IRS's business information return (Corporate 1099) program.

On June 19, 1992, Tax Executives Institute filed the following comments with the Internal Revenue Service on the burdens associated with the implementation of a business information return program. The comments were based on a survey of TEI members concerning the start-up and ongoing costs that corporations would incur in connection with a business information reporting and matching program both as payers and payees. The comments take the form of a letter from TEI President Reginald W. Kowalchuk to Thomas R. Burger, Sr., Chief of the IRS's Information Reporting Compliance Staff, and were prepared under the aegis of its IRS Administrative Affairs Committee, whose chair is Linda B. Burke of the Aluminum Company of America.

This letter responds to your request for Tax Executives Institute's assistance with respect to an IRS study to assess the costs and burdens of implementing a business information return program. Specifically, your staff provided us with a draft survey, which we in turn circulated to many of our members. The questionnaire sought information on the start-up and ongoing costs that corporations would incur in connection with a business information reporting and matching program both as payers and payees. For convenience, we shall use the term "business information return program" to refer collectively to proposals to impose both an information reporting obligation on persons making payments to corporations and a matching or reconciliation obligation on the corporate recipients of information returns.

Overview

As you know, Tax Executives Institute has long had concerns about the wisdom and efficacy of implementing a business information return program. We are certain that a program to require the filing of Forms 1099 in respect of payments to corporations would impose substantial costs and yield very little benefit to the tax administration system. Thus, we applaud and agree with the Internal Revenue Service's previous testimony in which Commissioners Gibbs and Goldberg forthrightly noted the costs, administrative problems, and limited utility of business document matching. We believe that this testimony -- which among other things affirmed the lack of any concrete data on the amount of unreported income -- persuasively demonstrated that such a program would be ill-advised, uneconomical, and unwarranted. Commissioner Goldberg's June 1991 testimony before the Subcommittee on Commerce, Consumer, and Monetary Affairs of the House Committee on Government Operations was especially effective. You will recall that Commissioner Goldberg distinguished the current individual information reporting system from proposals for a corporate program on the grounds that a corporate program would do little in advancing the IRS's goal of providing taxpayers with timely, accurate, and usable information with which they can file their returns. TEI was quite pleased that, during the Institute's annual liaison meeting with senior IRS officials earlier this year, new Commissioner Peterson reiterated that the Institute was "preaching to the choir" in voicing its concerns about business document matching.

Notwithstanding our opposition to a business information return program, we appreciate the IRS's desire to better quantify the relative costs and burdens that would be occasioned by such a program. Thus, we were pleased to have received the IRS's request for assistance. Before turning to the responses we received from our members, however, we wish to affirm our view that large, publicly held corporations do not fail to report income (and, specifically, any "study income" that would be reported on Form s 1099). Such companies are subject to stringent reporting requirements by government agencies and their financial statements must be reviewed and certified by independent auditors. This safeguard is complemented by the companies' lack of any incentive to underreport income for financial reporting purposes: they generally wish to report as much earnings as possible. What is more, financial controls represent a clear "audit trail" for IRS examiners to follow to confirm that income is correctly and completely reported. This is a point that the IRS itself has acknowledged, not only in its testimony before Congress but in its internal analyses.(1)

More relevant to the IRS's survey, a business information return program would present myriad practical obstacles (including special problems that would confront accrual and fiscal-year taxpayers, as well as affiliated groups of taxpayers) -- problems the IRS has effectively addressed in its congressional testimony. In light of the IRS's previous recognition of these problems and the ongoing nature of its current data-collection efforts, we were surprised and disappointed to see the press reports last week that "[al memorandum endorsing the concept of a limited information reporting program for corporations has been floated within the Internal Revenue Service" and that Dave Blattner, the IRS's Chief Operations Officer, "had endorsed the concept." BNA Daily Tax Report No. 111, at G-7 (June 9, 1992) (quoting Les Cummins). Again, we realize that the IRS's position was described as "evolving," but inasmuch as the survey data have not yet been analyzed, the issuance of the memorandum seems both premature and misdirected.

Limitations on the Data

With these comments as background, we now turn to the results of the survey. We begin with what we assume is an understandable and acceptable caveat: given the still-inchoate nature of proposals to implement a business information return program, the responses must be viewed as tentative and somewhat speculative.(2) Indeed, since taxpayers do not know with certainty the specific requirements of the program, they are unable to develop totally accurate budgets of what a program requiring the filing and reconciling of information returns will cost. As a practical matter, too, many TEI members to whom the Institute sent the questionnaire reported that constraints within their companies precluded them from devoting as much time and resources to answering the survey as they would like. Put another way, as important as the survey is, the demands placed on companies by the tax system "as it is today" took precedence over their efforts to estimate the costs and demands of the tax system "as it might be tomorrow." This is not to denigrate the IRS's effort to secure accurate "costing" information, but simply to explain why the response rate to the survey was not as high as the IRS (and the Institute) would have liked.

The aforementioned cost and budget restraints notwithstanding, the Institute did receive completed questionnaires from Adolph Coors Co., Aluminum Company of America, Amerada Hess Corp., Ashland Oil Co., COBE Laboratories, Inc., Halliburton Company, Intel Corp., MCI Communications Corp., M.D.C. Holdings, Inc., Mobil Corporation, and PPG Industries, Inc.

Summary of Survey Results

The responses we received confirm that the corporate community would incur substantial costs in establishing and administering a business information return program. These costs and burdens, moreover, would easily outweigh any benefits accruing to the recipients of the business information return system. The costs of implementing such a program would be substantial because systems are not currently in place to capture the necessary information and render it into a usable form. Computer hardware would have to be purchased or modified, and new software programs would have to be developed to implement the program. As previously suggested, the nature of the inquiry ("starting at ground zero") made it difficult for respondents to accurately estimate their start-up and annual costs. One result from the survey, however, is clear: the cost of implementing a business information return program would be substantial and there would be no benefit in terms of providing corporate taxpayers with timely, accurate, and usable information. Corporate taxpayers do not find any valid use for the Forms 1099 that they now receive; the control mechanisms they have in place are more than adequate to confirm the receipt of income. A corporate reporting system would simply add to the taxpayers' burdens.(3)

Specifically, the respondents reported that average start-up costs associated with generating and disseminating information returns by the payer would be $156 per report, and ongoing costs would amount to $51. If the taxpayer were required to reconcile the reports it receives, the costs of reconciliation by the payees would be even more out of whack: the average start-up cost of receiving (and reconciling) information returns was estimated to be almost $700 per report, whereas the annual maintenance expense would be nearly $90 per report.(4) Suffice it to say, TEI believes the estimates underscore why a business information return program is unacceptable, especially for the large corporate community in respect of which no significant compliance problems have been identified, let alone verified. TEI recognizes that the start-up costs, as well as annual maintenance costs, would probably decrease over time as software is developed by outside vendors and efficiencies are achieved. We continue to question, however, whether the costs could ever be brought into balance with the benefits achieved.

Respondents identified the following major obstacles to the implementation of a business information return program: (1) the use of fiscal-year ends by payees, (2) the use of the accrual method of accounting by payees, and (3) the receipt of information returns by subsidiaries or affiliates that relate to income reported on the parent company's income tax return.

Consider, for example, the range of problems associated with the calendar year/fiscal-year issue. Payers would have to modify their reporting systems to enable them to issue information returns on a fiscal-year basis. First, they would have to solicit information about fiscal year-ends from their payees. Then, they would have to contend with the reality that fiscal years do not always end on the last day of the month, that some companies have 13-week quarters, and that their fiscal years end on a different date each year (e.g., 52/53 week fiscal years). The cash basis/accrual basis issue presents another set of problems. Indeed, inasmuch as most corporations do not use the cash method of accounting, the utility of information returns in confirming their income is virtually nil. Perhaps the most pronounced concern that responding companies identified, however, is this: not only would the information returns they receive be useless but the resulting "mismatches" -- between reported income and "real" income (taking into account the fiscal year, the method of accounting, differences between gross proceeds and income, and differences between which entity receives the information return and which one reports the income for tax purposes) -- would consume valuable time and resources, with virtually no increased revenue flowing to the fisc. Indeed, since the cost of implementing and maintaining a business information return program would be deductible, the government would itself subsidize the corporate costs and, in fact, may come out a net loser in the bargain, without even taking into account its own costs.

Start-up Costs of Preparing Reports

The respondents estimated that start-up costs for generating and disseminating information returns under existing reporting laws (i.e., on a calendar-year, cash basis) would range from $10,000 to more than $1 million. The average cost per report would be almost $43. (The average cost would, of course, depend on the number of returns required to be filed.)

These projected costs would increase significantly if payers were required to issue reports based on the fiscal year of their payees. One company estimated a seven-fold increase in its start-up costs if it were required to issue corporate Forms 1099 on a fiscal-year basis; another predicted costs as high as $10 million. The average cost per report was estimated to be $156. The use of a transfer agent would likely increase these costs.

Annual Costs of Preparing Reports

The annual costs to a payee of administering a business information return program would not be insignificant. If information returns were to be generated and disseminated based on existing reporting rules, our members estimate annual expenditures would range from $7,000 to more than $300,000. The average cost per report would be almost $26.

For most companies, these costs would double if the reports had to be prepared based on the fiscal year of the payee. TEI's members predicted costs ranging from $35,000 to $600,000. The average cost to prepare each report would be $51.

Start-Up Costs for Receiving and Reconciling Reports

TEI members identified the reconciliation of payee statements received by a corporation as the major obstacle to cost-efficient implementation of the program. One large multinational, for example, estimated that its start-up costs for reconciling payee statements could run upwards of $18 million; another company predicted $10.4 million in initial expenses. As you know, the IRS itself has estimated the compliance costs for payees at $1 billion.

On the average, the respondents estimated that their companies would incur costs of almost $700 per report to set up the necessary systems for receiving and reconciling information returns.

Annual Costs of Receiving and Reconciling Reports

Among our respondents, the estimated annual costs of receiving reports under the current reporting rules ranged from $10,000 to $2 million. If payees received reports of payments on a fiscal-year basis, the annual costs would range from $30,000 to $2 million. The average per-return costs were estimated to be almost $88 under current reporting rules and almost $90 for fiscal-year reports.

Payer-by-Payer Breakdown

The start-up costs associated with the requirement that the payee provide a payer-by-payer breakdown on its return (similar to the Form 1040, Schedule B) ranged from $1,000 to $4 million. The annual costs of such a requirement would be from $1,000 to $1 million. These costs would be incurred in addition to the costs outlined in the previous two comments.

Benefits to Corporations

Responding corporations were unanimous in the view that a business information return program would produce no internal benefits to the payee corporation in confirming corporate income. In other words, it would not advance the goal of providing taxpayers with timely, accurate, and usable information with which they can file their tax returns. One respondent stated that if his company were required to reconcile information received from suppliers and vendors, his company "could hire 10 people to keep track of this mess and still not be certain we had it right."

As already explained, publicly held corporations (and other companies that have audited financial statements) already have adequate procedures and controls in place to account for all incoming cash. The results are monitored annually by both internal and external audit staffs. The receipt of corporate Forms 1099 would be superfluous. Worse yet, given the potential for mismatches -- because of cash vs. accrual and calendar vs fiscal year discrepancies, the character of income issues, basis and associated deductions, consolidated return questions, and special problems related to foreign transactions -- corporate information returns would likely prompt unnecessary requests for reconciliation, they would inject inefficiencies in a process that already works well. Indeed, the putative benefit to corporations can be succinctly summarized by looking at what corporations do now with the Forms 1099 they receive: They throw them out.

Conclusion

In summary, the results of the survey confirm that a business information return program would be ill-advised and would result in substantially higher costs and more complexity for the taxpayer and the government without contributing in any meaningful way to increasing voluntary compliance.

Tax Executives Institute appreciates this opportunity to assist the IRS in assessing the benefits and burdens of a business information return program. If you have any questions, please do not hesitate to call Linda B. Burke, chair of TEI's IRS Administrative Affairs Committee, at [phone] or Timothy J. McCormally or Mary L. Fahey of the Institute's professional staff at [phone]. (1) See, e.g., "Gross Tax Gap Trends According to New IRS Estimates," Statistics of Income Bulletin, Vol 9., No. 1, at 24 (Summer 1988) ("internal financial controls established by larger corporations to protect the interests of their stockholders make it difficult to hide corporate income from tax agencies"). (2) The Institute recognizes that some of the reported results seem counterintuitive. For example, the estimated annual costs of receiving and reconciling business information returns received on a calendar-year basis range from $10,000 to $2,000,000, whereas the range under a fiscal-year program was reported to be from $30,000 to $2,000,000. At first blush, it seems that the fiscal-year program should be easier (and less costly) to administer. Rather than "deconstruct" the various responses, however, we have decided to present them in their "unvarnished" form are subject to the caveat in the text. (3) A corporate reporting system may also have a "ripple" effect for state reporting purposes. (4) The survey seemingly assumes that a business information return system would require payees to reconcile the reports they receive to the income listed in the corporate tax return. Some question may exist, however, whether the IRS has the authority to impose such a requirement on a taxpayer in the absence of any evidence that its internal controls are inadequate. Hence, should a taxpayer resist an IRS request for a generalized reconciliation schedule, a court might reasonably conclude that the corporation's system of reporting controls are such that it should not be required to devote scarce resources to reconciling Forms 1099 for the IRS examination team.