Tax Administration: Data on the Tax Compliance of Sweatshops (Fact Sheet,
09/23/94, GAO/GGD-94-210FS).

The problem of sweatshops in the garment industry has not improved in
recent years, largely due to weaknesses in labor laws, fewer enforcement
resources, and an increase in the number of employers.  Further,
sweatshops often fail to comply with federal and state tax laws.  This
report focuses on the tax issue.  GAO identifies (1) the extent to which
sweatshops in these industries complied with federal and state tax laws
and (2) the efforts and resources that the Internal Revenue Service and
states used to correct sweatshop noncompliance.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-94-210FS
     TITLE:  Tax Administration: Data on the Tax Compliance of Sweatshops
      DATE:  09/23/94
   SUBJECT:  Labor law
             Tax law
             Compliance
             Law enforcement
             Clothing industry
             Food industry
             Tax violations
             Federal/state relations
             Audits
             Tax nonpayment
IDENTIFIER:  California
             New York
             IRS Audit Specialization Program
             IRS Market Segment Specialization Program
             DOL Targeted Industries Partnership Program
             
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Cover
================================================================ COVER


Fact Sheet for the Chairman, Commerce, Consumer, and Monetary Affairs
Subcommittee, Committee on Government Operations, House of
Representatives

September 1994

TAX ADMINISTRATION - DATA ON THE
TAX COMPLIANCE OF SWEATSHOPS

GAO/GGD-94-210FS

Tax Compliance of Sweatshops


Abbreviations
=============================================================== ABBREV

  ASP - Audit Specialization Program
  DOL - Department of Labor
  EDD - Employment Development Department
  EIN - employer identification number
  IRS - Internal Revenue Service
  MSSP - Market Segment Specialization Program
  OSHA - Office of Safety and Health Administration
  TIPP - Targeted Industry Participation Program

Letter
=============================================================== LETTER


B-258413

September 23, 1994

The Honorable John M.  Spratt, Jr.
Chairman, Commerce, Consumer, and
 Monetary Affairs Subcommittee
Committee on Government Operations
House of Representatives

Dear Mr.  Chairman: 

This fact sheet responds to your request that we examine compliance
with federal and state tax laws by sweatshops in the garment and
restaurant industries.  You asked us to identify (1) the extent to
which sweatshops in these industries complied with federal and state
tax laws and (2) the efforts and resources that the Internal Revenue
Service (IRS) and states used to correct any sweatshop noncompliance. 
Businesses that reduce their costs by not complying with tax and
other laws pose an unfair competitive threat to businesses that do
comply. 

Experts have commonly described sweatshops as establishments
employing workers at low wages, for long hours, under poor and unsafe
working conditions.  They usually violate labor and safety laws. 
They also may not comply with laws on paying employment (i.e.,
unemployment, social security, medicare, and withheld income taxes)
and income taxes.  When businesses do not properly pay and report
wages, they can violate both labor and tax laws. 

Federal laws and regulations do not define a sweatshop.  Building on
previous research, we defined a sweatshop as a business that violates
more than one federal or state law governing wages and hours, child
labor, health or safety, workers' compensation, or industry
registration.  The Department of Labor (DOL) and the Occupational
Safety and Health Administration (OSHA) regulated such laws at the
federal level. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :1

In trying to identify sweatshops' tax compliance, we found that IRS
and state databases captured tax data for various types of businesses
but not for sweatshops.  According to IRS officials, the term
"sweatshop" refers to those violating labor, health, and safety laws,
not tax laws.  Without such tax data, we could not measure the
overall tax compliance for sweatshops.  Instead, we collected federal
and state data on elements of tax compliance for a group of
sweatshops.  The scope of our work precluded us from projecting these
results to any population of sweatshops. 

Using our definition of multiple violations of federal or state laws,
we identified and collected tax data on a group of 69 garment
sweatshops from three sources:  (1) nationwide DOL and OSHA data, (2)
a 1994 DOL study on California garment businesses, and (3) a New York
state task force on garment businesses.  For each source, we matched
data on violations of labor laws and health/safety laws to identify
the sweatshops. 

We selected California and New York because they each had recent data
on garment businesses as well as reputations for having more garment
sweatshops than other states.  We also identified 26 restaurant
sweatshops from the national source but could not do so for the other
two sources due to the garment industry focus at the two states. 

For sweatshops in our study group, we sought IRS and state data on
elements of tax compliance.  For tax years 1990 through 1993, the
data showed whether they (1) filed income and employment tax returns
on time, (2) paid acknowledged tax liabilities on time, and (3)
accurately reported their taxes. 

IRS provided complete tax data for the 94 garment and restaurant
businesses that met our sweatshop definition.  Because of our scope
and time constraints, we only sought state tax data from California
and New York.  California and New York were able to provide data on
the filing of state tax returns but not on the two other elements. 
Finally, we could not get state data on 21 of the 26 restaurant
sweatshops because they were located in states other than California
and New York. 

To identify efforts and resources to correct tax noncompliance by
sweatshops, we interviewed IRS, California, and New York officials
responsible for compliance.  Because IRS and state databases did not
identify sweatshops, data on resources were sparse.  The officials
could discuss efforts to improve tax and labor law compliance in
industries that may have sweatshops. 

We did our work between April 1994 and September 1994 in accordance
with generally accepted government auditing standards.  Appendix I
has more details on our objectives, scope, and methodology. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Although no data existed on the overall tax compliance of sweatshops,
our work showed that many of those in our study group failed to
comply with one or more elements of federal or state tax laws. 
Furthermore, these violators of labor and health or safety laws had a
tendency to violate federal or state tax laws. 

For example, of the 94 garment and restaurant sweatshops we studied,
84 (about 89 percent) were assessed at least one penalty for filing
returns or paying their taxes late in one or more tax years between
1990 and 1993.  As of mid-1994, 30 sweatshops still owed tax
liabilities of $492,000.  Because comparable tax data were not
available for other types of businesses, we could not determine
whether they complied better or worse in filing tax returns and
paying taxes. 

IRS identified most of these tax liabilities through audits, which
offer the most comprehensive way to identify noncompliance.  IRS had
audited just 15 of the 94 sweatshops at least once during the 4 years
we analyzed.  Because the other 79 sweatshops had not been audited,
their amounts of additional tax liabilities are limited to
noncompliance caught through less comprehensive IRS enforcement
actions, such as computer matching. 

Lacking tax data on sweatshops, IRS and the two states could not
focus enforcement efforts on pursuing any unpaid income taxes of
sweatshops.  In general, tax officials at IRS and the two states said
they applied their limited enforcement resources to industries that
tended to have larger amounts of unpaid income taxes.  IRS officials
said these industries are an enforcement priority and may include
sweatshops, such as garment businesses. 

For example, IRS and the two states had directed enforcement efforts
at the garment and restaurant industries but not at the tax
compliance of sweatshops.  The state efforts tended to focus on
violations of labor laws rather than tax laws.  IRS' efforts included
developing a nationwide audit program for the garment industry and
hiring a national garment manufacturing specialist to coordinate that
effort.  IRS also organized a group in Los Angeles to address tax
noncompliance in this industry and was planning similar groups in
other states. 

Officials at DOL and the two states generally favored working with
IRS on joint compliance projects, such as for garment sweatshops. 
Such joint efforts could improve compliance with all laws, including
tax laws.  The federal tax code, however, restricts IRS' ability to
share tax data in joint efforts. 

Appendix II provides more details on aspects of tax compliance with
federal and state laws by the sweatshops we studied.  Appendix III
discusses the federal and state efforts to address tax noncompliance
by garment sweatshops. 

We received comments on a draft of this fact sheet during a September
14, 1994, meeting with IRS Examination officials, who represented the
Assistant Commissioner for Examination and who oversaw the audits of
garment and restaurant businesses.  They generally agreed with our
depiction of the facts but offered clarifications that we
incorporated where appropriate. 


---------------------------------------------------------- Letter :2.1

As agreed with the Subcommittee, unless you publicly announce the
contents of this fact sheet earlier, we plan no further distribution
for 30 days.  At that time, we will send copies to the Secretary of
the Treasury, the Commissioner of Internal Revenue, and other
interested parties.  We will also provide copies to others upon
request. 

Appendix IV lists the major contributors to this fact sheet.  If you
have any questions, please feel free to call me at (202) 512-9044. 

Sincerely yours,

Natwar M.  Gandhi
Associate Director, Tax Policy
 and Administration Issues


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

Our objectives were to identify (1) the extent to which sweatshops in
the garment as well as restaurant industries complied with federal
and state tax laws, and (2) the efforts and resources that the
Internal Revenue Service (IRS) and states used to correct any
sweatshop noncompliance. 

In attempting to answer the objective on tax compliance, we found
that no federal or state data existed on the overall tax compliance
of sweatshops because the term "sweatshop" refers to labor law rather
than tax law.  Therefore, we developed surrogates.  First, we
compiled a list of sweatshops in the garment and restaurant
industries by applying our sweatshop definition (i.e., multiple labor
law violators) to three sources.  The first source identified
sweatshops nationwide.  The other two sources covered two large
states (California and New York) where sweatshops were likely to
exist in larger numbers than elsewhere according to DOL.  Second, we
analyzed specific elements of tax compliance for sweatshops in our
list. 

To identify sweatshops from the national source, we used nationwide
databases from DOL and OSHA on businesses that violated labor and
health/safety laws, respectively.  Each database contained business
names and addresses for fiscal years 1990 through 1993.  To apply our
definition of a sweatshop, we manually compared business names and
addresses on the databases to find those with both types of
violations.  For the garment industry, we compared 123 DOL violators
with 1,151 OSHA violators; for the restaurants, we compared 6,735 DOL
violators with 2,309 OSHA violators.  These comparisons produced 5
garment and 44 restaurant sweatshops. 

We supplemented our nationwide sweatshop list by identifying
California and New York sweatshops.  We chose these two states not
only because they reputedly had more sweatshops than other states but
also because recent data existed on garment sweatshops in both
states.  However, neither state had recent data on restaurant
sweatshops. 

To identify the California sweatshops, we used data from a 1994 DOL
study.  DOL randomly selected 121 of 4,186 garment businesses
identified by the California Employment Development Department (EDD),
which is responsible for state unemployment taxes.  DOL eliminated 52
businesses that could not be located, had gone out of business, or
were not directly involved in the garment industry.  DOL investigated
the remaining 69 businesses for labor and health/safety violations. 
On the basis of violations cited by DOL, we found that 54 of the 69
businesses met our definition of a sweatshop (i.e., more than one
type of violation). 

The third source of sweatshop data came from the Apparel Industry
Task Force at the New York Department of Labor.  In focusing on labor
law compliance, the task force created a list of garment businesses
that had violated labor laws on the basis of 1,300 inspections.  To
identify sweatshops under our definition, we manually compared the
New York list of labor violators to DOL and OSHA lists of business
violators in the garment industry.  This comparison identified 28
garment sweatshops, which included 1 sweatshop that we identified
from the national source. 

After accounting for this New York case, we identified 130 sweatshops
from the three sources--86 garment and 44 restaurant sweatshops. 
These sources, however, rarely provided an employer identification
number (EIN).  We needed the EIN to obtain data from IRS and the two
states on the elements of tax compliance (e.g., timely filed returns,
accurately reported income).  For businesses without an EIN, we asked
IRS to research its databases, using the business name and zip code
that we provided, to find any EINs.  We eventually eliminated from
further analysis 28 of the 130 sweatshops for which no EIN could be
found.\1

The remaining 102 sweatshops with EINs included 26 restaurants and 76
garment firms.  For the 102 sweatshops, we requested IRS tax
transcripts for tax years 1990 through 1993.  The transcripts
identified whether the businesses filed all required income and
employment tax returns and paid all related taxes on time.  They also
showed whether IRS took some type of enforcement action, such as an
audit or computer matching for unfiled returns or unreported income. 
After reviewing IRS' data, we dropped from our analysis seven
sweatshops that had been recently established (i.e., winter
1993-1994) and one that IRS had not recorded as having a requirement
to file a tax return.  We based our analysis on the remaining 94
sweatshops. 

Given the scope and time constraints, we attempted to collect state
tax data for the 67 sweatshops located only in California and New
York.  For the 46 sweatshops in California, the state could provide
data on whether 44 of them filed their tax returns.  New York could
not provide specific tax data on each of the 21 New York sweatshops
because a state law prohibited such disclosures.  As an alternative,
we asked for and received aggregated tax data on the 21 New York
sweatshops.  State tax data on the 26 restaurant sweatshops were
especially sparse.  We could only collect state tax data on 3 of the
5 restaurants located in California; the remaining 21 restaurants
were in states other than New York. 

We then analyzed the federal and state tax data.  For each type of
tax for each year, we determined the amount of additional taxes,
penalties, and interest that IRS assessed against the businesses.  We
also identified the amount of tax delinquencies outstanding as of
mid-1994.  Given the lack of a sweatshop universe and the small
number of cases analyzed, our results cannot be projected to any
larger population. 

To identify efforts and resources for correcting tax noncompliance
among sweatshops, we interviewed responsible tax officials at (1)
IRS' National Office, Western Regional Office, and Los Angeles and
Manhattan district offices and (2) California and New York state tax
agencies.  Data on such resources were sparse because IRS and state
databases did not identify sweatshops.  Even so, these officials
could discuss efforts to improve labor and tax law compliance,
particularly with labor laws, in industries that have tended to have
sweatshops. 

We also discussed the opportunities for and status of any joint
compliance efforts among IRS, DOL, and the two states.  As part of
this effort, we analyzed the results of two 1994 joint investigations
of garment sweatshops by DOL and California. 


--------------------
\1 Those without EINs could be nonfilers of tax returns or could
reflect inaccuracies in the way the business reported or IRS recorded
an EIN. 


IRS AND STATE ENFORCEMENT SHOWED
THAT SWEATSHOPS TENDED TO BE
NONCOMPLIANT WITH FEDERAL AND
STATE TAX LAWS
========================================================== Appendix II

IRS tax data did not allow us to determine the overall tax compliance
of sweatshops.  These data did allow us to determine whether the
sweatshops in our group complied with selected tax elements.  We
determined whether these sweatshops (1) timely filed all required
income and employment tax returns, (2) timely paid all acknowledged
tax liabilities on these returns, and (3) accurately reported their
taxes.  Table II.1 shows our results on the filing and paying
elements of federal tax compliance. 



                          Table II.1
           
           Compliance With Federal Tax Elements on
            Filing Returns and Paying Taxes for 94
             Garment and Restaurant Sweatshops by
           Type of Tax Return, Tax Years 1990-1993

                        Employment  Unemployment
                               tax           tax  Income tax
Tax element              returns\a     returns\b   returns\c
--------------------  ------------  ------------  ----------
Timely filed                    62            74          90
Not timely filed                32            20           4
Nonfilers\d                     13             8           4
Timely paid                     20            57          61
Not timely paid                 74            37          33
------------------------------------------------------------
Note:  Numbers are based on 94 completed cases. 

\a Employer's Quarterly Federal Tax Return (Form 941) delinquent in
one or more quarters during a 4-year period. 

\b Employer's Annual Federal Unemployment Tax Return (Form 940)
delinquent in 1 or more of the 4 years. 

\c Business Income Tax Returns (Forms 1065, 1120, and 1040 Schedule
C) delinquent in 1 or more of the 4 years. 

\d These nonfilers are a subset of all those not filing on time. 

Source:  IRS Business and Individual Master File transcripts. 

Table II.1 shows that many sweatshops did not comply with one or more
of these tax elements.  For example, of the 94 sweatshops, 32 did not
timely file their employment tax returns, of which 13 did not file at
all.  Including these 32, 74 did not pay employment taxes on time. 
Data did not exist to show whether other types of businesses complied
better or worse in filing returns and paying tax liabilities.  Table
II.2 shows the amounts of taxes, interest and penalties owed by the
sweatshops. 



                                    Table II.2
                     
                     Amounts of Federal Taxes, Penalties, and
                        Interest Owed Among 94 Garment and
                     Restaurant Sweatshops as of Mid-1994 by
                     Type of Tax Return, Tax Years 1990-1993

                              (Dollars in thousands)

                                  Employment  Unemployment
                                 tax returns           tax  Income tax
Type of liability                  returns\a     returns\b   returns\c     Total
-------------------------------  -----------  ------------  ----------  --------
Original tax reported            $644,528.0\     $13,533.7   $19,302.7  $677,418
                                           d                                  .4
Additional tax assessed               $300.7         $33.9      $514.2    $848.8
Interest and penalties                $323.3         $19.8        $9.8    $352.9
Total liabilities                     $624.0         $53.7      $524.0  $1,201.7
Amount still owed                   $435.1\e         $50.2        $7.1    $492.4
--------------------------------------------------------------------------------
Note:  Amounts are based on 94 analyzed cases. 

\a Employer's Quarterly Federal Tax Return (Form 941) delinquent in
one or more quarters during a 4-year period. 

\b Employer's Annual Federal Unemployment Tax Return (Form 940)
delinquent in 1 or more of the 4 years. 

\c Business Income Tax Returns (Forms 1065, 1120, and 1040 Schedule
C) delinquent in 1 or more of the 4 years. 

\d Includes two businesses that accounted for about $552 million. 

\e Part of this amount may not be actual liabilities because of
errors the business made in reporting or IRS made in recording the
employment tax information. 

Source:  IRS Business and Individual Master File transcripts. 

As shown in table II.2, about $492,000 is still owed IRS for the
three types of taxes.  We found that 30 of 94 sweatshops owed this
amount, or about $16,400 on average. 

In addition to what tables II.1 and II.2 show, we found that 84 of
the 94 sweatshops received one or more penalties for filing returns
and/or paying taxes late.  For example, IRS assessed delinquency
penalties against 37 of the 94 sweatshops for not filing the required
tax returns during tax years 1990 through 1993.  Of the 37, 25 still
owed $418,113 to IRS as of mid-1994.  As a result, these 25 accounted
for about 85 percent of the $492,000 still owed. 

The total amount of noncompliance could be greater across all 94
sweatshops.  We found that IRS audited 15 of the 94 sweatshops. 
Because they are more detailed than computerized checks of tax
returns, audits are likely to catch more noncompliance.  For example,
these 15 audits accounted for about $589,000 of the $848,800 (about
70 percent) in the additional taxes assessed for the three types of
taxes (see table II.2). 

In addition to the federal tax data, we were able to collect state
tax filing data from California on 41 garment sweatshops and 3
restaurants.  Of the 44 sweatshops, only 6 did not file state tax
returns.  The state data did not allow us to determine whether the
other 38 sweatshops filed a tax return on time or accurately or paid
taxes on time. 

We also collected aggregate state data on whether the 21 sweatshops
in New York had filed the required state tax returns.  New York
reported that 15 of the 21 had filed a tax return at one time but
were no longer filing, 1 had never filed a return, and 5 were
compliant.  New York state officials indicated that they would be
sending notices to the 15 that had stopped filing tax returns. 


EFFORTS TO CORRECT TAX
NONCOMPLIANCE OF SWEATSHOPS ARE
LIMITED
========================================================= Appendix III

Because IRS and California and New York state tax offices did not
track sweatshops, we could not measure the resources applied to
correct their tax noncompliance.  These tax authorities had no tax
compliance efforts directed at sweatshops.  IRS Examination officials
said that their enforcement efforts, given resource constraints,
focused on industries with large amounts of tax noncompliance and
that these industries may include sweatshops. 

IRS and the two states did have some efforts devoted to the garment
and restaurant industries.  IRS' efforts in the garment industry
tended to be small-scaled and did not target sweatshops.  California
and New York had efforts that focused on sweatshops but placed
greater emphasis on the garment rather than on the restaurant
industry and on labor law compliance rather than on tax law
compliance. 


   IRS' NATIONAL ENFORCEMENT
   EFFORTS
------------------------------------------------------- Appendix III:1

IRS had two nationwide projects that involved audits of garment
manufacturers and contractors.  A manufacturer coordinates all
aspects in producing and selling garments to retailers. 
Manufacturers may contract out certain functions such as cutting
fabric and assembling garments.  A contractor performs these or other
designated functions for a manufacturer.  Contractors receive a
negotiated payment per unit of work and have their own workforce,
machinery, and facilities. 

IRS did these two garment projects under its Audit Specialization
Program (ASP), which has evolved into IRS' nationwide Market Segment
Specialization Program (MSSP).\2 ASP audits addressed compliance in
particular types of businesses owned by individuals or corporations
and represented a small portion of all IRS audits.\3 For example, IRS
also audited garment businesses outside of ASP through its more
general audit programs. 

Table III.1 provides ASP audit results for fiscal year 1993.  It
shows that the two garment projects, compared to other projects,
tended to be relatively productive in the revenue generated per audit
and per audit hour.  None of the ASP projects isolated sweatshops or
covered restaurants, except for fast food operations.\4



                         Table III.1
           
             IRS Audit Results for ASP Projects,
                       Fiscal Year 1993

                        Number
                            of
                        return  Recommended          Revenue
                             s      revenue  Revenu      per
                        audite          (in   e per    audit
Type of ASP project          d    millions)  return     hour
----------------------  ------  -----------  ------  -------
Auto dealers             2,593        $27.1  $10,46     $380
                                                  0
Construction\a           2,354         57.0  24,235      988
Motion pictures            773          1.7   2,154      201
Gas retailers              730         15.2  20,789      779
Laundromat                 575          1.3   2,294      123
Health care                523         10.5  20,106      721
Garment\b                  518          8.2  15,845      836
Attorneys                  477          4.0   8,366      393
Commercial fishing         249          2.7  10,972      844
Taxi cabs                   67          1.7  25,738    1,422
Travel agencies             60           .2   2,555      169
Fast food                   50           .2   4,049      149
Other\c                    181          3.0  16,343    1,078
============================================================
Total                    9,150       $132.8  $14,51    $ 628
                                                  5
------------------------------------------------------------
Note:  We collected preliminary ASP results for part of fiscal year
1994.  Although incomplete, 1994 results generally indicated that
IRS' audits have generated about 33 percent more revenue per audit
hour and per return compared to 1993.  Partial-year results for
garment audits generally increased at similar rates. 

\a Includes two construction projects. 

\b Includes two garment projects. 

\c Includes seven projects:  air charter, bed and breakfast,
trucking, mortuaries, reforestation, rehabilitation tax credit, and
wine industry. 

Source:  IRS Table 37, Category VIII Projects, nationwide, fiscal
year 1993. 


--------------------
\2 IRS is starting to develop its enforcement efforts around market
segments (e.g., particular types of taxpayers or businesses).  Under
MSSP, IRS is developing expertise on each segment as well as unique
ways to address related compliance issues. 

\3 IRS did 1.3 million audits of all types of tax returns (largely
individual and corporate) in fiscal year 1993 (the most recent year). 
These audits recommended $23.1 billion in additional revenue (i.e.,
taxes and penalties), or $17,751 per audit.  On the other hand, IRS
did 9,150 ASP audits and recommended $132.8 million in additional
revenue, or $14,514 per audit. 

\4 IRS has been developing a special audit guide for the whole
restaurant industry. 


   IRS' LOS ANGELES DISTRICT
   OFFICE PROJECTS
------------------------------------------------------- Appendix III:2

IRS' Los Angeles District Office has a project on the garment
industry.  Compared to ASP projects, this project is more likely to
deal with sweatshops.  Specifically, the district is working with the
Franchise Tax Board, EDD, and the Department of Labor Standards in
California and with DOL and the U.S.  Immigration and Naturalization
Service to identify compliance problems with garment contractors in
Los Angeles County.  IRS officials believe that this project,
although fairly new, has the potential to improve tax compliance in
the garment industry. 

To address tax compliance in the garment industry, the district first
researched IRS records to identify garment manufacturers that had
made large payments to contractors.  District staff then reviewed
these contractors' tax returns to identify those least likely to be
compliant and worthy of an audit. 

This district also has an outreach program to educate garment
employers on federal tax responsibilities.  IRS officials said that
about 100 members of the Chinese Garment Association of Southern
California attended a seminar hosted by Chinese-American revenue
agents from IRS.  The agents emphasized the importance of complete
and timely business records and tax returns.  IRS officials said IRS
plans to hold similar seminars with the Hispanic community in
conjunction with the Garment Workers' Justice Center and the
Coalition of Apparel Industries. 

IRS is developing similar garment projects with Florida, New York,
New Jersey, and Texas.  These IRS projects are being coordinated by a
nationwide garment manufacturing specialist.  In addition, IRS is
implementing several joint projects with states on the restaurant
industry in Kansas, Oklahoma, Illinois, Virginia, New Jersey,
Louisiana, and Vermont, although the emphasis is on the tips paid to
workers. 


   STATE OF CALIFORNIA
------------------------------------------------------- Appendix III:3

California is participating in the Targeted Industries Partnership
Program (TIPP).  TIPP is a federal-state effort that involving DOL,
the California Department of Industrial Relations, and the California
EDD.  The objectives of TIPP follow: 

  Maximize enforcement and educational efforts by focusing on
     industries that regularly have violated labor laws and have
     employed significant numbers of lower paid employees. 

  Increase the level of voluntary compliance by educating employers
     on their employment responsibilities. 

  Prevent businesses that violate labor laws from putting other
     employers at a competitive disadvantage. 

Focusing on businesses with a history of violations, TIPP initially
targeted agriculture and garment manufacturing employers for a 2-year
pilot study that DOL began in November 1992.  In March 1994, DOL
issued a report on results from the first year.  The penalties
assessed by DOL and the state of California exceeded $4 million. 


   STATE OF NEW YORK
------------------------------------------------------- Appendix III:4

The New York State Department of Labor's Apparel Industry Task Force
has been attempting to correct labor noncompliance within the garment
industry.  State investigators can make unannounced raids on
suspected sweatshops.  Upon finding violations of state, local, or
federal laws, the task force attempts to alert the appropriate
regulatory agencies such as DOL's Wage and Hour Division and OSHA. 
This task force did about 1,300 inspections in fiscal year 1993 to
identify violators of labor and health/safety laws in the state. 


   IRS COORDINATION WITH OTHER
   AGENCIES
------------------------------------------------------- Appendix III:5

In reviewing IRS' efforts, we noticed that IRS rarely worked with DOL
to improve compliance among garment sweatshops.  DOL officials said
they would like to work more closely with IRS in joint efforts. 
Doing so could enhance tax as well as labor compliance efforts. 

IRS officials pointed out that a major barrier to joint projects is
Internal Revenue Code section 6103, which restricts IRS' ability to
share tax data.  As a result, IRS' partners in joint projects tend to
provide much more data than they receive.  According to DOL officials
in New York, coordination with IRS is limited.  For example, they
said they have referred two garment cases to IRS, but IRS has not
shared the results of any audit work on these cases because of the
disclosure law. 

This restriction on sharing tax data has hampered at least one joint
effort with DOL.  In it, DOL drafted a special memorandum of
understanding to govern information sharing and provided it to IRS
along with the results of its investigations of five garment
manufacturers that violated multiple labor laws.  According to IRS
officials, IRS could not share the results of the referred
investigations with DOL because of section 6103. 

Our work uncovered two examples in which information sharing and
joint efforts may be helpful.  For example, in tracking recent DOL
inspections of California garment businesses, we noted that DOL
collected data at each business on the number of employees and amount
of wages paid.  We compared the DOL data with data that these
businesses reported to IRS and California on tax returns.  We found,
in reviewing a February 1994 garment industry inspection, that DOL
recorded 40 employees at a business.  Yet our review of state tax
information revealed that the business only reported 2 or 3 employees
throughout the first quarter of 1994.  By not reporting all
employees, the business can avoid paying employment taxes as well as
meeting other requirements (e.g., minimum wages and hours). 

In another example, DOL fined the business for paying wages to its
employees of $265,700 in cash without withholding the required taxes. 
According to its July 1994 report, DOL provided this information to
IRS.  At the time we reviewed the federal tax data as of August 1994,
IRS had not had time to act on this information.  IRS officials said
that this information may be useful in identifying withholding
noncompliance. 


MAJOR CONTRIBUTORS TO THIS FACT
SHEET
========================================================== Appendix IV

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Tom Short, Assistant Director, Tax Policy and Administration
 Issues

NEW YORK REGIONAL OFFICE

Richard T.  Borst, Senior Evaluator
George F.  Degen, Evaluator

SAN FRANCISCO REGIONAL OFFICE

Ralph T.  Block, Assistant Director, Tax Policy and Administration
 Issues
Sharon K.  Caporale, Evaluator
Lou Roberts, Senior Evaluator
Kathleen E.  Seymour, Evaluator-in-Charge

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