TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION 

Additional Actions Are Needed to 

Ensure That Improper Fuel Tax 

Credit Claims Are Disallowed 

September 26, 2014 

Reference Number: 2014-30-067 

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process 

and information determined to be restricted from public release has been redacted from this document. 

Redaction Legend: 

1 = Tax Return/Return Information 

2 = Risk Circumvention of Agency Regulation or Statute 

Phone Number / 202-622-6500 

E-mail Address / TIGTACommunications@tigta.treas.gov

Website / http://www.treasury.gov/tigta
HIGHLIGHTS

ADDITIONAL ACTIONS ARE NEEDED TO the fuel. These lower claim amounts are 

ENSURE THAT IMPROPER FUEL TAX generally not selected for review due to current 

CREDIT CLAIMS ARE DISALLOWED IRS policy. As a result, approximately 

$120.5 million in questionable fuel tax credit 

Highlights claims may have been allowed in the 

three years reviewed. 

TIGTA’s evaluation indicates that a combination 

Final Report issued on of factors caused the questionable claims to be 

September 26, 2014 released and that actions can be taken at the 

processing and examination levels to better 

Highlights of Reference Number: 2014-30-067 ensure that fuel tax credit claims are refunded 

to the Internal Revenue Service Commissioners only when appropriate. Without improved 

for the Small Business/Self-Employed and the controls and processes to prevent the issuance 

Wage and Investment Divisions. of questionable refunds, millions of dollars in 

Federal tax revenue will be lost each year. IMPACT ON TAXPAYERS 

WHAT TIGTA RECOMMENDED Taxpayers are allowed to claim a fuel tax credit 

on their individual tax returns to offset the TIGTA recommended that the IRS: 1) use 

amount of any Federal taxes paid on fuel used systemic controls to ensure that all Forms 1040 

for off-highway business purposes, such as claiming a fuel tax credit at the threshold amount 

farming or commercial fishing. In Processing or above are manually reviewed prior to refund 

Years 2011 through 2013, approximately issuance; 2) if additional auditing resources 

$694 million in fuel tax credits were claimed by become available, consider lowering the 

individual taxpayers. A significant number of the systemic threshold amount for selecting and 

claims for these credits are potentially improper. reviewing Forms 1040 claiming a fuel tax credit 

For the past several years, the IRS has included that report only wage income; and 3) provide 

fuel tax credit scams on its annual list of the managers and examiners with additional training 

“Dirty Dozen” tax scams. and procedures to determine acceptable 

supporting documentation for fuel tax credit WHY TIGTA DID THE AUDIT claims as well as to review amended returns 

when the original return has been adjusted This audit was initiated to evaluate whether 

beyond removing the fuel tax credit. opportunities exist to improve the return 

classification and examination processes for In response to the report, IRS officials agreed individual income tax returns claiming a fuel tax with the recommendations and stated that they credit. have taken or plan to take appropriate corrective 

WHAT TIGTA FOUND actions. 

TIGTA’s evaluation of data from Processing 

Years 2011 through 2013 indicates that a total of 

4,004 Forms 1040, U.S. Individual Income Tax 

Return, claiming a fuel tax credit at or above the 

threshold amount for manual screening were not 

properly coded for review, and credits totaling 

approximately $47.2 million may have been 

erroneously released to taxpayers. 

Furthermore, there were 198,395 returns with 

fuel tax credit claims below the manual 

screening threshold amount that were 

questionable because they did not report any 

business income to support the business use of 
DEPARTMENT OF THE TREASURY 

WASHINGTON, D.C. 20220

TREASURY INSPECTOR GENERAL 

FOR TAX ADMINISTRATION 

September 26, 2014 

MEMORANDUM FOR COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED 

DIVISION 

COMMISSIONER, WAGE AND INVESTMENT DIVISION 

FROM: Michael E. McKenney 

Deputy Inspector General for Audit 

SUBJECT: Final Audit Report – Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed (Audit # 201230024) 

This report presents the results of our review to evaluate whether opportunities exist to improve 

the return classification and examination processes for individual income tax returns claiming a 

fuel tax credit. This audit is included in our Fiscal Year 2014 Annual Audit Plan and addresses 

the major management challenge of Tax Compliance Initiatives. 

Management’s complete response to the draft report is included as Appendix VII. 

Copies of this report are also being sent to the Internal Revenue Service managers affected by the 

report recommendations. If you have any questions, please contact me or Bryce Kisler, Acting 

Assistant Inspector General for Audit (Compliance and Enforcement Operations). 
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

Table of Contents 

Background .......................................................................................................... Page 1 

Results of Review ............................................................................................... Page 3 

The Internal Revenue Service Did Not Always Identify 

Questionable Fuel Tax Credit Claims ........................................................... Page 3 

Recently Implemented Filters Do Not Always Identify 

Questionable Fuel Tax Credit Claims ........................................................... Page 7 

Recommendations 1 and 2: .............................................. Page 9 

Additional Guidance Could Improve Examiner Review 

of Fuel Tax Credit Claims ............................................................................. Page 9 

Recommendation 3: ........................................................ Page 13 

Appendices 

Appendix I – Detailed Objective, Scope, and Methodology ........................ Page 15 

Appendix II – Major Contributors to This Report ........................................ Page 18 

Appendix III – Report Distribution List ....................................................... Page 19 

Appendix IV – Outcome Measures ............................................................... Page 20 

Appendix V – Selected Statistical Tables ..................................................... Page 23 

Appendix VI – Glossary of Terms ................................................................ Page 29 

Appendix VII – Management’s Response to the Draft Report ..................... Page 32 
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

Abbreviations 

FRP Frivolous Return Program 

FY Fiscal Year 

IMF Individual Master File 

IRM Internal Revenue Manual 

IRS Internal Revenue Service 

IRTF Individual Return Transaction File 

PY Processing Year 

RICS Return Integrity and Correspondence Services 

SSA Social Security Administration 

TIGTA Treasury Inspector General for Tax Administration 

 
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

Background 

The Federal fuel tax on gasoline is 18.4 cents per gallon and, when combined with the taxes 

imposed by other levels of Government, is the second largest factor contributing to the price 

motorists pay for gasoline. Other types of fuel are taxed at different rates; for example, the tax 

on diesel fuel is 24.4 cents per gallon. Because revenues from the Federal fuel tax are used to 

maintain the Nation’s highways, Congress enacted legislation to provide a credit to offset the 

amount of Federal taxes paid by taxpayers on fuel used for off-highway business purposes, such 

as for farming or commercial fishing. During Processing Years (PY) 2011 through 2013,1

individual taxpayers claimed approximately $694 million in fuel tax credits using Form 4136, 

Credit for Federal Tax Paid on Fuels. 

Congress typically establishes tax credits to encourage certain activities or to provide assistance 

to taxpayers in certain situations. Unlike an income tax deduction, which reduces the amount of 

income subject to tax, a tax credit reduces the amount of taxes owed dollar for dollar. This 

makes a tax credit more valuable than a tax deduction of the same dollar amount for those 

seeking to minimize their tax liabilities. Moreover, some 

tax credits, such as the Earned Income Tax Credit and 

fuel tax credits, are refundable in certain situations, 

meaning that they are paid out even if there is no tax 

liability or the credit exceeds the amount of any income 

tax due. 

Unscrupulous individuals and criminals have been known 

to file fraudulent tax returns claiming improper fuel tax credits to reduce taxes and/or receive 

improper refunds. For the past several years, the Internal Revenue Service (IRS) has included 

fuel tax credit scams on its annual list of “Dirty Dozen” tax scams; for example, the IRS news 

release for the 2014 list states:2

 

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. 

Farmers and other taxpayers who use fuel for off-highway business purposes may 

be eligible for the fuel tax credit. But other individuals have claimed the tax 

credit although they were not eligible. Fraud involving the fuel tax credit is 

considered a frivolous tax claim and can result in a penalty of $5,000.

Overall responsibility for the Federal Fuel Tax Program area falls under the Excise Tax Program 

of the IRS’s Small Business/Self-Employed Division. The Small Business/Self-Employed 

 

1

 See Appendix VI for a glossary of terms. 

2

 IRS News Release 2014-16, IRS Releases the “Dirty Dozen” Tax Scams for 2014; Identity Theft, Phone Scams 

Lead List (Feb. 19, 2014). 

Page 1

For the past several years, 

the Internal Revenue Service 

has included fuel tax credit 

scams on its annual list of 

“Dirty Dozen” tax scams. 
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

Division’s Excise Tax Program covers fuel taxes as well as other excise taxes. The Small 

Business/Self-Employed Division’s Fuel Tax Program is responsible for conducting a wide 

variety of fuel-related examinations, inspections, and compliance reviews for the taxes on 

different types of fuel (e.g., gasoline, diesel, kerosene, biodiesel, and ethanol), primarily at 

refineries, fuel terminals, and other approved facilities, as well as the monitoring of untaxed, 

dyed fuels.3

However, the IRS’s Wage and Investment Division’s Submission Processing function is 

responsible for identifying individual returns claiming fuel tax credits on Form 4136 and 

referring questionable returns for further examination before the refunds are issued. IRS 

computer programs identify Forms 1040, U.S. Individual Income Tax Return, claiming fuel tax 

credits at or above a threshold amount during the processing of the returns, based on criteria 

provided by the Examination function. These returns are flagged with an action code requiring 

manual screening to determine whether the claim is appropriate or the return should be selected 

for audit. If the return is selected for audit, an unallowable code is assigned to the return to 

freeze the portion of the refund attributable to a fuel tax credit. The audits are generally 

performed using correspondence by general examiners at an IRS campus or by examiners 

assigned to the Frivolous Return Program (FRP). As a matter of policy, the IRS does not 

specifically scrutinize Forms 1040 claiming a fuel tax credit below an established threshold 

amount. 

This review was performed at the Wage and Investment Division’s Submission Processing 

function in Austin, Texas, and the Small Business/Self-Employed Division offices in Louisville, 

Kentucky; Philadelphia, Pennsylvania; and Ogden, Utah, during the period August 2012 through 

March 2014. We conducted this performance audit 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 objective. We believe that the evidence obtained provides a 

reasonable basis for our findings and conclusions based on our audit objective. Detailed 

information on our audit objective, scope, and methodology is presented in Appendix I. Major 

contributors to the report are listed in Appendix II. 

 

3

 Dyed fuels are used for nontaxable off-road purposes, such as in refrigeration units on trailers, off-road equipment, 

and home heating. Undyed fuels may be sold tax free for use on a farm for farming purposes or to a political 

subdivision of a State or the District of Columbia. 

Page 2
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

Results of Review 

Although the IRS’s screening filters are preventing a significant amount of questionable fuel tax 

credit claims from being processed, additional efforts are needed to prevent the issuance of 

millions of dollars in refunds from questionable claims. In PYs 2011 and 2012, the IRS’s 

existing systems and processes prevented the issuance of approximately $208 million in 

questionable fuel tax credits claimed on Forms 1040 during return processing. During the same 

period, approximately $133 million in potentially questionable fuel tax credit claims were not 

detected, and potentially fraudulent refunds were paid to taxpayers. 

The Wage and Investment Division implemented new identity theft screening filters in 

September 2012 that, in addition to improving the detection of potential identity theft fraud, also 

improved the IRS’s ability to identify questionable fuel tax credit claims during return 

processing. For PY 2013, the IRS’s systems and processes, including the newly implemented 

filters, prevented the issuance of $33 million in questionable fuel tax credit claims during return 

processing; however, approximately $35 million in potentially questionable claims were still not 

detected. Also, when questionable returns were identified and referred for further review, 

examiners did not always make correct decisions when allowing the fuel tax credit claims. If the 

IRS does not adequately detect and prevent questionable fuel tax credit claims, millions of 

dollars in improper refunds may continue to be erroneously released to taxpayers. 

The Internal Revenue Service Did Not Always Identify Questionable 

Fuel Tax Credit Claims 

To determine the number of individual tax returns with questionable fuel tax credit claims being 

processed by the IRS, we developed and reviewed a database4

 of 1,152,278 Forms 1040 claiming 

a fuel tax credit during PYs 2011 through 2013.5 As shown in Figure 1, our analysis found that 

approximately $168 million (24 percent) of the $694 million in fuel tax credit claims for the 

three years were questionable based on the fact that the individuals reported no farming or other 

business income to support their claims. A total of 202,399 (18 percent) of the 1,152,278 returns 

with fuel tax credit claims of ***2*** or more filed in PYs 2011 through 2013 were 

questionable. The Internal Revenue Manual (IRM) states that an action code will be generated 

during processing that requires a manual review of any tax return filed by an individual taxpayer 

claiming a fuel tax credit on Form 4136 at or above a fixed threshold amount before a refund is 

issued; however, exception criteria provided by Examination allowed some returns to avoid 

identification by the action code process. 

 

4

 The database consists of data from the IRS’s Individual Return Transaction File and Individual Master File. 

5

 See Appendix V for detailed statistical tables. 

Page 3
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

Figure 1: Total Form 1040 Fuel Tax Credit Filings 

and Questionable Filings for PYs 2011–20136

PY 

Total Form 1040 Filings With Fuel Tax Credit Claims 

Total Claims Questionable Claims 

Number Amount (millions) Number Amount (millions)

2011 343,666 $166 47,413 $46.6 

2012 499,959 $382 113,115 $86.6 

2013 308,653 $146 41,871 $34.6 

Total 1,152,278 $694 202,399 $167.8 

Source: Treasury Inspector General for Tax Administration (TIGTA) analysis of the IRS’s individual 

taxpayer account information as of December 31, 2013. 

Returns with questionable fuel tax credit claims at the manual screening 

threshold amount or above are not being selected for screening 

As shown in Figure 2 below, our analysis identified $47.2 million in allowed fuel tax credit 

claims on 4,004 tax returns for the three-year period that were not identified for review by IRS 

computer systems based on the programming criteria in use. These returns were questionable 

because they*************2*******************,7

 and no other business income that would 

qualify the filer to claim a fuel tax credit. These 4,004 returns claimed a fuel tax credit at or 

above the threshold amount that otherwise should have been selected for manual screening 

before the refunds were issued, but they were not selected. For example, in PY 2013, taxpayers 

filing Forms 1040 *******************2*********************and claiming a fuel tax 

credit reported an average gross cash income of almost $14,000 with no other types of income on 

the return. However, these taxpayers also claimed an average fuel tax credit of over $11,000, 

which, assuming an average cost of $2 per gallon,8

 would be the equivalent of spending over 

$121,000 on fuel for the year. As a result of not identifying and reviewing all questionable fuel 

 

6

 Dollar amounts are rounded. 

7

 *******************2************************************************************** 

*****************************************2***************************************************

****************************************2****************************************************

************************2***************************************. 

8

 We will use this figure throughout this report because the IRS training manual uses $2 per gallon as the average 

cost of fuel. 

Page 4
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

tax credit claims at or above the threshold amount, we estimate that a total of $68.2 million in 

questionable claims may be paid for a total of five years.9

Figure 2: Form 1040 Fuel Tax Credit Filings and Questionable 

Filings at or Above Screening Threshold for PYs 2011–201310

PY 

Form 1040 Filings With Fuel Tax Credit Claims at or Above the Threshold 

Total Claims Questionable Claims 

Number Amount (millions) Number Amount (millions)

2011 11,171 $74 1,360 $20.0 

2012 25,927 $187 1,692 $16.7 

2013 8,720 $63 952 $10.5 

Total 45,818 $324 4,004 $47.2 

Source: TIGTA analysis of the IRS’s individual taxpayer account information as of December 31, 2013. 

Our discussions with IRS officials revealed that some of these returns were not coded for manual 

screening based on the criteria used in the IRS computer programs. IRS officials agreed that the 

programming criteria permitted some questionable claims to avoid the initial review, and they 

indicated that programming and processes have been changed to prevent similar exceptions 

during the 2015 Filing Season. 

Millions of dollars in questionable fuel tax credit claims below the threshold 

amount were paid on Forms 1040 reporting only wage income 

As seen in Figure 3, we identified $120.5 million in fuel tax credit claims on 198,395 PYs 2011 

through 2013 returns that reported *****************************2***************

r************************************2****************************************

*****2***** but claimed fuel tax credits of at least ***2*** but below the threshold amount. 

The fuel tax credit is intended for taxpayers’ use of fuel for an off-highway business purpose, 

such as for farm equipment or for commercial fishing boats. 

 

9

 See Appendix IV. The forecasted portion of the total assumes, among other considerations, that economic 

conditions and tax laws do not change. 

10 Dollar amounts are rounded. 

Page 5
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

Figure 3: Form 1040 Fuel Tax Credit Filings and Questionable Filings 

of at Least ***2** but Below the Screening Threshold for PYs 2011–201311

PY 

Form 1040 Filings With Fuel Tax Credit Claims 

of at Least ***2*** but Below the Threshold 

Total Claims Questionable Claims 

Number Amount (millions) Number Amount (millions)

2011 195,870 $86 46,053 $26.5 

2012 337,824 $188 111,423 $69.9 

2013 173,903 $78 40,919 $24.1 

Total 707,597 $352 198,395 $120.5 

Source: TIGTA analysis of the IRS’s individual taxpayer account information as of December 31, 2013. 

In November 2012, we provided the Small Business/Self-Employed Division with information 

on 17,782 returns claiming a fuel tax credit in PYs 2011 and 2012 that were selected using our 

analysis. Of these returns, 10,694 were for taxpayers who reported only wage income, with no 

business income to support the fuel tax credit claim. As examination resources have become 

available, the IRS has opened over 6,000 examinations to date using our information and has 

assessed nearly $17 million in additional taxes for the first 1,928 cases closed. 

We also provided IRS’s Criminal Investigation with information on 400 returns with 

questionable fuel tax credit claims to determine if it was tracking any of the returns under any 

possible fraud schemes. Our sample included 200 returns each from PYs 2011 and 2012. For 

each year, 100 returns had fuel tax credit claims at or above the threshold amount and 

100 returns had fuel tax credit claims that were at least ***2*** but below the threshold amount. 

Criminal Investigation informed us that it was tracking at least 50 percent of the returns we 

provided with fuel tax credit claims above the threshold amount, but it was tracking less than 

10 percent of the returns we provided with fuel tax credit claims under the threshold. However, 

it was not able to tell us if any of these returns will ultimately be worked because each case is 

evaluated based on the type of scheme, its complexity, the dollar amount involved, and whether 

the case impact was sufficient enough to refer to the United States Attorney’s Office for 

prosecution. 

 

11 Dollar amounts are rounded. 

Page 6
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

Recently Implemented Filters Do Not Always Identify Questionable 

Fuel Tax Credit Claims 

In Calendar Year 2011, the Wage and Investment Division (which is responsible for processing 

most individual income tax returns) established the Return Integrity and Correspondence 

Services (RICS) function to consolidate responsibilities for ensuring revenue protection and 

refund compliance into one function. In September 2012, the RICS function implemented 

four new screening filters to allow the IRS to identify potentially questionable fuel tax credit 

claims by individuals. Although primarily focused on identifying identity theft, the new filter 

rules also involve determining whether returns with fuel tax credit claims above a screening 

amount contain the type and amount of income that would make the claim not plausible. 

When processing is stopped by the new filters, a letter is sent to the taxpayer requesting that the 

taxpayer contact the IRS to confirm their identity. If the taxpayer responds to the letter, the 

processing of the return continues and a refund may be issued. If the taxpayer does not respond, 

the IRS removes the return from processing to prevent the issuance of a potentially erroneous 

refund. 

As shown in Figure 4 below, our analysis found that the number and dollar amount of potentially 

questionable fuel tax credit claims not identified during processing was lower in PY 2013, after 

the IRS’s new filters had been in operation for the entire processing year. In PY 2012, the IRS 

paid approximately $17 million for 1,692 potentially questionable fuel tax credit claims at or 

above the threshold amount, while in PY 2013 the IRS paid approximately $11 million for 

952 potentially questionable claims using the same criteria. 

The filters also appear to have reduced the number of potentially questionable fuel tax credit 

claims of at least **2**but below the threshold amount. In PY 2012, the IRS paid $69.9 million 

for 111,423 potentially questionable fuel tax credit claims in this range. However, in PY 2013, 

the IRS only paid approximately $24 million for 40,919 potentially questionable claims using the 

same criteria. 

Figure 4: Effectiveness of the RICS Function’s New Fuel Tax Credit Filters 

Processing Year 

Potentially Questionable Fuel Tax Credit Claims Not Identified 

At Least ***2***but 

Below the Threshold Amount 

At or Above 

the Threshold Amount 

Number 

Amount 

(millions) Number 

Amount 

(millions) 

2012 111,423 $69.9 1,692 $16.7 

2013 40,919 $24.1 952 $10.5 

Source: TIGTA analysis of the IRS’s individual taxpayer database files as of December 31, 2013. 

Page 7
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

In March 2014, we provided the Small Business/Self-Employed Division with information on 

2,566 returns processed in PY 2013 that appear to be questionable based on our data analysis but 

were not selected by the IRS’s filters. Of these, 952 returns claimed fuel tax credits at or above 

the threshold amount. More than 1,600 of the 2,566 returns claimed fuel tax credits of at least 

***2*** but below the threshold amount, but they reported only wage income with no business 

or supplemental income reported on Schedule C, Schedule E, or Schedule F. The IRS plans to 

analyze these returns and open examinations as resources become available. 

Some Form 1040 filers claiming fuel tax credits were prisoners or deceased 

persons 

To determine if any fuel tax credit claims were made by prisoners, we matched the IRS’s 

Individual Return Transaction File (IRTF) to the IRS’s Prisoner File for PYs 2011 and 2012 and 

identified approximately $2 million in refunds for 1,901 questionable fuel tax credit claims on 

Forms 1040 that were sent to individuals reported to be in prison for the entire year covered by 

the tax return.12 We also matched the same IRTF data to Social Security Administration (SSA) 

data on deceased persons and found refunds totaling $265,605 from 135 questionable fuel tax 

credit claims that were sent to individuals who were reported as deceased for the entire year 

covered by the tax return. 

The IRS compiles a Prisoner File from the Federal Bureau of Prisons and State Departments of 

Corrections. Various IRS offices and functions use the Prisoner File to detect and prevent fraud 

committed by prisoners, including the filing of fraudulent tax returns. In December 2012, 

TIGTA reported that, despite increased efforts by the IRS to improve the accuracy of the 

Prisoner File,13 not all prisoner information contained in the file is accurate. In the report, the 

IRS stated that it was deploying new programming and procedures for the Prisoner File in 

Calendar Year 2013. Because the recommendations from that report have not been fully 

implemented or reviewed by TIGTA, we will not make any additional recommendations on the 

Prisoner File in this report. 

The SSA provides a weekly update file of Social Security Numbers, names, dates of birth, and 

dates of death, among other items. The IRS uses the SSA data to update its computer files to 

verify the identity of an individual during return processing. If a person has died, the date of 

death is reflected on the SSA weekly updates. Prior to Calendar Year 2013, when the IRS 

received a tax return notating that the taxpayer was deceased, the IRS would manually update the 

taxpayer account with an indicator to reflect that the taxpayer no longer had a filing requirement. 

This indicator was also added to a taxpayer’s account if the IRS was auditing the tax return and 

discovered that the taxpayer was deceased. However, this process neglected deceased 

individuals who did not already have a filing requirement (e.g., young individuals and 

 

12 Account analysis as of September 2012. 

13 TIGTA, Ref. No. 2013-40-011, Further Efforts Are Needed to Ensure the Internal Revenue Service Prisoner File 

Is Accurate and Complete (Dec. 2012). 

Page 8
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

individuals who had little or no income), which allowed identity thieves to use these Social 

Security Numbers to file false returns to receive tax refunds. IRS officials told us that beginning 

in Calendar Year 2013, they are no longer solely relying on the manual system to update 

taxpayer accounts but instead have automated the process using weekly SSA data to update 

taxpayer accounts with an indicator that may reject a return from processing when there is a 

date of death appearing on the SSA data. 

Recommendations 

The Commissioner, Wage and Investment Division, should: 

Recommendation 1: Use systemic controls to ensure that all Forms 1040 claiming a fuel tax 

credit at or above the threshold amount are manually reviewed prior to refund issuance. 

Management’s Response: The IRS agreed with this recommendation and stated that 

it has updated and revised its processes of identifying tax returns claiming the fuel tax 

credit for additional review. 

Recommendation 2: If additional auditing resources become available, consider lowering the 

systemic threshold amount for selecting and reviewing Forms 1040 that only report wage income 

but claim a fuel tax credit. 

Management’s Response: The IRS agreed with this recommendation and stated that 

it plans to consider thresholds as an inherent part of the planning process. 

Additional Guidance Could Improve Examiner Review of Fuel Tax 

Credit Claims 

Although examiners receive some training and guidance for examining fuel tax credit claims, we 

found a need for additional guidance and supervision for reviewing amended returns and making 

a determination on acceptable documentation for supporting fuel tax credit claims. We reviewed 

examinations conducted during Fiscal Year (FY) 2011 by Campus correspondence examiners for 

returns with the fuel tax credit project codes as well as returns selected for FRP examinations. 

For both groups of audits, we found examiners allowed many claims to be processed without 

adequate supporting documentation and did not always properly review amended returns filed by 

potential frivolous filers. 

Examiners allowed fuel tax credit claims without proper supporting 

documentation 

During tax return processing at IRS campuses, examiners screen individual tax returns that meet 

the dollar threshold criteria and determine if the taxpayers’ fuel tax credit claims appear 

reasonable. For those returns that require further review, an unallowable code is added to the 

Page 9
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

return. When a taxpayer is selected for examination, a letter is sent to the taxpayer requesting 

supporting documentation, such as copies of invoices or receipts for the fuel purchases that show 

the Federal excise tax was paid, a list of vehicles and equipment used, and the number of gallons 

and types of fuel used along with the business use of each type of fuel. 

During FY 2011, the IRS’s Campus Correspondence Examination function conducted two fuel 

tax credit audit projects: Project Code 0656 (15 audits) and Project Code 0000, Source Code 03 

(117 audits).14 Project Code 0656 used the following criteria to select returns for audit: 

 Taxpayer claims credit as a vendor of undyed diesel fuel or kerosene and does not 

provide the required documentation. 

 Taxpayer claims credit for undyed diesel fuel or kerosene used in farming. 

 Taxpayer claims credit as a gasoline wholesale distributor. 

 Taxpayer claims credit for nontaxable use when there is no obvious reason. 

 Sole proprietors claiming credits as Gasohol Blenders or for Train/Intercity Bus User. 

 The credit appears to be inflated or excessive. 

 The amount of the credit is large for heating oil or liquefied petroleum gas. 

Project Code 0000, Source Code 03, selected returns for audit based on the following criteria: 

 No allowable business use of the fuel is evident on the return. 

 Taxpayer claimed credit for diesel fuel or kerosene use on a farm for farming purposes. 

 The credit appears to be excessive for the business activity reported on the return. 

 Taxpayer claimed a credit as a gasoline wholesale distributor. 

 Taxpayer did not provide the documentation required for a registered vendor of diesel 

fuel or kerosene with Form 4136. 

We reviewed all 15 Project Code 0656 audits and found five cases (33 percent) with total fuel 

tax credit claims of $28,411 for which the examiner incorrectly allowed the credit. We reviewed 

a statistically valid sample of 30 Project Code 0000 (Source Code 03) audits and found 18 cases 

(60 percent) totaling $122,810 for which the examiner incorrectly allowed the fuel tax credit.15 

Projecting these results to the sample population of 117 returns, we estimate that a total of 

 

14 Audits were closed agreed or no-change. 

15 Our sampling criteria included a confidence level of 95 percent and a precision rate of ±15.38 percent. 

Page 10
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

$478,959 in fuel tax credit claims should not have been allowed.16 If all fuel tax credit claims 

had been properly identified and audited, we forecast that a total of $2,536,850 in questionable 

claims may be prevented over five years.17

Both case reviews found instances in which examiners accepted the taxpayer’s claimed fuel tax 

credit with little or no documentation. **********2********************************** 

**********************************2*******************************************

**********************************2*******************************************

**********************************2*******************************************

**********************************2*******************************************

**********************************2*******************************************

**********************************2*******************************************

******************2***********************, the IRS is treating them differently than 

taxpayers under audit claiming the credit on a Schedule C or Schedule F, who are required to 

provide receipts to support their fuel tax credit claims. We also found that for those taxpayers 

who did submit receipts, examiners did not always make the correct determination as to whether 

the taxpayer’s occupation qualified them for the credit or whether the Federal excise tax was 

paid on the fuel. 

IRS management advised us that examiners are trained on fuel tax credit claims as part of 

training given to all correspondence tax technicians. For guidance, examiners are instructed to 

review IRM 4.19.15.19, which provides some basic issues to evaluate when reviewing fuel tax 

credit claims, such as reviewing receipts to determine if the Federal excise tax was imposed on 

the fuel. The IRM states that further information on fuel tax credit claims can be found in 

Publication 510, Excise Taxes (Including Fuel Tax Credits and Refunds), and Publication 225, 

Farmer’s Tax Guide. However, this information may not provide examiners with a clear 

understanding of the requirements to evaluate a fuel tax credit claim. ******1******** 

**************************************1***************************************

**************************************1***************************************

 1** *. 

Examiners did not always properly review amended returns filed by potential 

frivolous filers 

Some fuel tax credit claims are identified as potentially frivolous by IRS employees during their 

manual processing of claims at IRS campuses. These claims are first routed to the FRP function 

at the IRS’s Ogden Campus for screening. An IRS notice is sent to the taxpayer stating that the 

 

16 The point estimate projection is based on a two-sided 95 percent confidence interval. We are 95 percent confident 

that the range of improperly allowed fuel tax credit claims for the 117 Project Code 0000 audits is between $189,578 

and $768,340. 

17 See Appendix IV. The five-year forecast is based on multiplying the base year by five and assumes, among other 

considerations, that economic conditions and tax laws do not change. 

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tax return is considered frivolous and any tax refund associated with the frivolous claim will not 

be issued.18 The notice further advises the taxpayer to file a corrected, nonfrivolous tax return 

within 30 days from the date of the letter to avoid assessment of a $5,000 frivolous income tax 

return penalty. In addition, if the taxpayer does not respond within 30 days from the date of the 

letter, a notice of deficiency may be issued stating the amount of taxes and penalties owed. 

During FY 2011, the Ogden Campus FRP function examined 399 individual tax returns claiming 

potentially frivolous fuel tax credits.19 We reviewed a statistically valid stratified sample of 

99 closed correspondence audits and found that examiners did not make the correct decision and 

erroneously allowed the fuel tax credit in 17 of them.20 Because fuel tax credits are refundable, 

the full amount of the credit can be refunded if the taxpayer does not owe taxes. Based on the 

examiners’ incorrect decisions, we estimate that the IRS may have issued $98,818 in potentially 

fraudulent refunds, as shown in Figure 5. Projecting these sample results to the sample 

population of 399 returns, we estimate that a total of $198,196 in potentially fraudulent refunds 

was issued.21 Forecasted to the sample population for a five-year period, a total of $990,978 in 

potentially fraudulent refunds could be allowed.22

Figure 5: Results of Review of Fuel Tax Credit FRP Correspondence Audits 

FRP Stratum Population 

Sample 

Size Errors 

Error 

Percentage Refunds 

Strata 1 12 11 7 63.6% $62,297 

Strata 2 42 20 4 20.0% $18,514 

Strata 3 345 68 6 8.8% $18,007 

Total 399 99 17 N/A23 $98,818 

Source: TIGTA review of 99 FY 2011 FRP audits of individual tax returns claiming a fuel tax credit. 

For 10 of the audits reviewed, the taxpayers submitted revised Schedules C with their amended 

returns, reducing their income and increasing their original refunds (and thus collectively 

avoiding $43,280 in taxes). For example, taxpayers added Schedules C with losses to the 

amended returns or adjusted previously submitted Schedules C to increase expenses and decrease 

profits without supporting documentation. For another six audits, the taxpayers did not provide 

 

18 Computer Paragraph 72. 

19 This represents a portion of the returns closed as agreed and no-change. 

20 Our sampling criteria included a confidence level of 95 percent and a precision rate of ±9.44 percent. 21 The point estimate projection is based on a two-sided 95 percent confidence interval. We are 95 percent confident 

that the range of potentially fraudulent refunds issued is between $116,919 and $279,472. 

22 See Appendix IV. The five-year forecast is based on multiplying the base year by five and assumes, among other 

considerations, that economic conditions and tax laws do not change. 

23 Because this was a stratified sample, a total error percentage is not applicable. 

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sufficient documentation or only provided a***2***, collectively avoiding $52,924 in taxes. 

***************************************1**************************************

***************************************1**************************************

*******1*************. 

A review of the 2011 FRP Student and Instructor Guide shows that examiners are instructed to 

review the return or claim to determine if the amount of the fuel tax credit is so 

disproportionately excessive to income (normally business income) reported on the individual’s 

return as to be unallowable. An exhibit in the guide instructs the examiner to multiply the 

number of gallons claimed by $2 and compare this to the taxpayer’s adjusted gross income. It 

further instructs examiners to review the individual’s occupation to determine if it would not 

generally qualify for off-highway usage. There are no additional instructions to assist the 

examiner in what documentation is acceptable as proof for the fuel tax credit claim. 

First-line managers did not identify incorrect adjustments

First-line managers are an important control component because they are responsible for the 

quality of work performed by the examiners they supervise. First-line managers use a variety of 

techniques to ensure that the examiners’ work is meeting acceptable standards and procedures 

are followed in considering, documenting, and assessing penalties. These techniques include 

observations and discussions with examiners and reviews of work conducted during and after the 

audits are closed. Through the observations, discussions, and reviews, first-line managers 

attempt to identify problems so that examiners can take prompt corrective actions. 

A review of the case files showed managerial reviews by a first-line manager in two of the 

45 fuel tax credit project examinations we reviewed and 31 of the 99 FRP examinations we 

reviewed. IRM 1.4.17.2.3.2, Compliance Workload Reviews, states that workload reviews are 

performed primarily to make an objective assessment of an employee’s performance, protect the 

rights of customers, and identify training needs. However, the IRM only requires that workload 

reviews for each employee be performed a minimum of two times per quarter. 

We also found several instances in which a manager or technical lead reviewed a case that was 

also in our sample as an exception, but the manager or lead did not identify the incorrect 

adjustments. Of the 23 fuel tax credit project examinations for which the examiner did not make 

the correct adjustment, only two were reviewed. Similarly, six of the 17 not properly adjusted 

FRP examination cases were reviewed. Because no supporting documentation was provided for 

the changes, the reviewer in each case should have questioned the examiner’s conclusion and 

subsequent actions. 

Recommendation 

Recommendation 3: The Director, Campus Reporting Compliance, Small Business/ 

Self-Employed Division, and the Director, Reporting Compliance, Wage and Investment 

Division, should provide managers and examiners with additional training and procedures to 

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(a) determine acceptable supporting documentation for claiming a fuel tax credit and (b) review 

amended returns when the original return has been adjusted beyond removing the fuel tax credit. 

Management’s Response: The IRS agreed with this recommendation and plans to 

assess its procedures and the training needs of examiners and managers with regard to the 

examination of fuel tax credit claims and the review of related amended tax returns. 

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Appendix I 

Detailed Objective, Scope, and Methodology 

The objective of this review was to evaluate whether opportunities exist to improve the return 

classification and examination processes for individual income tax returns claiming a fuel tax 

credit.1

 To accomplish this objective, we: 

I. Determined the policies and procedures related to identifying for examination individual 

tax returns claiming questionable fuel tax credits and the policies, procedures, and 

training provided to help guide examiners. 

A. Researched the IRM and met with IRS officials to determine the current criteria and 

systematic filters and computer codes (Action Code 300) used for identifying returns 

with potential fuel tax credit issues, including claims over the threshold amounts. 

B. Visited the IRS Austin Campus, which processes individual returns with fuel tax 

credit claims, and created a flowchart of the process. 

II. Determined filing trends of individual returns with a fuel tax credit. 

A. Obtained IRS IRTF data for PYs 2011 through 2013. 

B. Analyzed the number and amount of fuel tax credit filings for PYs 2011 through 

2013. 

III. Assessed the effectiveness of the initial screening of returns with fuel tax credits at IRS 

campuses. 

A. Used a combination of IRTF and IRS Individual Master File (IMF) data to identify 

fuel tax credit returns in PYs 2011 through 2013 that should have been selected for 

examination before refund issuance based on the fuel tax credit being above the 

threshold amount. 

B. Provided PYs 2011 and 2012 sample cases identified in Step III.A to appropriate IRS 

personnel for review to obtain agreement that these cases should have been selected. 

IV. Identified and selected FY 2011 examinations for the PY 2010 population of individual 

returns with fuel tax credits. 

A. Used a combination of PY 2010 fuel tax credit and the FY 2011 closed 

correspondence examination file to identify the various fuel tax credit audit project 

examinations. 

 

1

 See Appendix VI for a glossary of terms. 

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B. Identified 117 PY 2010 returns claiming a fuel tax credit that had closed 

correspondence examinations in FY 2011 under fuel tax Project Code 0000 and 

15 PY 2010 returns with closed examinations under fuel tax Project Code 0656, all 

with agreed or no-change decisions. 

C. Selected a statistically valid sample of 30 closed examination cases from the 

population of 117 cases identified from Step IV.B. Our sampling criteria included a 

confidence level of 95 percent, a desired precision rate of ±15.69 percent, and an 

estimated error rate equal of 50 percent. We used a statistical sample so that we 

could project the results to the population. 

D. Identified 399 PY 2010 returns claiming a fuel tax credit that had closed audits in the 

FY 2011 correspondence examination file under the FRP project code with agreed or 

no-change decisions. 

E. Selected three statistically valid stratified samples consisting of 11, 20, and 68 for a 

total of 99 closed examination cases from Step IV.D. Our sampling criteria included 

a confidence level of 95 percent, a desired precision rate of ±9.44 percent,2

 and an 

estimated error rate of 50 percent for each of the stratum We used a statistical sample 

so that we could project the results to the population. 

F. Projected outcome measures from closed case reviews of fuel tax credit audit projects 

and the FRP examinations. 

G. Used TIGTA’s contract statistician to ensure the accuracy of sample designs, 

projections, and forecasts. 

V. Conducted data validation for computer coding files (Action Code 300), IRTF fuel tax 

credit filings, and the IMF. 

A. For Steps II and III, randomly selected 20 records for PYs 2011 and 2012 from the 

computer coding file (Action Code 300) and validated them to the Integrated Data 

Retrieval System. We determined that the data were sufficiently reliable for the 

purposes of this report. 

B. For Steps II and III, randomly selected 20 records each for PYs 2011 through 2013 

from the IRTF for returns claiming a fuel tax credit and validated against the 

Integrated Data Retrieval System. We determined that the data were sufficiently 

reliable for the purposes of this report. 

C. For Steps II and III, randomly selected 20 records each for PYs 2011 through 2013 

from the IMF for returns claiming a fuel tax credit and validated against the 

 

2

 Our initial statistically valid stratified samples consisted of 12, 20, and 68 for a total of 100 returns to be reviewed. 

However, we received only 11 of 12 returns in the first stratum. 

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Integrated Data Retrieval System. We determined that the data were sufficiently 

reliable for the purposes of this report. 

D. For Step IV, randomly selected 20 records for PY 2010 from the IRTF for returns 

claiming a fuel tax credit and validated against the Integrated Data Retrieval System. 

We determined that the data were sufficiently reliable for the purposes of this report. 

E. For Step IV, compared the FY 2011 closed correspondence examination file totals to 

the IRS Data Book for FY 2011 for data validation. We determined that the data 

were sufficiently reliable for the purposes of this report. 

Internal controls methodology

Internal controls relate to management’s plans, methods, and procedures used to meet their 

mission, goals, and objectives. Internal controls include the processes and procedures for 

planning, organizing, directing, and controlling program operations. They include the systems 

for measuring, reporting, and monitoring program performance. We determined the following 

internal controls were relevant to our audit objective: IRS policies, procedures, and practices 

(i.e., systemic filters, file matching, etc.) for the processing and examination of individual returns 

claiming the fuel tax credit. We evaluated these controls by reviewing source materials, 

interviewing management, and reviewing samples of closed examination cases. 

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Appendix II 

Major Contributors to This Report 

Margaret E. Begg, Assistant Inspector General for Audit (Compliance and Enforcement 

Operations) 

Nancy A. Nakamura, Assistant Inspector General for Audit (Compliance and Enforcement 

Operations) 

Randee Cook, Acting Assistant Inspector General for Audit (Compliance and Enforcement 

Operations) 

Bryce Kisler, Acting Assistant Inspector General for Audit (Compliance and Enforcement 

Operations) 

Frank Dunleavy, Director 

Glen Rhoades, Director 

Michelle Philpott, Acting Director 

Robert Jenness, Audit Manager 

William Tran, Lead Auditor 

Todd Anderson, Senior Auditor 

Carole Connolly, Senior Auditor 

Brian Hattery, Information Technology Specialist 

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Appendix III 

Report Distribution List 

Commissioner C 

Office of the Commissioner – Attn: Chief of Staff C 

Deputy Commissioner for Services and Enforcement SE 

Deputy Commissioner, Small Business/Self-Employed Division SE:S 

Deputy Commissioner, Wage and Investment Division SE:W 

Director, Campus Compliance Services, Small Business/Self-Employed Division SE:S:CCS 

Director, Communications, Liaison and Disclosure, Small Business/Self-Employed Division 

SE:S:CSO 

Director, Examination, Small Business/Self-Employed Division SE:S:E 

Director, Return Integrity and Correspondence Services, Wage and Investment Division 

SE:W:RICS 

Director, Campus Reporting Compliance, Small Business/Self-Employed Division 

SE:S:CCS:CRC 

Director, Exam Policy, Small Business/Self-Employed Division SE:S:E:EP 

Director, Exam Planning and Delivery, Small Business/Self-Employed Division SE:S:E:EPD 

Director, Submission Processing, Wage and Investment Division SE:W:CAS:SP 

Chief Counsel CC 

National Taxpayer Advocate TA 

Director, Office of Legislative Affairs CL:LA 

Director, Office of Program Evaluation and Risk Analysis RAS:O 

Office of Internal Control OS:CFO:CPIC:IC 

Audit Liaisons: 

Commissioner, Small Business/Self-Employed Division SE:S 

Commissioner, Wage and Investment Division SE:W 

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Appendix IV 

Outcome Measures 

This appendix presents detailed information on the measurable impact that our recommended 

corrective actions will have on tax administration. These benefits will be incorporated into our 

Semiannual Report to Congress. 

Type and Value of Outcome Measures:

Total potential revenue protection of $68.2 million in questionable fuel tax credits1

 claimed on 

5,908 tax returns over five years, as shown below. 

 Revenue Protection – Potential; $36.7 million claimed on 3,052 returns for PYs 2011 and 

2012 with questionable fuel tax credit claims at or above the screening threshold that were 

not selected for review during return processing (see page 3). 

 Revenue Protection – Potential; $10.5 million claimed on 952 tax returns for PY 2013 with 

questionable fuel tax credit claims at or above the screening threshold that were not selected 

for review during return processing or by the revised filters implemented by the RICS 

function (see page 3). The three-year forecast is $31.5 million (2,856 tax returns), computed 

by multiplying $10.5 million (952 tax returns) by three years.2

Methodology Used to Measure the Reported Benefits: 

We used the IRS’s IRTF to identify return filings claiming fuel tax credits on Form 4136, Credit 

for Federal Tax Paid on Fuels. We also obtained return processing data to identify the return 

filings that received an Action Code 300 and then eliminated these returns from our analysis 

because they were processed properly. Our intention was to identify only returns that were not 

selected for examination based on fuel tax credit claims. We then matched the returns to the 

IMF to eliminate any that were examined, surveyed, or had open examinations. Using the IMF, 

we further eliminated returns that had the fuel tax credit claims disallowed or otherwise stopped 

during return processing or had been corrected by taxpayers, assuming that these fuel tax credit 

claims were also properly addressed. This left us with the total population of tax returns with 

fuel tax credit claims that were paid without being examined or adjusted/corrected through other 

processes. 

 

1

 See Appendix VI for a glossary of terms. 

2

 The three-year forecast assumes, among other considerations, that economic conditions and tax laws do not 

change. 

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For fuel tax credits at or above the threshold amount, we further reduced this population to those 

returns filed with *********************2**************, with no other business income. 

We computed the fuel expense by dividing the fuel tax credit claimed by 18.3 cents to determine 

the number of gallons used by each taxpayer and then multiplying the number of gallons by 

$2.00.3 We divided the fuel expenses by gross profit cash or total income accrual  2** **** 

************************************2*****************************************

 2** ******. In the final population, we determined 4,004 returns with a fuel expense 

percentage greater than 50 percent of gross profit for PYs 2011 through 2013. See Figure 2, 

Questionable Claims totals on page 5. 

We identified 3,052 questionable fuel tax credit claims at or above the threshold amount for 

$36.7 million in PYs 2011 through 2012, and 952 questionable fuel tax credit claims at or above 

the threshold amount for $10.5 million in PY 2013, for a total of 4,004 returns for $47.2 million. 

We multiplied PY 2013 questionable fuel tax credit claims of $10.5 million (952 tax returns) by 

two years (to get the two additional years for our five-year total), which totals $21 million in fuel 

tax credits claimed on 1,904 tax returns. The combined five-year total is $68.2 million 

($36.7 million plus $10.5 million plus $21 million) claimed on 5,908 tax returns (3,052 returns 

plus 952 returns plus 1,904 returns). 

Figure 1 provides a summary of these calculations in chart form. 

Figure 1: Summary of Revenue Protection Calculations 

Fuel Tax Credits At or Above the Threshold Dollars 

(see Figure 2, Questionable Claims totals on page 5) Returns (millions) 

PY 2011 1,360 $20.0 

PY 2012 1,692 $16.7 

PY 2013 952 $10.5 

Total PYs 2011–2013

PY 2013 Totals Projected Over 

Two Additional Years (PY 2013 totals x 2)

Grand Total Fuel Tax Credits 

at or Above Threshold: 

4,004

1,904

5,908 

 $47.2 

 $21.0 

$68.2 

 

3

 There are various types of fuel taxes claimed on Form 4136. To be conservative in our estimate, we used the 

18.3 cents per gallon credit for the nontaxable use of gasoline to divide the credit claimed, and multiplied the result 

by $2.00. 

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Type and Value of Outcome Measure: 

Total potential revenue protection from examination operations of $3,527,828 forecasted over 

five years,4 as shown below. 

Campus Correspondence Examination Program: 

 Revenue Protection – Potential, Project 0656: $28,411 for one year; $142,055 forecasted 

over five years (see page 9). 

 Revenue Protection – Potential, Project 0000: $478,959 for one year; $2,394,795 

forecasted over five years (see page 9). 

FRP Examination: 

 Revenue Protection – Potential, $198,196 for one year; $990,980 forecasted over 

five years, (see page 9). 

Methodology Used to Measure the Reported Benefit: 

Project 0656 = $28,411 

We determined that for five of the 15 cases, examiners should have disallowed an additional 

$28,411 in fuel tax credits. The five-year total revenue forecast is $28,411 * 5 = $142,055. 

Project 0000 Source Code 03 = $478,959 ± $289,381 

We determined that for 18 of the 30 cases reviewed, examiners should have disallowed $122,810 

in fuel tax credits. Projecting this to the population of 117 cases, we are 95 percent confident 

that an additional 70 cases (± 18 cases) should have disallowed credits totaling $478,959 

(± $289,381).5

 The five-year total revenue forecast is $478,959 * 5 = $2,394,795. 

Project 0310 Frivolous Return Examinations = $990,980 

We determined that for 17 of the 99 cases (claims) reviewed, examiners should have disallowed 

a total of seven of the 11 claims in stratum 1 with an average claim of $5,663.36 in fuel tax 

credits, four of the 20 claims in stratum 2 with an average claim of $925.66 in fuel tax credits, 

and six of the 68 claims in stratum 3 with an average claim of $264.80 in fuel tax credits. 

Projecting these into total strata populations of 12, 42, and 345, respectively (a combined total 

population of 399 cases), we are 95 percent confident that an additional 46 cases (± 22 cases) 

should have disallowed credits totaling $198,196 (± $81,276).6

 The five-year total revenue 

forecast is $198,196 * 5 = $990,980. 

 

4

 The five-year forecast assumes, among other considerations, that economic conditions and tax laws do not change. 5

 This projection was made using a 15.38 percent precision rate. 

6

 This projection was made using a 5.44 percent precision rate. 

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Appendix V 

Selected Statistical Tables 

Figure 1 shows that the number of Forms 1040, U.S. Individual Income Tax Return, with fuel tax 

credit1

 claims increased between PYs 2011 and 2012 but decreased in PY 2013, for an overall 

decrease of 10 percent for the three-year period. The largest decrease is the category of $20,000 

to under $25,000, which shows a decrease of 81 percent. 

Figure 1: Number of Form 1040 Fuel Tax Credit Filings for PYs 2011–2013 

Fuel Tax Credit 

Claims on 

Forms 1040 

Processing Year 

Percentage 

Increase 

(Decrease) 

Processing 

Years 

2011 2012 2013 2011–2013 

Under Threshold 

Amount 332,488 474,032 299,933 (10)% 

Threshold Amount 

to Under $5,000 7,143 13,118 6,042 (15)% 

$5,000 to 

Under $10,000 1,552 8,649 1,758 13% 

$10,000 to 

Under $15,000 1,147 1,371 445 (61)% 

$15,000 to 

Under $20,000 746 753 180 (76)% 

$20,000 to 

Under $25,000 512 1,028 96 (81)% 

$25,000 or More 78 1,008 199 155% 

Total 343,666 499,959 308,653 (10)% 

Source: TIGTA analysis of IRTF data for PYs 2011 through 2013.

 

1

 See Appendix VI for a glossary of terms. 

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Figure 2 shows that the amount of fuel tax credits claimed on Forms 1040 decreased by 

12 percent between PYs 2011 and 2013. The largest decrease in claimed fuel tax credits was 

in the category of $20,000 to under $25,000, which shows a decrease of 80 percent. 

Figure 2: Amount of Form 1040 Fuel Tax Credit Filings for PYs 2011–2013 

Percentage 

Amount of Fuel 

Processing Year Increase 

(Decrease) 

Tax Credit Processing 

Claimed on Years 

Forms 1040 2011 2012 2013 2011–2013 

Under 

Threshold $91,960,077 $194,181,173 $83,585,516 (9)% 

Amount 

Threshold 

Amount to $17,016,906 $29,475,407 $14,397,465 (15)% 

Under $5,000 

$5,000 to 

Under $10,000 $11,890,778 $68,430,561 $14,179,216 19% 

$10,000 to 

Under $15,000 $15,066,635 $16,730,780 $5,383,537 (64)% 

$15,000 to 

Under $20,000 $14,460,648 13,856,615 $3,146,016 (78)% 

$20,000 to 

Under $25,000 $10,635,771 $21,664,948 $2,075,964 (80)% 

$25,000 or More $4,988,898 $37,163,177 $23,568,633 372% 

Total $166,019,713 $381,052,661 $146,336,347 (12)% 

Source: TIGTA analysis of IRTF data for PYs 2011 through 2013. 

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Figure 3 shows selected characteristics of Forms 1040 with fuel tax credit claims of less than 

**2**. For example, 74,527 returns reported no income tax owed, while 33,791 returns also 

claimed over $64 million in Earned Income Tax Credits. 

Figure 3: PY 2013 Selected Characteristics of Forms 1040 

With Fuel Tax Credit Claims Less Than ***2*** 

Fuel Tax Credit 

Less Than ***2** Selected Return Characteristics 

Schedule C Less Than - *2* Schedule C Greater Than -*2* 

Number 30,780 56,067 

Amount $(598,532,129) $1,488,049,909 

Schedule D Less Than -*2* Schedule D Greater Than -*2* 

Number 23,215 77,496 

Amount $(454,733,536) $9,121,006,060 

Schedule E Less Than -*2* Schedule E Greater Than -*2* 

Number 23,202 74,637 

Amount $(1,142,623,286) $5,613,987,614 

Schedule F Less Than -*2* Schedule F Greater Than -*2* 

Number 73,673 67,494 

Amount $(1,566,753,070) $2,845,323,592 

Tentative Tax Equal to -*2* Tentative Tax Greater Than -*2* 

Number 74,527 164,355 

Amount $4,411,478,305 

Wages Equal to -*2* Wages Greater Than -*2* 

Number 88,333 150,549 

Amount $8,119,947,291 

Earned Income Credit 

Equal to -*2* 

Earned Income Credit 

Greater Than -*2* 

Number 205,091 33,791 

Amount $64,086,384 

Source: TIGTA analysis of PY 2013 IRTF data. Note: Schedule C, Profit or Loss From Business; Schedule D, 

Capital Gains and Losses; Schedule E, Supplemental Income and Loss; Schedule F, Profit or Loss From Farming. 

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Figure 4 shows that for Form 1040 fuel tax credit claims of ***2*** or more, 31,245 taxpayers 

reported no taxes owed, while 24,980 taxpayers also claimed nearly $50 million in Earned 

Income Tax Credits. 

Figure 4: PY 2013 Selected Return Characteristics 

for Returns With Fuel Tax Credits of ***2**or More 

Returns With Fuel Tax 

Credit ***2*** or More Selected Return Characteristics 

Schedule C Less Than -*2* Schedule C Greater Than -*2* 

Number 9,000 19,965 

Amount $(305,031,928) $610,651,722 

Schedule D Less Than -*2* Schedule D Greater Than -*2* 

Number 3,465 7,497 

Amount $(8,873,045) $6,324,415,045 

Schedule E Less Than -*2* Schedule E Greater Than -*2* 

Number 3,731 9,124 

Amount $(1,268,725,374) $4,527,018,268 

Schedule F Less Than -*2* Schedule F Greater Than -*2* 

Number 4,993 6,946 

Amount $(401,932,712) $474,430,171 

Tentative Tax Equal to -*2* Tentative Tax Greater Than -*2* 

Number 31,245 38,512 

Amount $3,098,631,143 

Wages Equal to -*2* Wages Greater Than -*2* 

Number 20,472 49,285 

Amount $1,939,816,577 

Earned Income Tax Credit 

Equal to -*2* 

Earned Income Tax Credit 

Greater Than -*2* 

Number 44,777 24,980 

Amount $49,693,642 

Source: TIGTA analysis of PY 2013 IRTF data. 

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Figure 5 shows that for Form 1040 fuel tax credit claims at or above the threshold amount in Tax 

Years 2011 and 2012, 73 percent and 90 percent, respectively, were timely filed, including those 

with extensions filed. However, 27 percent and 10 percent of the claims in these populations 

were filed late. The majority of questionable claims were filed late, with 53 percent and 

54 percent in the same period. 

For fuel tax credit claims of at least ***2*** but below the threshold amount, 85 percent and 

93 percent, respectively, were timely filed for Tax Years 2011 and 2012, and 15 percent and 

7 percent were filed late (while 12 percent and 9 percent of the questionable claims were filed 

late). 

Figure 5: Percentage of Tax Year 2011 and 2012 Returns 

Claiming the Fuel Tax Credit That Were Timely and Late Filed2

Tax 

Year 

At or Above the Threshold Amount 

At Least **2** but 

Below the Threshold Amount 

Overall Fuel Tax 

Credit Returns 

Questionable 

Claims 

Overall Fuel Tax 

Credit Returns 

Questionable 

Claims 

Timely 

Filers 

Late 

Filers 

Timely 

Filers 

Late 

Filers 

Timely 

Filers 

Late 

Filers 

Timely 

Filers 

Late 

Filers 

2011 73% 27% 47% 53% 85% 15% 88% 12% 

2012 90% 10% 46% 54% 93% 7% 91% 9% 

Source: TIGTA analysis of IRTF and IMF data for Tax Years 2011 and 2012. 

 

2

 For this analysis, a return was deemed late if the return receipt date had passed the normal filling date, including an 

extension even though there was no late file penalty because of the return generating a refund. 

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Figure 6 shows that for Form 1040 fuel tax credit claims at or above the threshold amount, 

42 percent and 70 percent were filed using preparers in PYs 2012 and 2013, respectively, while 

1.1 percent and 0.3 percent of the questionable claims were filed using preparers for the same 

periods. For Form 1040 fuel tax credit claims of at least **2** but below the threshold amount, 

85 percent and 83 percent, respectively, used preparers, while 89 percent and 75 percent of the 

questionable claims used preparers for the same periods. 

Figure 6: Percentage of Fuel Tax Credit Returns 

Prepared by Preparers for PYs 2012 and 2013 

Processing 

Year 

At or Above 

the Threshold Amount 

At Least ***2*** but Below 

the Threshold Amount 

Overall Fuel 

Tax Credit 

Returns 

Questionable 

Claims 

Overall Fuel 

Tax Credit 

Returns 

Questionable 

Claims 

2012 42% 1.1% 85% 89% 

2013 70% 0.3% 83% 75% 

Source: TIGTA analysis of IRTF data for PYs 2012 and 2013.

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Appendix VI 

Glossary of Terms 

Page 29

Term Definition 

Action Code Numeric codes edited in the bottom center margin of a return 

to reject documents and identify the reason the document has 

been rejected.

Audit Information 

Management System 

A computer system used to control returns, input 

assessments/adjustments to the Integrated Data Retrieval 

System, and provide management reports.

Computer Paragraph A computer-generated notice resulting from an analysis of the 

taxpayer’s account. It is used to notify the taxpayers of a 

balance due, refund, or no balance status. It is also used for 

internal research and review.

Correspondence Examination A process that is less intrusive than a face-to-face 

examination, more automated, and conducted by examiners 

who are trained to address and focus on less complex tax 

issues.

Earned Income Tax Credit A refundable Federal tax credit for low-income working 

individuals and families.

Examiner Primarily responsible for determining the correct tax liabilities 

of taxpayers. Examinations of individual taxpayers can range 

from reviewing their tax returns and resolving questionable 

items by corresponding with them through the mail to a 

detailed face-to-face examination of a taxpayer’s financial 

records at his or her place of business.

First-Line Manager A group manager in the Examination function responsible for 

supervision of IRS examiners.

Fiscal Year Any yearly accounting period, regardless of its relationship to 

a calendar year. The Federal Government’s fiscal year begins 

on October 1 and ends on September 30.
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

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Term Definition 

Frivolous Return Program Encourages individuals to become compliant with the tax 

laws, advises taxpayers of the potential consequences for 

asserting frivolous arguments, and takes action on accounts 

for which taxpayers do not become compliant.

Fuel Tax Credit A credit that can be taken for U.S. Federal income tax 

purposes for certain nontaxable uses of fuels. Final 

purchasers and, in some cases, vendors of certain types of 

fuels may be able to claim a refund or credit for the Federal 

excise tax that applies on the fuel if it is for specific 

nontaxable uses, such as on a farm; for off-highway business 

use; for commercial fishing; for use in certain types of 

intercity, local, and school buses; and for exclusive use by a 

nonprofit educational organization.

Individual Master File The IRS database that maintains transactions or records of 

individual tax accounts.

Individual Return 

Transaction File 

The IRS database that contains information originally filed by 

the taxpayer and transcribed from Forms 1040 and 1040A, 

U.S. Individual Income Tax Return, and Form 1040EZ, 

Income Tax Return for Single and Joint Filers With No 

Dependents, and their accompanying forms and schedules.

Integrated Data Retrieval 

System 

A computer system capable of retrieving or updating stored 

information; it works in conjunction with a taxpayer’s account 

records.

Internal Revenue Manual An IRS handbook of procedure and law specifically designed 

to cover one area of processing.

Notice of Deficiency A legal notice in which the IRS determines the taxpayer’s tax 

deficiency. The notice of deficiency consists of: (1) a letter 

explaining the purpose of the notice, the amount of the 

deficiency, and the taxpayer’s options; (2) a waiver to allow 

the taxpayer to agree to the additional tax liability; (3) a 

statement showing how the deficiency was computed; and 

(4) an explanation of the adjustments.

Processing Year The year in which tax returns and other tax data are processed.
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

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Term Definition 

Project Code A four-digit code used on the Audit Information Management 

System to identify a special program to which an examination 

belongs.

Return Integrity and Comprised of organizations that strengthen revenue protection 

Correspondence Services and prerefund compliance, administer refundable credits, and 

Function provide oversight of content for all notices and letters sent to 

taxpayers.

Social Security Number A nine-digit number assigned by the Social Security 

Administration and used as the account number of a taxpayer 

on the IMF.

Tax Year The 12-month accounting period for keeping records on 

income and expenses used as the basis for calculating the 

annual taxes due. For most individual taxpayers, the tax year 

is synonymous with the calendar year.

Transaction Code A three-digit code used to identify transactions being applied 

to (actions being taken on) a taxpayer’s account.

Unallowable Code During return processing, a two-digit unallowable code 

identifies item(s) that have been disallowed. These can 

include a taxpayer’s deductions, exemptions, items exceeding 

statutory limitations, items of a questionable nature, or items 

not supported by the proper information or schedule.
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

Appendix VII 

Management’s Response to the Draft Report 

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Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

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Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 
Additional Actions Are Needed to Ensure That 

Improper Fuel Tax Credit Claims Are Disallowed 

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