Suspecting that businesses are failing to pay taxes on billions of dollars of profits, the General Accounting Office is auditing a nationwide sample of U.S. companies to determine whether there is widespread underreporting of business-investment income on federal tax returns.
A pilot GAO audit conducted earlier this year showed that 54 percent of the companies in the study failed to report all their investment income.
Congressional sources said they expect that, based on the pilot study, the national audit of 1,200 companies will give a better idea of how much tax revenue is lost annually because of underreporting of investment income by all types of businesses.
Since the early 1960s, the Internal Revenue Service has used a compliance program -- now largely computerized -- to compare individual taxpayers' returns with the documents reporting wages, interest, dividends and certain deductions that are filed by employers, banks and the like.
The IRS has no such information-matching program for business, because the agency said it would be too complicated to compare business-tax returns with other forms reporting income.
Rep. Doug Barnard Jr. (D-Ga.), chairman of the House subcommittee on commerce, consumer and monetary affairs, called the IRS' reluctance to include business in the document-matching program "indefensible." Barnard said failure to use the program, which he described as the IRS' "most effective tax-compliance mechanism," assures the "continuing loss of hundreds of millions and probably billions in tax revenues properly due the U.S. Treasury."
Barnard added, "It says to the American taxpayer that the IRS has a double standard of enforcement -- a tough one for individual taxpayers and a forgiving one for business taxpayers."
Barnard said that if the results of the GAO's national survey of corporate tax noncompliance are comparable to findings in the pilot study, his subcommittee not only will hold further hearings but also will expect the IRS to implement a full document-matching program for business-investment income.
The nationwide GAO audit of business returns requested by Barnard's subcommittee in May is expected to be completed by June 1987.
The previous pilot study looked at the returns of 91 corporations and 14 partnerships on the West Coast. Forty-nine of the 91 corporations in the sample failed to list all their income from investments, neglecting to report slightly more than $1 million in interest and dividend income.
The study also found that half of the 14 partnerships failed to report all income from interest and dividends. More than 20 percent of the $1.3 million in interest and dividends earned by the 14 partnerships was left off their tax returns.
Subcommittee staff members expect the GAO's national survey to yield findings comparable to those contained in the pilot study. "Even if it comes out to be only 10 percent compared with 54 percent in the pilot study , we're still talking megabucks" in lost tax revenue, said one aide working on the project.
In 1983 -- the latest year for which information is available -- U.S. corporations earned $500 billion in interest- and dividend-investment income, according to the IRS. Partnerships and sole proprietorships earned an additional $49 billion. But because the IRS audits less than 3 percent of all corporate-tax returns and less than 2 percent of those from partnerships, there is no way of knowing how much investment income was reported by those corporations and sole proprietorships, staff members of Barnard's subcommittee maintain.
Congress has criticized the IRS for failing to develop a system that would enable it to reconcile business-tax returns with investment-income information provided by third parties.
IRS officials could not be reached for comment on the request for the GAO study or on the IRS's lack of a document-matching program for business. In testimony before Barnard's subcommittee in April, an IRS official defended the disparity, noting that problems in developing a document-matching program for business have been "insurmountable."
IRS officials testified in April that the agency expects to collect $3 billion in additional taxes in 1986 as a result of underreporting discovered through the document-matching program for individual taxpayers. Based on those projections, the subcommittee is convinced that a document-matching program for business-investment income is likely to produce substantially more tax revenue.
In testimony before the subcommittee last spring, however, Philip E. Coates, an associate commissioner at the IRS, reacted strongly to suggestions that weaknesses in the present system may contribute to the loss of billions of dollars in tax revenue.
Although he acknowledged that the business-income reporting program "is not perfect," Coates said, "if it were perfect, it would undoubtedly yield millions of dollars in additional revenue." But even under the best of circumstances, "we do not believe that there is any evidence that billions of dollars of revenue are lost due to program weaknesses," he added.
IRS representatives have told the subcommittee that several problems preclude development of a document-matching program for business:
About 60 percent of business taxpayers file returns based on a fiscal year rather than on the calendar-year basis used by individuals.
Many businesses use the accrual method of accounting, whereas income-information documents reflect a cash-accounting method.
Some business taxpayers receive information returns under several different names, including those of subsidiaries and affiliated entities, but report their income under one name.
While the IRS will continue to explore an expansion of the information-returns program, the agency said that routine examination of tax returns will continue to be its major emphasis in monitoring business-investment income.