Summary

Taxpayers are required to have identification numbers so that IRS can establish accounts for them and record transactions, such as the payment of taxes. Most taxpayers have only one identification number. However, persons who are self-employed (referred to as sole proprietors) are sometimes required to have two identification numbers--a Social Security Numbers for their individual income tax returns and an Employer Identification Number for their business returns. According to the Internal Revenue Serviced (IRS), sole proprietors are among the worst groups in terms of reporting all income. This report discusses whether IRS (1) accurately cross references the two identification numbers that self-employed persons report and (2) needs to take steps to improve the accuracy of its cross-reference files.

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