GAO 

United States Government Accountability Office

Report to Congressional Addressees

RECOVERY ACT

IRS Quickly 

Implemented Tax 

Provisions, but 

Reporting and 

Enforcement 

Improvements Are 

Needed 

February 2010 

GAO-10-349 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

February 2010

RECOVERY ACT

IRS Quickly Implemented Tax Provisions, but 

Reporting and Enforcement Improvements Are 

Highlights of GAO-10-349, a report to Needed 

congressional addressees 

The American Recovery and 

Reinvestment Act of 2009 

(Recovery Act), was enacted to 

bolster the struggling U.S. economy 

at an estimated cost of $787 billion, 

of which more than a third was in 

the form of tax relief to the public. 

This report (1) describes the status 

of the Internal Revenue Service’s 

(IRS) implementation of Recovery 

Act tax provisions; (2) examines 

whether IRS captured or planned 

to capture data on the use of the 

provisions; (3) assesses IRS’s 

efforts to determine potential 

abuse of the provisions; and (4) 

discusses possible lessons learned 

for future tax administration. GAO 

analyzed IRS’s implementation and 

data-collection plans for each 

provision; reviewed IRS and 

Department of the Treasury 

(Treasury) risk-management 

documents; interviewed federal 

and industry officials; and focused 

on five provisions implemented in 

2009: Build America Bonds (BAB), 

Consolidated Omnibus Budget 

Reconciliation Act (COBRA), FirstTime Homebuyer Credit (FTHBC), 

Making Work Pay Credit, and Net 

Operating Loss carrybacks. 

What GAO Recommends

GAO suggests that the Congress 

consider (1) authorizing IRS to 

publish more BAB information and 

(2) granting IRS broader authority 

to correct errors during tax-return 

processing. GAO also recommends 

IRS obtain more information on 

BABs, enhance compliance with 

the COBRA provision, and prepare 

a report on Recovery Act lessons 

learned. 

IRS Quickly Addressed the Act’s Significant Implementation Challenges

The Recovery Act posed significant implementation challenges for IRS 

because it had more than 50 provisions, many of which were immediately or 

retroactively available and had to be implemented during the tax filing 

season—IRS’s busiest time. Some provisions affected the 2009 filing season 

(2008 tax year), while others mainly will affect the 2010 and 2011 filing 

seasons. IRS responded quickly to its challenges. For instance, within about 6 

months of the Recovery Act’s enactment, IRS had issued guidance or 

instructions for more than 80 percent of the provisions. 

Categorization of the Tax Provisions That IRS Had a Role in Administering

a

The actual value is nonzero but is rounded down to zero. 

b

This dollar total differs from the $288 billion used by the administration and posted on recovery.gov; it 

includes COBRA premium subsidies and economic recovery payments, because IRS is involved in 

administering them. 

However, responding quickly entailed tradeoffs, such as not making some 

computer changes to collect data, and subsequent improvements were 

required. For example, because of the compressed time to implement the 2009 

FTHBC, IRS did not make computer changes to collect data, including the 

home purchase date. Without such information, IRS was unable to easily 

distinguish 2008 and 2009 FTHBCs. Distinguishing between the two credits is 

critical because they involve different requirements, including whether and 

how the credit is to be repaid. IRS plans to verify the date of purchase on past 

claims and make any necessary adjustments when it begins enforcing 2008 

FTHBC repayment provisions. IRS also plans to make the computer changes 

needed to collect all significant data, including the home purchase date, from 

a revised form for 2009 claims.

IRS’s Data-Collection Efforts Have Limitations 

IRS went beyond its typical data-collection efforts and plans to collect some 

data to track many Recovery Act provisions. Specifically, IRS currently has 

detailed data-collection plans for 17 or about 31 percent of the provisions 

View GAO-10-349 or key components. For 

more information, contact Michael Brostek at 

(202) 512-9110 or brostekm@gao.gov. 
United States Government Accountability Office

Highlights of GAO-10-349 (continued) 

and 63 percent of the total estimated cost of the tax 

provisions. Initial collections did not fully or accurately 

capture the use of some provisions. In addition, very 

little of the data that IRS has collected on the tax 

provisions has been released publicly. 

As one example of limited data, neither IRS nor any 

other federal agency is collecting for publication the sort 

of information on BABs that the Congress required for 

the act’s spending projects. BAB projects can be very 

similar to those funded by Recovery Act spending 

projects, but the same transparency and accountability 

do not apply. If IRS were to collect such information, 

then it would need the Congress to grant it the authority 

to publish the information. State and local governments 

may issue an unlimited number of BABs through 

December 31, 2010, and all BAB proceeds must be used 

for qualified capital expenditures. As of January 1, 2010, 

state and local governments reported 443 BABs, which 

raised about $32.4 billion. One hundred and thirty-one 

BABs were issued for education, which were more 

issuances than for any other specified type of BAB. 

As another example, COBRA data will understate the 

number of individuals receiving health insurance. For 

instance, if COBRA premium assistance was paid for a 

former employee, his or her spouse, and one child, an 

employer would count that as one person provided 

assistance. According to IRS officials, the relevant form 

did not include dependents due to a short 

implementation time frame, space constraints on the 

form, and a desire not to overburden employers with 

additional reporting requirements. 

Provisions’ Economic Stimulus Effect Cannot Be 

Precisely Isolated

Similar to what GAO has found about the act’s spending 

projects, the tax provisions’ economic stimulus effect 

cannot be precisely isolated. Economists use evidence 

from macroeconomic forecasting models and models 

that extrapolate from historical data to assess stimulus 

effects. These approaches, however, are imprecise 

because historical experience may not apply well given 

the magnitude of the Recovery Act. The effect of some 

provisions on specific aspects of the economy may be 

described in general terms. For example, the Council of 

Economic Advisers noted that in addition to other policy 

actions affecting residential real estate, the FTHBC may 

have moderated construction-industry job losses. 

IRS Took Steps to Mitigate Abuse of Provisions, but 

Some Compliance Challenges Arose and Others Remain

As a result of IRS’s FTHBC prerefund compliance 

reviews, as of February 1, 2010, IRS had frozen about 

140,000 refunds pending civil or criminal examination, 

and, as of December 2, 2009, had identified 175 criminal 

schemes and had 123 criminal investigations open. 

Although IRS addressed some challenges with the 

FTHBC in these ways, it still needs to finalize a way to 

identify individuals who fail to report home sales and 

might be required to repay part of the credit because 

their homes ceased to be their principal places of 

residence within 3 years of purchase. A form already 

exists that could be used for this purpose—Form 1099-S, 

“Proceeds from Real Estate Transactions,” but it is not 

clear IRS could use the form for this purpose under 

current legislative authority. As GAO’s review ended, IRS 

identified third-party data that it expected to use and 

then evaluate the results. 

Similarly, IRS had not finalized actions to ensure that 

employers stop claiming the credit for COBRA premium 

subsidies when former employees are no longer eligible. 

A cost-effective option to help IRS with unresolved 

compliance issues exists—expanding a planned project 

to determine if employers are claiming the subsidies for 

longer than allowed. If they are, IRS could send all 

employers letters reminding them of their obligations 

and urging them to correct any errors they have made. 

Documenting IRS’s Recovery Act Lessons Learned and 

Expanding Its Authority, with Appropriate Controls, 

Could Improve Future Tax Administration

Issues IRS encountered in its Recovery Act experience 

could provide useful guidance for the future. Officials 

intend to do a lessons-learned study after the 2010 filing 

season but have yet to develop plans for doing so. 

In addition, IRS and taxpayers would have benefited if 

IRS had more statutory “math error authority” (MEA) to 

correct errors during tax-return processing when the 

Recovery Act was first implemented, rather than only 

after problems were identified. Authorizing such 

authority on a broader basis rather than case-by-case, 

with appropriate controls, could have several benefits to 

IRS and taxpayers; for example, it is an automated and 

low-cost means to protect revenue and avoid audits that 

are costly to IRS and burdensome to taxpayers. 

Agency Comments

The Commissioner of Internal Revenue agreed fully with 

two recommendations and agreed with the benefit of the 

third. He noted that the benefit of more BAB information 

would have to be balanced with the burden on BAB 

issuers but said IRS stood ready to implement the 

recommendation if the Congress authorized publication 

of the data. GAO believes this burden could be tempered 

by having a minimum reporting threshold or delaying the 

onset of requirements, as was done when similar 

reporting for charitable organizations was instituted. He 

also said that in those cases in which more MEA could 

be effectively deployed, IRS would welcome it. 
Page i GAO-10-349 

Contents 

Letter 1

Background 2

IRS Moved Quickly to Address the Recovery Act’s Significant 

Implementation Challenges 7

IRS’s Data-Collection Efforts Have Limitations, and the Tax 

Provisions’ Economic Stimulus Effect Cannot Be Precisely 

Isolated 13

IRS Took Steps to Mitigate Abuse of Provisions, but Some 

Compliance Challenges Arose and Others Remain 21

Documenting IRS’s Recovery Act Lessons Learned and Expanding 

Its Authority, with Appropriate Controls, Could Improve Future 

Tax Administration 27

Conclusions 31

Matters for Congressional Consideration 32

Recommendations for Executive Action 32

Agency Comments and Our Evaluation 33

Appendix I Background and Requirements of Selected Provisions 37 

Appendix II Objectives, Scope, and Methodology 43 

Appendix III The 54 Recovery Act Tax Provisions That IRS Has 

a Role in Administering 46 

Appendix IV IRS Data Collected on Four Tax Provisions in the 

Recovery Act 49 

Appendix V Comments from the Internal Revenue Service 52 

Appendix VI GAO Contact and Staff Acknowledgments 55 

 Recovery Act Tax Provisions 
Tables 

Table 1: Implementation Status of IRS’s 54 Provisions as of January 

12, 2010 9

Table 2: Results of IRS’s Recovery Act Data-Collection Planning 

Effort 14

Table 3: Estimated Multipliers for Selected Recovery Act 

Provisions 20

Table 4: Eligibility Requirements for the FTHBC 39

Table 5: Characteristics of the Five Provisions GAO Selected for 

Analysis Plus the HCTC 44

Table 6: Information about the 54 Recovery Act Provisions That 

IRS Has a Role in Administering 46

Table 7: Recent Selected IRS Data Collected on BABs 49

Table 8: Recent Selected IRS Data Collected on COBRA 50

Table 9: Selected IRS Data Collected on the FTHBC through 

November 21, 2009 51

Table 10: Selected IRS Data Collected on the HCTC through 

November 2009 51

Figures 

Figure 1: Categorization of the Tax Provisions That IRS Had a Role 

in Administering, with Number and Dollar Value of 

Provisions 4

Figure 2: Total JCT-Estimated Budget Effects of the 54 Recovery 

Act Provisions That IRS Has a Role in Administering, from 

Fiscal Year 2009 through 2019 5

Figure 3: Number of BAB Issuances by Type of Issue as of January 

1, 2010 50

Page ii GAO-10-349 Recovery Act Tax Provisions
Abbreviations 

AEITC Advance Earned Income Tax Credit 

AGI adjusted gross income 

AMT alternative minimum tax 

BAB Build America Bond 

CBO Congressional Budget Office 

CEA Council of Economic Advisers 

COBRA Consolidated Omnibus Budget Reconciliation Act 

FMS Financial Management Service 

FTHBC First-Time Homebuyer Credit 

GDP gross domestic product 

HCTC Health Coverage Tax Credit 

IRA individual retirement account 

IRS Internal Revenue Service 

JCT Joint Committee on Taxation 

MAGI modified adjusted gross income 

MEA math error authority 

MWPC Making Work Pay Credit 

NOL Net Operating Loss 

PBGC Pension Benefit Guaranty Corporation 

SB/SE Small Business/Self-Employed 

TAA Trade Adjustment Assistance 

TIGTA Treasury Inspector General for Tax Administration 

Treasury Department of the Treasury 

WOTC Work Opportunity Tax Credit 

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Page iii GAO-10-349 Recovery Act Tax Provisions
Page 1 GAO-10-349 

 

United States Government Accountability Office

Washington, DC 20548 

 

February 10, 2010 

Congressional Addressees 

The American Recovery and Reinvestment Act of 2009 (Recovery Act) is 

an estimated $787 billion initiative intended to address the most serious 

economic crisis since the Great Depression.1

 Although the Recovery Act 

primarily consists of new funding for programs and other investments 

designed to stimulate the economy, more than a third of the act consists of 

tax relief to the American public. The Recovery Act calls for 

unprecedented levels of transparency and accountability in how Recovery 

Act dollars are being spent, but information on the tax provisions is 

generally not included in mandatory Recovery Act reporting. We raised the 

issue of providing similar oversight of the tax provisions in previous 

testimony.2

 GAO reports and testimonies on the Recovery Act are available 

at www.gao.gov/recovery. 

As part of an effort to provide the Congress and others with relevant 

oversight information on the tax provisions in the Recovery Act, we 

performed this review under the Comptroller General’s authority to 

conduct evaluations. Our objectives were to (1) describe the status of the 

Internal Revenue Service’s (IRS) implementation of Recovery Act tax 

provisions; (2) analyze IRS’s plans to collect data on the provisions, 

examine whether and how IRS captured data on the use of selected 

provisions, and discuss the provisions’ overall effect; (3) assess IRS’s 

efforts to determine potential abuse of the provisions and IRS’s steps for 

minimizing it; and (4) discuss possible lessons learned for future tax 

administration. To meet our objectives, we obtained and analyzed IRS’s 

implementation and data-collection plans for each provision; reviewed 

IRS, Department of the Treasury (Treasury), and Treasury Inspector 

General for Tax Administration (TIGTA) planning, implementation, risk 

management, and other documents; and interviewed federal officials and 

industry representatives. 

We reviewed IRS’s plans and actions for 54 provisions that it had a role in 

administering. Of these, we focused our analysis on five provisions—Build 

1

Pub. L. No. 111-5, 123 Stat. 115 (Feb. 17, 2009). 

2

GAO, American Recovery and Reinvestment Act: GAO’s Role in Helping to Ensure 

Accountability and Transparency, GAO-09-453T (Washington, D.C.: Mar. 5, 2009). 

 Recovery Act Tax Provisions 
 

America Bonds (BAB), Consolidated Omnibus Budget Reconciliation Act 

(COBRA) premium subsidies, the First-Time Homebuyer Credit (FTHBC), 

the Making Work Pay Credit (MWPC), and net operating loss (NOL) 

carrybacks. We selected these provisions because they were all being 

implemented in 2009; included some that were among the largest in terms 

of estimated revenue loss; most were refundable, meaning that taxpayers 

may receive a tax refund even if they do not have any tax liability; and 

covered most of IRS’s categories of Recovery Act provisions.3

 We also 

reviewed a sixth provision—the Health Coverage Tax Credit (HCTC)—but 

limited our work to data-collection issues because we are doing a separate 

review of the HCTC, which is due in March 2010 as mandated by the 

Recovery Act. See the Background section or appendix I for a description 

of the provisions we reviewed. See appendix II for a full description of our 

scope and methodology. 

We conducted this performance audit from June 2009 through February 

2010 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives and found the IRS data we 

used reliable for the purposes of this report. 

IRS received approximately $197 million to implement 54 Recovery Act 

provisions.4

 The Joint Committee on Taxation (JCT) estimated that these 

54 provisions would cost about $325 billion between fiscal year 2009 and 

fiscal year 2019. (App. III shows the estimated cost of each provision.) 

JCT’s estimate can be reconciled with the Congressional Budget Office’s 

(CBO) estimate of $212 billion in reduced revenue and the administration’s 

$288 billion in tax relief shown on its Recovery Act Web site, 

recovery.gov.5

 JCT’s estimate includes the effect on the budget of 

provisions of the act administered through the tax code, but CBO’s $212 

Background 

 

3

See fig. 1 for a categorization of the tax provisions that IRS had a role in administering. 

4

As of January 29, 2010, IRS had obligated about $121 million of the $197 million for 

Recovery Act administrative expenses, with the majority of the money thus far used for 

HCTC. 

5

Recovery.gov is the official government Web site to help taxpayers track how Recovery 

Act money is being spent. 

Page 2 GAO-10-349 Recovery Act Tax Provisions
 

billion estimate, which is based on JCT’s estimate, includes only the effect 

on revenue collections. The primary difference is that CBO’s estimate does 

not include some provisions that result in additional federal outlays rather 

than only reduced tax collections. This occurs under several provisions 

when taxpayers can receive a refund even if they do not have any tax 

liability. On recovery.gov, the administration includes both categories to 

arrive at its estimate of $288 billion in tax relief. The JCT estimate of $325 

billion also includes the cost of COBRA and economic recovery payments 

provisions that IRS administers. 

IRS had a role in administering 54 Recovery Act provisions. However, IRS 

is not responsible for implementing all provisions included in the tax 

section of the Recovery Act, such as grants in lieu of credits and the New 

Markets Tax Credit. Grants were authorized because the effectiveness of 

particular credits was thought to be undermined by economic conditions; 

the grant provisions are administered elsewhere in Treasury. In a recent 

report, TIGTA’s count of Recovery Act provisions also differed from ours; 

for example, it included the New Markets Tax Credit, which is being 

administered by Treasury’s Community Development Financial 

Institutions Fund.6

To facilitate management of the provisions, as shown in figure 1, IRS 

grouped the provisions into six categories, with individual credits as the 

largest category by far in terms of dollars. A seventh category, withholding 

on government contractors, appears in the figure because it is being 

administered by IRS; however, IRS did not consider it to be a category 

because the Recovery Act only delayed the effective date for the 

withholding. 

 

6

TIGTA, Recovery Act: Evaluation of the Internal Revenue Service’s Capability to Ensure 

Proper Use of Recovery Act Funds (Washington, D.C., Nov. 27, 2009). 

Page 3 GAO-10-349 Recovery Act Tax Provisions
 

Figure 1: Categorization of the Tax Provisions That IRS Had a Role in 

Administering, with Number and Dollar Value of Provisions 

Source: GAO analysis of IRS and Joint Committee on Taxation data.

Individual credits

Bond incentives

Consolidated Omnibus Budget Reconciliation Act

Energy incentives

Business incentives

Health coverage improvement

Withholding on government contractors

IRS categorization Number of provisions

$247

20

6

27

25

0a

0a

14

11

14

1

1

1

12

Value of provisions

(dollars in billions)

Total=$325b Total=54

a

The actual value is nonzero but is rounded down to zero. 

b

This dollar total differs from the total $326 billion reported by JCT because it excludes seven 

provisions that IRS is not responsible for administering. These seven provisions are two grants-inlieu-of-credits provisions, coordination of low-income housing credit and low-income housing grants, 

the New Markets Tax Credit, the public debt limit, a prohibition on the collection of certain payments, 

and executive compensation oversight. 

The bulk of the stimulus to be provided by the tax provisions is expected 

to be in fiscal year 2010, as shown in figure 2. 

Page 4 GAO-10-349 Recovery Act Tax Provisions
 

Figure 2: Total JCT-Estimated Budget Effects of the 54 Recovery Act Provisions 

That IRS Has a Role in Administering, from Fiscal Year 2009 through 2019 

Estimated budget effects of 54 provisions (including reduced revenue and outlays)

Dollars (in billions)

Source: JCT.

Fiscal year

-250

-200

-150

-100

-50

0

50

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

As previously mentioned, we focused our work on five provisions and 

performed limited work on a sixth. A brief description of each provision 

follows. (See app. I for a more thorough description of these provisions, 

including provision requirements.) 

• Build America Bonds (BAB): BABs are taxable government bonds that can 

be issued with federal subsidies for a portion of the borrowing costs 

delivered either through nonrefundable tax credits provided to holders of 

the bonds (tax credit BAB) or as refundable tax credits paid to state and 

local governmental issuers of the bonds (direct payment BAB). Direct 

payment BABs are a new type of bond that provides state and local 

government issuers with a direct subsidy payment equal to 35 percent of 

the bond interest they pay. Tax credit BABs provide investors with a 

nonrefundable tax credit of 35 percent of the net bond interest payments 

(excluding the credit), which represents a federal subsidy to the state or 

local governmental issuer equal to approximately 25 percent of the total 

return to the investor. State and local governments may issue an unlimited 

number of BABs through December 31, 2010, and all BAB proceeds must 

be used for capital expenditures. 

Page 5 GAO-10-349 Recovery Act Tax Provisions
 

• Consolidated Omnibus Budget Reconciliation Act (COBRA): Recently 

extended, the COBRA provision originally provided a 65 percent health 

insurance subsidy for up to 9 months for individuals who lost health 

insurance coverage due to involuntary termination between September 1, 

2008, and December 31, 2009.7

 Former employers, or in some cases 

multiemployer health plans or insurers, pay 65 percent of insurance 

premium costs and are reimbursed through a tax credit against their 

payroll tax liability or through a tax refund if the credit exceeds their 

payroll tax liability. 

• First-Time Homebuyer Credit (FTHBC): The Recovery Act expanded the 

FTHBC, which was initially established under the Housing and Economic 

Recovery Act of 2008,8

 to provide taxpayers a refundable tax credit of up 

to $8,000 for the purchase of a home.9

 Taxpayers are generally not required 

to repay the credit unless the home ceases to be the taxpayer’s principal 

residence within 3 years of purchase.10 Several of the issues with the 

FTHBC that are discussed in this report include differences between the 

2008 and 2009 credits. The 2008 credit differs from the 2009 credit in that it 

provided taxpayers up to $7,500, which has to be repaid in $500 

increments over the course of a 15-year period. We testified on the use of 

 

7

The Department of Defense Appropriations Act, 2010, Pub. L. No. 111-118, 123 Stat. 3409 

(Dec. 19, 2009), extended COBRA premium assistance to include individuals involuntarily 

terminated through February 28, 2010. The maximum duration of assistance was also 

increased from 9 to 15 months. 

8

Pub. L. No. 110-289, 122 Stat. 2654 (July 30, 2008). The 2008 FTHBC operated similarly to 

an interest-free loan, which taxpayers must pay back over time. The credit originally 

applied to purchases made between April 9, 2008, and June 30, 2009. The Recovery Act 

amended the FTHBC to make it a true refundable credit (taxpayers do not repay the credit) 

and extended the tax credit to purchases made between January 1, 2009, and November 30, 

2009. 

9

The Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92, 123 

Stat. 2984 (Nov. 6, 2009), extended the FTHBC to home purchases made through April 30, 

2010, as well as those that are under a binding contract on that date if the contract provides 

for closing the sale on or before June 30, 2010. The act also authorized a credit of up to 

$6,500 for individuals who owned and used the same residence as their principal residence 

for any 5 consecutive years during the 8-year period ending when they bought another 

property to use as their principal residence. The amendments and extensions by this act 

were generally outside the scope of our work. 

10A principal residence is the main home a taxpayer lives in most of the time. It can be a 

house, houseboat, housetrailer, cooperative apartment, condominium, or other type of 

residence. Among other circumstances, a home ceases to be a principal residence when a 

taxpayer sells it. 

Page 6 GAO-10-349 Recovery Act Tax Provisions
 

the FTHBC and implementation and compliance challenges in October 

2009.11

• Making Work Pay Credit (MWPC): The MWPC is a refundable tax credit 

that provides up to $400 and $800, respectively, to working individuals and 

married couples who file joint returns. Taxpayers may receive the credit 

throughout the year in the form of lower amounts of tax withheld from 

their paychecks. Taxpayers who do not have taxes withheld throughout 

the year will not benefit from the credit until they claim it on their annual 

tax return. 

• Net Operating Loss (NOL) Carryback: The NOL carryback provision 

allows eligible small businesses—those that had a 3-year gross receipts 

average of no more than $15 million—to apply for a refund for taxes paid 

in up to 5 previous years if the business experienced a loss in 2008.12

• Health Coverage Tax Credit (HCTC): The HCTC can be claimed (1) by 

workers who have lost manufacturing or service jobs due to international 

trade or have lost public agency jobs and are eligible for a form of Trade 

Adjustment Assistance or (2) by those who are receiving payments from 

the Pension Benefit Guaranty Corporation. Among other things, the 

Recovery Act increased the health insurance premium subsidy rate from 

65 percent to 80 percent of the premiums for an eligible taxpayer’s 

qualified health insurance plan. 

While IRS has implemented major pieces of legislation in the past, the 

Recovery Act posed significant implementation challenges because it was 

a large piece of legislation and many provisions were immediately or 

retroactively effective and had to be implemented during the tax filing 

season—IRS’s busiest time of year. IRS officials moved quickly to 

implement the Recovery Act, aided by their efforts to organize internally 

and consult externally with lawmakers and industry groups before the 

act’s passage. IRS put its highest priority on implementing 14 of the 54 IRS 

provisions in 2009 because they required immediate action.13 Some of 

IRS Moved Quickly to 

Address the Recovery 

Act’s Significant 

Implementation 

Challenges 

 

11GAO, First-Time Homebuyer Tax Credit: Taxpayers’ Use of the Credit and 

Implementation and Compliance Challenges, GAO-10-166T (Washington, D.C.: Oct. 22, 

2009). 

12The Worker, Homeownership, and Business Assistance Act of 2009 revised the NOL 

carryback provision by extending the NOLs qualifying for the 5-year carryback period to 

those occurring in 2009 and expanding the provision to include all businesses, except for 

those that received funds under the Troubled Asset Relief Program. 

13The 14 provisions IRS implemented in 2009 were the MWPC, economic recovery 

payments to recipients of Social Security and other benefits, a special credit for 

government retirees, temporary increases in the Earned Income Tax Credit, the FTHBC, 

NOL carrybacks, COBRA, the HCTC, and six bond provisions, including BABs. 

Page 7 GAO-10-349 Recovery Act Tax Provisions
 

these provisions, such as the FTHBC and NOL carrybacks, were 

retroactive and could be claimed on a 2008 tax return. IRS started taking 

action on many of the remaining 40 provisions in 2009 as well. Some 

provisions affected the 2009 filing season (for tax year 2008), while others 

mainly will affect the 2010 and 2011 filing seasons. 

To implement the provisions, IRS quickly issued forms and guidance, 

communicated with taxpayers and tax return preparers, and made 

computer programming or processing changes. For example, within days 

of the act’s passage, IRS issued revised withholding tables for the MWPC 

and produced new or updated tax forms and instructions for it and 

COBRA. As shown in table 1, as of January 12, 2010, IRS either completed 

or initiated steps to issue new forms and instructions and revise many 

others for 48 of the 54 provisions, or 89 percent of the total. When we first 

checked on progress, as of August 20, 2009, or about 6 months after the 

Recovery Act’s enactment, the percentage was also greater than 80 

percent. In addition, as of January 12, 2010, IRS communicated with 

taxpayers and tax return preparers through a variety of avenues, such as 

news releases, postings on irs.gov, podcasts, and You Tube videos for 47 of 

the 54, or about 87 percent of the provisions. IRS also made computer 

programming changes to enable processing for paper and electronically 

filed returns for 39, or about 72 percent of the provisions. IRS did not plan 

to engage in guidance and instruction for 6 provisions or education and 

outreach activities for 7 provisions, or make processing and programming 

changes for 15 provisions because, according to IRS officials, some did not 

require activities to inform the public or ready IRS systems. We agree with 

this decision because, as we saw, some of the tax provisions without 

implementation activities were extensions or expansions of previously 

existing tax provisions, modified previously existing tax rules, or gave 

additional guidance. For example, one provision amended the Work 

Opportunity Tax Credit (WOTC) to create two new categories of targeted 

groups, and as a result, IRS updated the instructions to the related tax 

form to be filed with IRS but did not isolate amounts related to these 

categories on the form itself or make any substantive processing and 

programming changes. 

Page 8 GAO-10-349 Recovery Act Tax Provisions
 

Table 1: Implementation Status of IRS’s 54 Provisions as of January 12, 2010 

Provision category 

Number of 

provisions

Number of provisions 

with guidance or 

instruction

Number of provisions 

with education or 

outreach 

Number of provisions 

with processing or 

programming changes

Individual credits 12 12 11 12

Business incentives 11 10 9 6

Energy incentives 14 14 14 12

COBRA provision 1 1 1 1

Bond incentives 14 10 10 7

Health coverage improvement 1 1 1 1

Withholding on government 

contractors 

1 0 1 0

Total 54 48 47 39

Source: GAO analysis of IRS data. 

Responding Quickly 

Entailed Tradeoffs, and 

Subsequent Improvements 

Were Made 

IRS management had to make tradeoffs, often balancing other factors, 

such as not making some computer changes to collect data, against the 

need to quickly process claims and get tax information and assistance out 

to the public, in order to implement the Recovery Act. For provisions we 

reviewed in detail, IRS’s initial actions were at times later substantively 

adjusted. 

As a first example of a tradeoff, because IRS needed to quickly issue a new 

set of withholding tables so taxpayers could immediately benefit from the 

MWPC through reduced federal tax withholding, Treasury decided not to 

fully account for the effect of the MWPC on taxpayers whose incomes 

were in the MWPC phaseout range.14 As a result, taxpayers with incomes in 

the phaseout range did not receive a precisely calculated tax reduction. In 

November 2009, IRS issued new withholding tables for 2010 that included 

two new brackets to better recognize the effect of the MWPC on taxpayers 

in the phaseout range. 

The withholding changes for the MWPC may also have unfavorable 

consequences for some other taxpayers. For instance, TIGTA recently 

reported that over 15 million taxpayers, such as those receiving pensions 

and joint filers with two or more jobs between them, may be negatively 

 

14The MWPC is reduced for single filers with modified adjusted gross incomes in excess of 

$75,000 and joint filers with incomes in excess of $150,000. 

Page 9 GAO-10-349 Recovery Act Tax Provisions
 

affected by the MWPC.15 These taxpayers may owe taxes or receive a 

lesser or no refund because not enough taxes were withheld from their 

paychecks to satisfy their eventual tax obligation or maintain previous 

withholding levels. IRS and Treasury have taken steps to deal with 

potential underwithholding for these taxpayers. IRS has conducted 

outreach to encourage taxpayers to look more closely at their tax 

withholding and plans to do more outreach. IRS’s Web site contains 

publications and other guidance, including a tax withholding calculator, 

instructing taxpayers how to adjust their withholding in light of the 

MWPC. To address potential underwithholding for pensioners, Treasury 

developed supplemental withholding tables that pension administrators 

can use in conjunction with the previously issued tables to offset the effect 

of the MWPC. 

In addition, because of the MWPC, some taxpayers could be subject to tax 

penalties as a result of the credit.16 TIGTA estimated that over 1 million 

taxpayers could be assessed a tax penalty or have their tax penalty 

increased because of the MWPC. IRS has taken steps to address these 

concerns as well, as it will allow taxpayers to use Form 2210, 

“Underpayment of Estimated Tax by Individuals, Estates, and Trusts,” to 

request that the penalties be waived. IRS has alerted taxpayers to this 

option and how to exercise it by adding information to the instructions for 

the Form 1040, “U.S. Individual Income Tax Return,” and, according to 

TIGTA, also plans to add information to Publication 505, “Tax Withholding 

and Estimated Tax.” 

A second tradeoff involved the FTHBC. Because of the compressed time to 

implement the revised credit, IRS did not make computer changes to easily 

collect data, including the home purchase date, from the Form 5405, “FirstTime Homebuyer Credit,” the form used to claim the credit.17 This was 

 

15TIGTA, Recovery Act: Millions of Taxpayers May Be Negatively Affected by the Reduced 

Withholding Associated With the Making Work Pay Credit (Washington, D.C., 2009). In a 

written response to TIGTA’s report, IRS officials said this estimate was overstated, but they 

did not provide their own estimate. 

16If taxpayers have significantly underpaid their taxes at the time they file their individual 

income tax returns, they may be assessed a tax penalty. Based on IRS rules for 2008, 

taxpayers would generally not be required to pay a penalty if the total tax shown on their 

return minus the amount they paid through withholding is less than $1,000, or if they had 

no tax liability in the previous year. 

17The 2009 FTHBC can be claimed on regularly filed or amended 2008 tax returns or on 

2009 returns, which are filed in 2010. 

Page 10 GAO-10-349 Recovery Act Tax Provisions
 

problematic because without the home purchase date IRS was unable to 

easily distinguish 2008 and 2009 FTHBC claims, a problem we noted in our 

October 2009 testimony.18 Distinguishing between the two credits is critical 

because the acts establishing them contain different requirements, 

including whether and how the credit is to be repaid.19 In studying FTHBC 

claims, TIGTA found that, as of May 29, 2009, IRS had not properly 

categorized more than 43,000 returns, considering them as 2008 claims 

instead of 2009 claims.20 According to TIGTA, if further action is not taken, 

some taxpayers who bought a home in 2009 could receive a letter from IRS 

incorrectly indicating that they must repay the credit. IRS plans to verify 

the date of purchase on past claims and make any necessary adjustments 

when it begins enforcing the 2008 FTHBC repayment provisions. IRS also 

plans to make the computer changes needed to collect all significant data 

for 2009 claims, including home purchase date, from a revised Form 5405. 

As a third example of a tradeoff, because of the limited time to make 

necessary computer programming changes that would have enabled 

payments by direct deposit, IRS issued BAB direct payments by paper 

check instead of electronic payments. According to IRS officials, IRS’s use 

of paper checks possibly increased the costs of issuing BAB direct 

payments at least nominally. For 2010, IRS plans to change Form 8038-CP, 

“Return for Credit Payments to Issuers of Qualified Bonds,” to include 

bank routing numbers so that payments can be made electronically. 

Also, because of the limited time, IRS used an existing tax-exempt 

government bond form, Form 8038-G, “Information Return for TaxExempt Government Obligations,” for state and local governments to 

report 2009 BAB information. Governmental issuers were required to 

submit a copy of Form 8038-G, to identify the issue as a BAB and to record 

information on the issue price, weighted average maturity, yield 

percentage, and the use of bond proceeds. However, unlike what is 

required for other bond issues, BAB issuers were also required to attach a 

separate schedule to identify the type of bond issue. For 2010, IRS plans to 

use a new form specifically designed for BABs. The new form will collect 

 

18GAO-10-166T. 

19Generally, taxpayers must pay back the 2008 FTHBC in $500 increments over a 15-year 

period, whereas the 2009 credit does not need to be repaid unless the home ceases to be 

the taxpayer’s principal residence within 3 years of the date it was purchased. 

20In late March 2009, IRS had begun categorizing incoming tax returns as either 2008 or 

2009 claims based on the home acquisition date reported on the Form 5405. 

Page 11 GAO-10-349 Recovery Act Tax Provisions
 

the same information that was collected in 2009, but issuers will be able to 

identify the type of BAB and provide information on the type of bond issue 

all on the form itself, requiring no attachment. 

Another effect of the limited time available to implement BABs was that 

BAB work took priority over already-existing bond projects, delaying the 

other projects somewhat, according to Treasury and IRS officials. 

As a final example, IRS also made tradeoffs when implementing NOL 

carrybacks. 

• As soon as the Recovery Act was enacted, taxpayers began filing 3-, 4-, and 

5-year NOL carryback claims, which allowed them to use 2008 small 

business losses to reduce taxable income from 3, 4, or 5 years before and 

get tax refunds quickly. Because taxpayers made claims before IRS issued 

its guidance on March 16, 2009, taxpayers made what IRS officials 

considered invalid or unclear elections on their NOL carryback claims.21

Despite the March 16th guidance, taxpayers continued to file unclear 

carryback claims because they appeared to have not followed the 

instructions in the guidance, which told taxpayers to attach a statement to 

their tax return indicating certain information. Officials processed the 

claims and decided to issue on May 11, 2009, a second piece of guidance 

superseding the March 16th one in order to make the process easier for 

taxpayers. The May 11th guidance reduced the burden on taxpayers by 

allowing them to file the appropriate NOL carryback form without having 

to attach an election statement. By reviewing the computations on the 

appropriate form, IRS was able to find the information it needed to 

process the claim. 

• When processing takes more than 45 days, IRS has to pay interest on NOL 

refunds, just as it must for other refunds taking more than 45 days to 

process. In order to process the claims on time, IRS initially took one to 

two revenue agents at seven campus locations away from examination 

cases for 1 to 2 days per week to determine whether small businesses’ 3-

year average gross receipts were under a $15 million ceiling, making them 

 

21The invalid or unclear elections generally refer to taxpayers not attaching a statement to 

their return indicating certain information, such as electing to apply the NOL to the 

taxpayer’s taxable year that begins in 2008. For these claims, IRS sent a letter to the 

taxpayers that said that IRS assumed they were making an NOL claim under section 1211 of 

the Recovery Act and if that was their intent, no further action was required. If that was not 

the taxpayers’ intent, they had 60 days to file an amended return. This guidance was in 

place until May 18, 2009. IRS did not track the number of invalid or unclear elections or the 

number of taxpayers who filed amended returns. 

Page 12 GAO-10-349 Recovery Act Tax Provisions
 

eligible for the NOL carryback refunds. This lasted for about 2 months 

until IRS developed a Gross Receipts Average Calculator tool. This tool 

replaced the need for extensive revenue agent involvement by 

automatically calculating a taxpayer’s average gross receipts. 

Collecting data on the tax provisions is important to (1) ensure Recovery 

Act funds are used efficiently, (2) ensure program compliance, and (3) 

determine program effectiveness. Without appropriate data, it may be 

either impossible or costly to determine the extent to which the tax 

benefits were used, when they were used, whether they were used 

effectively and as intended, and whether any lessons could be learned. In 

previous reports, we noted that IRS did not collect sufficient information 

to determine the use and effectiveness of certain tax provisions.22 In the 

report on Indian reservation depreciation, we noted that the lack of 

sufficient data impeded IRS’s ability to ensure program compliance.23

IRS’s Data-Collection 

Efforts Have 

Limitations, and the 

Tax Provisions’ 

Economic Stimulus 

Effect Cannot Be 

Precisely Isolated 

IRS Has Plans to Collect 

Some Data to Track Many 

Provisions 

In the past, IRS officials said that IRS’s role is to collect data only to the 

extent that the data help it to administer the tax code. However, for the 

Recovery Act, IRS went beyond its typical efforts in order to provide 

transparency over the use of the tax provisions and to collect more 

reportable data on the tax provisions. For example, IRS did not collect any 

additional data related to the 5-year NOL carryback for the Job Creation 

and Worker Assistance Act of 2002, but it is collecting carryback data for 

the Recovery Act’s NOL provision. 

Throughout the year after the Recovery Act was enacted, IRS developed 

plans for collecting data. For example, as shown in table 2, of the 54 

provisions that IRS has a role in implementing, IRS had detailed datacollection plans for 17, or about 31 percent. These 17 provisions cover 

about $207 billion, or 63 percent, of the $325 billion total cost that JCT 

estimated for the 54 provisions. For about 33 percent of the 54 provisions, 

covering about $96 billion, or 30 percent, of the total cost, IRS had 

 

22See, for example, GAO, Tax Expenditures: Available Data Are Insufficient to Determine 

the Use and Impact of Indian Reservation Depreciation, GAO-08-731 (Washington, D.C.: 

June 26, 2008); Empowerment Zone and Enterprise Community Program: Improvements 

Occurred in Communities, but the Effect of the Program is Unclear, GAO-06-727 

(Washington, D.C.: Sept. 22, 2006); and Tax Administration: Information Is Not Available 

to Determine Whether $5 Billion in Liberty Zone Tax Benefits Will Be Realized, 

GAO-03-1102 (Washington, D.C.: Sept. 30, 2003). 

23GAO-08-731. 

Page 13 GAO-10-349 Recovery Act Tax Provisions
 

identified preliminary data sources, but not what, if any, data it will 

compile and report. 

Table 2: Results of IRS’s Recovery Act Data-Collection Planning Effort 

Calculation category 

Detailed 

plansa

Preliminary data 

sources identifiedb

No data available 

from tax formsc

No reporting 

plannedd

Total

Number of provisions 17 18 9 10 54

Percent of number of provisions 31 33 17 19 100

JCT total estimated revenue loss (in billions) 207 96 5 18 325e 

Percent of JCT total estimated revenue loss 63 30 1 6 100

Source: GAO analysis of IRS data. 

a

IRS started or plans to have its nonresearch units create weekly or monthly reports or estimates, or it 

has noted the specific data it plans to collect. 

b

IRS has identified forms from which data could be collected by its research unit but has not identified 

the specific data it plans to compile and report. 

c

IRS does not plan to modify tax forms to collect data. 

d

IRS does not plan to collect data or report any information. According to IRS officials, this category 

includes nine provisions related to guidance or reflecting rule changes where there is nothing for them 

to report and one provision that Treasury’s Financial Management Service (FMS) took the lead in 

administering, although IRS had a minimal role. 

e

Numbers do not add to $325 billion due to rounding. 

For the remaining 19 provisions covering about 7 percent of the total cost, 

IRS does not plan to compile or report any data. For 9 of these provisions, 

covering about $5 billion, or 1 percent of total cost, IRS officials stated 

that no data are available on tax forms and IRS does not plan to modify tax 

forms to enable data collection. As an example, the WOTC is included in 

this group. The Recovery Act expands the credit by adding two categories 

of eligible individuals. IRS does not plan to modify the tax form to enable 

data collection on the newly eligible individuals as it currently does not 

collect data on any of the eligible individuals. For the final 10 provisions, 

covering about $18 billion or 6 percent of total cost, IRS did not plan to 

collect data or report any information because, according to IRS officials, 

this category included 9 provisions relating to guidance or reflecting rule 

changes.24 For the other provision, IRS had a minimal role, and Treasury’s 

 

24Although IRS does not plan to collect or report information on certain provisions, it may 

still engage in enforcement-related activities to ensure a credit is lawfully claimed. 

Page 14 GAO-10-349 Recovery Act Tax Provisions
 

Financial Management Service (FMS) took the lead in administering it.25

We agree with IRS’s decision not to report on these 10 provisions. 

Very little of the data that IRS has collected on the tax provisions has been 

released publicly. On September 3, 2009, Treasury released preliminary 

data collected on its Recovery Act programs, including the use of BABs, 

economic recovery payments, and the FTHBC. Recovery.gov includes a 

chart on the estimated dollars distributed through the tax provisions, but 

this estimate is not based on actual provision use. Rather, it prorates 

estimates that were created by Treasury’s Office of Tax Analysis before 

the act’s implementation. Data collected for individual tax provisions that 

specify the number of provision users and dollar amount of claims made 

were not reported on recovery.gov, as of January 20, 2010. 

Initial Data Collection Did 

Not Fully or Accurately 

Capture the Use of Some 

Recovery Act Provisions 

During much of our review, IRS focused on collecting and internally 

reporting data on four provisions—BABs, COBRA, the FTHBC, and the 

HCTC. (See app. IV for information on the use of these provisions.) Some 

of the data IRS collected did not accurately capture taxpayers’ use of 

Recovery Act provisions, as provision use was sometimes incompletely 

described or overstated. 

IRS’s reporting requirements for BABs are minimal in contrast to 

requirements for Recovery Act infrastructure and other direct spending 

projects, even though such projects may be similar. For example, funding 

for both Recovery Act spending projects and BABs may be used for 

highway, school, water, sewer, or utility improvements. Currently, IRS 

requires state and local governments to submit an information return at 

the time of bond issuance that describes the type of bond issue, issue 

price, weighted average maturity, yield percentage, and the use of bond 

proceeds. As shown in appendix IV, as of January 1, 2010, state and local 

governments reported 443 BAB issuances valued at about $32.4 billion. 

One hundred and thirty-one BABs were issued for education, which was 

more issuances than for any other type, except the “other” category. 

BAB Data Do Not Show 

Specific Bond Use 

Spending projects undertaken under the Recovery Act by state and local 

governments are subject to additional reporting requirements. Section 

 

25FMS took the lead in administering the economic recovery payments for Social Security 

recipients. IRS’s role related to economic recovery payments arose from the fact that the 

MWPC must be reduced by the amount of economic recovery payment received. IRS 

conducted outreach related to the provision. 

Page 15 GAO-10-349 Recovery Act Tax Provisions
 

1512 of the act requires nonfederal recipients of Recovery Act grants, 

contracts, and loans to provide information on each project or activity, 

including a description of the project and its purpose, an evaluation of its 

status toward completion, the amount of recovery funds spent, and the 

number of jobs created and retained.26 The reporting required for spending 

projects is intended to increase accountability and transparency. In 

addition, federal agencies are required to submit reports that describe the 

amount of Recovery Act funds made available and paid out to the states 

through contracts, grants, and loans. Although IRS is not required to 

publicly report data on BAB use, doing so could increase accountability 

and transparency. As part of its bond outreach efforts, Treasury has asked 

governmental issuers to report how their government has used BABs. 

Treasury plans to compile this information for its internal use only. There 

are no efforts by other federal agencies to compile or publish BAB 

information. The limited data collected and publicly reported for BABs 

does not reflect the same emphasis as that for spending projects. 

According to the Director of IRS’s Tax-Exempt Bonds division, more 

detailed information reporting on BAB-financed projects, such as that 

required on the Schedule K of Form 990, “Supplemental Information on 

Tax-Exempt Bonds,” may increase compliance over the life of bonds 

because government issuers would be reminded of bond requirements 

each year when filing the form and would be more likely to keep and 

maintain required documentation. Charitable organizations are required to 

submit Schedule K annually with their tax returns, although no similar 

yearly bond reporting requirement exists for governmental bond issuers. 

The rationale for the Schedule K was that significant noncompliance with 

recordkeeping requirements for charitable organization tax-exempt bonds 

existed, making it hard for IRS to determine if the bonds remained 

qualified for tax exemption throughout their life. Accordingly, Schedule K 

and its instructions ask for a description of the bond’s purpose—

constructing a hospital or acquiring office equipment are examples cited—

and the year the project was substantially completed, just like the 

reporting requirements for Recovery Act spending projects. 

IRS officials said that yearly BAB reporting similar to the Schedule K 

would help IRS know whether bonds remained qualified for their tax-

 

26Section 1512 of Division A of the Recovery Act. Neither individuals nor recipients 

receiving funds through entitlement programs, such as Medicaid, or tax programs are 

required to report. 

Page 16 GAO-10-349 Recovery Act Tax Provisions
 

advantaged status. One hundred percent of BAB proceeds are to be used 

for qualified capital expenditures, and yearly reporting by governmental 

issuers would allow IRS to more easily identify issuers who have not 

adhered to this standard or maintained the required documentation to 

show how bond proceeds were used. It could also help lawmakers or 

others in determining the overall effectiveness of the newly created bonds. 

Any additional cost of reporting, such as those already borne for spending 

projects, could be tempered by having a minimum reporting threshold or 

delaying the onset of requirements, as was the case when reporting for 

charitable organizations was instituted. However, if IRS required more 

specific reporting for BABs, it could not publicly release it for individual 

issuers. Currently, unlike the case with the Schedule K, IRS is prohibited 

from disclosing BAB-related information collected by IRS. Legislation 

would be needed to allow the BAB information and any similar 

information related to governmental bonds to be disclosed. 

According to Treasury officials, given the periodic direct payments that 

IRS must make for the first time to state and local governments for BABs, 

ongoing safeguards are needed to verify that payments are only made on 

outstanding bond issues that continue to meet BAB eligibility 

requirements. To this end, IRS and Treasury have a working group to 

examine different approaches for acquiring BAB information over the life 

of bonds to verify payments and determine how frequently additional bond 

information reporting by issuers should occur. The working group may 

suggest new bond reporting requirements, such as a new tax form, in late 

2010. More detailed reporting on BABs to provide added transparency and 

accountability could help with this effort and be beneficial if it were 

compatible with other needs identified by the working group. 

As of December 18, 2009, IRS had not reported the number of former 

employees receiving COBRA premium assistance. When the data are 

ready, IRS information on COBRA premium assistance claims will 

understate the total number of individuals receiving health insurance. 

Employers are instructed to list the number of individuals provided 

COBRA premium assistance on Form 941 for 2009, “Employer’s Quarterly 

Federal Tax Return.” However, the number entered on the form is only the 

total number of former employees receiving COBRA coverage and does 

not include their dependents who may be covered under the same 

insurance plan. For example, if COBRA premium assistance was paid for 

an insurance plan that covered a former employee and his or her spouse 

and child, an employer would count that as one person provided COBRA 

premium assistance on Form 941, not three. Counting this way prevents a 

meaningful comparison with the JCT’s estimate that 7 million workers and 

COBRA Data Will Not Include 

the Number of Dependents 

Benefiting from COBRA 

Assistance 

Page 17 GAO-10-349 Recovery Act Tax Provisions
 

dependents would use the COBRA subsidy. Moreover, the number does 

not provide stakeholders complete information on provision use. 

According to IRS officials, the form did not include dependents due to a 

short time frame for implementation, space constraints on the form, and a 

desire not to overburden employers with additional reporting 

requirements. As of December 26, 2009, as shown in appendix IV, IRS had 

received approximately 192,000 returns from employers claiming about 

$803 million in COBRA credits.27

Before September 30, 2009, IRS’s 2009 FTHBC information was 

understated—it did not show the full dollar amount of the credits claimed. 

Initially, IRS only reported the difference between the maximum benefits 

of the 2008 and 2009 FTHBCs as the total benefit of the 2009 FTHBC. That 

is, the data only reflected an estimated increment above the 2008 FTHBC’s 

maximum benefit of $7,500 as the amount of credit claimed for the 2009 

FTHBC, rather than up to the full amount of the credit, a maximum of 

$8,000. In a September 3, 2009, report on the Recovery Act, Treasury also 

reported this estimated incremental amount. On September 4, 2009, we 

pointed out to IRS officials that the increment did not consider that 

taxpayers might have decided to buy a house because the $8,000 maximum 

benefit offered with the 2009 FTHBC generally would not have to be paid 

back to the federal government—unlike the 2008 credit for which the 

$7,500 would have to be repaid over 15 years. IRS revised its data and 

provided information reflecting the full amount of the credit claimed in a 

September 30, 2009, report. As shown in appendix IV, as of November 21, 

2009, IRS data show that about 1.1 million filers claimed about $7.3 billion 

of the 2008 credit, while about 630,000 filers claimed about $4.7 billion of 

the 2009 FTHBC.28

Initial FTHBC Data Did Not 

Reflect the Credit’s Full Dollar 

Value 

 

27Although the Form 941 is filed quarterly, employers were not required to submit all 

COBRA subsidy claims for 2009 until the fourth quarter of 2009; therefore, there may be an 

increase in the total number of COBRA filers for the year. 

28These data should be interpreted as interim, as some concerns exist about their reliability. 

In September 2009, TIGTA reported that 43,967 returns were coded as a 2008 FTHBC even 

though the purchase had occurred in 2009. IRS plans to verify the date of purchase and 

make any needed adjustments when it begins enforcing the 2008 FTHBC payback 

provisions. We reported this information to the Congress at a hearing on October 22, 2009, 

GAO-10-166T. 

Page 18 GAO-10-349 Recovery Act Tax Provisions
 

The roughly 12,000 new enrollees in the HCTC program that IRS has 

attributed to the Recovery Act is overstated, at least for the early period 

soon after the Recovery Act. (App. IV provides more detailed data.) The 

number is overstated because it included some taxpayers who were in the 

pipeline for enrollment before the President signed the Recovery Act on 

February 17, 2009. IRS officials chose April 1, 2009, as the first date for 

attributing HCTC participation to the act. They chose this date because, 

among other things, it was the date the health insurance premium subsidy 

rate rose from 65 percent to 80 percent, and presumably more people 

would be inclined to enroll given the higher subsidy. However, according 

to June 2008 IRS data, IRS would only mail HCTC program kits and 

registration forms to taxpayers after other agencies spent 1 to many 

months determining if a taxpayer was in fact eligible for the credit in the 

first place. Thus, to be enrolled in April 2009, many taxpayers would have 

to have started the HCTC process before the Recovery Act was signed. IRS 

officials acknowledged some of the enrollees counted as new could have 

been in the pipeline for enrollment on February 17. Officials also said their 

collection of data in general was not intended to see whether the Recovery 

Act actually motivated someone to change behavior, in this case to enroll 

in the HCTC program. 

HCTC Data Overstate the 

Number of New Enrollees 

Attributable to the Recovery 

Act 

The Economic Stimulus 

Effect of the Tax 

Provisions Cannot Be 

Precisely Isolated 

The data IRS has collected about the tax provisions it is administering are 

not designed to isolate or differentiate the stimulus effect of these 

provisions from that of other Recovery Act provisions. To assess the 

effects of stimulus policies such as tax incentives, economists use 

evidence from macroeconometric forecasting models and models that 

extrapolate from historical data. The forecasting models are based largely 

on historical evidence, and the analyses estimate behavior based on how 

economic variables such as gross domestic product (GDP) have 

responded to stimulus policies in the past. Neither type of model uses 

current data to assess the effect of the stimulus. The models are used to 

estimate “multipliers,” which represent the cumulative effect of a 

particular incentive, such as a tax cut, on GDP over time. For example, a 

multiplier of 1.0 means a dollar of stimulus financed by borrowing results 

in an additional dollar of GDP. Generally, multipliers can provide insights 

into the potential effect on GDP of different types of public spending. 

Because of the limited historical experience with a fiscal stimulus of the 

magnitude of the Recovery Act, there is uncertainty about the extent to 

which multipliers based on historical evidence about the effect of previous 

Page 19 GAO-10-349 Recovery Act Tax Provisions
 

business cycles will accurately reflect the stimulus effect this time. 

However, economists use the models as a basis for constructing 

reasonable ranges of values for multipliers.29 Drawing on analyses based 

on past experience with the results of government spending, CBO has 

estimated multipliers for Recovery Act provisions that include tax 

expenditures (see table 3). 

Table 3: Estimated Multipliers for Selected Recovery Act Provisions 

Estimated policy multiplier

Category High Low

Onetime payments to retirees 1.2 0.2

2-year tax cuts for lower- and middle-income people 1.7 0.5

1-year tax cuts for higher-income people 0.5 0.1

Extension of the FTHBC 1.0 0.2

Tax provisions for businesses primarily affecting cash flow 0.4 0.0

Source: CBO. 

Although the economic effect of each of the Recovery Act tax provisions 

cannot be precisely estimated, the effect of some provisions on specific 

aspects of the economy may be described in general terms. For example, 

reports released by the Executive Office of the President’s Council of 

Economic Advisers (CEA) in September 2009 and January 2010 noted the 

potential effect of the bonus depreciation, MWPC, and FTHBC 

provisions.30 According to CEA’s analysis, the bonus depreciation 

provision, which allows businesses to recover the costs of acquired 

property at a faster rate than they otherwise would, benefited businesses 

and may have led to a slower investment decline in the second quarter of 

2009 than would have occurred in the absence of such provisions. 

Additionally CEA concluded that although the MWPC, along with other 

provisions of the Recovery Act and other economic recovery policies, 

 

29For more information on the imprecision of economic forecasting and macroeconomic 

models and multipliers that were created for the Recovery Act, see GAO, Recovery Act: 

Recipient Reported Jobs Data Provide Some Insight into Use of Recovery Act Funding, 

but Data Quality and Reporting Issues Need Attention, GAO-10-223 (Washington, D.C.: 

Nov. 19, 2009). 

30Executive Office of the President’s Council of Economic Advisers, The Economic Impact 

of the American Recovery and Reinvestment Act of 2009: First Quarterly Report 

(Washington, D.C., Sept. 10, 2009); Executive Office of the President’s Council of Economic 

Advisers, The Economic Impact of the American Recovery and Reinvestment Act of 2009: 

Second Quarterly Report (Washington, D.C., Jan. 13, 2010). 

Page 20 GAO-10-349 Recovery Act Tax Provisions
 

helped stabilize consumption, a small drop in consumption in the second 

quarter could indicate that households were using the MWPC mainly to 

increase savings and pay off debt. In addition, their analysis suggests that, 

in addition to other policy actions affecting residential real estate, the 

Recovery Act’s FTHBC may have moderated job losses in the construction 

industry. 

We have previously reported that evaluating risk is important because it 

allows an organization to identify potential problems before they occur so 

that mitigating activities can be planned and implemented over a project’s 

life to minimize adverse effects on objectives and outcomes.31 Risk 

management includes executive oversight, preparing for risk management, 

identifying and analyzing risks, and mitigating risks. Organizations prepare 

for risk management by establishing a strategy for identifying, analyzing, 

and mitigating risks. Identifying and analyzing risks involves identifying 

risks from internal and external sources and evaluating each risk to 

determine its likelihood and consequences. Mitigating risks involves 

developing risk-mitigation plans that outline the techniques and methods 

that will be used to avoid, reduce, and control the probability of risk 

occurrence. 

IRS Took Steps to 

Mitigate Abuse of 

Provisions, but Some 

Compliance 

Challenges Arose and 

Others Remain 

Consistent with these activities, IRS established an executive steering 

committee to oversee Recovery Act implementation. The committee, 

which was formed before the act’s enactment, included the heads of all 

IRS operating divisions. It met regularly to discuss issues such as the 

resources needed to implement the tax provisions, changes to be made to 

forms and information systems, information to be posted on the Internet, 

and compliance challenges. 

IRS also completed eight risk assessments—questionnaires that identified 

potential risks, their likelihood of occurrence, and their effect—that 

 

31GAO, Foreign Assistance: State Department Foreign Aid Information Systems Have 

Improved Change Management Practices but Do Not Follow Risk Management Best 

Practices, GAO-09-52R (Washington, D.C.: Nov. 21, 2008); and GAO, Information 

Security Risk Assessment: Practices of Leading Organizations, GAO/AIMD-00-33 

(Washington, D.C.: Nov. 1, 1999). 

Page 21 GAO-10-349 Recovery Act Tax Provisions
 

covered 12 provisions immediately available to taxpayers.32 The risk 

assessments considered common risk areas such as the adequacy of 

internal control procedures, agency-specific risks such as the extent of 

management oversight over the risk-management process, and programspecific risks such as resource availability. The risk assessments resulted 

in 9 of the 12 provisions being considered as medium risk and 3 as low 

risk. IRS plans to reevaluate these assessments and complete assessments 

of the remaining Recovery Act tax provisions in 2010. Following Treasury 

policy, IRS completed mitigation plans for the 9 provisions it found to be 

at medium risk. 

The mitigation plans outlined the actions that IRS planned to take to 

address identified risks, and IRS program officials were responsible for 

monitoring their implementation. In addition, Treasury began reviewing 

IRS risk-mitigation plans in July 2009 and told us in January 2010 it 

planned to begin reviewing risk assessments and mitigation plans for tax 

year 2010 provisions that month, taking into account GAO, TIGTA, and 

Treasury Office of Inspector General findings. 

IRS Has Addressed Some 

Compliance Challenges 

with the FTHBC, and 

Alternatives Exist That 

May Alleviate a Remaining 

Challenge 

Despite its efforts to assess and mitigate potential risks, IRS still 

encountered compliance challenges with the FTHBC; it addressed some of 

them. For example, IRS used prerefund filters to ensure that taxpayer 

income and the amount of credit claimed on a return do not exceed 

statutory limits. IRS also used an electronic fraud-detection system with 

filters to detect and prevent fraudulent refund schemes. However, IRS and 

TIGTA reviews of early FTHBC filings identified additional compliance 

issues, such as instances where taxpayers who had previously owned a 

home claimed the credit. Based on its review of early filings, IRS 

implemented additional computer filters to better determine taxpayer 

eligibility before refunds were issued. For example, IRS developed filters 

to check for indications of prior homeownership within the past 3 years. 

As a result of its prerefund checks, as of February 1, 2010, IRS had frozen 

 

32Some risk assessments covered more than one provision. The 12 provisions were the 

COBRA provision, the FTHBC, the HCTC, the NOL carryback provision, the MWPC, the 

Advance Earned Income Tax Credit, and six bond provisions, including BABs. IRS did not 

assess the risks for two other provisions immediately available to taxpayers—economic 

recovery payments to Social Security recipients, disabled veterans, and railroad retirement 

beneficiaries because Treasury’s Financial Management Service administered this 

provision, and a tax credit for certain government retirees, because the credit could not be 

claimed until 2009 returns were filed, starting in 2010. IRS planned to prepare a risk 

assessment for this credit in 2010. 

Page 22 GAO-10-349 Recovery Act Tax Provisions
 

about 140,000 refunds pending civil or criminal examination, and, as of 

December 2, 2009, had identified 175 criminal schemes and had 123 

criminal investigations open. 

IRS faces a challenge in knowing whether homebuyer credit recipients sell 

their homes. This is important for the 2009 credit because the Recovery 

Act requires that at least part of the credit up to $8,000 may have to be 

repaid if a home is sold or otherwise ceases to be the taxpayer’s principal 

residence within 3 years of purchase.33 Repayment is also an issue for the 

2008 FTHBC, as individuals who sell their homes or otherwise cease to use 

their home as their principal residence before fully repaying their credit up 

to $7,500 have to accelerate their repayment. IRS modified Form 5405 for 

taxpayers to report the disposition of their home or a change in its use, but 

as of December 2009 it had not decided how it will identify individuals 

who fail to report.34

An IRS form already exists that could help resolve this compliance issue, 

but whether IRS is authorized to use it for this purpose would have to be 

determined. Currently, IRS annually receives some Forms 1099-S, 

“Proceeds from Real Estate Transactions,” from agents closing real estate 

transactions such as home sales.35 The form provides information such as 

the seller’s name and Social Security number and the sale price of the 

home and is to be used by IRS to determine if taxpayers have filed returns 

and reported all of their proceeds from real estate transactions. However, 

closing agents are generally exempt from reporting information on the sale 

of principal residences sold for $250,000 or less if the agent receives 

written certification from the seller that certain assurances are true.36

Moreover, it is not clear whether IRS has the authority to require Form 

1099-S be filed by third parties currently exempted for purposes of 

 

33The Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92, 

which extended the credit until April 30, 2010, also maintained the requirement that at least 

part of the credit may have to be repaid if the home is sold within 3 years of purchase. 

34Form 5405 is the form used to claim the FTHBC. The 2009 FTHBC can be claimed on 

regularly filed or amended tax returns for 2008 or 2009 returns. 

35Section 6045(e) of the Internal Revenue Code generally requires some real estate parties 

such as closing agents to file information returns with IRS on Form 1099-S. 

3626 U.S.C. § 6045(e)(5). To be excepted from the information-reporting requirements on 

the sale or exchange of a principal residence, the closing agent must obtain from the seller 

a written certification, signed by the seller under penalties of perjury, that certain 

assurances (such as the sale or exchange is of the entire residence for $250,000 or less) are 

true. See Internal Revenue Procedure 2007-12. 

Page 23 GAO-10-349 Recovery Act Tax Provisions
 

recapture from FTHBC recipients. If Form 1099-S information reporting 

could be required for all home sales or for those taxpayers who do not 

certify that they had not claimed the FTHBC, IRS might be better able to 

identify the taxpayers who need to repay part or all of the credit. Because 

Form 1099-S contains the seller’s Social Security number, IRS could match 

the identification numbers on the Forms 1099-S to those reported on 

returns claiming the FTHBC, isolating Form 1099-S filers who should have 

reported their home sale on the FTHBC form, but did not. 

As we were completing our review, IRS officials identified an alternative 

way to analyze whether homebuyer credit recipients sell their homes and 

are, therefore, possibly subject to payback requirements. This alternative 

involves acquiring access to third-party data in the form of publicly 

available real estate information from local governments. This information 

could include individual properties’ addresses, previous and recent sales 

prices, and sales dates. IRS could use these data in matches against Form 

5405 or other IRS data to identify taxpayers who claimed the FTHBC and 

then sold their property without repaying any required part of the FTHBC 

benefit they received. IRS expects to purchase the use of these data, use 

them, and then evaluate how well they help IRS enforce the FTHBC 

provisions. The evaluation is not yet designed but should be able to cover 

issues like data reliability, comprehensiveness, and cost-effectiveness. 

An Option Exists to Better 

Identify Unresolved 

COBRA Compliance Issues 

The Recovery Act provides eligible taxpayers with COBRA premium 

assistance—a 65 percent reduction in health insurance premiums for 

individuals who were involuntarily terminated between September 1, 2008, 

and December 31, 2009.37 An employer pays 65 percent of its former 

employees’ insurance premium costs and is reimbursed in the form of a 

payroll tax credit.38 This tax provision is only the second refundable tax 

credit administered by IRS’s Small Business/Self-Employed (SB/SE) 

 

37The Department of Defense Appropriations Act, 2010 (Pub. L. No. 111-118) extends 

premium assistance to those involuntarily terminated through February 28, 2010. 

38In some instances, such as for state health plans that are subject to COBRA requirements, 

multiemployer group health plans or insurers may provide the COBRA subsidy and file for 

a COBRA credit. 

Page 24 GAO-10-349 Recovery Act Tax Provisions
 

division.39 Unlike the other credit, SB/SE’s compliance strategy for COBRA 

focuses on the employer and the Form 941, not on individuals receiving 

assistance. 

To identify fraudulent or erroneous COBRA claims made by employers, 

IRS instituted a number of prepayment checks, such as looking for 

irregularities in COBRA claims and in the dollar value of subsidies. As of 

September 22, 2009, the prepayment checks had stopped about 1,500, or 2 

percent, of COBRA claims for further review. 

Other compliance challenges have not been resolved. For example, IRS 

does not know who receives the COBRA subsidies, which limits its ability 

to determine if a taxpayer is qualified to receive a subsidy and to ensure 

that employers do not receive the credit for ineligible individuals. In an 

effort to reduce employer burden, IRS did not require employers to submit 

lists of all people receiving COBRA. As a result, it was only aware of the 

number of individuals an employer reported on Form 941 and the total 

amount of the subsidy claimed. Employers are required by IRS to keep 

records of the COBRA assistance, including the names and Social Security 

numbers of covered employees, but IRS would see this information only 

during any examinations. 

Another challenge facing IRS is verifying that those taxpayers who are 

required to repay part of the COBRA subsidy they receive do so. Those 

individuals and married couples filing joint tax returns with modified 

adjusted incomes above $125,000 and $250,000, respectively, are required 

to report on their tax returns that they received COBRA assistance. This 

requirement is in place because the COBRA subsidy phases out for those 

taxpayers with higher incomes, and those above the phaseout range are 

ineligible. IRS plans to conduct a review of filed returns to identify highincome taxpayers who did not report the subsidy as an addition to tax. 

However, rather than rely solely on audits to determine if these taxpayers 

 

39The Advance Earned Income Tax Credit (AEITC) was the first tax credit to be 

administered by SB/SE. The AEITC allows individuals to receive a portion of the Earned 

Income Tax Credit in their paychecks, instead of receiving all of it when filing their yearend tax return. Employers report the amount paid on the Form 941, “Employer’s Quarterly 

Federal Tax Return,” and on the employee’s Form W-2, “Wage and Tax Statement.” In 2007, 

we found that there was low use and high noncompliance associated with the AEITC. For 

more information, see GAO, Advance Earned Income Tax Credit: Low Use and Small 

Dollars Paid Impede IRS’s Efforts to Reduce High Noncompliance, GAO-07-1110 

(Washington, D.C.: Aug. 10, 2007). Based on our report, in 2009 the President recommended 

in his fiscal year 2010 budget request that the AEITC program be terminated. 

Page 25 GAO-10-349 Recovery Act Tax Provisions
 

are subject to additional tax, IRS has taken some steps to obtain this 

information. For example, IRS worked with tax-preparation software 

companies to ensure that pointed questions are asked during tax return 

preparation to determine if individuals received COBRA during the year. 

IRS also has plans to use a compliance initiative project to test whether 

taxpayers did not report the subsidy as an addition to tax and decide if 

further action is needed.40

Individuals are allowed to receive a COBRA subsidy for up to 9 months 

after their involuntary termination, but, since IRS does not know from the 

Form 941 who is receiving COBRA subsidies, it also does not have the 

information to know when an individual’s eligibility period ends.41 Claims 

beyond 9 months may not be widespread because some studies have 

shown that, even with the subsidy, COBRA is generally more expensive to 

employees than employer-sponsored plans.42 Thus, in most circumstances, 

individuals have an incentive to terminate their COBRA coverage when 

other options exist. However, employers may have an incentive to 

continue claiming the credit even when former employees are no longer 

eligible. A past report of ours noted that businesses facing economic 

hardship may take advantage of the tax system by diverting payroll taxes 

for their own uses.43 Employer audits are one of the ways IRS learns if an 

employer claimed the credit for employees for longer than 9 months. IRS 

will not be able to audit all employers. To address this concern, IRS has 

conducted outreach with the employer and payroll communities 

emphasizing the time limit and planned to continue doing so in the coming 

months. Yet, other than relying on costly audits, IRS had not finalized 

actions that it could take to ensure employers stop claiming the credit 

 

40Compliance initiative projects are activities to identify potential areas of noncompliance 

within a group of taxpayers so that the noncompliance can be corrected. 

41Under the Recovery Act, individual eligibility periods end 9 months after the employee is 

involuntarily terminated and subsequently elects COBRA continuation coverage or when 

the employee becomes eligible for another group health insurance plan, such as Medicare 

or a plan offered through a spouse’s employer. The Department of Defense Appropriations 

Act, 2010 (Pub. L. No. 111-118) extended coverage for up to 15 months. 

42See Congressional Research Service, Health Insurance Premium Assistance for the 

Unemployed: The American Recovery and Reinvestment Act of 2009, R40420 

(Washington, D.C., Mar. 6, 2009) and The Kaiser Commission on Medicaid and the 

Uninsured, The COBRA Subsidy and Health Insurance for the Unemployed (Washington, 

D.C., Mar. 2009). 

43GAO, Tax Compliance: Businesses Owe Billions in Federal Payroll Taxes, GAO-08-617 

(Washington, D.C.: July 25, 2008). 

Page 26 GAO-10-349 Recovery Act Tax Provisions
 

when their former employees are no longer eligible, thus safeguarding 

against invalid COBRA claims that increase costs to the federal 

government. 

A cost-effective option to help IRS with the unresolved compliance issues 

exists. IRS could expand its planned compliance initiative project to test 

whether employers are claiming COBRA subsidies for employees for 

longer than 9 months, or 15 months when considering the recent 

extension. IRS can use existing information to determine if significant 

noncompliance with the 15-month provision is apparent. If significant 

indications of noncompliance are found, IRS could issue “soft notices” to 

employers to remind them of COBRA eligibility requirements and the 

consequences of noncompliance.44 IRS officials responded favorably to 

these ideas and said they would consider adopting them. 

IRS plans to do a “lessons learned” review of its Recovery Act experiences 

and implementation, most likely after the 2010 filing season, but it had not 

yet developed detailed plans during our review. This study would be 

consistent with a recommendation we have previously made. In an August 

2002 report on the advance tax refund program, which the Congress 

designed to stimulate the economy, we noted that analysis is a key part of 

understanding performance and identifying improvement options.45 We 

therefore recommended that IRS convene a study group to assess its 

performance with respect to the advance tax refund and related ratereduction credit. We also said that to ensure that managers faced with 

similar challenges in the future have the benefit of this assessment, the 

results should be thoroughly documented. IRS implemented this 

recommendation and later said that the resulting internal report was a 

cornerstone in improving administration of the advance child tax credit. 

Documenting IRS’s 

Recovery Act Lessons 

Learned and 

Expanding Its 

Authority, with 

Appropriate Controls, 

Could Improve Future 

Tax Administration 

 

44IRS tests have shown that the agency has successfully reduced subsequent 

noncompliance in situations that involve relatively small amounts of money by sending 

letters referred to as “soft notices” that ask taxpayers to voluntarily fix their misreporting 

by filing an amended return or not repeating the action in the next year. 

45GAO, Tax Administration: Advance Tax Refund Program Was a Major 

Accomplishment, but Not Problem Free, GAO-02-827 (Washington, D.C.: Aug. 2, 2002). 

Page 27 GAO-10-349 Recovery Act Tax Provisions
 

IRS would have benefited from having math error authority (MEA) to 

enforce at least one Recovery Act provision from the outset rather than 

only after problems were identified. The Internal Revenue Code provides 

IRS with MEA to assess additional tax or correct other tax return errors in 

limited circumstances when an adjustment is the result of mathematical or 

clerical errors on the return.46 Over the years, the Congress has granted 

IRS MEA for specified purposes.47 For example, when a taxpayer makes an 

entry on a tax return for a deduction or credit in an amount that exceeds 

the statutory limit for that deduction or credit, IRS uses its MEA to correct 

the error during tax return processing. MEA is an automated and low-cost 

means to protect federal revenue and avoid the need for costly audits. This 

is due, in part, to the fact that IRS does not have to follow its standard 

deficiency procedures when using MEA—it must only notify the taxpayer 

that the assessment has been made and provide an explanation of the 

error. 

IRS Could Benefit from 

Broader Math Error 

Authority 

As described earlier, IRS had problems enforcing some of the eligibility 

requirements of the FTHBC. After learning about the compliance problems 

with the FTHBC, the Congress expanded IRS’s MEA in the Worker, 

Homeownership, and Business Assistance Act of 2009.48 It followed our 

suggestion that, to reduce IRS’s reliance on costly and burdensome audits 

of the credit, the Congress should consider providing IRS with additional 

MEA.49 Specifically, we suggested that the Congress consider giving IRS 

MEA to use tax return information to automatically verify taxpayers’ 

compliance with the 2008 FTHBC payback provision and to ensure that 

taxpayers do not improperly claim the credit in multiple years. In addition 

to following these suggestions, based on noncompliance identified by 

TIGTA, the Congress granted IRS MEA to assess additional tax without the 

notice of deficiency otherwise required if a taxpayer did not meet the 

credit’s age requirement or did not submit the settlement statement used 

in the home purchase. 

 

4626 U.S.C. § 6213(b). 

47Section 6213(g)(2) of the Internal Revenue Code lists the circumstances in which MEA 

may be used. 

48Pub. L. No. 111-92, 123 Stat. 2984 (Nov. 6, 2009). 

49GAO, Tax Administration: Opportunities Exist for IRS to Enhance Taxpayer Service 

and Enforcement for the 2010 Filing Season, GAO-09-1026 (Washington, D.C.: Sept. 23, 

2009). 

Page 28 GAO-10-349 Recovery Act Tax Provisions
 

The Congress has been incrementally adding MEA authorizations for 

almost a century. The first basic exemption to the deficiency procedures 

for mathematical errors can be found in the Internal Revenue law in 1926. 

In 1976, the Congress expanded the authority beyond mathematical errors 

to clerical errors and gave taxpayers the right to ask that IRS reverse the 

math error assessment and follow IRS’s normal deficiency procedures. In 

the 1990s, the Congress extended MEA multiple times to help IRS 

determine eligibility for certain tax exemptions and credits. As a recent 

example of where MEA could also be useful, in 2008 we suggested that the 

Congress provide IRS with the authority to automatically correct returns 

for individual retirement account (IRA) contributions that violated certain 

dollar or age limits.50 In 2004, IRS had found IRA contribution overclaims 

by taxpayers under age 50 resulting in $23.2 million in underreported taxes 

but did not have the MEA to use age-based data to check for age-based 

eligibility. Also, on September 30, 2009, after finding more than $600 

million of inappropriately claimed Hope Credits for higher education, 

TIGTA recommended that the Congress give IRS MEA to disallow claims 

for the Hope Credit for more years than allowed by law.51 In a November 

2009 report, TIGTA listed four examples of other reports it had issued in 

fiscal years 2008 and 2009 with issues related to MEA, three 

recommending that specific MEA be obtained or studied.52

Authorizing the use of MEA on a broader basis rather than case-by-case, 

with appropriate controls, could have several benefits to IRS and 

taxpayers. It could 

• enable IRS to correct all or nearly all returns with types of noncompliance 

for which IRS identifies with virtual certainty the noncompliance and the 

needed correction, not just those it can address through other 

enforcement means; 

• be low cost and less intrusive and burdensome to taxpayers than audits; 

 

50GAO, Tax Administration: IRS’s 2008 Filing Season Generally Successful Despite 

Challenges, although IRS Could Expand Enforcement during Returns Processing, 

GAO-09-146 (Washington, D.C.: Dec. 12, 2008). 

51TIGTA, Improvements Are Needed in the Administration of Education Credits and 

Reporting Requirements for Educational Institutions (Washington, D.C., Sept. 30, 2009). 

52TIGTA, Recovery Act: Evaluation of the Internal Revenue Service’s Capability to Ensure 

Proper Use of Recovery Act Funds (Washington, D.C., Nov. 27, 2009). 

Page 29 GAO-10-349 Recovery Act Tax Provisions
 

• ensure that taxpayers who are noncompliant on a particular issue are 

more often treated alike, that is, that a greater portion of them are brought 

into compliance, not just those that IRS could otherwise address; 

• enhance equity between compliant and noncompliant taxpayers because a 

greater portion of the noncompliant ones would be brought into 

compliance; 

• provide a taxpayer service as it would generally allow noncompliant 

taxpayers to receive their refunds faster than if IRS had to address the 

error through some other compliance mechanism, have their returns 

corrected without penalty and before interest is accrued, and avoid timeconsuming interaction with IRS under its other programs for resolving 

noncompliance; 

• help ensure taxpayers receive the tax benefits for which they are eligible 

by identifying taxpayers underclaiming a tax benefit; 

• free up IRS resources to pursue other forms of noncompliance; and 

• allow IRS to quickly address provisions arising from new and quickly 

moving initiatives like the Recovery Act without waiting for new MEA to 

go through the legislative process. 

Broader authority to use MEA could take several forms; for instance, it 

could be granted for (1) new legislation that had to be implemented in 

short time periods, (2) newly created or revised refundable credits, or (3) 

wherever IRS could check for obvious noncompliance in both new 

legislation and already enacted laws. Refundable credits, which entail cash 

payments to taxpayers irrespective of the amount of their tax liabilities, 

are growing in popularity and automatic authority could enable IRS to 

monitor low-dollar amounts on individual returns that would be too laborintensive and costly to audit. 

Although broader MEA could benefit IRS and taxpayers, controls may be 

needed to ensure broader authority is properly used. While stating that IRS 

generally uses its authority properly, the IRS National Taxpayer 

Advocate’s 2006 annual report warned of IRS’s implementation of MEA 

impairing taxpayer rights.53 The Taxpayer Advocate pointed out that in 

considering the 1976 legislation mentioned above, the Congress was 

concerned that IRS might use its authority in ways that would undermine 

taxpayer rights. Consequently, the Congress incorporated certain taxpayer 

safeguards into the legislation, such as requiring IRS to explain to the 

taxpayer the errors it asserted. Still, the Taxpayer Advocate was 

 

53IRS, National Taxpayer Advocate 2006 Annual Report to Congress (Washington, D.C., 

Dec. 31, 2006). 

Page 30 GAO-10-349 Recovery Act Tax Provisions
 

concerned that taxpayers, especially low-income taxpayers, might not 

proactively ask, within 60 days after being assessed tax by IRS, to have 

their assessment reversed by IRS, and thus might be unable to challenge 

an IRS notice through normal deficiency procedures or in the Tax Court. 

She was also concerned that MEA notices to taxpayers did not contain the 

type of information the Congress envisioned that clearly explained to 

taxpayers the nature of the error that IRS addressed through MEA. 

The Taxpayer Advocate’s 2002 annual report recommended that the 

Congress specifically limit the scope of the assessment authority for 

mathematical or clerical errors and provide standards by which to judge 

any proposed expansion of this authority.54 The Taxpayer Advocate said 

that MEA should be limited to situations where there are inconsistent 

items and the inconsistency is determined from the face of the return; 

where required items, such as schedules, were omitted from the tax 

return; and where items on the return are numerical or quantitative. 

With these or other standards in mind, the Congress could extend broader 

MEA to IRS but could specify criteria governing when IRS could use the 

authority and require other controls as well. For example, the Congress 

could require IRS to submit a report on a proposed new use of MEA. The 

report could include how such use would meet the standards or criteria 

outlined by the Congress. The report could also describe IRS’s or the 

Taxpayer Advocate’s assessment of any potential effect on taxpayer rights. 

Or, the Congress could require a more informal procedure whereby IRS 

simply notifies a committee, such as JCT, of its proposed use and 

subsequently submits a report after such use is underway. In any case, the 

Congress could provide IRS broader authority to use MEA than is 

currently authorized, but still provide appropriate safeguards by outlining 

criteria and guidelines and requiring IRS to report in order to alleviate 

concerns of improper use of MEA. 

A year since the passage of the Recovery Act, IRS’s quick implementation 

has allowed billions of dollars to be available to bolster the struggling U.S. 

economy. In the face of significant challenges posed by the Recovery Act, 

IRS traded off the requirements for quick implementation against the 

needs to collect proper data and enforce compliance with tax laws. As IRS 

Conclusions 

 

54IRS, National Taxpayer Advocate FY 2002 Annual Report to Congress (Washington, 

D.C., Dec. 31, 2002). 

Page 31 GAO-10-349 Recovery Act Tax Provisions
 

gained experience with Recovery Act implementation, it at times 

substantively adjusted its approach for specific provisions. Following 

through on its stated intention to capture the lessons it learned from the 

overall experience would help IRS the next time it is charged with similar 

tasks. Similarly, the data-collection and enforcement framework IRS has 

created allows room to enhance the data it collects for BABs and to 

strengthen the foundation for enforcing COBRA and FTHBC provisions. In 

terms of the FTHBC, we are making no recommendations concerning the 

payback feature because late in our review IRS identified a potentially 

promising alternative that it expected to pursue to enforce it. This 

alternative will bear watching, and we look forward to IRS assessing how 

well it will work. Finally, receiving broader MEA, with appropriate 

safeguards, from the Congress would give IRS the flexibility to respond 

quickly as new uses emerge in the future. 

The Congress should consider the following: 

• Granting IRS the authority to publicly release information on Build 

America Bonds (BAB), such as project purpose, beginning and ending 

dates, and costs; this approach would be broadly consistent with the 

Recovery Act reporting and transparency provisions for direct spending 

programs. 

• Broadening IRS’s ability to use math error authority (MEA), with 

appropriate safeguards against misuse of that authority. 

We recommend the Commissioner of Internal Revenue take three actions: 

• Require governmental issuers to submit additional information on Build 

America Bond (BAB)-financed projects, including information on project 

purpose, beginning and ending dates, and costs. This reporting could be 

similar to the bond reporting required for charitable organizations on the 

Schedule K of Form 990, “Supplemental Information on Tax-Exempt 

Bonds.” Should the Congress grant the authority, IRS should publish the 

information in a report available to the public. 

Matters for 

Congressional 

Consideration 

Recommendations for 

Executive Action 

• Direct officials to conduct a compliance initiative project to determine if 

individuals are receiving COBRA or employers are claiming individual 

COBRA subsidies for longer than 15 months. IRS can use existing 

information to determine if significant noncompliance with the 15-month 

provision is apparent. If significant noncompliance is found, IRS should 

issue soft notices to all employers to remind them of COBRA eligibility 

requirements and urge them to correct errors that may have been made. 

Page 32 GAO-10-349 Recovery Act Tax Provisions
 

• Prepare a report detailing the lessons learned from its Recovery Act 

experiences and implementation and publish the results of its review, in 

line with the Recovery Act’s emphasis on transparency. 

We received written comments on a draft of this report from the 

Commissioner of Internal Revenue on February 4, 2010 (for the full text of 

the comments, see app. V). He agreed with the benefit of one of our 

recommendations and agreed fully with the other two. In agreeing that IRS 

compliance efforts would benefit from requiring more information from 

issuers of Build America Bonds, he noted that the benefit would have to be 

balanced against the burden imposed on state and municipal governments 

issuing the bonds. As we said in our report, any additional cost of 

reporting could be tempered by having a minimum reporting threshold or 

delaying the onset of requirements, as was done when similar reporting for 

charitable organizations was instituted. The Commissioner recognized, as 

we had, that IRS would need statutory authority before it could make the 

information public. He said that if granted that authority, IRS stood ready 

to implement the recommendation. In agreeing with our other 

recommendations, the Commissioner said that IRS (1) has plans in place 

to do a compliance project to test the 15-month COBRA rule, and (2) will 

review and publish a report on lessons learned from IRS’s management 

and implementation of the Recovery Act. 

Agency Comments 

and Our Evaluation 

The Commissioner added that in those cases in which additional math 

error authority could be effectively deployed, IRS would welcome it. He 

said IRS looked forward to discussing the issue in more detail as the 

Congress considers any new tax legislation. 

We also received technical comments on a draft of this report from 

Treasury’s Acting Tax Legislative Counsel and made changes where 

appropriate. 

We plan to send copies of this report to the Secretary of the Treasury, the 

Commissioner of Internal Revenue, and other interested parties. The 

report will also be available at no charge on GAO’s Web site at 

www.gao.gov. 

Page 33 GAO-10-349 Recovery Act Tax Provisions
 

For further information regarding this report, please contact me at (202) 

512-9110 or at brostekm@gao.gov. Contacts for our Offices of 

Congressional Relations and Public Affairs may be found on the last 

pageof this report. Individuals making key contributions to this report may 

be found in appendix VI. 

eam 

Michael Brostek 

Director, Tax Issues 

Strategic Issues T

Page 34 GAO-10-349 Recovery Act Tax Provisions
 

List of Addressees 

The Honorable Nancy Pelosi 

Speaker of the House of Representatives 

The Honorable Robert C. Byrd 

President Pro Tempore of the Senate 

The Honorable Harry Reid 

Majority Leader 

United States Senate 

The Honorable Mitch McConnell 

Republican Leader 

United States Senate 

The Honorable Steny Hoyer 

Majority Leader 

House of Representatives 

The Honorable John Boehner 

Minority Leader 

House of Representatives 

The Honorable Daniel K. Inouye 

Chairman 

The Honorable Thad Cochran 

Vice Chairman 

Committee on Appropriations 

United States Senate 

The Honorable Dave Obey 

Chairman 

The Honorable Jerry Lewis 

Ranking Member 

Committee on Appropriations 

House of Representatives 

Page 35 GAO-10-349 Recovery Act Tax Provisions
 

The Honorable Joseph I. Lieberman 

Chairman 

The Honorable Susan M. Collins 

Ranking Member 

Committee on Homeland Security and Governmental Affairs 

United States Senate 

The Honorable Edolphus Towns 

Chairman 

The Honorable Darrell E. Issa 

Ranking Member 

Committee on Oversight and Government Reform 

House of Representatives 

The Honorable Max Baucus 

Chairman 

The Honorable Charles E. Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

The Honorable Charles Rangel 

Chairman 

The Honorable Dave Camp 

Ranking Member 

Committee on Ways and Means 

House of Representatives 

Page 36 GAO-10-349 Recovery Act Tax Provisions
A

Selected

ppendix I: Background and Requirements of 

 Provisions 

Page 37 GAO-10-349 

Appendix I: Background and Requirements of 

Selected Provisions 

The sections below provide background and describe requirements of the 

five provisions we selected to review in detail, as well as the Health 

Coverage Tax Credit (HCTC). Appendix II details our objectives, scope, 

and methodology, including why we selected each provision. 

Build America Bonds 

(BAB) 

BABs are taxable government bonds, with federal subsidies for a portion 

of the borrowing costs, that state and local governments may issue 

through December 31, 2010.1

 BAB subsidies can be either nonrefundable 

tax credits provided to holders of the bonds (tax credit BABs) or 

refundable tax credits paid to state and local governmental issuers of the 

bonds (direct payment BABs). Direct payment bonds are a new type of 

bond that provides state and local government issuers with a direct 

subsidy payment equal to 35 percent of the bond interest they pay. 

Because of this feature, state and local governments are able to offer the 

bonds to investors at a higher interest rate than they can with tax-exempt 

bonds. Direct payment BABs may appeal to a broader market than 

traditional tax-exempt bonds because a wider range of investors, such as 

pension funds that pay no taxes and therefore have less incentive to invest 

in tax-exempt bonds, are able to take advantage of them and receive a 

return comparable to taxable debt instruments. Tax credit BABs provide 

investors with a nonrefundable tax credit of 35 percent of the net bond 

interest payments (excluding the credit), which represents a federal 

subsidy to the state or local governmental issuer equal to approximately 25 

percent of the total return to the investor. This subsidy is expected to 

make investors indifferent between the tax credit bond and a taxed bond 

that is otherwise similar. As a result, each dollar of federal revenue 

foregone for both direct payment and tax credit BABs benefits state and 

local governments. One hundred percent of the proceeds from BABs must 

be used for capital expenditures. There is no volume limitation on the 

amount of eligible BABs that can be issued during this period. 

 

1

Section 1531 of Title I of Division B of the American Recovery and Reinvestment Act of 

2009 (Recovery Act). 

 Recovery Act Tax Provisions 
Appendix I: Background and Requirements of 

Selected Provisions 

COBRA was established in 1985 and provides access to health insurance 

for individuals who lost their employer-sponsored coverage. Before the 

American Recovery and Reinvestment Act of 2009 (Recovery Act),2

individuals paid up to 102 percent of the total COBRA premium cost—the 

full cost plus a two percent administration fee—to retain their health 

coverage. The act provided up to 9 months of premium assistance at a 

lower rate to individuals who were involuntarily terminated from their 

jobs. The Department of Defense Appropriations Act, 2010 (Pub. L. No. 

111–118) extended the duration of premium assistance from 9 months to 

15 months. Individuals pay no more than 35 percent of premium costs and 

their former employers pay the remaining 65 percent. Employers are 

reimbursed for their COBRA subsidies through a tax credit against their 

payroll tax liability or through a tax refund if the credit exceeds their 

payroll tax liability. Employers file Form 941, “Employer’s Quarterly 

Federal Tax Return,” for a COBRA credit. In some instances, such as for 

state health plans that are subject to COBRA requirements, multiemployer 

group health plans or insurers, instead of the former employer, may 

provide the COBRA subsidy and file for a COBRA credit. 

Consolidated Omnibus 

Budget Reconciliation Act 

(COBRA) Premium 

Subsidies 

To be eligible for COBRA premium assistance, individuals must (1) be 

involuntarily terminated between September 1, 2008, and December 31, 

2009 (recently extended to February 28, 2010), (2) not be eligible for 

another group health plan, such as Medicare or a group plan offered 

through a spouse’s employer, and (3) have a modified adjusted income 

below $145,000, or $290,000 if married and filing a joint tax return. 

The First-Time Homebuyer 

Credit (FTHBC) 

The FTHBC initially was established by the Housing and Economic 

Recovery Act of 2008 as a tax credit equal to 10 percent of the purchase 

price of the principal residence, up to $7,500, which took the form of an 

interest-free loan that must be paid back in $500 increments over 15 years.3

The Recovery Act increased the maximum credit for the 2009 FTHBC to 

$8,000, with no payback required unless the home ceases to be the 

taxpayer’s principal residence within 3 years.4

 This $8,000 credit is a 

 

2

Title III of Division B of the Recovery Act. 

3

Pub. L. No. 110-289, 122 Stat. 2654 (July 30, 2008). The 2008 FTHBC applied to purchases 

made between April 9, 2008, and June 30, 2009. 

4

Section 1006 of Title I of Division B of the Recovery Act. 

Page 38 GAO-10-349 Recovery Act Tax Provisions
Appendix I: Background and Requirements of 

Selected Provisions 

refundable tax credit, meaning that it is paid out even if there is no tax 

liability. The 2009 FTHBC was enacted into law on February 17, 2009, but 

eligibility was made retroactive to be applied to homes purchased between 

January 1, 2009, and November 30, 2009. 

The Worker, Homeownership, and Business Assistance Act of 2009 

extended the FTHBC to home purchases made through April 30, 2010, as 

well as those that are under a binding contract on that date if the contract 

provides for closing the sale on or before June 30, 2010.5

 The act also 

authorized a credit of up to $6,500 for individuals who owned and used the 

same residence as their principal residence for any 5 consecutive years 

during the 8-year period ending when they bought another property to use 

as their principal residence. 

The 2008 and 2009 FTHBC, as well as the 2010 credit, have complex 

requirements. Regarding the amount of the credit, taxpayers buying their 

first home can claim the smaller of 

• $7,500 for the 2008 credit and $8,000 for the 2009 and 2010 credits, or 

• 10 percent of the purchase price of the home. 

Virtually all eligibility requirements for the 2008 and 2009 FTHBC are 

identical, as noted in table 4. However, there are differences—the primary 

one being the purchase date. The 2010 FTHBC contains several new 

requirements. 

Table 4: Eligibility Requirements for the FTHBC 

Eligibility requirements 

2008

FTHBC 

2009 

FTHBC 

2010 

FTHBC 

Date of purchase must be between April 9, 2008, and June 30, 2009 x 

Date of purchase must be between January 1, 2009, and November 30, 2009 x 

Date of purchase must be between December 1, 2009, and April 30, 2010, or it may occur after April 

30, 2010 if the seller enters into a binding contract by April 30, 2010, that provides for closing on the 

sale before July 1, 2010. These dates are extended by a year for those who have served on qualified 

official extended duty outside the United States for at least 90 days between January 1, 2009, and 

April 30, 2010 

x 

Home must be principal residenceax x x 

Taxpayer must have no prior homeownership within the past 3 years x x 

 

5

Pub. L. No. 111-92, 123 Stat. 2984 (Nov. 6, 2009). This act was generally outside the scope 

of our work. 

Page 39 GAO-10-349 Recovery Act Tax Provisions
Appendix I: Background and Requirements of 

Selected Provisions 

Eligibility requirements 

2008

FTHBC 

2009 

FTHBC 

2010 

FTHBC 

Taxpayers must have owned and used the same residence as their principal residence for any 5 

consecutive years during the 8-year period ending when they bought another property to use as their 

principal residence to be eligible for a reduced credit of $6,500. 

x 

Home cannot be a gift or inheritance x x x 

Home cannot be acquired from a relative x x x 

Home must be located in the United States x x x 

Single filers: 

Modified adjusted gross income (MAGI) must be less than $95,000.b

Between $75,000 and $95,000 the credit phases out. x x 

Married filing jointly filers: 

MAGI must be less than $170,000. 

Between $150,000 and $170,000 the credit phases out. x x 

Single filers: 

MAGI must be less than $145,000. 

Between $125,000 and $145,000 the credit phases out. 

x 

Married filing jointly filers: 

MAGI must be less than $245,000. 

Between $225,000 and $245,000 the credit phases out. 

x 

Taxpayer cannot be a nonresident alien x x x 

Taxpayer must not have been allowed to claim the District of Columbia homebuyer credit for the 

current or any prior tax year 

x 

Home financing cannot come from tax-exempt mortgage revenue bonds x 

Taxpayer must be at least 18 years old unless married x 

Taxpayer cannot be eligible to be claimed as a dependent on someone else’s tax return x 

Taxpayer must attach a copy of the settlement statement to the tax return x 

Home price cannot exceed $800,000 x 

Source: GAO analysis of FTHBC information. 

Notes: The “x” indicates if the related eligibility requirement applies to FTHBC for homes purchased in 

2008, 2009, or 2010. 

a

A principal residence is the main home a taxpayer lives in most of the time. It can be a house, 

houseboat, housetrailer, cooperative apartment, condominium, or other type of residence. 

b

MAGI is modified adjusted gross income (AGI), as figured on an income tax return, plus various 

amounts excluded from the income tax return, such as some types of foreign income that would have 

to be added to AGI to yield MAGI. 

The Making Work Pay 

Credit (MWPC) 

The MWPC provides up to $400 for working individuals and $800 for 

working married couples.6

 Taxpayers may receive the credit throughout 

 

6

Section 1001 of Title I of Division B of the Recovery Act. 

Page 40 GAO-10-349 Recovery Act Tax Provisions
Appendix I: Background and Requirements of 

Selected Provisions 

the year in the form of lower amounts of tax withheld from their 

paychecks. The MWPC is completely phased out for single taxpayers and 

for married taxpayers filing jointly with modified adjusted gross incomes 

(MAGI) in excess of $95,000 and $190,000, respectively. Taxpayers must 

have a Social Security number in order to claim the credit, and 

nonresident aliens and dependents cannot claim it. 

If a taxpayer received a $250 economic recovery payment or a $250 

government retiree credit, the MWPC is reduced by that amount. Under 

the Recovery Act, individuals receiving Social Security and certain other 

benefits were to receive a onetime payment of $250, as were certain 

government retirees. 

Net Operating Loss (NOL) 

Carrybacks 

The NOL carryback provision is available to eligible small businesses—

those that had a 3-year gross receipts average of no more than $15 

million—if their costs and deductions exceeded their income in 2008.7

 It 

allowed these businesses to apply for a tax refund for taxes paid in up to 5 

previous years. The refund is the difference between previous taxes paid 

and the taxes that would have been paid if the amount of the 2008 loss 

were deducted from past profits. The Recovery Act increased the smallbusiness gross-receipts limit from $5 million to $15 million and extended 

the NOL carryback period for 2008 NOLs from 2 years to up to 5 years. 

Health Coverage Tax 

Credit (HCTC) 

The HCTC helps workers pay for health insurance by subsidizing part of 

their health insurance premium when they are between the ages of 55 and 

64 and are receiving payments from the Pension Benefit Guaranty 

Corporation (PBGC) or they are eligible for Trade Adjustment Assistance 

(TAA) benefits because they lost their jobs due to international trade. 

Other eligibility requirements for individuals include that they not be 

entitled to benefits from a government health insurance program and that 

they be enrolled in a qualified health plan. IRS administers the HCTC 

program but relies on the Department of Labor and PBGC to identify that 

 

7

Section 1211 of Title I of Division B of the Recovery Act. The Worker, Homeownership, 

and Business Assistance Act of 2009, mentioned earlier, revised the NOL carryback 

provision by extending the NOLs qualifying for the 5-year carryback period to those 

occurring in 2009 and expanding the provision to include all taxpayers, except for those 

that received funds under the Troubled Asset Relief Program. Refunds issued for the 5th 

year are limited to 50 percent of a taxpayer’s taxable income for that year, with an 

exception for 2008 small-business losses. This revision was generally outside the scope of 

our work. 

Page 41 GAO-10-349 Recovery Act Tax Provisions
Appendix I: Background and Requirements of 

Selected Provisions 

workers are potentially eligible for the credit. The HCTC can be claimed 

on a yearly basis on an individual’s tax return or taxpayers can choose to 

have advance payments sent to their health plans on a monthly basis as 

health insurance premiums are due. 

The Recovery Act made several changes to the HCTC, effective until 

December 31, 2010, including the following.8

 First, it increased the health 

insurance premium subsidy rate from 65 percent of premiums to 80 

percent. Second, it allowed taxpayers to be reimbursed for payments they 

made to their health plans when they were eligible for, but not yet enrolled 

in, the HCTC program. Third, it allowed family members of HCTC 

recipients to continue to receive coverage for up to 2 years if the qualified 

taxpayer becomes eligible for Medicare, the taxpayer and the spouse 

divorce, or the taxpayer dies. Fourth, it added a new qualified health 

insurance plan—one funded by a voluntary employees’ beneficiary 

association. Other changes that do not expire but will need to be 

reauthorized in 2010 include broadening eligibility for the TAA program to 

include service sector and public agency workers and requiring the 

Department of the Treasury to conduct a biennial survey of HCTC-eligible 

individuals. 

 

8

The Trade Adjustment Assistance Health Coverage Improvement Act, sections 1899A1899L of Title I of Division B of the Recovery Act. IRS is responsible for administering 

sections 1899A-1899J. 

Page 42 GAO-10-349 Recovery Act Tax Provisions
Appendix II: Objectives, Scope, and 

Methodology 

Page 43 GAO-10-349 

Appendix II: Objectives, Scope, and 

Methodology 

Our objectives were to (1) describe the status of the Internal Revenue 

Service’s (IRS) implementation of American Recovery and Reinvestment 

Act of 2009 (Recovery Act) tax provisions; (2) analyze IRS plans to collect 

data on the provisions, examine whether and how IRS captured data on 

the use of selected provisions, and discuss the provisions’ overall effect; 

(3) assess IRS’s efforts to determine potential abuse of the provisions and 

IRS’s steps for minimizing it; and (4) discuss possible lessons learned for 

future tax administration. 

To address the first objective, we identified from IRS documents 

implementation steps taken and planned for each of the 54 Recovery Act 

provisions that IRS had a role in administering. We focused on education 

and outreach, guidance and instruction, and processing and programming 

activities because they were part of a framework that IRS used to 

implement Recovery Act tax provisions. 

To further address this objective as well as others, we selected five 

Recovery Act tax provisions to review in detail—Build America Bonds 

(BAB), Consolidated Omnibus Budget Reconciliation Act (COBRA) 

premium subsidies, the First-Time Homebuyer Credit (FTHBC), the 

Making Work Pay Credit (MWPC), and net operating loss (NOL) 

carrybacks. We also reviewed the Health Coverage Tax Credit (HCTC), but 

our analysis of the HCTC was limited to data-collection issues because we 

are doing a separate review of the HCTC, which is due in March 2010, as 

mandated by the Recovery Act. 

We chose the five provisions to review in detail using the following four 

criteria: 

• Year of implementation. By choosing provisions being implemented in 

2009, we could study how IRS’s forms, guidance, systems, and processes 

were used to implement change relatively quickly. In addition, more 

reliable data would be available than for provisions that could not be 

claimed until the future. 

• Estimated revenue loss. We chose estimated revenue loss as another 

criterion to make sure we included provisions estimated to have a large 

effect on revenue. We were interested in whether a provision’s estimated 

revenue loss was among the largest of the 54 provisions. The six 

provisions we selected had total estimated revenue losses of about $153 

billion over the period from fiscal year 2009 through fiscal year 2011, 

almost half the estimated losses for all 54 provisions. 

• Refundable components. We chose refundability as a third criterion 

because IRS has frequently noted that refundable tax provisions are more 

 Recovery Act Tax Provisions 
Appendix II: Objectives, Scope, and 

Methodology 

susceptible to abuse than other tax provisions. Further, when IRS actually 

refunds money to taxpayers, recouping it can be difficult if the monies 

were paid erroneously. 

• Coverage. As shown earlier in table 1, IRS grouped Recovery Act 

provisions into the following categories: individual tax credits, tax 

incentives for business, renewable energy, various bond incentives, health 

coverage improvement, and COBRA. We chose coverage as a fourth 

criterion in order to ensure that we considered at least one provision from 

most of the IRS categories. We did not select provisions from the 

Renewable Energy group because none of them was being implemented in 

2009. We selected the BAB and NOL carryback provisions in spite of their 

relatively small dollar estimates to achieve wider coverage of IRS 

categories. 

Table 5 summarizes how the five provisions we selected for further study 

addressed these criteria and also shows how the HCTC relates to the 

criteria. 

Table 5: Characteristics of the Five Provisions GAO Selected for Analysis Plus the HCTC 

Criterion 1 Criterion 2 Criterion 3 Criterion 4 

Provision 

Was the provision 

being 

implemented in 

2009? 

Was the provision’s 

estimated revenue cost 

for fiscal years 2009 

through 2019 among 

the 10 largest of the 54 

provisions? 

What was the 

estimated revenue 

cost for that period? 

(dollars in millions)

Did the provision 

have a refundable 

feature? 

In what IRS 

category was 

the 

provision? 

BAB Yes No $4,348 Yes Various bond 

incentives 

COBRA Yes Yes 24,677 Yes COBRA 

provision 

FTHBC Yes Yes 6,638 Yes Individual 

credits 

MWPC Yes Yes 116,199 Yes Individual 

credits 

NOL 

carryback 

Yes No 947 No Business 

incentives 

HCTC Yes No 457 Yes Health 

coverage 

improvement 

Source: GAO analysis of IRS and Joint Committee on Taxation information. 

For the second objective, dealing with IRS’s collection of data on the 

Recovery Act provisions, we analyzed IRS planning documents for 

collecting data for the 54 provisions. For the 5 selected provisions and the 

HCTC, we analyzed whether IRS would be able to identify provision users 

Page 44 GAO-10-349 Recovery Act Tax Provisions
Appendix II: Objectives, Scope, and 

Methodology 

and the extent of use. To see how these data could relate to estimating 

IRS’s Recovery Act provisions’ effect on the overall economy, we 

consulted with GAO economics experts, including the Chief Economist’s 

office, and studied Council of Economic Advisers (CEA) and 

Congressional Budget Office (CBO) reports. 

To meet the third objective, relating to the potential abuse of provisions, 

we determined what risk assessments and risk-mitigation plans IRS had 

done or planned for the future and discussed them with IRS and 

Department of the Treasury officials. We also assessed IRS’s riskmanagement efforts against GAO and other published criteria on 

mitigating abusive noncompliance. For the five selected provisions, we 

examined the potential for abuse by reviewing IRS documentation and risk 

assessments and interviewing Treasury Inspector General for Tax 

Administration (TIGTA) and IRS officials. 

We used the results of our work and TIGTA’s to answer our fourth 

objective—discussing possible lessons learned for future tax 

administration. We interviewed responsible IRS officials to obtain their 

views on these observations. 

We found the IRS data we used reliable for the purposes of this report. We 

determined this after interviewing IRS and, where appropriate, TIGTA 

officials, and reviewing various TIGTA reports. 

We conducted this performance audit from June 2009 through February 

2010 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. 

Page 45 GAO-10-349 Recovery Act Tax Provisions
Appendix III: The 54 Recovery Act Tax 

Provisions That IRS Has a Role in 

Administering 

Table 6 details information about the 54 American Recovery and 

Reinvestment Act of 2009 (Recovery Act) provisions that the Internal 

Revenue Service (IRS) has a role in administering. 

Table 6: Information about the 54 Recovery Act Provisions That IRS Has a Role in Administering 

Provision 

number Short provision name 

Original 

expiration 

datea

RefundablebIRS category 

Total Joint Committee 

on Taxation (JCT) 

estimated revenue cost 

from fiscal year 2009 

through fiscal year 

2019 (dollars in 

millions)

1001 Making Work Pay Credit 2010 X Individual credits $116,199

1002 Increase in Earned Income Tax Credit 2010 X Individual credits 4,663

1003 Increase in Child Tax Credit 2010 X Individual credits 14,830

1004 American Opportunity Tax Credit 2010 X Individual credits 13,907

1005 Computer equipment allowed as 

education expense 

2010 Individual credits 6

1006 First-Time Home Buyer Credit 2009 X Individual credits 6,638

1007 Suspension of tax on portion of 

unemployment compensation 

2009 Individual credits 4,740

1008 Deduction for state sales tax on the 

purchase of new car 

2009 Individual credits 1,684

1011 Increase alternative minimum tax 

(AMT) relief for nonrefundable credits 

2009 Individual credits 69,759

1012 Extension of increased AMT 

exemption amount 

2009 Individual credits 0

1101 Extend credit for renewable energy 

resources 

2013 Energy incentives 13,143

1102 Election of investment credit in lieu of 

production tax credits 

2013 Energy incentives 285

1103 Repeal of certain limitations on credit 

for renewable energy property 

n.a. Energy incentives 604

1104 Coordination with renewable energy 

grants 

2010 Energy incentives No revenue effect

1111 New clean renewable energy bonds n.a. Bond incentives 578

1112 Qualified energy conservation bonds n.a. Bond incentives 803

1121 Extension and modification of credit for 

nonbusiness energy property 

2010 Energy incentives 2,034

1122 Modification of credit for residential 

energy-efficient property 

n.a. Energy incentives 268

1123 Increase in credit for alternative fuel 

vehicle refueling property 

2010 Energy incentives 54

Appendix III: The 54 Recovery Act Tax 

Provisions That IRS Has a Role in 

Administering 

Page 46 GAO-10-349 Recovery Act Tax Provisions 
Appendix III: The 54 Recovery Act Tax 

Provisions That IRS Has a Role in 

Administering 

Provision 

number Short provision name 

Original 

expiration 

datea

 Refundableb IRS category 

Total Joint Committee 

on Taxation (JCT) 

estimated revenue cost 

from fiscal year 2009 

through fiscal year 

2019 (dollars in 

millions)

1131 Application of monitoring requirement 

for carbon dioxide 

n.a. Energy incentives No revenue effect

1141 Credit for qualified plug-in electric-drive 

motor vehicles 

n.a. Energy incentives 2,002

1142 Credit for certain plug-in electric 

vehicles 

2011 Energy incentives 0

1143 Conversion kits 2011 Energy incentives No revenue effect

1144 Treatment of alternative motor vehicle 

credit as a personal credit allowed 

against AMT 

n.a. Energy incentives No revenue effect

1151 Increased exclusion amount for 

commuter transit benefits and passes 

2010 Energy incentives 192

1201 Special allowance for property 

acquired during 2009 

2010 Business incentives 5,879

1202 Temporary increase in limitations on 

expensing of certain depreciable 

business assets 

2009 Business incentives 41

1211 5-year carryback of 2008 net operating 

losses (NOL) 

2008 Business incentives 947

1212 Decreased required estimated tax 

payments for small businesses in 2009

2009 Business incentives 0

1221 Modify the Work Opportunity Tax 

Credit 

2010 Business incentives 231

1231 Allow deferral of income from 

cancellation of indebtedness 

2010 Business incentives 1,622

1232 Modification of rules for original issue 

discount 

n.a. Business incentives No revenue effect

1241 Increase exclusion for qualified small 

business stock 

2010 Business incentives 829

1251 Reduction of recognition period for S 

corporation built-in gain 

2010 Business incentives 415

1261 Clarify regulations related to limitations 

on built-in losses 

2009 Business incentives -6,977c

1262 Treatment of change of ownership of 

automaker for NOLs 

n.a. Business incentives 3,163

1301 Industrial Development Bonds 2010 Bond incentives 203

1302 Energy Investment Credit 2011 Energy incentives 1,647

1401 Recovery Zone Bonds 2010 X Bond incentives 5,371

Page 47 GAO-10-349 Recovery Act Tax Provisions
Appendix III: The 54 Recovery Act Tax 

Provisions That IRS Has a Role in 

Administering 

Provision 

number Short provision name 

Original 

expiration 

datea

 Refundableb IRS category 

Total Joint Committee 

on Taxation (JCT) 

estimated revenue cost 

from fiscal year 2009 

through fiscal year 

2019 (dollars in 

millions)

1402 Tribal Economic Development Bonds n.a. Bond incentives 315

1501 De minimis safe harbor exemption 2010 Bond incentives 3,234

1502 Modification of small-issuer exception 2010 Bond incentives No revenue effect

1503 Temporary modification of AMT 

limitation on tax-exempt bonds 

2010 Bond incentives 555

1504 Modification to High Speed Intercity 

Rail Facility Bonds 

n.a. Bond incentives 288

1511 Delay in application of withholding tax 

on government contractors 

2011 Withholding on 

government 

contractors 

291

1521 Qualified school construction bonds 2010 Bond incentives 9,877

1522 Qualified zone academy bonds 2010 Bond incentives 1,045

1531 Build America Bonds 2010 X Bond incentives 4,348

1541 Regulated investment companies allow 

to pass-thru tax credit bonds 

n.a. Bond incentives 0

1601 Application of certain labor standards 

for projects financed with certain bonds

n.a. Bond incentives No revenue effect

2201 Economic Recovery Payments 2009 Individual credits 14,225

2202 Economic Recovery Payments for 

government retirees 

2009 Individual credits 218

3001 Consolidated Omnibus Budget 

Reconciliation Act (COBRA) 

2009 X COBRA 24,677

1899 A-J Health Coverage Tax Credit 2010 X Health coverage 

improvement 

457

 Total $325,290

Source: GAO analysis of IRS and JCT data. 

a

The expiration date is defined as the last year for which the benefit can be claimed or the qualifying 

purchase or event must occur. The notation n.a., not applicable, indicates that no expiration date 

exists. An example of a provision without an expiration date is bonds that have volume limits, but not 

date limits. Original expiration dates are cited, but some provisions have already been extended, such 

as the provision 1006, the First-Time Homebuyer Credit. This provision was also revised as part of 

the extension. 

b

An X denotes that the provision has a refundable feature. 

c

This provision generates revenue. 

Page 48 GAO-10-349 Recovery Act Tax Provisions
Appendix IV: IRS Data Collected on Four Tax Appendix IV: IRS Data Collected on Four Tax Provisions in the Recovery Act 

Provisions in the Recovery Act 

The Internal Revenue Service (IRS) collected and internally circulated 

data on the use of three of the five provisions we focused on in our review, 

plus the Health Coverage Tax Credit (HCTC). Treasury released limited 

data to the public, but data on the individual provisions’ use was not 

posted on recovery.gov, the administration’s official Web site for 

monitoring the American Recovery and Reinvestment Act of 2009 

(Recovery Act). As shown in tables 7 through 10, respectively, and in 

figure 3, these provisions were (1) Build America Bonds (BAB), (2) 

Consolidated Omnibus Budget Reconciliation Act (COBRA) premium 

subsidies, (3) the First-Time Homebuyer Credit (FTHBC), and (4) the 

HCTC. IRS has plans to collect data on other provisions in the future, as 

noted in table 2. For example, IRS plans to report data on the Making 

Work Pay Credit (MWPC) in April 2010.1

Table 7: Recent Selected IRS Data Collected on BABs 

Data category Amount

Number of information returns showing BAB issuancesa 443

Dollar value of associated issuancesb (in billions) 32.4 

Number of returns requesting a BAB direct paymentc 140

Number of returns requesting a BAB tax creditd0

Source: IRS. 

Note: Data on the number of information returns showing BAB issuances and the dollar value of 

associated issuances are as of January 1, 2010. Information on the number of returns requesting a 

BAB direct payment is as of November 14, 2009. 

a

The number of filings of Form 8038-G, “Information Return for Tax-Exempt Government Obligations,” 

which notifies IRS of a BAB issue. 

b

The dollar value of all BABs issued and reported on Form 8038-G. 

c

The number of filings of Form 8038-CP, “Return for Credit Payments for Issuers of Qualified Bonds,” 

which requests a BAB direct payment. 

d

The number of filings of Form 8912, “Credit to Holders of Tax Credit Bonds,” which requests a BAB 

tax credit. 

 

1

To accelerate the delivery of the credit, IRS issued new withholding tables that reduce 

federal tax withholding. However, IRS does not know how many employers used the new 

tables. 

Page 49 GAO-10-349 Recovery Act Tax Provisions 
Appendix IV: IRS Data Collected on Four Tax 

Provisions in the Recovery Act 

Figure 3: Number of BAB Issuances by Type of Issue as of January 1, 2010 

11% 42%

Source: IRS.

30%

7%

4%

3%

Health/hospital, 7

Housing, 1

Education, 131

Other, 188

Transportation, 50

Utilities, 33

Environment, 19

Public safety, 14

2%

Note: Percentages do not add to 100 percent due to rounding. 

Table 8: Recent Selected IRS Data Collected on COBRA 

Data category Amount 

Number of returns claiming a COBRA credita191,618

Number of employees receiving benefitsbNot yet available 

Amount of credits claimed (dollars in millions)c$803 

Amount of outlays made (dollars in millions)d $254 

Source: IRS. 

Notes: Information on the number of returns claiming a COBRA credit is as of December 26, 2009. 

Data on the amount of credits claimed and the amount of outlays made are as of November 14, 2009. 

a

The number of employer filings of Form 941 with claims for the COBRA subsidy. 

b

The number of employees for which COBRA premium assistance was provided. 

c

The dollar value of all COBRA subsidy claims. 

d

The dollar value of COBRA subsidy claims that resulted in a tax refund to employers. 

Page 50 GAO-10-349 Recovery Act Tax Provisions
Appendix IV: IRS Data Collected on Four Tax 

Provisions in the Recovery Act 

Table 9: Selected IRS Data Collected on the FTHBC through November 21, 2009 

Data category 2008 2009

Number of filers claiming the FTHBC 1,068,253 630,045

Amount of credits claimed (dollars in billions) $7.3 $4.7

Source: IRS. 

Note: While combined 2008 and 2009 data appear reliable, some concerns exist about the reliability 

of each year’s data. In a group of 47,276 electronically filed returns that appeared not to have claimed 

the whole FTHBC, the Treasury Inspector General for Tax Administration (TIGTA) found that 93 

percent, or 43,967, were not coded as a 2009 FTHBC even though the purchase had occurred in 

2009. It is likely that the errors are a result of (1) taxpayers who purchased a house in 2009 prior to 

the passage of the Recovery Act and claimed the 2008 credit, when, in fact, they are eligible for the 

expanded benefits of the 2009 credit; and (2) IRS’s not properly coding the purchase date as a 2009 

FTHBC on some returns. IRS had plans to monitor instances where taxpayers claimed the 2008 

instead of the 2009 credit. When those taxpayers did not file an amended return, IRS had plans to 

notify them of their eligibility for the expanded benefits of the 2009 credit. According to IRS officials, 

IRS planned to correct the other errors when it began enforcing the 2008 FTHBC payback provisions. 

At that time, IRS planned to verify the date of purchase and make any adjustments. 

Table 10: Selected IRS Data Collected on the HCTC through November 2009 

Data category Amount

Number of new enrolleesa 12,116

Payments to enrolleesb (dollars in millions) $26.2 

Source: IRS. 

a

For April 2009 through August 2009, the monthly number of new enrollees was roughly 1,000, 

ranging between 1,066 and 1,420. In September 2009, October 2009, and November 2009, the 

numbers rose to 1,930, 2,494, and 1,624 respectively. 

b

The payments include not only amounts for new enrollees but also incremental amounts for current 

participants because those already enrolled had the percentage of their health insurance costs 

covered by the HCTC increased from 65 percent to 80 percent. 

Page 51 GAO-10-349 Recovery Act Tax Provisions
Appendix V: Comments from the Internal Appendix V: Comments from the Internal Revenue Service 

Revenue Service 

Page 52 GAO-10-349 Recovery Act Tax Provisions 
Appendix V: Comments from the Internal 

Revenue Service 

Page 53 GAO-10-349 Recovery Act Tax Provisions
Appendix V: Comments from the Internal 

Revenue Service 

Page 54 GAO-10-349 Recovery Act Tax Provisions
Appendix VI: 

A

GAO Contact and Staff 

cknowledgments 

Page 55 GAO-10-349 

Appendix VI: GAO Contact and Staff 

Acknowledgments 

Michael Brostek, (202) 512-9110, brostekm@gao.gov

In addition to the contact named above, Libby Mixon, Assistant Director; 

Amy R. Bowser; Gerardine Brennan; Sherwin D. Chapman; Andrea S. 

Clark; William J. Cordrey; Mary C. Coyle; John E. Dicken; Rachel E. 

Dunsmoor; Shirley A. Jones; Lawrence M. Korb; Susan E. Offutt; John G. 

Smale, Jr.; Steven J. Sebastian; and Anne O. Stevens made key 

contributions to this report. 

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