Recovery Act: IRS Quickly Implemented Tax Provisions, but Reporting and Enforcement Improvements Are Needed
Published: 2010-02-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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), First-Time Homebuyer Credit (FTHBC), Making Work Pay Credit, and Net Operating Loss carrybacks.
section_title: What GAO Found
paragraphs: 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. 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 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. 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. 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. 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.

section_title: Letter
paragraphs: 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. 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. 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  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. 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.
subsections: section_title: Background
paragraphs: IRS received approximately $197 million to implement 54 Recovery Act  provisions. 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. JCT’s estimate includes the effect on the budget of  provisions of the act administered through the tax code, but CBO’s $212  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.
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.
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.
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.
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. 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, to provide taxpayers a refundable tax credit of up  to $8,000 for the purchase of a home. 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. 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  the FTHBC and implementation and compliance challenges in October  2009.
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.
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.
section_title: IRS Moved Quickly to Address the Recovery Act’s Significant Implementation Challenges
paragraphs: 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. Some of  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.
subsections: section_title: Responding Quickly Entailed Tradeoffs, and Subsequent Improvements Were Made
paragraphs: 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. 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  affected by the MWPC. 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. 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, “First- Time Homebuyer Credit,” the form used to claim the credit. This was  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. 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. 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. 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 Tax- Exempt 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  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.  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  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.
section_title: IRS’s Data-Collection Efforts Have Limitations, and the Tax Provisions’ Economic Stimulus Effect Cannot Be Precisely Isolated
paragraphs: 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. In the  report on Indian reservation depreciation, we noted that the lack of  sufficient data impeded IRS’s ability to ensure program compliance.
subsections: section_title: IRS Has Plans to Collect Some Data to Track Many Provisions
paragraphs: 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 data- collection 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  identified preliminary data sources, but not what, if any, data it will  compile and report.
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. For the other provision, IRS had a minimal role, and Treasury’s  Financial Management Service (FMS) took the lead in administering it.  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.
section_title: Initial Data Collection Did Not Fully or Accurately Capture the Use of Some Recovery Act Provisions
paragraphs: 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.
subsections: section_title: BAB Data Do Not Show Specific Bond Use
paragraphs: 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.
Spending projects undertaken under the Recovery Act by state and local  governments are subject to additional reporting requirements. Section  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. 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- 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.
section_title: COBRA Data Will Not Include the Number of Dependents Benefiting from COBRA Assistance
paragraphs: 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  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.
section_title: Initial FTHBC Data Did Not Reflect the Credit’s Full Dollar Value
paragraphs: 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.
section_title: HCTC Data Overstate the Number of New Enrollees Attributable to the Recovery Act
paragraphs: 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.
section_title: The Economic Stimulus Effect of the Tax Provisions Cannot Be Precisely Isolated
paragraphs: 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  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. 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).
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. 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,  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.
section_title: IRS Took Steps to Mitigate Abuse of Provisions, but Some Compliance Challenges Arose and Others Remain
paragraphs: 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. 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.
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  covered 12 provisions immediately available to taxpayers. 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 program- specific 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.
subsections: section_title: IRS Has Addressed Some Compliance Challenges with the FTHBC, and Alternatives Exist That May Alleviate a Remaining Challenge
paragraphs: 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  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. 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.
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. 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.  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  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.
section_title: An Option Exists to Better Identify Unresolved COBRA Compliance Issues
paragraphs: 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. An employer pays 65 percent of its former  employees’ insurance premium costs and is reimbursed in the form of a  payroll tax credit. This tax provision is only the second refundable tax  credit administered by IRS’s Small Business/Self-Employed (SB/SE)  division. 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 high- income taxpayers who did not report the subsidy as an addition to tax.  However, rather than rely solely on audits to determine if these taxpayers  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.
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. 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. 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. 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  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. IRS officials responded favorably to  these ideas and said they would consider adopting them.
section_title: Documenting IRS’s Recovery Act Lessons Learned and Expanding Its Authority, with Appropriate Controls, Could Improve Future Tax Administration
paragraphs: 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. We  therefore recommended that IRS convene a study group to assess its  performance with respect to the advance tax refund and related rate- reduction 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.
subsections: section_title: IRS Could Benefit from Broader Math Error Authority
paragraphs: 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. Over the years, the Congress has granted  IRS MEA for specified purposes. 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.
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. 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. 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.
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. 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. 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.
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;    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 time- consuming 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 labor- intensive 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. 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  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. 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.
section_title: Conclusions
paragraphs: 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  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.
section_title: Matters for Congressional Consideration
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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.
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.
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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
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.
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.
section_title: Appendix I: Background and Requirements of Selected Provisions
paragraphs: 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.
subsections: section_title: Build America Bonds (BAB)
paragraphs: 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. 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.
section_title: Consolidated Omnibus Budget Reconciliation Act (COBRA) Premium Subsidies
paragraphs: 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),  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.
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.
section_title: The First-Time Homebuyer Credit (FTHBC)
paragraphs: 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.
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. This $8,000 credit is a  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. 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.
section_title: The Making Work Pay Credit (MWPC)
paragraphs: The MWPC provides up to $400 for working individuals and $800 for  working married couples. Taxpayers may receive the credit throughout  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.
section_title: Net Operating Loss (NOL) Carrybacks
paragraphs: 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. 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 small- business 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.
section_title: Health Coverage Tax Credit (HCTC)
paragraphs: 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  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. 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.
section_title: Appendix II: Objectives, Scope, and Methodology
paragraphs: 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  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.
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  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 risk- management 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.
section_title: Appendix III: The 54 Recovery Act Tax Provisions That IRS Has a Role in Administering
paragraphs: 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.
section_title: Appendix IV: IRS Data Collected on Four Tax Provisions in the Recovery Act
paragraphs: 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.
section_title: Appendix V: Comments from the Internal Revenue Service
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: 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.