Tax News

CCH (cch.taxgroup.com) reports:

  Requiring federal tax compliance to obtain a state business license can help boost tax collection, the Government Accountability Office (GAO) reported on July 16 ("Tax Compliance: Opportunities Exist to Improve Tax Compliance of Applicants for State Business Licenses (Reference Number: GAO-09-569)"). The GAO examined data-sharing arrangements between the IRS and several states at the request of the Senate Finance Committee.

State Requirements

  The GAO contacted all 50 states and the District of Columbia to inquire if they require tax compliance for business licenses. Twenty states responded that they require compliance with state taxes to obtain a state business license. These requirements exist for one or more industries. Another 20 states reported that they do not require tax compliance for state business licenses. Eight states had no business license requirement at the state level.

California

  The GAO examined in detail the data-sharing arrangement between the IRS and California. Applicants for California business licenses in three industries (farm labor contracting, garment manufacturing and car washing and polishing) must be compliant with federal employment tax obligations. Applicants submit a state business license application and IRS Form 8821, Tax Information Authorization. IRS examiners in Ogden, Utah, check the employment tax status of the applicant. The IRS informs California if the applicant is compliant or not.

  Between 2006 and 2008, the IRS told California that roughly 24 percent of applicants needed to take action to become compliant with their federal employment tax obligations. In some cases, individuals had to file employment tax returns. Collaboration between the IRS and California resulted in the collection of more than $7 million in additional federal revenues.

Compliance

  According to the GAO, the data-sharing arrangement between the IRS and California has been a valuable tool for improving compliance. "Requiring tax compliance makes the businesses think about the consequences of not being tax compliant." Additionally, the data-sharing arrangement can be viewed as a deterrent. "Individuals will learn that they cannot secure a state business license without being compliant in all their tax obligations."

  "This report confirms my initial thinking that we can improve tax compliance through better cooperation between the IRS and state licensing boards," Sen. Max Baucus, D-Mont., said in a statement. Sen. Charles E. Grassley, R-Iowa, urged the IRS to work with all the states on arrangements similar to its data-sharing program with California.

  By George L. Yaksick, Jr., CCH News Staff

GAO Report: Tax Compliance: Opportunities Exist to Improve Tax Compliance of Applicants for State Business Licenses (Reference Number: GAO-09-569)

Senate Finance Committee Release: Baucus, Grassley Call for Federal-State Cooperation in Improving Tax Compliance