contract awards to businesses and individuals that abuse the Federal tax system. DOD and IRS partially agreed. OMB did not agree that we ought to be able to punish these contractors who have showed this kind of an attitude about their obligations to the country and to their fellow citizens. What happened, by the way, to the guy who built the Caribbean home? Is he living there peacefully, or did we find a better place for him to live? [Laughter.] Mr. Ryan. Well, actually, he is still there, and, as a matter of fact, one of the agents who worked on this, Kenny Hill, actually sent him an email, and he got a reply back. We told him what we wanted, and after that, he decided not to email us back anymore. Senator Lautenberg. Is he out of reach? Mr. Ryan. In the Caribbean, he is, yes. Senator Lautenberg. We need an extradition treaty with that country. Mr. Kutz. Senator, can I make one point on one of the things that you said? You talked about the employees and whether they are made whole. I just wanted to make the point: The way the system works is that the employees are made whole-- -- Senator Lautenberg. I figured that. Mr. Kutz [continuing]. For Social Security and withholding taxes. And the money comes from the general fund. So the taxpayers are paying for it. Senator Lautenberg. But the fund is deprived of the receipt of those taxes. Mr. Kutz. Right, and when we reported on this years ago, it is tens of billions of dollars over time that the Social Security fund has had to be subsidized by the general fund. So it is a substantial amount of money over time. Senator Lautenberg. Was there any evidence of a conspiratorial nature among some of these questionable contractors? Was there, perhaps, a connection how to deal with the government on these things, easy pickings, as they say? Mr. Ryan. I think of the contractors that we looked at, Senator, we did not uncover anything that would show a conspiracy, necessarily, between the contractor, the contracting officer, or the government representative. In one of the cases that my colleagues mentioned, about the gentleman who went to the Caribbean, he did have substantial contracts. He was taking the money out the back door and improving his lifestyle. At the same time, he was subcontracting his contract to family members, friends, or people who actually left the first company and went to the second one. And in response, he wanted a kickback. He wanted to get a substantial amount of money from these subcontractors to ensure that they would have the work. He wanted the money paid under the table and sent to offshore accounts. Mr. Kutz. In another case, what was happening is the company was paying the owner and the owner's wife's bills for them: The mortgage, credit card bills, and car payments. And so, this money was coming out of the company. The company was using it as a deduction, probably, and these people were not reporting it as income. And they were calling it a loan, but the money was never paid back. So there were other schemes. And, as Mr. Ryan said earlier, a lot of the companies, there was evidence they were paying their employees wages in cash, which means that you have unreported payroll taxes under the table, basically. Senator Lautenberg. It sounds like these problems are initiated at the time of contract issue, and the notion that we cannot even withhold payments to them for work that they purportedly did allows that--this sounds a little bit like a sad comedy about our inability, giving out these billions of dollars worth of contracts, that we cannot withhold money you owe us. Mr. Ryan, I want to ask you a question: I wonder if you could update us on the progress of a report that was requested by Members of Congress last April on the Defense Department contracts that were awarded to Halliburton over the past couple of years. What has happened with it, and can we expect it to be released for Congressional review? Mr. Ryan. I have no knowledge of that work. It is not within my investigative responsibilities. Mr. Kutz. GAO does have work underway in that area, but none of us are involved in that work at this point. Senator Lautenberg. I see. I was curious about whether or not some of the auditors found that--first of all, you were able to uncover this information. Why was this information not covered routinely by IRS or even DOD? There was a question asked before about DOD collecting taxes. Does DOD have that responsibility, tax collection? Mr. Kutz. Under the Debt Collection Improvement Act, their responsibility is to refer their payment systems to the Treasury Department for offset purposes before they make the payment, and any items that are tagged, they are supposed to withhold and remit the money back to the Treasury Department. So they do have that responsibility. Senator Lautenberg. So what is it? Have you found any obstructionism from the other members of government agencies that prevented the review of these cases? Mr. Kutz. I am not sure I understand the question. Senator Lautenberg. Well, I mean, has there been any evidence that these investigations were stopped, blocked in any way, as a result of friends in government or anything? Mr. Kutz. No, there is no evidence of that. But there is evidence that these companies are doing significant business with other Federal agencies, like NASA, the Department of Energy, HHS, etc. So they are doing significant business with others. Senator Lautenberg. Well, the reason I asked that question, forgive me, is the Army Corps of Engineers waived an auditor's demand for information data from Halliburton and shut off an audit review because DOD's own auditing agency found that Halliburton has both failed to conduct adequate subcontracting price evaluations and had also overcharged U.S. taxpayers $61 million. This was public information, for the importation of fuel to Iraq. Subsequently, the Army Corps waived the auditors' demands for more information and data from Halliburton, effectively shut off the audit. Is that a familiar---- Mr. Kutz. No. Senator Lautenberg [continuing]. Case to any of you? Mr. Kutz. We are not familiar with that. Mr. Ryan. No. Senator Lautenberg. That is why I asked the question about whether or not there was any attempt by one part of a government agency to say look, this is not really that important, and let us forget about it. Mr. Kutz. But let me say something else, though: With the 47 case studies we had, these are potential felonies, as I mentioned in the opening statement, as we talked about earlier. There was no evidence that any of these 47 were being pursued for prosecution under those laws that applied on failure to withhold and pay payroll taxes. Senator Lautenberg. That is pretty astounding information, that they rest in comfort at the expense of the taxpayers and the country. Senator Coleman. Senator Lautenberg, I would note that your time has expired. Senator Lautenberg. I am sorry. Thank you. Senator Coleman. Senator Fitzgerald. OPENING STATEMENT OF SENATOR FITZGERALD Senator Fitzgerald. Thank you, Mr. Chairman. Mr. Chairman, if I could have unanimous consent to submit my opening statement for the record, I would appreciate that. Senator Coleman. Without objection. [The prepared opening statement of Senator Fitzgerald follows:] PREPARED OPENING STATEMENT OF SENATOR FITZGERALD Good morning. I want to join my colleagues in welcoming the distinguished witnesses who are present today. I would like to thank Chairman Coleman for holding this important hearing on Department of Defense contractors who are not paying taxes owed to the Federal Government. The spending at the Department of Defense accounts for nearly a fifth of the Federal Government's annual budget. According to the U.S. General Accounting Office, over $183 billion was disbursed to contractors of the Department of Defense through 16 different payment systems in fiscal year 2002. At the same time, 27,1000 Department of Defense contractors owed nearly $3 billion in unpaid taxes. And it's not just the large contractors who are evading taxes, it's also the small contractors like the dentist and the caterer. The lack of controls that allowed such payments to be made without first deducting delinquent axes is astounding. The efforts of the Department of Defense to refer contractors to the Financial Management Service (FMS) at the Department of the Treasury as required by the Debt Collection Improvement Act of 1996 are obviously inadequate. Only one payment system out of 16 separate DOD payment systems is set up to refer payment information to FMS to offset contractor payments. And in numerous cases--4,900 cases--DOD contractors provided invalid taxpayer identification numbers, which were not validated before payment was made. For one of the Federal Government's largest agencies to make billions of dollars in payments and not verify taxpayer identification numbers when the resources are right there is beyond me. What is more appalling is the fat that some of these unpaid taxes are payroll taxes deducted from employees' paychecks, but never remitted to the government. It is the obligation of all persons, businesses and organizations in the U.S. that earn non-exempt income to pay their Federal taxes, particularly if those taxes have been withheld from an employee's wages. When hardworking Americans comply with this requirement while others blatantly fail to do so, there is an injustice and a breakdown of the system. And when there is a failure to pay taxes, it is theft-- from the Federal Government and from the hardworking taxpayers in America. The Federal tax system is based on voluntary compliance and the IRS, though fearsome in its reputation, is essentially a very large, and not very efficient, collection agency. although the Treasury's Financial Management Service runs the Treasury Offset Program, which matches IRS tax debtors with Federal payees to identify payments that can be levied, much more needs to be done--by both the Department of Defense and Treasury. I look forward to hearing from our witnesses from GAO today regarding their review of Department of Defense contractors' compliance with tax laws, including the scope of their investigation, their findings, and their recommendations on tightening the system. Additionally, I look forward to hearing from our witnesses from the Internal Revenue Service, Financial Management Service and the Department of Defense about their operations, the Treasury Offset Program and the referral of the DOD payment systems to Treasury. As Members of Congress, we fail to act as stewards of taxpayer money if we allow these contractors to dodge taxes with impunity. Again, I thank the witnesses for appearing today, and I look forward to hearing their testimony. Thank you, Mr. Chairman. Senator Fitzgerald. And thank you, gentlemen, for being with us today. I imagine this is far more pervasive than just the problem with the Defense Department. And I think you did a report back in April 2000 talking about how the same sort of thing is happening with government contracts from all agencies of the Federal Government. Are we talking, in general, about contracts that are so small they are not subject to our competitive bidding or our procurement law? Mr. Kutz. No, they are not that small generally. Senator Fitzgerald. They are ones that may have been competitively bid? Mr. Kutz. Right; most of those smaller ones would be used-- the purchase card would actually be used to procure those. These were not purchase card disbursements. These were competitively-bid contracts generally. Senator Fitzgerald. OK, competitively-bid contracts. We have a huge procurement code that walks through what you have to do for a competitive bid process, but it seems to me we are really not checking to see that those who are bidding are even true companies. You talk about fly-by-night companies that somebody maybe just opened up a week before they go in to get this government contract, and all of a sudden, they are in business. Then, when they get their payment, they take the magnetic sign off their van, and they are in some other business. This is really pretty astonishing, the lack of controls over who is qualifying for these government contracts. Is that not an area, a fundamental threshold area, that we need to address? Mr. Kutz. We did not look at that systematically, but there was very little evidence that the Department's contracting officers and contract community really knew who they were dealing with, as you mentioned. Again, we would have to look at that more systematically, but there are supposed to be processes and controls in place to make sure these contractors are reputable before we do business with them, but for these 47 cases, they were not there, and they were not working. Senator Fitzgerald. They were not there, and you saw ones who really were not legitimate businesses, is basically what you are saying. Mr. Kutz. Well, they were not paying their taxes in all 47 cases, and, as Mr. Ryan said, many of them were involved in these other crimes: Embezzlement, money laundering, forgery, grand theft, etc. So there were some serious background issues with many of these contractors. Senator Fitzgerald. So it looks like there had been no investigation, no background check at all on the part of the DOD before they did business with these entities. Mr. Kutz. If there was, it would have not picked--it did not pick these things up, or no one did anything about it. So again, we did not look at that process, but we saw no evidence that anyone had raised any questions. Senator Fitzgerald. Well, it would seem to me that if we required them to do a criminal background check, required them to check to make sure their taxes were paid, required them to have been in business for a certain period of time and have a corporation in good standing--although I suppose some of these--are unincorporated sole proprietorships---- Mr. Kutz. Correct, some of them were. Senator Fitzgerald. But we could put some requirements in the law before they could even enter into a contract with the company, could we not? Mr. Kutz. Yes, we could. And I think there are some policies in place from a governmentwide perspective, but again, we did not see that they were necessarily working. I mean, these contractors could have been debarred if someone had been aware of what they were doing. So for some reason, they were not aware what they were doing, or they were aware, and they did nothing about it. Senator Fitzgerald. There is no requirement that DOD do a criminal background check on a prospective contractor. Is that correct? Mr. Ryan. I do not know, Senator. Senator Fitzgerald. Is there a requirement that they check to make sure they do not have delinquent taxes? Mr. Kutz. No, not that I am aware of. Mr. Ryan. No. Senator Fitzgerald. No. Well, we could put those into the law before they could enter into a contract with companies. And it seems to me that some of these companies may be winning the competitive bidding, as a couple of the other Senators said, because they are not paying their employees' payroll taxes. They are paying their employees, perhaps, under the table and so forth. They have less overhead expense than a legitimate company that plays by the rules and funds its payroll taxes. Were any of these 47 cases referred to prosecutors? Mr. Ryan. We referred them back to the agency, for the agency to decide what they want to do with them. I think we developed enough evidence to indicate that the case should be reopened. I think you will have to ask the next panel as to what they decide to do with that information. We have made our full investigative files available to the agents of the IRS, and we will be glad to share the information with them and also continue to work with them. Mr. Kutz. We referred all 47, basically, for collection follow-up and several that Agent Ryan is talking about for criminal review. Senator Fitzgerald. I would think some high-profile prosecutions by U.S. Attorneys around the country of these bad actors would send a message out that might chill further criminal activity. Well, I appreciate your being here. You do agree that this is not just a DOD problem. This is no doubt going on with perhaps all our other agencies of government. Mr. Kutz. It would appear so. Just these contractors alone, the 47, had a lot of business with other government agencies. Senator Fitzgerald. So this is probably a governmentwide problem, and we are probably losing billions and billions of dollars in waste, and we are missing an easy opportunity to collect back taxes for the IRS. Mr. Kutz. I will note that for non-DOD agencies, the actual contractor offset of taxes has only yielded about $6 million in 2003. For DOD, it was under $1 million. So even though DOD is two-thirds of the government's contracting, and the others are a third, the other program has not been much more successful than the DOD. So something is wrong with the entire levy program for payments to contractors--$7 million a year in collections. There is something very wrong with that. Senator Fitzgerald. Something is wrong. Well, Mr. Chairman, thank you very much, and gentlemen, thank you for your time. Senator Coleman. Thank you, Senator Fitzgerald. Senator Akaka. OPENING STATEMENT OF SENATOR AKAKA Senator Akaka. Thank you very much, Mr. Chairman. I really appreciate your conducting today's hearing and for your leadership, Mr. Chairman, in shedding light on tax evasion by DOD contractors. Mr. Chairman, I have a statement that I would like to have placed in the record at this point. Senator Coleman. Without objection. [The prepared statement of Senator Akaka follows:] PREPARED OPENING STATEMENT OF SENATOR AKAKA Thank you Mr. Chairman. I appreciate your conducting today's hearing and for your leadership in shedding light on tax evasion by DoD contractors. At a time when this country faces an unprecedented projected budget deficit of $480 billion, this year, it is wrong that 27,000 contractors owe the government $3 billion in unpaid taxes. Americans incur a high cost as a result of the failure of government contractors to pay their taxes. The General Accounting Office report, which is the focus of today's hearing, found that well over half of the cases of abuse involved a failure to submit payroll taxes. This has resulted in a $1.2 billion funding shortfall to the U.S. Treasury, Medicare, Social Security, and federally funded State programs. As the Ranking Member of the Governmental Affairs Financial Management Subcommittee and the Armed Services Readiness Subcommittee, I believe GAO's findings raise serious concerns at a time when my constituents are calling for investigations into overcharges for Iraqi contracts and the debarment of those contractors who are guilty of misconduct. By law, government contractors must comply with ethical standards of conduct. Yet when contractors do break the law, they often continue to receive government contracts. A 2002 Project on Government Oversight report found that 16 of the top 43 federal contractors had been convicted of criminal violations. Only one had been suspended from receiving federal contracts. Surprisingly, federal law does not prevent contractors with unpaid taxes from receiving contracts. The rate of tax payment delinquency among federal contractors is almost double the rate among the general public. I am disappointed that the Administration chose to weaken ethical standards in the Federal Acquisition Regulation for contractors eligible to receive federal contracts. GAO's findings also go to the heart of existing management challenges at DoD, which for the past 12 years have been on GAO's High Risk list. Without addressing systemic problems in DoD's financial systems, we will continue to see such abuses. Shortcomings in DoD financial management systems are a decades-old problem. While these challenges are not exciting or easily understood, correcting them is vitally important. As we can see from the GAO report, billions of dollars are at stake. DoD's inability and unwillingness to track accurately tax levies has an impact on a variety of DoD functions and operations. I want to know why aren't DoD and IRS working together to share relevant information and aggressively pursuing tax evading contractors? Prior to today's hearing, DoD claimed that enabling all 20 of its pay systems to report payment information to the Treasury Offset Program (TOP) database, where it can be screened for discrepancies, presented too much of a hardship. This is unacceptable. Federal agencies are required to share this information under the Debt Collection Improvement Act of 1996. Mr. Chairman thank you again for holding this hearing. I look forward to learning from all of our witnesses on how we can prevent these abuses in the future. Senator Akaka. From what I have learned, I am completely shocked at what is happening in our country, especially when we think about how much tax revenue is not being collected. At a time our country faces an unprecedented projected budget deficit of $480 billion this year, 27,000 contractors owe the government $3 billion in unpaid taxes. As the Ranking Member of Governmental Affairs' Financial Management, the Budget, and the International Security Subcommittee and the Armed Service's Readiness and Management Support Subcommittee, and from working with Senator Fitzgerald, I believe GAO's findings raise serious concerns, especially when my constituents in Hawaii are calling for investigations into overcharges for Iraqi contracts and debarment of those contractors who are guilty of misconduct. And hearing from the Federal side here, I also wonder about what is happening to State taxes from these contractors. Mr. Kutz. We can assure you that just about all 47 of them were deadbeat State taxpayers, too. We saw that in just about every case, pretty much. When you saw Federal, it was State. So all the States are affected by this, also. Senator Akaka. So it is a huge problem that we are facing, and I am astonished that Federal law does not prevent contractors with unpaid taxes from receiving contracts. The rate of tax payment delinquency among Federal contractors is almost double the rate among the general public. I am disappointed that the administration chose to weaken ethical standards in the Federal Acquisition Regulations for contractors eligible to receive Federal contracts. And I have two questions, one difference that I cannot understand is that in his written statement, Deputy Under Secretary Lanzillotta states that DOD has collected $2.1 million through the levy program, your report states that DOD has only collected $332,000 through the levy program. Can you clarify the discrepancy in these numbers? Mr. Sebastian. I have a possible explanation for you. The less than $700,000 that we are referring to has to do with the 15 percent continuous levy authority. In the case of the other roughly $1.3 million that may be referred to in the Under Secretary's statement, that may be a direct one-time levy against that particular contractor's payments, meaning it is not systematic. The IRS and DOD working in tandem would have made the levy against that particular payment, and it may not have been capped at 15 percent. But it was a one-time levy. And there may have been a few situations like that that created the additional $1.3 or $1.4 million. Mr. Kutz. Right. The continuous levy would mean if 20 payments were made to a contractor in a year, you would take 15 percent of each and every payment versus a one-time hit outside of this program. Senator Akaka. In your written statement, you stated that improving DOD's ability to aid the IRS in its levy program may require legislative changes from Congress, and after hearing the comments that are made and responses and the questions here, this question becomes very important to us. Could you elaborate on what kind of legislation you think is necessary to deal with the kinds of problems we are facing? Mr. Kutz. There are several that have come up here. The first one is the bar, the legislative bar, as you mentioned in your statement a couple of minutes ago of not letting contractors do business with the government that have significant or severe unpaid tax problems. And that was a bill that was produced in the House, I guess, in 1999 and 2000. And it got through the Government Reform Committee, and then, it stalled at that point in time. So, certainly, the most severe type of legislative action would be the bar. And again, there are some implementation issues with that, but conceptually, that is a policy alternative. One other thing is sharing of information between DOD and IRS to validate the contractor information. There is some restriction. Now, this contractor database includes not only DOD contractors but other agency contractors. Right now, due to the disclosure rules, they are not able to share all of that information for validation purposes with the Internal Revenue Service to make sure we validate everyone in the contract system. And then, Mr. Sebastian spoke earlier about possibly some legislation in the levy area. Mr. Sebastian. Right. Such as taking a look at some of the restrictions in place with regard to a contractor that comes to the IRS in an attempt to make a payment arrangement through an offer or installment agreement; currently, the levy process would suspend over the period of time in which IRS is evaluating that proposal. And if the proposal is accepted, the contractor would be paying under those arrangements. One legislative change you could have, would be to ensure that the levy continues and may actually become a collecting mechanism for an agreed-to installment agreement or an offer in compromise. So you are guaranteed a stream of payments in the event you are dealing with a contractor who went into the arrangement knowing full-well they intended to default on the agreement. Senator Akaka. Mr. Chairman, it is obvious that this is a much larger problem than just in DOD, and we need to expand what we are doing to all Federal contractors and try to correct this for the benefit of our taxpayers. Thank you very much, Mr. Chairman. Senator Coleman. Thank you, Senator Akaka, and I assure you that we will continue down this path. Clearly, we have a rat's nest here, and my sense is that at least we have got folks in the system that a lot of good could happen, as it impacts not just DOD but other agencies; as it impacts local governments that depend on tax receipts; it may cut off other criminal activity. But the system has got to grab somebody, and obviously, that is not being done. Gentlemen, I want to thank you for your testimony. Your report was exemplary; your testimony compelling. The record will be held open for another 2 weeks if my colleagues have other questions for you, but I want to thank you for your testimony today. Mr. Sebastian. Thank you. Senator Coleman. I would now like to welcome our final panel of witnesses for this morning's hearing. We have a vote posted. I believe we have 12 minutes. I will begin the hearing, and hopefully, one of my colleagues will return and continue. If that does not happen, we will simply recess for a very short period. Our final panel, the Hon. Mark Everson, Commissioner of the Internal Revenue Service; Richard Gregg, the Commissioner of the Treasury Department's Financial Management Service; and finally, from the Department of Defense, Lawrence J. Lanzillotta, the Principal Deputy Under Secretary of Defense for the Comptroller. Mr. Everson, it is good to see you again. As you remember, in November, you testified before this Subcommittee regarding the IRS' response to abusive tax shelters that robbed the U.S. taxpayers of an estimated $85 billion over 6 years, according to GAO's study of abusive tax shelters. In that regard, I want to acknowledge and applaud the IRS' recent legislative proposals to curb abusive tax shelters, which would raise penalties to promoters and taxpayers alike. And I would also note before your testimony, and I know you have to testify other places, but I did note this morning, I appreciated the opportunity we had to visit yesterday and your commitment to followup and root out some of the abuses and particularly the cases that have come before us. I wanted to thank you for that. Mr. Everson. Thank you. Senator Coleman. Mr. Lanzillotta, I also want to welcome you back and look forward to hearing how you propose to levy your contractor payments where it is warranted. I thank all of you for your attendance this afternoon, and I look forward to hearing your reaction to the recent GAO examination of DOD contractors who are abusing the Federal tax system. And I am particularly interested in learning what corrective actions you would propose to ensure that DOD contractors pay the taxes that they owe the Federal Government. Before we begin, pursuant to Rule 6, all witnesses before this Subcommittee are required to be sworn. I would ask you to please stand and raise your right hand. [Witnesses sworn.] Senator Coleman. Thank you, gentlemen. We will be using a timing system. You are aware of this system: One minute before the red light comes on, you will see the lights go from green to yellow. If you can, then, limit your testimony to that period of time. Your written statement will be entered in its completeness in the record. Commissioner Everson, we will have you go first, followed by Commissioner Gregg and finally Mr. Lanzillotta. After we have heard all of the testimony, we will turn to questions. Commissioner Everson, you may proceed. TESTIMONY OF HON. MARK EVERSON,\1\ COMMISSIONER, INTERNAL REVENUE SERVICE, U.S. DEPARTMENT OF THE TREASURY Mr. Everson. Mr. Chairman, Senator Fitzgerald, thank you for inviting me here today. I am particularly pleased to be here on February 12, President Lincoln's birthday. After all, he signed into law the first income tax and appointed the first Commissioner of Internal Revenue, and despite that fact, he remains one of our most popular and revered Presidents. [Laughter.] --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Everson appears in the Appendix on page 82. --------------------------------------------------------------------------- I welcome the opportunity to testify on the General Accounting Office's study of the need for strengthened government procedures and assuring that the Department of Defense contractors meet their Federal tax obligations. I want to say at the outset that we at the IRS agree with the major conclusions of the GAO study and believe that many improvements can be made to our own efforts in this area. A number of positive steps are already underway. Before turning to this subject, I want to say a few things about our goals at the IRS and tax collection in general. I have set three priorities for the IRS during my 5-year term as Commissioner. First, we must continue to improve service, making it easier for the taxpayer to understand and comply with the tax laws. Through focused implementation of the IRS Restructuring and Reform Act of 1998, the IRS has measurably improved service to taxpayers and practitioners. We are not backing away from this commitment to improve service. The second area of emphasis is information technology modernization. We have made a great deal of progress in increasing e-filing and providing information to taxpayers and practitioners online and other important gains in technology. But we have struggled to update our master files and improve our financial and other infrastructure systems. We are addressing these challenges on an ongoing basis and must modernize. The third area of focus, a core element of which is the subject of your hearing today--collections--is to strengthen the integrity of the Nation's tax system through enhanced enforcement activities. I know you are familiar with our enforcement efforts, and I remain appreciative of the Subcommittee's leadership in this area, including holding a hearing last fall on abusive tax shelters and their promotion by professional services firms. I strongly support your call for more stringent penalties for promoters who violate the law and very much appreciate the fact that you have called for augmenting resources at the IRS. As you know, the President recently transmitted the 2005 budget request to Congress. It calls for a 5 percent overall increase for the IRS, including a 10 percent boost to our enforcement activities. The President's budget addresses a number of areas about which the Subcommittee has concerns, including enhanced collections, combatting abusive tax shelters and confronting tax abuses within the tax-exempt sector. I hope I can count on your active support for this request. Turning to today's subject, let me reiterate what I said a moment ago: We largely agree with the GAO report. The GAO has made thoughtful observations about why the IRS has not levied taxes from many defense contractors. The GAO observed that the IRS had, ``a collection philosophy of continuing to work with businesses and individuals to achieve voluntary compliance rather than taking reliable enforcement actions such as levies of Federal contractor payments.'' I agree with this assessment, which I believe reflects an overhang from the 1998 Reform Act. The GAO has also said that, ``due to resource constraints, the IRS has established policies that either exclude or delay referral of a significant number of cases to the levy program.'' I largely, but do not entirely, agree with this view. I believe we are making progress on both of these concerns. We are giving greater emphasis to enforcement, which will address some of the reticence our employees have had to use the levy tool. And, as I just noted, we are seeking more resources to boost our activities for enforcement. This having been said, a central conflict remains between two competing public policy goals: Taxpayer rights, on the one hand, and the expectation that those who do business with the government have a clean bill of financial health, on the other. The Taxpayer Relief Act of 1997 expanded the collection authority of the government by allowing the IRS to continuously levy up to 15 percent of payments to contractors. But the IRS Restructuring and Reform Act of 1998 established new procedures which limited the prompt collection of monies due in order to protect taxpayer rights. In addition, I would note that certain privacy protections significantly limit the IRS' ability to share taxpayer information with other agencies for collection purposes. The chart over here shows the effects of these competing priorities. As GAO has noted, in 2002, there were about a quarter of a trillion dollars of monies owed to the government. This is all money owed to the government. And as GAO also said, it stays on the books of the government for 10 years. The pie wedges show that statutory and operational exclusions limit the amount that is available for the levy program. As examples, the statutory exclusions include the right of a taxpayer to appeal an IRS decision, which can delay the collection process for months or even years and prevents a matter from being considered for levy. This is also the case, for example, if there is already an installment agreement in place between the IRS and the taxpayer. As for operational, or as the GAO called it, policy exclusions, the IRS has excluded from the levy portfolio certain other categories of debt: Cases involving financial hardship to the taxpayer, where the taxpayer has died, and where the taxpayer is living in a designated disaster area, to mention a few. Responding to the GAO report and to the interests of the Subcommittee, we have already taken steps to reduce operational exclusions. Again, this is based on the 2002 audited data. As you can see on the chart, we are making available an additional $26 billion for potential levy through adjustment of certain exclusion criteria. These steps will take effect over the next few months, as we update the programming of our systems. We are also creating a joint task force with Treasury, Defense, and OMB to examine the contractor collection issue. By June of this year, the task force will make recommendations on short-term operational improvements, mid- and long-term operational changes and potential statutory proposals that could improve the collection of taxes from Federal contractors. The statutory limits on tax debt collection merit a public discussion about the conflict between the need for taxpayer rights versus the need to make sure that government vendors have a clean bill of financial health. Defense contractors do not have to do business with the government. It can be argued that contractors should be held to a higher standard. Again, I want to thank the GAO and the Subcommittee for focusing on the issue of collections from delinquent defense contractors. I am happy to take any questions. Senator Coleman. Thank you, Mr. Everson. If there is anything else in your full statement, we will make sure that it is entered into the record. Commissioner Gregg, I think what we might do here, as I am told the time is winding down on the time to vote, is I am going to recess this hearing very briefly. Senator Levin should be on his way back. But let me recess, hopefully, for not more than 10 minutes, and then, we will return with your testimony. [Recess.] Senator Levin [presiding]. The Subcommittee will be back in order, and we will call upon you, Mr. Gregg. The Chairman would like us to proceed, so please do so. TESTIMONY OF RICHARD L. GREGG,\1\ COMMISSIONER, FINANCIAL MANAGEMENT SERVICE, U.S. DEPARTMENT OF THE TREASURY Mr. Gregg. Thank you, Senator. --------------------------------------------------------------------------- \1\ The prepared statementof Mr. Gregg with an attachment appears in the Appendix on page 92. --------------------------------------------------------------------------- Thank you for inviting me today to discuss the role of the Financial Management Service in collecting unpaid Federal taxes that are owed by DOD contractors. Treasury appreciates your focusing attention on government financial management issues. FMS is a Treasury bureau charged with broad financial management responsibilities, including disbursing payments, collecting revenue and maintaining the government's accounts. And I welcome the opportunity today to acquaint the Subcommittee with FMS' fourth business line, which is the collection of delinquent debts owed to the government, both non-tax and tax. The Debt Collection Improvement Act of 1996 is the principal law under which FMS collects non-tax debts owed to Federal agencies. Our collections are accomplished through two programs: The Treasury Offset Program, TOP, and cross- servicing. I will just focus on TOP today. TOP is our largest collection program and is directly linked to payment disbursements. Through TOP, FMS reduces the amount of individuals' or businesses' Federal payments disbursed by Treasury and other agencies to satisfy delinquent debts. Types of payments include benefit payments paid on behalf of the Social Security Administration, Office of Personnel Management retirement payments, Federal income tax refund payments and payments to businesses, vendor payments, for goods and services provided to the Federal Government. A reduction or offset occurs if the name and taxpayer identifying number of a debtor included in the TOP database is matched against the name and the taxpayer identifying number of a Federal payment recipient. The TOP debtor information is supplied by the agencies to which the debts are owed. The recent GAO report notes that FMS also has a key role in the collection of Federal tax debts. In partnership with FMS, the IRS collects unpaid Federal income taxes through the continuous levy of certain Federal payments disbursed by FMS. Vendor, Federal employee salary, OPM retirement, and Social Security benefit payments are among those that are levied continuously at a rate of up to 15 percent until a debt is satisfied. This is accomplished through an automated process using the TOP system. If there is a match between the IRS tax debts and FMS payment records, IRS initiates a process by which the debtor is given a minimum of 30 days to make payment arrangements, appeal the proposed levy action, or apply for a hardship determination. The levy of a payment occurs only after IRS completes its due process notification and directs FMS to levy future payments. The Continuous Levy Program was authorized under the Taxpayer Relief Act of 1997. I spoke earlier of the link between TOP and payment disbursements. While Treasury is the primary disburser, with 85 percent of the government's disbursements, nearly 1 billion payments a year, other agencies, including DOD and the U.S. Postal Service, have payment disbursement authority as well. These agencies, which disburse payments such as salary and vendor, began matching their payments against FMS' TOP debtor database in 2002. Individuals or businesses receiving these non-Treasury disbursed payments may also have their payments levied if they owe tax debts and would be afforded the same due process as those receiving a Treasury disbursed payment. Routinely, we work with our partner agencies on debt collection issues by providing information and making recommendations for enhanced collections. As an example, we have been working with DOD and IRS for some time on ways that are tailored to their specific needs to improve collections. In the case of DOD, the existing program is designed in such a way that their contractors may either have their payments offset, if they owe non-tax debts, or levied if they owe tax debts. At present, payments disbursed through two of DOD's contract pay systems are being matched against the TOP data for both offset and levy purposes. I have been advised that in the coming months, DOD expects to begin matching vendor payments it disburses through its remaining systems. For our part, FMS is working closely with DOD, and we are well-prepared to assume the additional work load. Mr. Chairman, Treasury views debt collection as an important financial management tool. Moreover, collecting money owed to the government is in close alignment with one of the governmentwide initiatives under the President's management agenda: Improved financial performance. Along these lines, you may be interested to know that the President's 2005 budget includes proposals to further improve the Federal Government's collection of delinquent debts. And one of these proposals would increase the continuous levy on Federal vendor payments from the current 15 percent to 100 percent. Unlike many Federal payments such as salary and retirement and benefit payments, vendor payments are not recurring, and, thus, fewer opportunities exist for collection. This levy increase would not affect the administrative processes already in place that give the debtor 30 days to make payment arrangements, appeal the levy action or apply for a hardship determination. We believe that devoting resources to debt collection is both wise and of enormous benefit to agencies in managing their budget accounts and producing accurate financial statements. As you can see from the chart attached to my statement, FMS' debt programs have resulted in the collection of more than $18 billion since 1997. Our success can be attributed, in large part, to having the expertise and the infrastructure and cooperative working relationships with agencies to collect millions of dollars of outstanding debts. At the same time, we recognize that there are always ways to improve. For example, to help maximize the potential of the levy program, we are actively engaged with IRS in examining the feasibility of making two important improvements. First, we are discussing ways to increase the number of tax debts in TOP that can be actively collected following the completion of IRS due process notification, and, in fact, as the Commissioner pointed out, some of that has already occurred. Under this approach, IRS may consider ways to provide due process to delinquent taxpayers before, not after, the tax debts are transmitted to TOP. Presently, payments to DOD contractors, many of which are one-time, have already been disbursed by the time the due process is completed. Modifying the due process timing would ensure that the payments being disbursed to DOD contractors who are identified as delinquent tax debtors can be levied immediately. We welcome the opportunity to work with DOD and IRS to devise procedures that address this issue. Second, we are exploring with IRS ways to improve the accuracy of information pertaining to taxpayer identification numbers, names and addresses contained in DOD's central contractor registration database. IRS advises, however, that there may be legal impediments under current law concerning the circumstances under which TIN matching may be used by IRS, the information the IRS may disclose as a result of that matching, and to whom the information is disclosed. If--I repeat if--these important issues can be addressed, we would anticipate increased matches of the delinquent tax debts with vendor payments to those same debtors. Increased matches would very likely result in greater collections. Once more, I appreciate the opportunity to testify today and would be happy to answer questions. Senator Levin. Thank you, Mr. Gregg. Mr. Lanzillotta. TESTIMONY OF LAWRENCE J. LANZILLOTTA,\1\ PRINCIPAL UNDER SECRETARY (COMPTROLLER), U.S. DEPARTMENT OF DEFENSE Mr. Lanzillotta. Thank you, Senator. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Lanzillotta appears in the Appendix on page 98. --------------------------------------------------------------------------- Mr. Chairman, Members of the Subcommittee, I am pleased to be here today to discuss the Department of Defense program for offsetting payments to commercial entities that either have tax or non-tax debts owed to the Federal Government. Even though the collection of Federal debts is not a primary mission of the Department of Defense, it is an important and inherent management responsibility. It is part of our DOD leadership's resolve to exercise strong stewardship over the taxpayers' dollars. We want to thank this Subcommittee and the General Accounting Office for focusing on how we can improve this component of our stewardship. The Department of Defense agrees with the four GAO report recommendations and has taken action to address the report findings. Since 1991, DOD has partnered with IRS to levy offset commercial payments to collect Federal debts through a manual process involving what we call paper levies. In July 2000, IRS, in conjunction with the Financial Management Service, FMS, started the Federal Payment Levy Program. This program provides for the collection of Federal debts through continuous levy on commercial payments. In 2001, DOD began working with FMS to participate in the program. In October 2002, DOD began providing its databases on pending commercial payments to FMS for matching against the Treasury Offset Program, TOP, database, which includes both Federal tax debt and non-tax debt. In December 2002, we began taking offsets. The Department currently provides a commercial payments database only for its largest commercial payment system, the Mechanized Contract Administrative Service, MOCAS, system, and does this once a week. As of January 31, 2004, DOD had collected about $2.1 million through offsets. This $2.1 million collection is far below what should be achieved. Increasing this performance requires changes not only within the Department but also changes in partnerships with other agencies, to include possible legislative changes. The primary challenge is to better identify, through automation, those DOD contractors whose payments should be offset because of their Federal debts. When DOD receives a notification that the contractor is indebted to the U.S. Government, and its payments are subject to levy, we have little trouble in executing prescribed offsets. DOD is advancing several actions and changes to improve the Federal levy performance. We are refining our procedures for Federal levies to ensure they are streamlined and efficient as possible. We have clarified with the IRS and Treasury that the Department's central point of contact for executing levies is the Defense Finance and Accounting Service, particularly the Commercial Payment Center in Columbus, Ohio. This will enable a single office to handle levies for all DOD commercial pay systems. Instead of once-a-week, the Department will twice weekly provide its database on MOCAS to FMS and evaluate whether we can even increase the frequency. Consistent with the GAO recommendation, the Department will continue to devote sufficient resources to implement all aspects of its formal plan to improve its levy performance. The Department is pursuing long-term changes. Some involve other agencies. We are expanding the DOD automated levy process beyond MOCAS to the rest of the Department's commercial pay systems. We have already included another pay system and will have the additional 18 pay systems that could be matched to the TOP database using the new automated system. We are currently working with Treasury to include these systems in the continuous offset program. This expanded automation should be completed no later than March 2005. We will have 90 percent of our payments completed by August 2004, which includes all of the DFAS-owned systems, to match against the TOP database. This action meets the GAO recommendation that DOD develop a formal plan for providing payment information to TOP for all of its commercial pay systems. This full automation is the Department's main focus for improving its levy performance. When our input is automated, DOD has fewer problems offsetting payments for matched vendors once we receive an automated file from Treasury. However, the total dollars offset is only about 1 percent of the debts we receive from IRS. We recognize the automated process can be more effective and are working with Treasury and IRS to get the needed changes. With manual procedures, we are seldom successful because by the time we become informed of a match for a pending payment, we have disbursed the payments. Still, we are considering possible interim procedures to use until full automation is completed. The Department of Defense relies on the information in the Central Contract Registration Database for the commercial payments provided to FMS for matching with its TOP database. This information comes from the contractors themselves. If either the name or the taxpayer identification number, the TIN, provided by the contractor differs from the name or the TIN listed on the debt record, the TOP database will not identify that contractor for an offset or levy. We believe that increasing the accuracy of the CCR will increase the effectiveness of the TOP system's ability to identify many contractors with Federal debt. We are working with IRS and FMS on how best to validate or correct the TIN and the name of the commercial activity in the CCR database. The goal is to eliminate the CCR inaccuracies as an obstacle to better levy collections. There are legal limitations. In seeking to achieve more levies, the Department of Defense must stay within the framework and the limitations of the Federal law and will honor taxpayers' rights. For example, certain tax-related information cannot be released even between Federal agencies except in strict compliance with Federal law. The Department looks forward to working with the IRS, FMS and others in considering what legislative and legal changes might help achieve more successes for this program. In closing, I assure you that the Department of Defense will support the Federal Payment Levy Program. We have a good partnership with IRS and FMS, and I am sure that we will produce substantial results. I also want to assure this Subcommittee that the Department of Defense is continuing its broader challenge of transforming all of its business and financial management processes. We have made a strong start in our historical overhaul of DOD management processes and the information systems that support them. Once fully implemented, several years from now, our Business Management Modernization Program will consolidate and integrate our management information systems. It will enable the maximum permissible exchange of information that is key to ensuring all of our business management responsibilities. Thank you for this opportunity to explain how the Department of Defense is working to sustain sound management and strong stewardship of its public resources. Thank you, Mr. Chairman. Senator Coleman [presiding]. Thank you, Mr. Lanzillotta. A kind of micro-focus question: Here, in terms of the number of DOD payment systems, my notes indicate that Thomas Bloom, former Director of the Defense Finance and Accounting Service, told GAO auditors there were 16 DOD payment systems, and I think the report was based on that. The Director of Commercial Pay Systems told the investigative staff of the Permanent Subcommittee that there were 18 DOD payment systems, and I believe your testimony today talks about 20 DOD payment systems. Could you please tell me the correct number of DOD payment systems? Mr. Lanzillotta. Mr. Chairman, in this area, there are 20 systems. Six are owned internally by DFAS; 14 are owned by other organizations such as the military services. Senator Coleman. OK. In listening to your testimony, it is clear that the solution to a lot of the problems lies in expanded automation. You have got to automate your systems; get them up to capacity. Apparently, we are talking about 90 percent of the work will be done by 2004, but March 2005 is when you expect to have things in place? Mr. Lanzillotta. In August 2004, we expect to have 90 percent of the dollar volume automated. It will take us until March 2005 to get that last 10 percent. But those last 10 percent represent numerous systems that are small and are more challenging. Senator Coleman. Can you help me understand or the Subcommittee understand what happened? From 1996 to 1997, when the Financial Management Service system was put in place; Taxpayer Offset Program, all of that, up until today, you have got a long period of time. I understand that collections under the system did not really, in any kind of significant way, take place until 2002-2003. What happened in the interim? Mr. Lanzillotta. As I mentioned in my statement earlier, we have always done manual processes. But when we process 12 million vouchers a year, these manual processes, because of the deliberative process, were not terribly effective. It was not until July 2000 that FMS and IRS gave us the ability to use automation. We were working as part of the development of those systems to ensure that we would be able to transmit data with FMS. In 2001, we started our own contractor debt system, which allowed us to pull from the MOCAS system the information that FMS would need. In 2002, it took us from 2001 to 2002 to perfect our system, run test data and test files, to where we could certify to the system that it was accurate and that we would not be making offsets or doing things that later we would regret. Senator Coleman. One of the keys to accuracy is having correct taxpayer identification numbers. Can you tell me what your plan is to ensure that you get correct taxpayer identification numbers prior to being paid? Mr. Lanzillotta. Right now, we are working with both FMS and IRS and hope to resolve this in the task force that was announced. In the Department of Defense currently, the TIN number is provided by the vendor on a voluntary basis. He just writes in the number that he has. We have no way to validate it until we get a readback from FMS as to what that is. There are 270,000 contractors currently in the database. It only works effectively if we can do a bump and know where our mistakes are. Individual queries are somewhat time consuming. Senator Coleman. You say it is voluntary. Is there anything that would preclude you from requiring---- Mr. Lanzillotta. I stand corrected, Mr. Chairman. It is not voluntary. In the case of service contracts, it is required by law. Senator Coleman. Services, but not goods, it is not required by law? Mr. Lanzillotta. There are some cases where the TIN numbers are not required by the vendor to put in. Senator Coleman. Is there anything that would preclude you from requiring, as a condition of getting a contract, in all contract cases, the submission of a TIN number? Mr. Lanzillotta. You know, this is kind of a question outside my expertise. It requires a procurement official. But a lot of these payments are what we call miscellaneous payments. They are payments to the credit cards, airlines, utilities, some agreements that we have, tariff agreements, where we just do things--they provide a service, and we just pay them, and a contract does not exist. Our goal would be to get TIN numbers for as much as we possibly could, because that is the key for us to be able to identify where the offset should be taken. Senator Coleman. One of the penalties for not providing taxpayer identification numbers is backup withholding, I believe about 28 percent. Do you know if you have implemented that? Mr. Lanzillotta. No, Mr. Chairman, we have not, but we will. Our problem that we are running into is when a vendor provides us a TIN, we do not know that it is a bad TIN until we bump it up against a payment, against the FMS. We do not know ahead of time. So we are having trouble ensuring that he has provided a valid TIN, because we have to make absolutely sure that when we hold up 28 percent of the payment that it is legally correct. Senator Coleman. I would strongly urge that you focus on what you need to do to make sure that you can evaluate whether somebody has a valid TIN, taxpayer identification number; and then, at that point in time, you can use the backup withholding. And when you said you will, when will you begin to use backup withholding? Mr. Lanzillotta. We have immediately told DFAS to make a plan for people who have not provided a TIN in areas where the law requires a TIN to implement the 28 percent. It will take us--I do not know exactly how much time--to work out with FMS and IRS the validation of the TINs, so we will know ahead of time that the TIN is wrong, and we can withhold the 28 percent. Senator Coleman. I turn to the commissioners, perhaps to supplement the response there. Can you give us a better sense of what kinds of things have to be done so that we can ensure that you have that kind of very basic information of a taxpayer identification number? Mr. Everson. I guess the one point I would emphasize is what I said before more generally that there are two conflicting sets of interests here. Generally, in this area, the protection of the taxpayer rights in terms of the procedures for due process that came in through RRA 1998 and some that we follow that we are reviewing, as we have already said, in terms of cleaning up some of these operational constraints. That is one set of conflicts with prompt collection. The other does relate to the absolute protection of taxpayer information, and there is a part of the Internal Revenue Code, that really protects information. Now, there is a carve-out here where we can share information on services, as Larry was just indicating. The carve-out relates to active contracts. This database is broader than that. It includes the registration of those who would wish to do business with the government, and that is not a carve-out that qualifies--the broader population does not qualify for the data sharing, nor does, as was indicated, goods that are purchased. So there is a whole series of issues here regarding taxpayer information that we need to get to, and I know some have suggested maybe people could waive their protections there, and then, we could address it that way. I think we need to focus on these issues over the next few months and figure out what the best way to jump on this problem so that we can automate the solution. As Larry said, and I agree, unless we automate it, we are not going to get anywhere. It is too cumbersome if it is all done by manpower. Senator Coleman. Commissioner Gregg, anything to add? Mr. Gregg. Yes, I think that the basic issue is if we could take a slice of the CCR and look at those that are active, but then, it gets down to--it is one thing for us to be able to identify that a TIN does not match, but what is necessary--and maybe legislation is necessary to give IRS the authority to provide the correct information to DOD, because it does not help very much if we just tell them that sorry, no match, and we cannot give them the information that is a valid TIN for that particular vendor. So that is something that I think IRS is looking at, but perhaps legislation is required. I am not sure. Senator Coleman. Please let us know if you think you need that authority, because certainly, we would be inclined to move in that direction. We are going to have a second round, but before my round is over, just to Commissioner Everson, in the 47 cases that were identified in the GAO report, can you tell us what your plans are with the folks involved in those cases? Mr. Everson. Certainly, I think you know, and Senator Levin knows, we worked very closely with this Subcommittee, on the followup of the hearings that you had in November, and I very much appreciate the materials that you have provided to us in connections with those matters that you were looking at. It is going to be the same thing here. We are going to take these 47 cases that happen to come from GAO. Our normal procedure would be that our business unit that handles these matters would look at them as a screen and then send potential cases into the Criminal Investigations Division, where they might take the case, investigate them. I am going to shortcut that process and ask our CI people to look at each and every one of these 47 cases to see what they think, in case they would conclude that they ought to look at some of them that maybe the business unit would not have looked at. Senator Coleman. Your CI people means criminal investigators? Mr. Everson. Criminal investigators, 1,811 law enforcement officials. Senator Coleman. Thank you very much, Commissioner. Senator Levin. Senator Levin. Thank you, Mr. Chairman, and thank you all for your testimony. The first question has to do with whether we should require that the Department of Defense contractors be paid up on their taxes or, at a minimum, be paid up on an installment agreement so that they not be on default on either their taxes or on an installment agreement. What is the Department of Defense's position on that? In other words, in order to get a new contract, you are not going to get a contract if you are in default on your taxes. Mr. Lanzillotta. In concept, Senator, I do not believe the Department would oppose that at all and would welcome the opportunity to have some legislative authority, because as it was mentioned before, it is not against the law to owe back taxes and still have a contract with the Federal Government. Senator Levin. It is not a matter of being against the law. The question is whether we ought to be giving a contract to people, paying them money when they owe us money. It is not a matter of whether it is a crime or illegal. It is a matter of just pure business common sense. No business would operate that way, and we are always told we should try to be more businesslike in our operations. So why would the Department of Defense, if we are owed money from a contractor on taxes, they are delinquent on taxes, or they are delinquent on an installment agreement, why would we be giving that contractor another contract? Mr. Lanzillotta. I completely agree with the concept, Senator, that we should require full payment or give us the ability to get full payment. But we will need some legislative authority to do that. Senator Levin. Will you recommend it? Mr. Lanzillotta. In concept, I certainly support it. Senator Levin. Would you let the Subcommittee know whether you would recommend it, that the Department ask the Secretary as to whether or not he and the Department would support it? I understand OMB opposes it. Do you know if that is true? Mr. Lanzillotta. Well, it happened in 2000, and so, everybody who was involved with that is not here to ask as to what were their reasons. I would have to get the provision and take it back and look at it. But in concept, we are looking at ourselves, and we looked at our database whether we could have a certification on the database as to whether somebody had paid their back taxes and make them certify, during registration, that they were not in arrears. We were told that legally, that is challenging to put that certification in there, that we did not have that authority, and then, if we did, in some cases, it would still be meaningless, because we would not have a way to back it up to see if they were lying to us or not. I think we need to look at it. Senator Levin. But false representation to get a contract is a pretty serious business under law. If you make a misrepresentation about a fact in order to get a Federal contract, you have got problems. And so, it is a real deterrent. It is a real weapon here to try to collect taxes. But rather than pursue it further, if you would get the Department's position on that issue, it would be helpful to us, because I think some of us, at least, want to seriously consider that kind of a requirement. Obviously, people can owe back taxes. A lot of times, that is going to be true. But if there is not an agreement to pay back taxes which is being complied with, if a contractor does not even have that, it seems to me that we should be mighty reluctant to give that contractor any additional contracts, unless there is some national security reason to do it. If that is the only contractor who is providing us with a substance that we cannot get anywhere else, I guess we have got to take our licks on that one. But other than that, I think we should be a lot more commonsensical about handing out taxpayer dollars to contractors who owe the IRS money. Mr. Lanzillotta. I will turn this over to Commissioner Everson. The Department does not know or does not have a list of vendors who owe back taxes. We only know when we submit a vendor payment against the database at that time. Senator Levin. You can require that the person represent that they do not owe back taxes before they get a contract. Mr. Lanzillotta. A certification-type process. Senator Levin. A certification process, yes. And just give us your position on a certification process. Commissioner Everson. Mr. Everson. Yes, thank you, Senator. I think this comes back to what I said is a conflict of two legitimate public policy interests. One is taxpayer rights, on the one hand, and the other is the desire of the government to have its vendors have a clean bill of financial health. We do have to be careful here, because there are instances where there are legitimate disputes between companies or individuals and the government. And they do take time to get resolved. So I do not think that I would be in a position to advocate that one side of this trumps the other, if you will. We need to improve, clearly, the sharing of information. We need to look at that so that judgment can be brought to bear into this discussion. But I would be reluctant to encourage a one-sided solution. It has got to be a balanced solution. As I indicated in the statement, we have agreed, this group plus OMB, has agreed to look at this, and I had a meeting with OMB on this subject earlier this week, and as they indicated, in the information that potential vendors bring to the government to be considered for a contract, information beyond that which is normally required between two contracting parties in the private sector is requested and then considered. I do believe that the administration can look at whether, in its procurement policies, additional changes can be made in that regard. But again, this involves more than just the procedural rights of taxpayers. You also get into privacy considerations, and there will need to be discussion as to whether statutory modifications are appropriate to have information sharing. Senator Levin. I do not see that there is any privacy issue in requiring that a potential contractor certify that he or she does not owe any withholding taxes. That is a certification issue. Mr. Everson. That is a procurement issue, that is exactly right. Senator Levin. That is not a privacy issue. Mr. Everson. But if you want to ping the IRS database to see whether that is correct or not, that is a different issue. Senator Levin. That may be a different issue. Mr. Everson. Right. Senator Levin. But just requiring the certification, now 25,000 of the 27,000---- Mr. Everson. Right. Senator Levin [continuing]. Cases are withholding issues. Those are usually not disputed issues. That is money which was---- Mr. Everson. Just trying to be clear here. Senator Levin. No, I can understand that there can be legitimate disputes. I can understand that. And we have got major defense contractors who have very legitimate disputes over contract issues, including whether taxes are owed. Mr. Everson. Yes. Senator Levin. We can protect that legitimate right. But when 90 percent of your cases deal with withholding taxes, over which there is no dispute at all, it seems to me just requiring a certification which would subject somebody who falsely certifies it to a criminal action could provide a real deterrent, a real collection device for back taxes. When the 30-day levy notice is finally sent, when is the money actually withheld? Is it at the same time that notice is sent, or is it the end of the 30 days? Mr. Everson. I would defer to my colleague. Mr. Gregg. Yes, it depends on the type of payment. If it is a recurring payment for a non-levy---- Senator Levin. The first one on a levy, when notice of a levy goes out. Mr. Gregg. And that depends on--what I said in my statement is that sometimes, because of the sending out the notice, the due process notice, we miss that first payment, because we get the information from DOD, and at that time, the payment may have to go out the door in 10 or 15 days, and by the time the due process notice goes out, the payment is out the door. So what we do is have our files ready for the subsequent payment. Senator Levin. But you do not wait for the 30 days. Mr. Gregg. No, we do not hold, or DOD does not hold payments up because of---- Senator Levin. Until after the 30-day period is up. Mr. Gregg. No. Senator Levin. Mr. Lanzillotta. Mr. Lanzillotta. The due process has to take place before I can make a payment offset. Senator Levin. Are payments made during that 30-day process? Mr. Lanzillotta. If FMS or the IRS has not completed their process, and a payment is due, a payment is made, yes. Senator Levin. Well, my question is you are sent a notice, a 30-day notice, a so-called due process notice, that a levy is going to attach. My question is will payments be made during that 30-day period? Mr. Lanzillotta. Yes. Senator Levin. OK. So you have a situation here where this is the fourth step in a process, right? Frequently, there has been a year's wait while somebody is in a queue. Mr. Everson. But as you indicated, Senator, this chart here--I want to respond to a point you made earlier. You asked if some of this is in response to the Subcommittee's interest or the GAO's interest; very much so. We have already taken some actions here to improve just what you are talking about. If you look over on the left, this pink box, it has got what we call-- I have characterized it as operational exclusions. GAO said policy. Below that squiggly line are areas where we have already looked, and we are making changes. This queue issue is one of them. And we are going to do more to clean this up. Senator Levin. That is good news in terms of this queue, because that one seems fairly--I mean, I am glad you have cleaned that one up. It is pretty obvious that it needed to be cleaned up, and I commend you for it. My last question in this round, then, would be do you have officers, in the IRS, that are there full-time revenue officers that work in the Tax Levy Program? Mr. Everson. That is a good question. We have revenue officers, of course, but you are asking about the levy program for Federal contractors, per se, I think is the substance of what you are asking. Senator Levin. Right. That is correct. Mr. Everson. Yes, it is entirely automated is the answer, Senator. So I have seen your proposal on this, and all five of the points that you have made, I think that this task force that we have suggested we are going to put together ought to look at that, because expertise attaches to all kinds of elements of our responsibility, and collections, as you know, as we have discussed, we have drawn down our revenue officers by over 25 percent due to resource constraints in the last 6 or 7 years. We are bringing that back up. The kind of thing we do need to consider is the expertise of revenue officers as we go forward, and we will in this task force. Senator Levin. I want to commend you for not just considering that but for fighting for resources for tax collection. We have got to turn this around. We cannot have these many uncollected taxes out there that just go by default because we do not have the resources to go after folks. There are a lot of areas where we need to go after them, and I appreciate your leadership and seeking the resources to do that. Mr. Everson. Thank you. Senator Coleman. Thank you, Senator Levin. Just to follow up on that comment, I share the concerns of Senator Levin, and I appreciate in our conversations, Commissioner, your intent to focus those resources, focus them on folks who are making a lot of money and should be paying their fair share, and they are not. And I think that the focus piece is also an important piece that the average taxpayer needs to understand and appreciate. Commissioner, Senator Levin in his questioning had raised the issue of a certification process, a taxpayer contractor certifying that they are not in violation of any taxpaying obligation. Do you know if any other agencies have a certification process? Mr. Everson. It is really a procurement question, Senator, and I am not sure that I know the answer to that. And again, from our point of view, it is not a consideration unless you cure this issue of the data sharing because of privacy. Then, it could play for us. Senator Coleman. And certainly, the Department of Defense is the 800-pound gorilla when it comes to contracting. Such a substantial percentage of Federal contracts are within that Department. But the testimony from earlier witnesses gave us the very clear understanding that these problems exist in other agencies. For Mr. Gregg, I would turn to you and raise the resource issue. For instance, just in these cases, we are talking about 27,100 tax-delinquent contractors identified by the GAO, with the potential of there being many more throughout the Federal Government. Does the FMS have the resources to levy all contractor payments? Mr. Gregg. Yes, we do, Senator. We have a very highly automated system, and we are basically prepared to handle about anything--we have huge amounts of debt already in our database and resources, not that I say they are unlimited, but they are enough to handle this. Senator Coleman. That is very encouraging, Commissioner. At the present time, I believe, the Defense Finance and Accounting Service is sending one computer tape a week, and I think, Mr. Lanzillotta, you said that you were trying to increase that, to mechanize your MOCAS system payments, sending a tape once a week. Was the intent to increase, sending that tape twice a week? Mr. Lanzillotta. Yes, Mr. Chairman, what we are looking at now is what is the cycle time that we have right now on a tape, and we are going to go to two tapes a week with the hope of doing a continuous offset, where all the new contracts or new vouchers would just constantly be sent to FMS. Senator Coleman. And I guess, then, the same question to you, Commissioner: Is that a resource question? Are you prepared to begin accepting and processing more MOCAS tapes? Mr. Gregg. Yes, we are. Senator Coleman. OK; that is very helpful. I take it if taxpayer identification numbers in the Central Contractor Registry are validated, that will increase your ability to make matches for levy purposes? Mr. Gregg. If there is a way for IRS to validate and provide accurate information back to DOD, if there is a problem with one of the TINs, then, yes. And I think that is something that this task force can look at, to see how much flexibility they have there. Senator Coleman. OK; the last question I am going to have is the Department of Defense has its one major disbursement system now going through the FMS process, but apparently a large number of other systems are not. Is there anything that the IRS can do, working with the Defense Department to accelerate the process of getting these systems referred to the FMS? Mr. Lanzillotta. Mr. Chairman, we are accelerating the process. And this is a DOD thing that we have to do. By August, we hope to have 90 percent of our volume, no later than August, 90 percent of our volume through the FMS system. The last systems, the remaining 10 percent, they represent a lot of smaller systems that we are just going to have to work on to ensure that no later than March 2005, we will have 100 percent of our vouchers being able to go through the FMS. Senator Coleman. Commissioner, perhaps on another occasion, we can have a broader discussion of the conflicting values issue that you raised, two important values: Taxpayer rights, and you have the value of trying to make sure that collections are done properly. Mr. Everson. Yes. Senator Coleman. Because taxpayers are impacted when collections are not collected properly, and I can see that here. But when payments are not made to Social Security, and to Medicare, taxpayers are paying for that. Mr. Everson. Yes, absolutely. I could not agree with you more. It is a very important subject. We need to run a balanced system that gives adequate consideration to both of those considerations. Senator Coleman. And as all of you gentlemen, I am sure, can tell by the reaction of my colleagues to this GAO report, there are a lot of concerns about the present state of affairs, a lot of concerns; certainly with DOD but beyond DOD, within the Federal Government. And I think it is quite obvious that we expect that those concerns will be addressed, that they be addressed expeditiously and that we do what we can to raise the level of confidence in the average taxpayer that they are paying their fair share, and they are not alone. So, with that, Senator Levin? Senator Levin. Thank you, Mr. Chairman. On this balance issue, I totally agree with you. One of the first things that I got involved in when I came to Washington, was a taxpayers' bill of rights. Mr. Everson. Yes. Senator Levin. As a matter of fact, that taxpayers' bill of rights came out of this Governmental Affairs Committee. Senator Pryor was involved; a number of other people were involved. It was a bipartisan effort, and it was very important, because there are abuses not just by taxpayers but by the IRS. Mr. Everson. Yes. Senator Levin. We do not want abuses on either side. But this issue, it seems to me and I think all of us, is an issue where we are handing out money. I mean, the Chairman is really focused on this aspect of it, and he is so right. I do not think this is the same thing as having a normal tax dispute about how much money does a taxpayer owe the government. We are handing out money to taxpayers. Ninety percent of the delinquent taxpayers here are people who have not paid their withholding, which I think is a crime. Mr. Everson. I agree with that entirely. The only cautionary note I am suggesting is that if you make things automatic, there are always exceptions, and I believe, however, the sharing of information that allows people to exercise judgment, that is where you get to a good answer. Senator Levin. I agree. You can get into areas where there are going to be disputes, but where you have got 25,000 of the 27,000 are withholding issues---- Mr. Everson. Yes, that is pretty clear cut. Senator Levin. Now, on the due process issue, if you send out a delinquency notice to somebody, that you are delinquent, can the IRS not give notice in that delinquency notice that you can be levied, in fact, any payment from the government to you can be levied for this delinquency unless you come in and work out something? Can't the levy due process notice be right in the delinquency notice? Mr. Everson. There are a series of steps that are in the laws from RRA 1998, and then, there are some other procedural things that the IRS does. And if you look at the whole time line--I considered doing a blow-up of this chart but declined to do it. Senator Levin. You took pity on us. Mr. Everson. Because you still could not see it. [Laughter.] The whole process and the dozen or more steps runs up to 2\1/2\ years. Someone who has a potential problem of $5,000 at the end goes all the way through the process, and has sustained penalties and interest, might owe $30,000 but not until 2\1/2\ years later. Someone can keep this moving if they want to. Some of this is at our discretion. I am not suggesting it is all in RRA 1998. And we have got to look at that. But some of the notices that we will send are actually very effective, because they do not require a great deal of investment of manpower, and they draw a certain response. So with the shortage of the revenue agents that we have had that we have all discussed, there has been more reliance on a bare-bones, automated system here. We need to attack that. As I have indicated, we have over 1,000 collection personnel who will come in if the Congress provides the monies we have asked for. This can help us, and perhaps as we look at these procedures, we can, as we are doing here, improve our times. And then, we will also look at legislative remedies. I do believe the Congress is open to considering whether there need to be some modifications. I am not suggesting throwing out RRA 1998. I do not want to be misinterpreted at all on that. But perhaps there are some modifications in order. One was mentioned earlier about frivolous offers to settle something, where you say I will settle a $1 million debt with $1. That can keep the process alive and provide rights. That is not a good thing, obviously. So we have got to look at both internal procedures and, I suggest, perhaps, statutory changes. Senator Levin. So you will be giving us recommendations for statutory changes? Mr. Everson. What we have agreed is that the three organizations represented here and OMB are going to take a look at this whole set of issues, both what is out there operationally; which largely might be in my shop; might be at DOD; could be in FMS, although I doubt--I mean, they are really sort of--largely a conduit here, a processor; we are going to look at that, and we will look and see what statutory considerations or processes might be warranted. Senator Levin. What kind of time line is there for that review? Mr. Everson. We will do something by June. I think that gives us 3 or 4 months to look at it. Senator Levin. That is great. Mr. Lanzillotta, why are you delivering data to FMS only twice a week? Why not every day? Mr. Lanzillotta. Senator, that is the goal, but what we have to make sure we do is when we pay a voucher, we send it over to FMS. They have to process it and come back and tell us where the offset should take place. Senator Levin. But is this not all automated? Mr. Lanzillotta. It still takes about a day for us to send a file over to FMS; for them to bump the file and send it back to us. Senator Levin. I know that, but can the list not be sent over automatically every day instead of twice a week? Mr. Lanzillotta. We are trying to get to that point where we---- Senator Levin. What is the problem, if it is automated, in getting to that point? Mr. Lanzillotta. Our systems. We have to redo the system a little bit, modify the system. Because what we do not want to do is get caught up where we have a transaction in transit somewhere, and we make a payment or fail to make a payment or collect twice or not collect at all. Senator Levin. Final question, then, would be whether or not you can share with us the DOD contractor list that you have imposed tax levies on? Mr. Lanzillotta. Senator, I can give you the same reference my fiscal lawyers gave me that says no. Senator Levin. And that is because of a privacy concern? Mr. Lanzillotta. That is because their interpretation of the statute says that we cannot release that information. I understand that there is some differing of opinion. Senator Levin. The question is this: Under Section 6103 of the Tax Code, you are not allowed access to confidential taxpayer information? Mr. Lanzillotta. Senator---- Senator Levin. You have it. You have a list of contractors that are in default and that have been levied upon. So if you got that list, why can we not have that list? Mr. Lanzillotta. Senator, I am just going to have to---- Senator Levin. Can you get us the legal opinion from your shop that says that you cannot share it with us? That is, would you get your lawyers to send a letter to the Subcommittee here explaining why it is that you can have it, despite Section 6103, but we cannot? That is the question. I am not asking you for the answer today. Mr. Lanzillotta. Certainly, Senator. Senator Levin. Would you get that from your lawyer to the Subcommittee? \1\ --------------------------------------------------------------------------- \1\ See Exhibit No. 7 (question No. 1) which appears in the Appendix on page 192. --------------------------------------------------------------------------- Thank you, Mr. Chairman. Senator Coleman. Thank you very much, Senator Levin. Gentlemen, thank you for your testimony; again, to the GAO, thank you for your work. This hearing will be closed. The record, however, will be left open for 14 days. 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