We have two concerns about the information that IRS maintains on taxpayers who claimed more than 10 withholding allowances or exemption from federal tax withholding that precluded us from using it to respond to Representative Gallegly’s questions. First, we are concerned about the completeness of the information because a significant number of employers may not send IRS the required forms. According to IRS’s information, about 75 percent of the large employers with 1,000 or more employees in its Large and Medium-Size Business (LMSB) and Small Business/Self-Employed (SB/SE) divisions that filed employment tax returns in tax year 2001 did not send IRS any forms. Although the number of questionable Form W-4s IRS might receive from individual employers can vary, it seems unlikely that 75 percent of employers with 1,000 or more employees could have no employees who submitted questionable Form W-4s. Second, some of the information may not be current--it may not reflect the current withholding status of some taxpayers. If an employee who previously claimed more than 10 allowances or claimed exemption from federal income tax withholding submitted a new Form W-4 claiming 10 or fewer allowances or not claiming exemption from withholding, the database would continue to show the earlier information. There is no requirement for employers to submit Form W-4s other than those claiming 10 or more allowances or exemption. We could not quantify the significance of our concerns about the reliability of IRS’s data; however, the uncertainty about how complete and current the data were precluded us from using them to respond to Representative Gallegly’s questions.

Click here for the full GAO Report, PDF Version, 13pgs. 1.5M