A new government report is instructing the Internal Revenue Service to improve its tracking of credit and debit card purchases to stop discrepancies with income claimed on tax returns.
The report, by the Treasury Inspector General for Tax Administration, estimated that the beefed up information reporting requirement would collect an extra $10 billion a year in tax revenue, AccountingToday.com reports.
The Housing and Economic Recovery Act of 2008 required banks and third-party payment settlement organizations to track debit and credit card payments and report them to the IRS. The IRS would then match the information with the income that business taxpayers report.
Efforts to improve tax compliance have been difficult to operate and the new report acknowledged that in order for the requirement to be effective, millions of additional information reporting documents would have to be added to IRS' computer systems.
TIGTA’s report also recognized that the IRS's new tax year 2011 income tax forms may not match between the sales reported on Forms 1099-K and the amounts reported on tax returns, AccountingToday.com reports.
“We found that improvements must be made if this effort is to function as intended, which is to help reduce the tax gap,” TIGTA Inspector General Russell George said, according to AccountingToday.com. “Based on our finding, the IRS immediately made adjustments to one tax form and is reviewing the other affected forms to make similar improvements.”
Merchants that do not ultimately provide a valid taxpayer identification number and a name to match IRS records will face a “backup withholding” as the law requires payment settlement entities to withhold a percentage of gross.
IRS officials agreed with the report’s recommendations and said they are planning appropriate corrective actions.