Tax Expenditures: IRS Data Available for Evaluations Are Limited
Published: 2013-04-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: By one measure, tax expenditures resulted in an estimated $1 trillion of revenue forgone by the federal government in fiscal year 2011. GAO has recommended greater scrutiny of tax expenditures, as periodic reviews could help determine how well specific tax expenditures achieve their goals and how their benefits and costs compare to those of other programs with similar goals. To assist with this, GAO recently issued a guide ( GAO-13-167SP ) for evaluating the performance of tax expenditures. GAO was asked to identify data needed for evaluating tax expenditures and its availability. This report: (1) determines the information available from IRS for evaluating tax expenditures; and (2) compares, for a few case studies, the information identified by federal agencies for evaluating outlay programs with similar purposes to tax expenditures. To address these objectives, GAO analyzed 173 tax expenditures, and information from IRS tax forms, federal agency performance reports, and prior GAO reports.
section_title: What GAO Found
paragraphs: Internal Revenue Service (IRS) data are not sufficient for identifying who claims a tax expenditure and how much they claim for $492 billion or almost half the dollar value of all tax expenditures that GAO examined. Such basic data are not available at IRS for tax expenditures because they do not have their own line item on a tax form. This included $102 billion of tax expenditures that were not on tax forms, such as the exclusion of interest on life insurance savings, and $390 billion of tax expenditures that were on tax forms but did not have their own line items, such as the credit for holding clean renewable energy bonds which is aggregated with other credits on a single line item.
In four cases in which the Office of Management and Budget (OMB) identified outlay programs and comparable tax expenditure programs that shared similar purposes, the related agencies produced performance measures and goals only for the outlay programs and not for the comparable tax expenditures. For example, OMB identified the Alternative Technology Vehicle Credit as having a comparable purpose to the Department of Energy (DOE) Vehicle Technologies outlay program--both are intended to create more fuel efficient modes of transportation. DOE produced a performance measure and goal for the outlay program--petroleum consumption reduced by 570 million gallons per year by 2011--as required under the provisions of the Government Performance and Results Act of 1993 and the Government Performance and Results Act Modernization Act of 2010. However, DOE did not produce measures and goals for the comparable tax expenditure as neither act requires DOE or other federal agencies to do so. Although IRS is responsible for administering these tax expenditures, it is required by law, unless otherwise directed by Congress, to collect only data which are required for administration of the tax code. GAO has recommended that the agencies responsible for tax expenditures be identified and the lack of credible performance data be addressed.
section_title: What GAO Recommends
paragraphs: GAO made no recommendations in this report. IRS provided technical comments that were incorporated as appropriate.

section_title: Letter
paragraphs: Tax expenditures are special exemptions and exclusions from taxation,  deductions, credits, deferrals of tax liability, and preferential tax rates that  are exceptions from a “normal” tax. They represent a substantial federal  commitment. An estimated $1 trillion in revenue was forgone through tax  expenditures in fiscal year 2011—an estimate produced by summing the  Department of the Treasury’s (Treasury) estimates for each of the 173 tax  expenditures reported in that year. As we have pointed out in our recently  issued guide to evaluating tax expenditures, many tax expenditures are  equivalent to spending through the tax code. For example, some tax  expenditure programs are intended, like some spending programs, to  encourage economic development in disadvantaged areas, finance  postsecondary education, and stimulate research and development. The  revenue the federal government forgoes from tax expenditures reduces  funds available for other federal activities, requires higher tax rates to  raise any given amount of revenue, or increases the budget deficit. The  Internal Revenue Service (IRS) is responsible for administering the tax  laws, including those for tax expenditures. However, IRS is not required  to collect or evaluate data other than those which are required for  administration of the tax code unless it is legislatively mandated to collect  additional information.
Since 1994, we have recommended greater scrutiny of tax expenditures,  as periodic reviews could help determine how well specific tax  expenditures work to achieve their goals and how their benefits and costs  compare to those of spending and other programs with similar goals.
Our recently issued guide, cited above, provides a framework for  evaluating the performance of tax expenditures. As requested, this report  focuses on the availability of data needed to evaluate tax expenditures.  Specifically, our objectives are to (1) determine the information available  from IRS for evaluating tax expenditures; and (2) compare, for a few case  studies, the information identified by federal agencies for evaluating  outlay programs with similar purposes to tax expenditures.
To address the first objective, we identified 173 tax expenditures for fiscal  year 2011 from Treasury’s list of tax expenditures from the Budget of the  United States Government, Fiscal Year 2012. To determine the dollar  amount of these tax expenditures, we used revised fiscal year 2011  estimates from the fiscal year 2013 budget. We then reviewed IRS tax  returns, information returns, other tax forms, and publications for tax year  2011 to determine whether they had information on the tax expenditures  that appeared on the Treasury list. For those tax expenditures that had  information, we reviewed IRS’s Statistics of Income (SOI) documentation  guide, Proposed Tax Year 2010 Forms and Schedules, the latest year  available, to determine whether SOI collects this information from tax  forms. We also reviewed our prior reports to identify instances where IRS  data available for evaluating tax expenditures were limited and the  limitations were not remedied by data from other sources.
To address the second objective, we based our selection of case studies  on the tax expenditures identified by agencies and the Office of  Management and Budget (OMB) as contributing to crosscutting priority  goals. We chose Department of Energy (DOE) and Department of Labor  (DOL) outlay programs that we considered comparable to these tax  expenditures for fiscal year 2011—the year most closely corresponding to  our list of tax expenditures and estimates of their dollar value. We  analyzed these reports for examples of information reported for the  Weatherization, Vehicle Technologies, Renewable Energy, and the  Workforce Investment Act (as it pertained to dislocated workers) outlay  programs and used the performance evaluation criteria developed in a  prior report to assess their usefulness for evaluations. Detailed  information on our scope and methodology can be found in appendix I.
We conducted this performance audit from September 2012 through April  2013 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.
subsections: section_title: Background
paragraphs: Tax expenditures are provisions of the tax code that are viewed as  exceptions to the “normal structure” of the individual and corporate  income tax (i.e., exceptions to taxing income). They take the form of  exemptions, exclusions, deductions, credits, deferrals, and preferential  tax rates; however, not all such provisions are tax expenditures. For  example, some provisions that determine tax liability, such as business  expense deductions, are not considered to be tax expenditures because  costs of earning income are usually deducted in calculating taxable  income for businesses. Generally, tax expenditures grant special tax relief  for certain kinds of behavior by taxpayers or for taxpayers in special  circumstances. Holding tax rates constant, tax expenditures result in  forgone tax revenue the government incurs by granting the relief. Many  of these provisions may, in effect, be viewed as spending programs  channeled through the tax system.
Congress updated the statutory framework for performance management  in the federal government, the Government Performance and Results Act  of 1993 (GPRA), with the GPRA Modernization Act of 2010 (GPRAMA).  Both acts require agencies to set goals and measure and report the  performance of their programs. GPRAMA introduced a more integrated  and crosscutting approach to performance measurement that cuts across  organizational boundaries. The act requires that OMB, in coordination  with agencies, develop long-term crosscutting priority goals to improve  performance and management of the government. OMB is to coordinate  annually with agencies to develop a federal government performance  plan which establishes performance indicators for achieving these goals.  Moreover, GPRAMA requires that this plan identify the tax expenditures  that contribute to each crosscutting priority goal. As we noted in a recent  report, sporadic progress has been made along these lines. OMB  Circular A-11 guidance directs agencies to list tax expenditures among  the various programs and activities that contribute to the subset of  performance goals that are designated as agency priority goals.
A performance evaluation of a tax expenditure program would use largely  the same concepts, methods, and types of data as an evaluation of an  outlay program. In prior reports, we have described in some detail how  such program evaluations would be conducted to measure progress  toward achieving the program’s intended purpose. Even if a tax  expenditure is meeting its intended purpose, broader questions can be  asked about its effects beyond that purpose. Specifically, the long  standing criteria of fairness, economic efficiency, transparency, simplicity,  and administrability can be used to evaluate whether a tax expenditure is  good tax policy.
Some agencies may be better positioned to collect tax expenditure  information and make it available for analysis than others. As we said in  our Guide for Evaluating Tax Expenditures, for a tax expenditure that is  part of a crosscutting agency priority goal, the responsible agencies  identified in the related performance plan may be the logical agencies  responsible for evaluating the tax expenditure. Although IRS is the federal  agency responsible for administering tax expenditures, it is not  responsible for the program areas targeted by many tax expenditures.  The information available at IRS is generally limited by the Paperwork  Reduction Act to data used for tax administration, not for performance  evaluation.
section_title: Information for Almost $500 Billion of Tax Expenditures Is Not Collected on Tax Forms
paragraphs: Of the 163 tax expenditures identified by Treasury for tax year 2011,  102, or 63 percent, were not on a tax return, information return, or other  tax form; or they were on these tax forms but did not have their own line  item, as shown in table 1. For these tax expenditures, the tax forms do  not capture information on who claimed the tax expenditures and how  much they claimed. An example of a tax expenditure not on a tax form is  the exclusion of interest on life insurance savings where the taxpayer is  not asked to report the amount of the exclusion anywhere on a tax form,  while an example of a tax expenditure without its own line item is the  credit for holding clean renewable energy bonds where the credit is  aggregated with other credits on a single line item. Nearly all deferrals  or exclusions were either not on a tax form or did not have their own line  item. For information on our classification by specific tax expenditure, see  appendix II.
If a tax expenditure has its own line item on a tax form, the IRS can  identify the claimant and amount of the claim. These account for about  half of the total tax expenditures. As shown in figure 1, these accounted  for $501 billion of the almost $1 trillion of revenue estimated by Treasury  in 2011 for the tax expenditures that we analyzed. The remaining $492  billion were not on tax forms or did not have their own line items. Having  such basic information about tax expenditures can facilitate certain kinds  of analysis. Specifically, when a tax expenditure has its own line item, the  claimant can be matched to his or her income which is also reported on  the tax return. This linkage facilitates analyses of the distributional effects  of a tax expenditure by showing tax expenditure use by income  category.
The sum of tax expenditure revenue loss estimates that appear in figure 1  approximates the total revenue forgone through tax expenditure  provisions. While sufficiently reliable as a gauge of general magnitude,  the sum of the individual revenue loss estimates has important limitations  in that any interactions between tax expenditures will not be reflected in  the sum.
Data necessary to assess how often a tax expenditure is used and by  whom generally would not be collected on tax returns unless IRS needs  the information to know the correct amount of taxes owed or is  legislatively mandated to collect or report the information. IRS is obligated  under the Paperwork Reduction Act to keep the administrative burden on  taxpayers as low as possible, while still fulfilling its mission.
subsections: section_title: Data for Evaluating Tax Expenditures May Not Be Available from Other Sources
paragraphs: In prior reports, we identified tax expenditures that could not be evaluated  because appropriate data were not available from any source, including  sources other than IRS. One example is Indian reservation depreciation  (IRD), where IRS did not collect information on the identity of claimants,  amounts claimed, or the location of the qualified investment. In addition,  we could not find reliable data at other agencies on which taxpayers use  IRD, how much IRD investment was made, or whether the provision was  having a positive effect on economic development.
For some tax expenditures, IRS data limitations can be remedied to some  extent by information available from other federal agencies. For example,  for Empowerment Zone (EZ) employment tax credits, IRS cannot  separate the total credits claimed to show how much was claimed for  specific EZ communities. This limitation is partially remedied by the  Department of Housing and Urban Development (HUD), which collects  community level information for some EZ-related tax expenditures.  However, as we have previously reported, HUD was unable to validate  the information on the use of some of these tax expenditures and it tracks  only a portion of the EZ employment credits. HUD and IRS have begun  collaborating to produce better data on the use of EZ tax credits.
For some tax expenditures, it may be possible to estimate missing IRS  information using other sources such as public records, state agency  records, and surveys. However, in general, such estimates cannot be  expected to be as precise as data from tax returns. For example, in the  case of an evaluation of the Research Tax Credit, a measure of spending  that qualifies for the credit derived from research spending as reported on  corporate annual reports will not be as accurate as a measure derived  from corporate tax returns because of differences in the tax and  accounting rules for reporting the spending. The less accurate data can  lead to less reliable conclusions from the evaluation.
section_title: Case Studies of Comparable Outlay and Tax Expenditure Programs Show Differences in Data Available for Measuring Performance
paragraphs: After reviewing the GPRAMA-mandated cross-agency priority (CAP)  goals established by OMB and federal agencies, we chose four outlay  programs—three addressing energy efficiency and one addressing job  training—that  we considered to be comparable to certain tax  expenditures based on their similar purposes. Table 2 provides  descriptions of these tax expenditures and comparable outlay programs.
As shown in table 3, the four comparable outlay programs and tax  expenditures associated with DOE and DOL had broadly similar purposes  in the areas of energy conservation and employment.
As shown in table 4, DOE and DOL produced performance measures and  goals for outlay programs in their annual reports but did not do so for the  comparable tax expenditures. Agencies were not required by GPRAMA to  produce these measures for the tax expenditures. Also, IRS collects the  basic information about claimants and the amounts claimed for the four  tax expenditures in our case studies. (See appendix II table 5). But, since  IRS is not tasked with evaluating tax expenditures, it has not formulated  performance measures or goals for these tax expenditures.
The performance measures shown in table 4 can track the progress of  the outlay programs, on an ongoing basis, toward specific goals (stated in  terms of number of gallons produced, number of turbines installed, etc.).  However, additional data may be needed for an assessment of broader  purposes and the impact of the programs. For example, for the vehicle  technologies program, the purpose of reducing petroleum consumption  can be measured by the performance measure in table 4 (gallons of  petroleum saved) but additional data are needed to measure the outlay  program’s broader purpose of reducing environmental impacts.
section_title: Concluding Observations
paragraphs: With so much spending going through the tax code in the form of tax  expenditures, the need to determine whether this spending is achieving  its purpose becomes more pressing. This report identifies gaps in the  data required to evaluate tax expenditures but makes no  recommendations on how to fill these gaps. A key step in collecting the  data is first determining who should undertake this task. As we said in our  guide for evaluating tax expenditures, the agency or agencies responsible  for the program ought to determine what data should be collected to  evaluate tax expenditures relevant to their goals. We recommended in  our 2005 report that the Director of OMB, in consultation with the  Secretary of the Treasury, determine which agencies will have leadership  responsibilities to review tax expenditures and how to address the lack of  credible performance information on tax expenditures. However, these  agencies have not yet been identified. GPRAMA may make a start on  answering the question of who should evaluate tax expenditures by  requiring that the responsible agencies identify the various program  activities that contribute to their goals, which we believe should include  tax expenditures.
section_title: Agency Comments and Our Evaluation
paragraphs: The IRS provided technical comments after viewing a draft of this report,  which we incorporated as appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we are sending copies of this report to the Acting  Commissioner of Internal Revenue and other interested parties. This  report will also be available at no charge on GAO’s website at  http://www.gao.gov.
If you have any questions on this report, please contact me at (202) 512- 9110 or whitej@gao.gov. Contact points for our offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  Key contributors to this report are listed in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine what Internal Revenue Service (IRS) data are available for  evaluating tax expenditures, we used 173 tax expenditures for fiscal year  2011 that were developed by the Department of the Treasury (Treasury)  and reported by the Office of Management and Budget (OMB) in  Analytical Perspectives, Budget of the United States Government, Fiscal  Year 2012. We reviewed IRS tax returns, tax forms, information returns,  and publications for tax year 2011 and categorized the tax expenditures  based on whether they were (1) not listed on tax forms, (2) listed on tax  forms but did not have their own line item, or (3) listed on tax forms and  had their own line item so the claimants and the amount claimed could be  identified. The tax returns we reviewed were primarily Form 1040 for  individual taxpayers, Form 1120 for corporate taxpayers, and Form 990  for tax-exempt organizations. Although the tax expenditure concept can  also be applied to other kinds of taxes, such as excise taxes, this report  covers only tax expenditures for the federal income tax system.
We sent a list of the tax expenditures that we initially identified as not  appearing on a tax form to IRS for verification of our assignment of these  tax expenditures to this category. (IRS was not able to verify our  assignment of all of the tax expenditures to their categories due to time  constraints encountered as the agency readied for the tax filing season.)   In addition, when IRS verified those not listed on a tax form, it generally  used information from tax returns but not from information returns.
Our assignment of the tax expenditures to the three categories  sometimes required that we make judgments about the adequacy of the  information on the tax forms. For example, according to IRS, the amount  of deferred income from installment sales can be obtained from Form  6252 (Installment Sale Income) by subtracting the installment sale income  line item from the gross profit line item. However, according to OMB, this  difference does not represent the amount of the tax expenditure. The tax  expenditure is the deferred amount less than $5 million for which non- dealers are not required to pay interest on their deferred taxes. Therefore,  since we could not identify the deferral amount for non-dealers, and the  amount of the tax expenditure deferral does not have its own line item, we  classified it as a tax expenditure that is on a tax form but does not have  its own line item.
During our matching, we identified 10 tax expenditures that we did not  include in our analysis because (1) they were not available in tax year  2011, such as the Hope Tax Credit which was temporarily replaced by the  American Opportunity Tax Credit; (2) some but not all parts of the tax  expenditure were on a tax form, such as the Exclusion of Benefits and  Allowances to Armed Forces Personnel where only the combat pay  portion was reported on a tax form—Form W-2 (Wage and Tax  Statement); and (3) where reporting of the tax expenditure was optional,  such as Employer Plans on Form W-2. Some tax expenditures use  multiple tax forms, multiple line items, or both on the forms to account for  all parts of the tax expenditure. When multiple forms or line items were  used, we considered the tax expenditure as having its own line item when  all parts of the tax expenditure were on tax forms and had their own line  items. For example, the Adoption Credit and Exclusion tax expenditure  lists the credit and exclusion on different line items of the Form 8839  (Qualified Adoption Expenses). Therefore, we considered this tax  expenditure as having its own line item.
We used the fiscal year 2013 budget, for fiscal year 2011 revised  estimates, to identify the tax expenditure amounts. We chose the tax  expenditure estimates reported in the budget for our analysis because  Treasury develops revised estimates based on changes in tax policy and  economic activity for the year prior to the reported fiscal budget year (i.e.,  retrospective estimates). Even though Treasury’s estimates are  retrospective, the final reported numbers are still estimates and may not  reflect additional policy changes. In addition, tax expenditure revenue loss  estimates for specific provisions do not take into account potential  behavioral responses to changes in these provisions on the part of  taxpayers. These revenue loss estimates do not represent the amount of  revenue that would be gained if certain tax expenditures were repealed  since repeal would probably change taxpayer behavior in some way that  would affect revenue.
For tax expenditures that were listed on tax forms, we reviewed IRS’s  Statistics of Income (SOI) Proposed Tax Year 2010 Forms and  Schedules to determine whether SOI collected data for tax year 2010, the  latest year available. We also reviewed SOI publications to identify the  types of available information and whether they included tax  expenditures. We reviewed our prior reports to identify instances where  IRS data available for evaluating tax expenditures were limited and the  limitations were not remedied by data from other sources.
To analyze examples of data that agencies used to evaluate outlay  programs that are comparable to tax expenditures, we visited the  performance.gov web site on October 19, 2012. We reviewed the  Government Performance and Results Act Modernization Act of 2010- mandated crosscutting, or what OMB calls cross-agency priority (CAP),  goals for contributing agencies and programs that explicitly included tax  expenditures among their policy initiatives. As examples of tax  expenditures, we chose five tax credits from the sixteen tax expenditures  listed under the CAP goal of energy efficiency and the one tax credit  listed under the CAP goal of job training. As examples of what we  considered to be comparable outlay programs, we chose three energy  efficiency and renewable energy outlay programs, Weatherization,  Vehicle Technologies, and Renewable Energy, and one Department of  Labor-based outlay program, the Workforce Investment Act as it  pertained to dislocated workers. We then reviewed the 2011 annual  performance reports from the Department of Energy and the Department  of Labor. We used fiscal year 2011 performance reports so the  performance data would be comparable to the tax expenditure data we  analyzed for tax year 2011. These performance reports were not  available for fiscal year 2012. We identified their performance measures  and goals, as well as the data they used to evaluate and assess these  outlay programs. Lastly, we used our own criteria for performance  measures and examples of data used to construct them.  Table 2  provides a more detailed description of the tax expenditures and  comparable outlay programs.
section_title: Appendix II: Tax Expenditures and Their Inclusion on Tax Forms
paragraphs: To determine whether tax expenditures were included on tax forms and  had their own line items, we matched the Department of Treasury’s list of  tax expenditures for fiscal year 2011 to Internal Revenue Service tax  forms for tax year 2011. The relationships of the tax expenditures to tax  forms are shown in table 5.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact name above, Kevin Daly, (Assistant Director),  Laurie King (Analyst-in-Charge), Jeff Arkin, Elizabeth Curda, Robert  Gebhart, Lois Hanshaw, Benjamin Licht, Ed Nannenhorn, Karen O’Conor,  Michael O’Neill, Robert Robinson, Alan Rozzi, MaryLynn Sergent,  Stephanie Shipman, and Anne Stevens all made contributions to this  report.