To assist New York in recovering from the September 11, 2001, terrorist attacks, Congress passed Public Law 107-147, the Job Creation and Worker Assistance Act of 2002. The act was signed into law on March 9, 2002, and created seven tax benefits that focus on the New York Liberty Zone. The Liberty Zone tax benefits include treating employees in the Liberty Zone as a targeted group for purposes of the work opportunity tax credit (WOTC), which IRS refers to as the business employee credit; a special depreciation allowance; an increase in section 179 expensing; special treatment of leasehold improvement property; an extension of the replacement period for involuntarily converted authority to issue tax-exempt private activity bonds; and authority to issue advance refunding bonds. An explanation of each benefit, an example of how it can be used, and the period each benefit is in effect are included in appendix II. Under the Congressional Budget Act of 1974 as amended, JCT provides estimates of the revenue consequences of tax legislation. In March 2002, JCT estimated that the New York Liberty Zone tax benefits would reduce federal revenues by $5.029 billion over the period 2002 through 2012. For one of the seven Liberty Zone tax benefits, the business employee credit, IRS is collecting but not planning to report some information about use—the number of taxpayers claiming the credit and the amount of credit claimed—nor is it planning to use this information to report on how the benefit has reduced taxpayers’ tax liabilities. IRS is not planning to collect or report information about the use of the other six benefits or how using these benefits has reduced taxpayers’ tax liabilities. IRS collects information on how many taxpayers use the business employee credit and the amount of the credit claimed on Form 8884 (New York Liberty Zone Business Employee Credit). Submission processing officials in the Small Business/Self-Employed (SB/SE) Division began entering information from this form into IRS’s computer system in January 2003. Some taxpayers claiming the business employee credit may have their returns processed by the Wage and Investment (W&I) Division, which is not planning to enter information from the form into the computer system. However, IRS officials said that the bulk of the taxpayers who would claim this credit would submit their returns to the SB/SE Division. IRS can collect information on the use of the business employee credit because it developed a new form to administer this credit. Although the business employee credit was included in the WOTC provisions, IRS officials said they needed to track business employee credits separately because the business employee credit can be used to offset any alternative minimum taxes owed but the general WOTC provisions cannot. IRS currently cannot collect information on the remaining six Liberty Zone benefits because it is using existing forms to administer them, and taxpayers do not report these six benefits as separate items on their returns. For example, taxpayers add the amount of depreciation they are allowed under the Liberty Zone special depreciation allowance benefit to other depreciation expenses and report their total depreciation expenses on their returns. Since taxpayers do not report their use of six of the seven benefits separately on their returns, IRS cannot report on how extensively these six benefits were used. IRS officials said that although they are collecting information on the amount of business employee credits claimed by taxpayers, they are not planning on reporting information on the extent to which the benefit reduced taxpayers’ tax liabilities. For the other six benefits, IRS officials said that without information about use, they cannot collect or report on the extent to which the benefits reduced taxpayers’ tax liabilities. According to IRS officials, the agency followed its usual procedures in determining the type of information to collect about the Liberty Zone tax benefits. They added that IRS would collect and report information that would help it to administer the tax laws or if it was legislatively mandated to collect or report information. IRS officials said they do not need information about the use of the Liberty Zone tax benefits or the resulting reductions in taxpayers’ tax liabilities in order to administer the tax laws. For example, IRS officials said that they do not need information on each specific benefit claimed to properly target their enforcement efforts. Instead, they target their enforcement efforts based on taxpayers claiming various credits, deductions, and so forth that fall outside of expected amounts. In addition, IRS officials noted that the agency has not been legislatively mandated to collect or report information on the benefits. IRS would need to make several changes if it were to collect more information on taxpayers’ use of the benefits and their effect on reducing taxpayers’ tax liabilities. IRS would need to change forms used to collect information from taxpayers, change how it processes information from tax returns, and revise computer programming, which would add to taxpayer burden and IRS’s workload. Even if it were to make these changes, IRS would not have information for two of the years the benefits were available. Also, although the additional information would enable IRS to make an estimate of the revenue loss due to the benefits, it would not be able to produce a verifiable measure of the loss. To produce the estimate, IRS would have to make assumptions about how taxpayers would have behaved in the absence of the benefits. For six of seven of the Liberty Zone tax benefits, IRS would need to revise forms, tax return processing procedures, and computer programming if it were to collect and report information about the number of taxpayers claiming the benefit and the amount they claimed. It would also need to take most of these steps to report on the use of the seventh benefit—the business employee credit. According to IRS officials, they would need to make staff available to revise forms, review returns for completeness and accuracy, transcribe the additional data, and write the necessary computer programs for entering and extracting data. They would also need to allocate computer resources to process the additional information collected and prepare reports on the use of the benefits. For example, for the special depreciation allowance benefit, IRS would need to revise Form 4562 (Depreciation and Amortization) so that taxpayers reported the amount of depreciation they claimed specifically due to this benefit, tax return processing procedures so that processing staff reviewed Form 4562 for completeness and accuracy and transcribed information about the special depreciation allowance, and computer programming so that information about the special depreciation allowance could be entered into IRS’s information systems and extracted in order to prepare reports about the use of the benefit. For the seventh benefit—the business employee credit—taxpayers already separately report the amount of the credit they are claiming, and IRS is already reviewing these forms for accuracy and completeness, transcribing data from them, and entering this information into the agency’s computer system for those returns that are processed by the SB/SE Division. However, computer programming would need to be changed to extract information to prepare reports about benefit use. For any returns processed by the W&I Division, IRS would also need to revise W&I processing procedures and computer programming. Since IRS currently does not have any plans to make these changes, officials were unable to estimate the costs involved in accomplishing these actions or the number of staff needed to do so. However, IRS officials estimated they added one full-time equivalent (FTE) primarily to review the Form 8884s for completeness and accuracy and for data transcription—part of the process to collect information about the use of the business employee credit. If IRS collected information about the use of the benefits, IRS could then develop some information on the reduction in taxpayers’ tax liabilities due to the benefits. For example, IRS could determine how much lower each taxpayers’ tax liability is due to the use of the tax benefits, assuming that taxpayer behavior would be the same whether the benefits existed or not. Table 1 is an example of such a computation for claiming the Liberty Zone Section 179 expensing benefit. In this example, a taxpayer with $100,000 in income bought $40,000 worth of office equipment in 2002 and placed this equipment in service in the Liberty Zone in 2002. After applying the Liberty Zone section 179 expensing benefit, taxable income would be $60,000. Since the equipment has been completely expensed, the taxpayer cannot claim any further deductions for this equipment. To recalculate the taxpayer’s taxable income as if the special Liberty Zone expensing benefit did not exist, IRS could assume that the taxpayer would make the same investment, even without the Liberty Zone tax benefit, and still claim the $24,000 section 179 deduction available to all taxpayers in 2002 and any other available deductions, such as the special depreciation allowance. In our example, the special depreciation allowance would be worth $4,800, and the amount otherwise available as a depreciation deduction (regular depreciation) would be worth $1,600, which would reduce the taxpayer’s taxable income to $69,600. The total reduction in taxable income would be $9,600. Once all the adjustments to taxable income were made, IRS would then need to apply the appropriate marginal tax rate to arrive at the taxpayer’s recalculated tax liability. If IRS were to begin collecting information on the number of taxpayers using the Liberty Zone tax benefits and the amounts they claimed, the information would not be complete. In addition, although the information would enable IRS to make an estimate of the revenue loss due to the benefits, the information would not result in a verifiable measure of the loss. To produce the estimate, IRS would have to make assumptions about how taxpayers would have behaved in the absence of the benefits. IRS said the earliest it would be able to collect information on the number of taxpayers using the benefits and the amounts each claimed would be for tax year 2004 returns, which IRS would not process until calendar year 2005. As a result, IRS would not have information for two of the years that the benefits were in effect, which is significant because most of the benefits expire by the end of 2006. IRS could not reconstruct information on tax liability for those 2 years because returns already filed would not indicate whether taxpayers used the Liberty Zone benefits and would not show the amount claimed through benefit use.