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Summaries of Tax-Related Products Issued

in Fiscal Year 1992 by Subject Matter

for even longer periods. Many of them related to tax periods more than 5 years old.

Summary of Related
Action(s)

Related GAO Product(s)

IRS coordinated with Treasury's Financial Management Service to successfully pilot test its new Federal Tax Deposit system for federal agencies-FEDTAX. This system (1) allows federal agencies to pay their taxes and file their quarterly tax returns electronically and (2) is expected to enhance communications with agencies in regard to their account status. Final actions are pending on how to promote accountability by top agency management for tax compliance through appropriate reviews. It is expected that about 300 federal agencies (both defense and civilian) will be on line in early 1993. Training of agency staff in the use of FEDTAX is ongoing.

GAO/T-GGD-91-2, 10/18/90; GAO/GGD-91-45, 04/16/91; and
GAO/T-GGD-91-59, 07/24/91

Summaries of Tax-Related Products Issued
in Fiscal Year 1992 by Subject Matter

IRS' Efforts to
Improve Corporate
Compliance

GAO/GGD-92-81BR, 4/17/92

In a report to the Chairman of the Permanent Subcommittee on Investigations, Senate Committee on Governmental Affairs, GAO discussed the second phase of its work on IRS' program to audit the nation's largest corporations-the Coordinated Examination Program (CEP). The report covered (1) trends in CEP examination results, (2) CEP audit coverage estimates, and (3) a profile of CEP taxpayers. GAO also reported on IRS' response to the drop in small corporation tax compliance.

GAO found that total CEP-recommended taxes from fiscal years 1987 to 1991
increased 167 per cent, from $7 billion to $18 billion, including one large
$6.5 billion dollar case closed in fiscal year 1991. Excluding that case, total
recommended taxes increased by 71 percent-from $7 billion to
$11.5 billion. CEP-recommended taxes per direct examination hour
remained fairly steady from fiscal years 1987 through 1990 and increased
in 1991 due to the large case. The term "recommended tax" refers to the
amount of additional tax that an examiner concludes should have been
paid on the basis of the examination, together with any associated
penalties. If the taxpayer agrees with this recommended amount, it is
assessed; if not, the taxpayer may appeal it. For CEP, IRS estimated that
taxpayers appeal about 90 percent of the taxes recommended and that
about 25 percent of the appealed recommendations are actually assessed.
At the Subcommittee's April 1991 hearing on corporate tax compliance,
the Commissioner of IRS testified that "with large corporations, we audit
virtually every CEP taxpayer every year." GAO used IRS' method of
calculating audit coverage for other groups of taxpayers to determine how
widely CEP Corporations were audited. GAO found that CEP audit coverage
ranged from 66 to 69 percent for fiscal years 1987 through 1990 and
77 percent in fiscal year 1991. IRS officials said they do not believe that an
audit coverage measure is applicable to the CEP program because every CEP
taxpayer's return is reviewed for revenue potential before it is excluded
from audit.

To create a profile of CEP Corporations, GAO matched a list of CEP taxpayers
in 1991 to IRS records of 1988 corporate income tax returns. On the basis of
their 1988 returns, GAO found that the majority of CEP Corporations in the
sample were in manufacturing, finance/insurance, or transportation
industries. Average reported assets were $6.5 billion. CEP corporations in
the sample reported an average income tax of $61 million based on
average taxable income of $179 million. After claiming tax credits and

Summaries of Tax-Related Products Issued

in Fiscal Year 1992 by Subject Matter

Summary of Related
Action(s)

Related GAO Product(s)

other tax adjustments, they reported an average net tax liability of
$42 million, or 23 percent of average taxable income.

IRS' most recent Taxpayer Compliance Measurement Program (TCMP) audit results showed that 2.3 million small corporations (about 80 percent of all corporations) voluntarily paid an estimated 61 percent of the tax they owed in 1987. For 1980, just 7 years earlier, IRS' TCMP audit results showed this voluntary compliance to be 81 percent. GAO found that IRS continued to study the data on the drop in compliance but had not yet initiated special compliance programs. IRS had begun four studies designed to provide information helpful in targeting such programs.

IRS is continuing to revise its CEP. GAO is completing the third phase of its CEP review and will be reporting on factors that affect the success of CEP audits and on the status of IRS' changes to CEP.

GAO/T-GGD-91-21, 4/17/91

Summaries of Tax-Related Products Issued
in Fiscal Year 1992 by Subject Matter

Status of Efforts to
Curb Motor Fuel Tax
Evasion

GAO/GGD-92-67, 05/12/92

In response to a request from Congressmen Downey and McGrath, GAO
studied federal motor fuel excise tax compliance and administration. This
report discussed (1) the lack of information to determine motor fuel
excise tax compliance, (2) the effect of recent legislation on compliance,
(3) the effectiveness of IRS programs in promoting compliance, and
(4) state initiatives that could be adapted to bolster federal motor fuel
excise tax collections.

GAO found that no reliable statistical information was available to estimate the current level of fuel tax evasion. IRS had recognized this problem and was investigating alternative methods for estimating motor fuel excise tax evasion. Although government and private officials involved in the motor fuel distribution and tax system agreed that the legislative changes that have taken effect over the last 5 years have reduced some forms of motor fuel excise tax evasion, disagreements existed about the extent of the reductions.

Because the level of evasion was unknown, GAO could not assess the effectiveness of IRS compliance programs. IRS was working with the Federal Highway Administration and selected states to determine whether joint enforcement efforts could improve compliance with motor fuel excise taxes. IRS was also developing a database containing information on all firms authorized to deal in tax-free motor fuel. The database was to be used by IRS and states in examining compliance and by terminal operators to determine whether firms they do business with are properly registered with IRS and thus eligible to purchase fuels tax-free.

GAO found that the applicability of states' compliance initiatives to federal motor fuel excise tax enforcement was difficult to gauge because of differences between state and federal taxes and collection systems. IRS was considering shifting the motor fuel excise tax collection point to the refinery level, which would be similar to New York State's collection point. GAO concluded that moving the collection point would reduce the number of liable firms and should help minimize the potential for evasion. Industry members, however, disagreed about the desirability of such a move.

Regardless of what the actual level of gasoline tax evasion may be, GAO found strong arguments suggesting that refinery-level taxation could curb evasion more than the current collection scheme. For example:

Summaries of Tax-Related Products Issued

in Fiscal Year 1992 by Subject Matter

Matter(s) for
Congressional
Consideration

Action(s) Taken And/or
Pending

Gasoline would change hands fewer times between production and

taxation, resulting in larger volume transactions.

• Refiners are presumed to be financially more sound and to maintain better records than other parties in the distribution chain.

• The tax would be imposed on fewer taxpayers, thereby reducing the universe for IRS' examination efforts.

A key question, however, is whether refinery-level tax collection imposes competitive disadvantages. The American Petroleum Institute argued that the cost disadvantages would make the petroleum distribution system less efficient or more reliant on foreign imports. For example, increasing carrying costs for gasoline before it was marketed would create a disincentive to store gasoline, which could result in spot shortages.

GAO concluded that the differences in competitive costs that could be created by moving the point of taxation to the refinery would likely vary on average between 2 cents per barrel (.0005 per gallon) for U.S. competitors and 4 cents per barrel (.001 per gallon) between U.S. and foreign competitors. GAO did not know whether such cost difference could have a significant effect on competition. In contrast, depending on how extensive evasion is in a particular market, tax-paying firms could face a 14.1 cent per gallon disadvantage compared to tax-evading firms.

Congress should explore the level of tax evasion with the responsible federal agencies and affected industries. If evasion is sufficiently high, Congress should consider moving the collection of gasoline excise taxes to the point at which gasoline first leaves the refinery or is first imported.

As of December 31, 1992, no congressional action had been taken.

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