IRS Says Firms Cheat U.S. Out of $1 Billion

The government is losing more than $1 billion a year in tax revenue because businesses don’t report all their interest and dividend earnings, Internal Revenue Service Commissioner Lawrence B. Gibbs said Tuesday.

Gibbs provided the revenue loss estimate to a House subcommittee that has been urging the IRS to begin using an enforcement technique on businesses that it has been using on individuals for years.

The technique, matching income tax returns with statements of interest and dividends paid by corporations, banks and other financial institutions, produced $3 billion in additional income taxes from individuals in 1986, said Rep. Doug Barnard Jr. (D-Ga.).

Barnard, chairman of the House Government Operations subcommittee on commerce, consumer and monetary affairs, told Gibbs that the agency’s failure to use a similar matching program on business tax returns raises questions about fairness in tax enforcement.

“I think the element of fairness is going to generate some real strong feeling from taxpayers, and well it should,” Barnard said.

Gibbs told the panel that the IRS will study the cost-effectiveness of starting a document-matching program for business returns.

Based on audits the IRS has conducted of corporate tax returns, Gibbs said he would estimate that less than 1% of interest and dividend income is unreported. But even at that rate, he said, the government would be losing $1 billion a year.

Similar audits on returns filed by single-owner businesses indicate that about 4.8% of interest and dividend income goes unreported, Gibbs said. That translates into an annual revenue loss of $164 million.

The IRS commissioner said he plans to expand the matching program now used to check individual returns for underreporting of investment income to include checks on such underreporting by single-owner businesses.