This report, Tax Decoder, is intended to decode the tax code for every taxpayer. It reveals more than 165 tax expenditures costing over $900 billion this year and more than $5 trillion over the next five years.
It is nearly impossible to know who is benefiting from the tax code because it lacks any real transparency or accountability. This is not unintentional. The Senate Finance Committee recently rejected an amendment that would have required the recipients of some tax credits to be publicly listed in the USAspending.gov website.10 The recipients of these tax breaks know who they are, so it seems reasonable for those who are paying the taxes to provide the benefits should know as well.
Tax Decoder attempts to provide a detailed and comprehensive overview of the code for all taxpayers. It includes the background, cost, and primary beneficiaries of each provision along with specific examples of some of the recipients of certain tax breaks. It covers well known tax provisions as well as others that are more obscure. ...
The combination of state policy and general public opinion favoring the legalizing of marijuana has led some in Congress to advocate for legalization and taxation of marijuana at the federal level. The Marijuana Tax Equity Act of 2013 (H.R. 501) would impose a federal excise tax of 50% on the producer and importer price of marijuana. The National Commission on Federal Marijuana Policy Act of 2013 (H.R. 1635) proposes establishing a National Commission on Federal Marijuana Policy that would review the potential revenue generated by taxing marijuana, among other things.
This report focuses solely on issues surrounding a potential federal marijuana tax. First, it provides a brief overview of marijuana production. Second, it presents possible justifications for taxes and, in some cases, estimates the level of tax suggested by that rationale. Third, it analyzes possible marijuana tax designs. The report also discusses various tax administration and enforcement issues, such as labeling and tracking.
This document provides estimates of the budgetary savings from 79 options that would decrease federal spending or increase federal revenues over the next decade.
36 of these 79 options are tax increases:
Individual Income Tax Rates 1. Increase Individual Income Tax Rates 2. Implement a New Minimum Tax on Adjusted Gross Income 3. Raise the Tax Rates on Long-Term Capital Gains and Dividends by 2 Percentage Points
For tax year 2011 (the most recent year available), an estimated 43 million taxpayers had individual retirement accounts (IRA) with a total reported fair market value (FMV) of $5.2 trillion. As shown in the table below, few taxpayers had aggregated balances exceeding $5 million as of 2011. Generally, taxpayers with IRA balances greater than $5 million tend to have adjusted gross incomes greater than $200,000, be joint filers, and are age 65 or older. Large individual and employer contributions sustained over decades and rolled over from an employer plan would be necessary to accumulate an IRA balance of more than $5 million. There is no total statutory limit on IRA accumulations or rollovers from employer defined contribution plans.
Estimated Taxpayers with Individual Retirement Accounts (IRA) by Size of IRA Balance, Tax Year 2011
A small number of taxpayers has accumulated larger IRA balances, likely by investing in assets unavailable to most investors—initially valued very low and offering disproportionately high potential investment returns if successful. Individuals who invest in these assets using certain types of IRAs can escape taxation on investment gains. For example, founders of companies who use IRAs to invest in nonpublicly traded shares of their newly formed companies can realize many millions of dollars in tax-favored gains on their investment if the company is successful. With no total limit on IRA accumulations, the government forgoes millions in tax revenue. The accumulation of these large IRA balances by a small number of investors stands in contrast to Congress's aim to prevent the tax-favored accumulation of balances exceeding what is needed for retirement.
In GAO's opinion, the Internal Revenue Service's (IRS) fiscal years 2014 and 2013 financial statements are fairly presented in all material respects. However, in GAO's opinion, IRS did not maintain effective internal control over financial reporting as of September 30, 2014, because of a continuing material weakness in internal control over unpaid tax assessments. ...
During fiscal year 2014, IRS continued to make important progress in addressing deficiencies in internal control over its financial reporting systems. However, GAO identified new and continuing deficiencies in internal control over information security, including missing security updates, insufficient monitoring of financial reporting systems and mainframe security, and ineffective maintenance of key application security, that constituted a significant deficiency in IRS's internal control over financial reporting systems. Until IRS fully addresses existing control deficiencies over its financial reporting systems, there is an increased risk that its financial and taxpayer data will remain vulnerable to inappropriate and undetected use, modification, or disclosure.
In Fiscal Year 2013, the IRS spent more than $13.7 million on wireless telecommunication devices and maintained an inventory of more than 49,000 devices reported as being in use. Effective controls over the assignment of and inventory accounting for these devices is important to ensure proper stewardship of Government funds.
TIGTA’s previous work found that IRS processes for assigning and monitoring the use of devices were not adequate to ensure that employees have a business need for the devices. In addition, prior work found that the IRS paid for thousands of devices that were unused. The overall objective of this review was to assess the efficiency and effectiveness of the IRS’s inventory control for wireless aircards, cellular phones, and BlackBerry® smartphone devices.
This audit was initiated to determine whether audits of partnerships subject to the TEFRA are initiated in accordance with applicable statutory and administrative procedures. ... TIGTA reviewed a statistically valid sample of 35 partnership audits subject to the TEFRA that were closed during Fiscal Year 2012 and identified 22 audits that were not conducted in accordance with one or more applicable TEFRA procedures. Specifically, TIGTA found that: (1) minimum tests were not always documented to determine whether TEFRA procedures should have been used to examine the partnership return; (2) necessary checks were not always documented to ensure that the Tax Matters Partner was qualified to represent the partnership; (3) some Forms 2848, Power of Attorney and Declaration of Representative, did not contain the required information that allows disclosure of tax return information; and (4) some Letters 1787, Notice of Beginning of Administrative Proceeding, were not issued timely. When the sample results are projected to the population of 2,698 TEFRA audits closed during Fiscal Year 2012, TIGTA estimates that approximately 1,696 TEFRA audits were not conducted in accordance with one or more applicable TEFRA procedures.
The Federal Information Security Management Act of 2002 (FISMA) was enacted to strengthen the security of information and systems within Federal Government agencies. The IRS collects and maintains a significant amount of personal and financial information on each taxpayer. As custodians of taxpayer information, the IRS has an obligation to protect the confidentiality of this sensitive information against unauthorized access or loss.
As part of the FISMA legislation, the Offices of Inspectors General are required to perform an annual independent evaluation of each Federal agency’s information security programs and practices. This report presents the results of TIGTA’s FISMA evaluation of the IRS for Fiscal Year 2014.
Based on this year’s FISMA evaluation, five of the 11 security program areas met the performance metrics specified by the Department of Homeland Security’s Fiscal Year 2014 Inspector General Federal Information Security Management Act Reporting Metrics. ... Four security program areas were not fully effective due to one or more program attributes that were not met. ... Two security program areas did not meet the level of performance specified due to the majority of the attributes not being met.
Issued in August 2004, the Homeland Security Presidential Directive 12 (HSPD-12), Policy for a Common Identification Standard for Federal Employees and Contractors, requires Federal agencies to issue identity credentials that meet the HSPD-12 standard and use them for gaining physical access to Federally controlled facilities and logical access to Federally controlled information systems. Without full implementation of HSPD-12 compliant authentication, IRS facilities, networks, and information systems are at an increased risk of unauthorized access.
This audit was initiated to determine the IRS’s progress in implementing HSPD-12 requirements for accessing IRS facilities and information systems. The U.S. Department of the Treasury has set a goal for its bureaus to achieve 100-percent HSPD-12 compliance by Fiscal Year 2015. In Fiscal Year 2012, the Administration identified HSPD-12 as a Cross-Agency Priority initiative needed to improve the security of Federal data.
The majority of the IRS workforce (85%) has been issued HSPD-12 compliant Personal Identity Verification (PIV) cards. However, full implementation of PIV card electronic authentication for accessing IRS facilities is not scheduled until at least Fiscal Year 2018, and only if funding is available. In addition, significant challenges remain in the area of implementing PIV card electronic authentication for accessing IRS networks and information systems. These challenges include many legacy systems and technologies in use at the IRS that are incompatible with PIV cards, and limited HSPD-12 staffing and funding for resolving these conflicts.
Washington is taking a hard look at tax-sheltered retirement accounts, especially “supersize” ones worth millions of dollars. Savers should consider what it could mean for them.
The U.S. Government Accountability Office, an arm of Congress, recently released a report on individual retirement accounts, requested by Senate Finance Committee Chairman Ron Wyden (D., Ore.). Its publication coincided with Senate hearings on retirement savings held last month.
The GAO study addressed questions many people asked after disclosures that former presidential candidate Mitt Romney had a traditional IRA worth as much as $101 million and technology entrepreneur Max Levchin put more than 13.3 million shares of YelpYELP -5.11% stock in a Roth IRA before the firm went public in 2012.
How many supersize IRAs are there? The GAO estimates more than 300 individuals or families have IRAs with balances greater than $25 million, while more than 9,000 have IRAs worth more than $5 million. The GAO wasn’t able to distinguish between regular and Roth IRAs, given the data. ...
If an IRS employee is unable to contact or unable to locate (UTC/UTL) a delinquent taxpayer, the collection case may be closed as currently not collectible (CNC). If all of the required research steps are not taken prior to the case closure, there is a risk that the Government’s interest may not be protected and that taxpayers will not be treated equitably.
In Fiscal Year 2012, the IRS closed 482,611 tax modules involving approximately $6.7 billion as CNC–UTC/UTL. This audit was initiated to determine whether these cases were adequately researched, documented, and approved to ensure that all actions were taken to collect outstanding taxpayer liabilities.
Required case actions were not always completed before closing cases as CNC–UTC/UTL. Of a stratified sample of 250 cases reviewed, there was no evidence that employees completed all of the required research steps for 57 percent of the cases prior to their closing. Moreover, 7 percent of the cases did not have a Notice of Federal Tax Lien (NFTL) filed on all delinquent tax periods as required. Collection Field function (Field) employees did not complete all research in 165 of the 204 Field cases, while Automated Collection System function employees did not complete all research in eight of the 38 Automated Collection System cases
The number of large partnerships has more than tripled to 10,099 from tax year 2002 to 2011. Almost two-thirds of large partnerships had more than 1,000 direct and indirect partners, had six or more tiers and/or self reported being in the finance and insurance sector, with many being investment funds.
The Internal Revenue Service (IRS) audits few large partnerships. Most audits resulted in no change to the partnership’s return and the aggregate change was small. Although internal control standards call for information about effective resource use, IRS has not defined what constitutes a large partnership and does not have codes to track these audits. According to IRS auditors, the audit results may be due to challenges such as finding the sources of income within multiple tiers while meeting the administrative tasks required by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) within specified time frames. For example, IRS auditors said that it can sometimes take months to identify the partner that represents the partnership in the audit, reducing time available to conduct the audit. TEFRA does not require large partnerships to identify this partner on tax returns. Also under TEFRA, unless the partnership elects to be taxed at the entity level (which few do), IRS must pass audit adjustments through to the ultimate partners. IRS officials stated that the process of determining each partner’s share of the adjustment is paper and labor intensive. When hundreds of partners’ returns have to be adjusted, the costs involved limit the number of audits IRS can conduct. Adjusting the partnership return instead of the partners’ returns would reduce these costs but, without legislative action, IRS’s ability to do so is limited.
About 9,000 U.S. taxpayers have each accumulated at least $5 million in individual retirement accounts, said the Government Accountability Office, raising questions about some investors’ tax-advantaged returns.
Today’s GAO report said someone who contributed the maximum amount each year to an IRA from 1975 to 2011 and invested it in the Standard & Poor’s 500 Index would have about $350,000. The maximum contribution this year is $5,500, plus an extra $1,000 for people age 50 and older.
For tax year 2011 (the most recent year available), an estimated 43 million taxpayers had individual retirement accounts (IRA) with total reported fair market value of $5.2 trillion. About 99 percent of those taxpayers had aggregate IRA balances (including inherited IRAs) of $1 million or less. As shown in the table below, few taxpayers had aggregated balances exceeding $5 million as of 2011. Generally, taxpayers with IRA balances of $5 million or more tend to have higher adjusted gross incomes, be joint filers, and 65 or more years old. The Internal Revenue Service (IRS) statistical data GAO analyzed may not provide a precise estimate of the number of taxpayers or other quantities when the number of taxpayers in a particular reporting group is very small. Even assuming maximum contributions sustained over decades and rolled over from an employer plan, it would take an aggressive stock market investment strategy to accumulate an IRA balance over $5 million. There is no total statutory limit on IRA accumulations or rollovers from employer defined contribution plans. An individual who made the maximum contributions every year since 1975 to a traditional IRA could have accumulated about $303,420 achieving investment returns equal to the average annual Social Security interest rates.
Estimated Taxpayers with IRA by Size of IRA Balance, Tax Year 2011
Median household net worth decreased by $5,046, or 6.8 percent, between 2000 and 2011. ... Between 2000 and 2011, experiences of households varied widely depending on their net worth quintile (See Figure 1). Median household net worth decreased by $5,124 for households in the first (bottom) net worth quintile, $7,056 (or 49.3 percent) for the second quintile, and $5,072 (or 6.9 percent) for the third quintile. Median household net worth increased by $18,433 (or 9.8 percent) for households in the fourth quintile, and by $61,379 (or 10.8 percent) for households in the highest (top) quintile.
The Affordable Care Act includes a tax provision that provides for an excise tax equal to 2.3 percent of the sales price for medical devices sold beginning January 1, 2013. Manufacturers, producers, and importers are responsible for collecting the medical device excise tax and must file a Form 720, Quarterly Federal Excise Tax Return. The Joint Committee on Taxation estimated revenues from the medical device excise tax of $20 billion for Fiscal Years 2013 through 2019. ...
Our review found that both the number of Forms 720 filed reporting the medical device excise tax and the amount of the associated revenue reported are lower than estimated. The IRS is attempting to develop a compliance strategy to ensure that businesses are compliant with medical device excise tax filing and payment requirements and has taken several measures to advise medical device manufacturers of the new excise tax. However, the IRS cannot identify the population of medical device manufacturers registered with the Food and Drug Administration that are required to file a Form 720 and pay the excise tax.
IRS policy requires contractor personnel to have a background investigation if they will have or require access to Sensitive But Unclassified (SBU) information, including taxpayer information. Allowing contractor personnel access to taxpayer and other SBU information without the appropriate background investigation exposes taxpayers to increased risk of fraud and identity theft.
Taxpayer and other SBU information may be at risk due to a lack of background investigation requirements in five contracts for courier, printing, document recovery, and sign language interpreter services. For example, in one printing services contract, the IRS provided the contractor a compact disk containing 1.4 million taxpayer names, addresses, and Social Security Numbers; however, none of the contractor personnel who worked on this contract were subject to a background investigation. In addition, TIGTA found 12 contracts for which IRS program and procurement office staff correctly determined that contractor personnel required background investigations because they would have access to SBU information; however, some contractor personnel did not have interim access approval or final background investigations before they began working on the contracts. Further, TIGTA identified 20 contracts for which either some or all contractor personnel did not sign nondisclosure agreements. In June 2013, after the period covered by our audit, the IRS issued more explicit guidance requiring the execution of nondisclosure agreements.
IRS records indicate that the majority of tax-exempt organizations pay their Federal taxes. However, a small percentage are not paying their taxes. More than 64,200 (3.8%) tax‑exempt organizations had nearly $875 million of Federal tax debt as of June 16, 2012. While some organizations owed minor amounts, approximately 1,200 tax‑exempt organizations owed more than $100,000 each. Unpaid taxes were often associated with multiple tax periods. For example, nine organizations each had Federal tax debt spanning 10 or more years that collectively totaled more than $5.5 million.
Staffing has also declined by about 10,000 full-time equivalents since fiscal year 2010, and performance has been uneven. ...
IRS does not calculate actual ROI or use it for resource decisions. These limitations are important, which is why GAO recommended in 2012 that IRS explore developing such estimates. ... GAO recommends that IRS (1) develop a long-term strategy to manage uncertain budgets, and (2) calculate actual ROI for implemented initiatives, compare actual ROI to projected ROI, and use the data to inform resource decisions.
318,462 federal workers and retirees owed more than $3.3 billion in back income taxes as of September 30, 2013, a delinquency rate of 3.27% (compared to 8.7% for the entire U.S. population). See the full spreadsheet here.
Among the 18 executive departments, the embattled Department of Veterans Affairs has the second highest delinquency rate among its employees: 4.38% (behind the Department of Housing and Urban Development's 5.29%).
Among 27 large (> 1,000 employees) independent agencies, the Federal Reserve has the third highest delinquency rate: 6.51%.
The delinquency rate is 4.87% in the House of Representatives and 2.43% in the Senate.
In the tax world, the delinquency rate is 3.02 in the Tax Court and 1.20% in the Treasury Department (the IRS is not separately broken out).
Individuals who pay alimony can deduct the amount paid from income on their tax return to reduce the amount of tax an individual must pay. Conversely, individuals who receive alimony must claim the amount received as income on their tax return. TIGTA initiated this audit to evaluate the alimony reporting gap and to assess controls the IRS has in place to promote reporting compliance.
Processes have not been developed to address the majority of discrepancies between alimony deductions claimed and income reported. TIGTA’s analysis of the 567,887 Tax Year 2010 returns with an alimony deduction claim identified 266,190 (47 percent) tax returns in which it appears that individuals claimed alimony deductions for which income was not reported on a corresponding recipient’s tax return or the amount of alimony income reported did not agree with the amount of the deduction taken. There is a discrepancy of more than $2.3 billion in deductions claimed without corresponding income reported.
The Improper Payments Elimination and Recovery Act (IPERA) of 2010 strengthened agency reporting requirements and redefined “significant improper payments” in Federal programs. The Office of Management and Budget has declared the Earned Income Tax Credit (EITC) Program a high-risk program that is subject to reporting in the Department of the Treasury Agency Financial Report. The IRS estimates that 22 to 26 percent of EITC payments were issued improperly in Fiscal Year 2013. The dollar value of these improper payments was estimated to be between $13.3 billion and $15.6 billion.
The IRS continues to not provide all required IPERA information to the Department of the Treasury for inclusion in the Department of the Treasury Agency Financial Report Fiscal Year 2013. For the third consecutive year, the IRS did not publish annual reduction targets or report an improper payment rate of less than 10 percent for the EITC. IRS management has indicated that the IRS and the Department of the Treasury are in continued discussions with the Office of Management and Budget to obtain its approval to develop supplemental measures that are appropriate to gauge the impact of EITC compliance and outreach efforts in lieu of developing error reduction targets. Finally, although risk assessments were performed for each of the programs that the Department of the Treasury required the IRS to assess, the risk assessment process still may not provide a valid assessment of improper payments in tax administration. As such, the EITC remains the only revenue program fund to be considered at high risk for improper payments.
IRS’s appropriations have declined to below fiscal year 2009 levels and FTEs have been reduced by about 8,000 since fiscal year 2009. Planned performance in enforcement and taxpayer service has decreased or fluctuated; for example, in the fiscal year 2014 congressional justification the audit coverage target for individual examinations was 1.0 percent for fiscal year 2014, however, the target was lowered to 0.8 percent in the fiscal year 2015 congressional justification. Amidst lower demand, IRS’s telephone level of service performance (the percentage of callers seeking live assistance and receiving it) was 73 percent from January 1 through March 15, 2014 compared to 69 percent during the same period last year. However, between fiscal years 2009 and 2013, IRS’s telephone level of service fluctuated between 61 percent and 74 percent. Average wait times have almost doubled since fiscal year 2009—from 8.8 minutes to 16.8 minutes as of mid-March 2014.
Not including other budgetary resources such as user fees, the fiscal year 2015 budget request for IRS is $12.5 billion, which is an increase of 10.5 percent ($1.2 billion) in funding and 8.3 percent in staffing (6,998 FTEs) over fiscal year 2014. According to the President’s budget, of the requested $1.2 billion, $480 million is predicated on a cap adjustment—funding above the discretionary spending limit—and largely covers enforcement and infrastructure initiatives. IRS’s workload has increased as a result of legislative mandates and priority programs, such as work related to the Patient Protection and Affordable Care Act and identity theft.
IRS has absorbed approximately $900 million in budget cuts since fiscal year 2010 through savings and efficiencies and by reducing, delaying, or eliminating services. For example, IRS delayed two information technology projects (Information Reporting and Document Matching and Return Review Program) and substantially reduced employee training. To help improve operations, the President requested a large budget increase for IRS in fiscal year 2015. However, additional funding is not the only solution. We have open recommendations on IRS’s operations that may help it achieve efficiencies over time, such as developing a long-term plan to improve web services.
IRS Enacted Appropriations, FY 2009-2014, and Fiscal Year 2015 Request
This report provides data on the number and characteristics of large partnerships as well as Internal Revenue Service (IRS) audits of large partnership returns. For purposes of this report, GAO did not identify a statutory, IRS, or industry-accepted definition of a large partnership. Instead, GAO used a combination of criteria for partner size and asset size used by IRS to define large partnerships as those that reported having 100 or more direct partners and $100 million or more in assets. The number of large partnerships increased from 720 in tax year 2002 to 2,226 in tax year 2011. Large partnerships also increased in terms of the average number of direct partners and average asset size. IRS had data on two categories of large partnership return audits. First, the number of completed field audits of large partnership returns increased from 11 in fiscal year 2007 to 31 in fiscal year 2013. Second, IRS counted audits closed through its campus function, which increased from 42 to 143 over the same period. Unlike field audits, campus function audits generally do not entail a review of the books and records of the large partnership return but rather were opened to pass through large partnership return audit adjustments to the related partners' returns. The percentage of IRS audits that resulted in no change to the taxpayer's return varied from fiscal year 2007 to 2013 but was 52 percent for campus function audits and 45 percent for field audits in fiscal year 2013.
Impact on Taxpayers The bankruptcy automatic stay provision prohibits the IRS from taking certain collection actions against a debtor (taxpayer) as soon as it learns, or is notified by a U.S. bankruptcy court, that a bankruptcy petition has been filed. Similarly, the debtor may be granted a discharge, which remains after the case is closed and is a permanent injunction order prohibiting the IRS from taking any form of collection action against the debtor personally with respect to discharged debts. If the IRS does not observe the automatic stay or the discharge injunction, taxpayers’ rights could potentially be violated and the IRS could be sued for damages.
Why TIGTA Did the Audit In Fiscal Year 2012, IRS data showed that the Field Insolvency function received 306,920 bankruptcy cases on taxpayers owing approximately $2.5 billion in taxes, penalties, and interest. This audit was initiated to determine whether the function has effective controls and procedures in place to take appropriate and timely actions to protect the Government’s interest and taxpayers’ rights during bankruptcy proceedings.
What TIGTA Found Field Insolvency function specialists frequently did not follow required procedures when working bankruptcy cases. Although TIGTA did not identify any violations of taxpayers’ rights and/or failure to protect the Government’s interest during this review, there is a higher risk that this could occur when procedures are not followed.
TIGTA’s review of three random samples of closed bankruptcy cases showed that specialists did not always follow established procedures in 17 (57 percent) of 30 Chapter 7 cases, 15 (50 percent) of 30 Chapter 11 cases, and 13 (43 percent) of 30 Chapter 13 cases reviewed. Specifically, specialists did not always timely or properly conduct the initial case analysis, follow up on scheduled case actions within a reasonable time, or timely or properly close cases.
TIGTA also reviewed a random sample of 30 bankruptcy cases with Automated Proof of Claim flag conditions (errors that need to be resolved by a specialist). Specialists did not timely or properly resolve the flag conditions in 12 (40 percent) of 30 cases.
The vast majority of vendors that conduct business with the IRS meet their Federal tax obligations. However, TIGTA found that 1,168 (7%) IRS vendors had a combined $589 million of Federal tax debt. ... TIGTA previously recommended that the IRS establish procedures requiring an annual tax check for all IRS contractors. The IRS disagreed with this recommendation and did not implement it. TIGTA continues to believe that the IRS should establish procedures requiring periodic (annual) tax compliance checks for all contractors. Because TIGTA has already recommended expanded tax checks for IRS contractors, no additional recommendations regarding IRS vendor tax compliance are being made at this time.
In GAO’s opinion, the Internal Revenue Service’s (IRS) fiscal years 2013 and 2012 financial statements are fairly presented in all material respects. However, in GAO’s opinion, IRS did not maintain effective internal control over financial reporting as of September 30, 2013, because of a continuing material weakness in internal control over unpaid tax assessments. ...
During fiscal year 2013, IRS continued to make important progress in addressing deficiencies in internal control over its financial reporting systems. However, new and continuing deficiencies in internal control that GAO identified over information security, including missing security updates, insufficient monitoring of financial reporting systems, and weak encryption for authentication, constituted a significant deficiency in IRS’s internal control. Until IRS fully addresses existing control deficiencies over its financial reporting systems, there is an increased risk that its financial and taxpayer data will remain vulnerable to inappropriate and undetected use, modification, or disclosure.
In addition to its internal control deficiencies, IRS faces significant ongoing financial management challenges associated with (1) safeguarding the large volume of sensitive hard copy taxpayer receipts and related information, and (2) its exposure to significant improper refunds from identity theft.
The IRS issues Employer Identification Numbers (EINs) to identify taxpayers’ business accounts. Individuals attempting to commit tax refund fraud commonly steal or falsely obtain an EIN to file tax returns reporting false income and withholding. TIGTA estimates that the IRS could issue almost $2.3 billion in potentially fraudulent tax refunds based on these EINs yearly (or about $11.4 billion over the next five years).
In March 2010, the President signed into law the Health Care and Education Reconciliation Act of 2010 and the Patient Protection and Affordable Care Act (ACA) (collectively referred to as the ACA). The ACA law seeks to provide more Americans with access to affordable health care. The Premium Tax Credit (PTC) Project falls under the IRS ACA Program. Beginning January 2014, eligible taxpayers who purchase health insurance through an Exchange may qualify for and request a refundable tax credit (the PTC) to assist with paying their health insurance premium. The credit is claimed on the taxpayer’s Federal tax return at the end of each coverage year. Because it is a refundable credit, taxpayers who have little or no income tax liability can still benefit. The PTC can also be paid in advance to a taxpayer’s health insurance provider to help cover the cost of premiums. This credit is referred to as the Advanced Premium Tax Credit (APTC). ...
The IRS has completed development and testing for the PTC Computation Engine (PTC-CE) needed to calculate the APTC and the Remainder Benchmark Household Contribution. In addition, the IRS developed a process to verify the accuracy of the PTC-CE calculations. However, improvements are needed to ensure the long-term success of the PTC Project by adherence to systems development controls for: (1) configuration and change management; (2) interagency test management process; (3) security; and (4) fraud detection and mitigation, in accordance with applicable guidance.
Since last year’s assessment report, the IRS has made progress on improving information security. As a result, the Government Accountability Office made a determination to downgrade information security from a material weakness to a significant deficiency. Even still, TIGTA’s reviews identified weaknesses in system access controls, audit trails, and remediation of security weaknesses.
In addition, the IRS took important steps to correct system performance issues of the Modernized e-File system to deliver a successful filing season. However, TIGTA continues to believe that the IRS’s Modernization Program remains a major risk. TIGTA identified several systems development issues that should be addressed to further strengthen and support the Modernization Program. For example, our review of the Customer Account Data Engine 2 database determined that existing data quality issues prevented the downstream interfaces from being implemented. Further, the development and implementation of new systems for the Affordable Care Act present major information technology management challenges. As a result, TIGTA plans to continue its strategic oversight of this area.
Achieving program efficiencies and cost savings is an important area for the IRS. In October 2012, the IRS achieved Information Technology Infrastructure Library® Maturity Level 3 to help achieve greater efficiency delivering information technology services. While the IRS has made progress on improving program effectiveness and reducing costs, TIGTA’s recent audit work involving data center consolidation, the Aircard and BlackBerry® smartphone program, and hardware and software management identified several opportunities for the IRS to achieve additional cost savings.
Congress enacted the erroneous claim for refund or credit penalty (referred to as the erroneous refund penalty) to enhance the IRS’s ability to address the growing number of erroneous tax credit and refund claims filed. Taxpayers who claim excessive tax credits or refunds may be penalized up to 20 percent of the erroneous tax credit or refund claim. Refund or credit claims that have no reasonable basis in law create unnecessary burden on both taxpayers and the IRS by straining resources and impeding effective tax administration.
The Small Business and Work Opportunity Tax Act of 2007 amended the Internal Revenue Code to allow for a monetary penalty for erroneous tax refund or tax credit claims. This audit was initiated to determine whether the IRS is properly assessing the erroneous claim for refund or credit penalty on individual tax accounts.
The IRS incorrectly interpreted the erroneous refund penalty law, which significantly limited the types of erroneous tax refund or credit claims to which the penalty would apply. The IRS assessed only 84 erroneous refund penalties totaling $1.9 million between May 2007 and May 2012.
In response to concerns raised from various IRS functions, the IRS Office of Chief Counsel subsequently revised its interpretation of the law as to when the erroneous refund penalty could be assessed, and issued an updated memorandum in May 2012.
Although the IRS revised its interpretation of the law, it has not developed processes and procedures to enable those functions (Campus Operations) that disallow the majority of individual tax credits to assess the penalty. For example, in the year after the IRS revised its interpretation of the law (June 3, 2012 through May 25, 2013), there were 709,123 individual tax credits disallowed by these functional areas for which the IRS could have potentially assessed erroneous refund penalties totaling more than $1.5 billion.
IRS management raised concerns about the costs and benefits of establishing processes and procedures for the Campus Operations to assess erroneous refund penalties. However, the IRS has not provided any documentation and/or analysis to support the validity of these concerns. In view of the significant problem of erroneous claims for credits and refunds and the related costs to the Government, TIGTA believes that the IRS should reexamine its decision and put appropriate procedures and processes in place to comply with this section of law.
Congress and the administration are reexamining tax expenditures used by corporations as part of corporate tax reform. These tax expenditures—special exemptions and exclusions, credits, deductions, deferrals, and preferential tax rates—support federal policy goals, but result in revenue forgone by the federal government.
GAO was asked to examine issues related to certain tax expenditures.
This report uses GAO’s tax expenditures evaluation guide to determine what is known about: (1) the deferral of income for controlled foreign corporations; (2) deferred taxes for certain financial firms on income earned overseas; and (3) the graduated corporate income tax rate. GAO combined the two deferral provisions for evaluation purposes.
GAO’s guide suggests using five questions to evaluate a tax expenditure: (1) what is its purpose and is the purpose being achieved; (2) does it meet the criteria for good tax policy; (3) how is it related to other federal programs; (4) what are its consequences for the federal budget; and (5) how is its evaluation being managed? To address these questions, GAO reviewed the legislative history and relevant academic and government studies, analyzed 2010 Internal Revenue Service (IRS) data, and interviewed agency officials and tax experts.
The Volunteer Program provides no-cost Federal tax return preparation and electronic filing to underserved segments of the population of individual taxpayers, including low- to moderate-income, elderly, disabled, and limited-English-proficient taxpayers. However, ensuring that tax returns are accurately prepared remains a challenge for the Volunteer Program. Problems with the accuracy of some of the tax returns affect the taxes owed and refunds received by these taxpayers. ...
Of the 39 tax returns prepared for auditors during the 2013 Filing Season, 20 (51 percent) were prepared correctly and 19 (49 percent) were prepared incorrectly. This is a two-percentage-point increase over the 49 percent accuracy rate for the same number of returns in the 2012 Filing Season.
The 19 incorrect tax returns resulted from incorrect application of the tax law, insufficient requests for information during the intake/ interview process, or lack of adherence to quality review requirements.
This audit was initiated to determine the accuracy of the results from the National Quality Review System (NQRS) and how management uses the feedback to enhance the quality of correspondence audits. ... TIGTA evaluated a statistical sample of 127 of 2,913 correspondence audits that had been reviewed by the NQRS during an 18‑month period and found errors with penalty determinations in 65 of the audits (51 percent) that had not been detected and reported by NQRS quality reviewers.
IRS executives and stakeholders should be provided with a more comprehensive snapshot of audit quality so that needed corrective actions can be timely recognized and taken. Only one overall measure of audit quality is currently reported quarterly by the NQRS to IRS executives and other key stakeholders even though as many as 71 items are reviewed.
Finally, the random selection of audits for NQRS review could not be verified. As such, TIGTA was not able to confirm the statistical validity of the NQRS results.
The IRS must ensure that the provisions of the Freedom of Information Act (FOIA), the Privacy Act of 1974 (Privacy Act), and Internal Revenue Code (I.R.C.) Section 6103 are followed. Errors can violate taxpayer rights and result in improper disclosures of tax information.
TIGTA is required to conduct periodic audits to determine if the IRS properly denied written requests for tax account information. ... The overall objective of this review was to determine whether the IRS improperly withheld information requested in writing based on FOIA exemption (b)(3), in conjunction with I.R.C. § 6103, and/or FOIA exemption (b)(7) or by replying that responsive records were not available or did not exist.
TIGTA reviewed a statistically valid sample of 55 FOIA/Privacy Act information requests from a population of 3,415 FOIA/Privacy Act requests and found nine (16.4 percent) in which taxpayer rights may have been violated because the IRS improperly withheld or failed to adequately search for and provide information to requestors.
In addition, the IRS may have violated taxpayer rights by failing to adequately search for and provide information in three (5.6 percent) of 54 sampled I.R.C. § 6103 information requests. When the sample results are projected to their respective populations, approximately 559 FOIA/Privacy Act and 13 I.R.C. § 6103 information requests may have had information erroneously withheld. ... Additionally, sensitive taxpayer information was inadvertently disclosed in response to nine (16.4 percent) of the FOIA/Privacy Act and four (7.4 percent) of the I.R.C. § 6103 information requests reviewed.
The IRS issues letter rulings that interpret and apply tax laws to a specific set of facts provided by corporations, individuals, and international entities. Because each letter ruling can impact millions of dollars of tax collections, the IRS must protect the integrity and independence of the letter ruling process. The appearance that practitioners could possibly manipulate the letter ruling process may result in the risk that inappropriate favorable rulings could cost the Government substantial tax revenue. ...
Chief Counsel does not have written policies or an effective management information system to prevent practitioners or taxpayers from having letter ruling requests assigned to a preferred attorney. Specifically, five of the six associate offices that provide rulings had no written policies and insufficient management information to assess the potential risk of outside influence on the assignment of their letter rulings. ...
TIGTA recommended that the Chief Counsel ... develop written policies for all Associate Chief Counsel offices to oversee, manage, and, as appropriate, limit the number of letter ruling assignments from the same practitioner.
This report is a compilation of statistical information reported by the IRS. The data presented in this report provide taxpayers and stakeholders with information about how the IRS focuses its compliance resources and the impact of those resources on revenue and compliance over time.
During Fiscal Years 2011 and 2012, the IRS encountered challenges that included administering recent legislative changes within an environment of decreasing resources. For example, approximately 50 of the 500 Affordable Care Act provisions add to or amend the Internal Revenue Code. At the same time, the IRS operated under a continuing resolution for Fiscal Year 2012 that funded it at a little more than $11.8 billion, which is a 2.7 percent reduction since Fiscal Year 2010.
Since Fiscal Year 2010, approximately 8,000 full-time IRS positions have been lost—about 5,000 from front-line enforcement personnel. In addition to offering early retirements and buyouts, IRS records indicate that more than one-third of executives and nearly 20 percent of nonexecutive managers are currently eligible for retirement.
Enforcement revenue collected declined by 9 percent in Fiscal Year 2012, from $55.2 billion to $50.2 billion. This has decreased in two straight years and is 13 percent less than the $57.6 billion collected in Fiscal Year 2010. The 13 percent eduction in enforcement revenue correlates to the 14 percent reduction in the number of enforcement personnel.
Synopsis The Tax Gap is defined as the difference between the true tax liability in any year and the amount of tax that is paid voluntarily and on time. The IRS's most recent Tax Gap estimate was $450 billion for Tax Year 2006. The Tax Gap estimate is a widely used measure in tax policy and administration. Some officials state that the absolute number is unimportant since the estimate is a significant amount. However, an important consideration for concern about accuracy is the relationship between the different forms of noncompliance and the types of tax. Furthermore, as Congress considers tax reform, it is important that the Tax Gap estimate reflects as accurately as possible the many forms and areas of noncompliance so that tax policy options can be considered.
Several issues affect the comprehensiveness, accuracy, reliability, and timeliness of the Tax Gap estimate.
First, the voluntary compliance rate computation derived from the Tax Gap estimate is now used by the IRS and the Department of the Treasury as the measure for achieving the Agency Priority Goal of increasing voluntary compliance. This may require more frequent or interim updates to the estimates. Furthermore, in order to have a credible goal, the data should be verifiable and valid. However, the IRS develops the Tax Gap estimates in accordance with its own policies and procedures. While Federal agencies are generally required to follow Office of Management and Budget Standards and Guidelines for Statistical Surveys, the IRS stated that these standards are not technically applicable to the conduct of the National Research Program. The IRS does adhere to several aspects of the OMB standards through its own policies and procedures, including elements in the planning and design phases, but does not adhere completely to other aspects associated with developing cost estimates, the production of estimates and projections, and conducting a formal peer review process.
Second, the individual income tax underreporting gap estimate could be more comprehensive if it included estimates for the informal economy and offshore tax evasion. While the estimation method does include a process to impute undetected income, separate quantified estimates would provide better information on the size of these compliance issues. These areas present significant challenges to tax administration, and the absence of a related estimate could hinder or delay possible solutions.
Third, the current method to estimate the corporate Tax Gap needs to be improved. There are two concerns about the accuracy and reliability of the Tax Year 2006 corporate income tax underreporting gap estimate. Both concerns relate to using recommended tax from operational examinations as the basis for projecting the Tax Gap.
The difficulty in deriving the actual tax liability of large corporations. Unlike recommended tax assessments for individual and small corporate taxes, large corporations often contest recommended taxes. The result is often an assessed amount that is substantially less than the recommended tax. Therefore, using recommended tax as a basis for projections of noncompliance may not provide reliable information.
A significant portion of small corporations are substantially no more than incorporated sole proprietorships. In fact, in Tax Year 2003, there were about 758,000 corporations with gross receipts of less than $100,000 reported. Consequently, it is extremely likely that a large portion of small corporations exhibit the same pathologies as those found in sole proprietorships. That is, a small percentage of these returns also account for a significant portion of the underreporting.
We recommended that the Director, Office of Research, Analysis, and Statistics, take the following actions: (1) conduct a study to determine the feasibility of providing interim updates of the Tax Gap estimate; (2) develop a process and procedures to ensure compliance with the applicable OMB standards; (3) issue a published report to explain the methods, assumptions, and premises used to develop the estimates; (4) develop the capability to estimate the Tax Gap for the informal economy; (5) perform a study to determine the feasibility of creating an estimate of the Tax Gap due to offshore tax evasion; (6) consider modifying the estimation model for large corporations from using recommended tax from operational examinations to tax assessments from operational examinations; and (7) consider conducting a National Research Program review on small corporations filing Form 1120, U.S. Corporate Income Tax Return, with total assets of less than $10 million.
The IRS agreed with our first three recommendations. The IRS substantially agreed with recommendation four by agreeing to perform a feasibility study to estimate the Tax Gap for the informal economy. The IRS agreed with recommendation five and substantially agreed to recommendation six by studying the merits of alternative approaches to estimating noncompliance by large corporations. Finally, the IRS is conducting a National Research Program review of small corporations with less than $250,000 in assets; however, it is a very small sample and therefore the IRS will consider the feasibility of conducting more studies of small corporations.
This report will provide an overview of the potential federal tax implications for same-sex
married couples of the U.S. Supreme Court ruling in United States v. Windsor, with a focus on the
federal income tax.
Estate tax issues are also discussed.
Importantly, this report focuses on
changes in the interpretation and administration of federal tax law resulting from the Court’s
decision. The decision itself did not amend federal tax law. This report is not intended to address
all tax-related issues that may arise as a result of the Windsor decision. Such discussion is beyond
the scope of this report.
Effective tax rates (ETR) differ from statutory tax rates in that they attempt to measure taxes paid as a proportion of economic income, while statutory rates indicate the amount of tax liability (before any credits) relative to taxable income, which is defined by tax law and reflects tax benefits and subsidies built into the law. Lacking access to detailed data from tax returns, most researchers have estimated ETRs based on data from financial statements. A common measure of tax liability used in past estimates has been the current tax expense--either federal only or worldwide (which comprises federal, foreign, and U.S. state and local income taxes). The most common measure of income for these estimates has been some variant of pretax net book income. GAO was able to compare book tax expenses to tax liabilities actually reported on corporate income tax returns.
For tax year 2010 (the most recent information available), profitable U.S. corporations that filed a Schedule M-3 paid U.S. federal income taxes amounting to about 13 percent of the pretax worldwide income that they reported in their financial statements (for those entities included in their tax returns). When foreign and state and local income taxes are included, the ETR for profitable filers increases to around 17 percent. The inclusion of unprofitable firms, which pay little if any tax, also raises the ETRs because the losses of unprofitable corporations greatly reduce the denominator of the measures. Even with the inclusion of unprofitable filers, which increased the average worldwide ETR to 22.7 percent, all of the ETRs were well below the top statutory tax rate of 35 percent. GAO could only estimate average ETRs with the data available and could not determine the variation in rates across corporations. The limited available data from Schedules M-3, along with prior GAO work relating to corporate taxpayers, suggest that ETRs are likely to vary considerably across corporations.
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.
Estimated tax revenue that the federal government forgoes resulting from
corporate tax expenditures increased over the past few decades as did
the total number of corporate tax expenditures. ... Estimated corporate revenue losses in 2011, which totaled $181.4 billion, were approximately the same size as the amount of corporate income tax revenue the federal government collected that year.
This compendium gathers basic information concerning approximately
250 federal tax provisions currently treated as tax expenditures. They include
those listed in Tax Expenditure Budgets prepared for fiscal years 2011-2015
by the Joint Committee on Taxation, although certain separate items that are
closely related and are within a major budget function may be combined. The
Joint Committee on Taxation also lists about 30 additional tax expenditures
with de minimis revenue losses (i.e., less that $50 million over 5 years).
With respect to each tax expenditure, this compendium provides:
The estimated federal revenue loss associated with the provision
for individual and corporate taxpayers, for fiscal years 2011-2015.
as estimated by the Joint Committee on Taxation;
The legal authorization for the provision (e.g., Internal Revenue
Code section, Treasury Department regulation, or Treasury ruling);
A description of the tax expenditure, including an example of its
operation where this is useful;
A brief analysis of the impact of the provision, including
information on the distribution of benefits where data are
A brief statement of the rationale for the adoption of the tax
expenditure where it is known. including relevant legislative
An assessment, which addresses the arguments for and against the
The information presented for each tax expenditure is not intended to be exhaustive or definitive. Rather, it is intended to provide an introductory understanding of the nature, effect, and background of each provision. Useful starting points for further research are listed in the selected bibliography following each provision.
The Joint Committee on Taxation recently released a 96 page report
on the tax provisions associated with Affordable Care Act. The report
describes the 21 tax increases included in Obamacare, totaling $1.058
trillion – a steep increase from initial assessment. The summer 2012
estimate is nearly twice the $569 billion estimate produced at the time
of the passage of the law in March 2010. ...
2010 Estimate, 2010-2019, $billion
2012 Estimate, 2013-2022, $billion
0.9% payroll tax on wages and self-employment
income and 3.8% t tax on dividends, capital gains, and other
investment income for taxpayers earning over $200,000 (singles) /
“Cadillac tax” on high-cost plans *
Employer mandate *
Annual tax on health insurance providers *
Individual mandate *
Annual tax on drug manufacturers/importers *
2.3% excise tax on medical device manufacturers/importers*
Limit FSAs in cafeteria plans *
Raise 7.5% AGI floor on medical expense deduction to 10% *
Deny eligibility of “black liquor” for cellulosic biofuel producer credit
Codify economic substance doctrine
Increase penalty for nonqualified HSA distributions *
Impose limitations on the use of HSAs, FSAs, HRAs, and Archer MSAs to purchase over-the-counter medicines *
Impose fee on insured and self-insured health plans; patient-centered outcomes research trust fund *
Eliminate deduction for expenses allocable to Medicare Part D subsidy
Impose 10% tax on tanning services *
Limit deduction for compensation to officers, employees, directors, and service providers of certain health insurance providers
Modify section 833 treatment of certain health organizations
Other Revenue Effects
Additional requirements for section 501(c)(3) hospitals
Employer W-2 reporting of value of health benefits
Total Gross Tax Increase:
* Provision targets households earning less than $250,000.
** Includes CBO’s $216.0 billion estimate for “Associated Effects
of Coverage Provisions on Tax Revenues” and $6.0 billion within CBO’s
“Other Revenue Provisions” category that is not otherwise accounted for
in the CBO or JCT estimates.
Source: Joint Committee on Taxation Estimates, prepared by Ways and Means Committee Staff
“At best, this is a conflict of interest that runs afoul of ...
Federal Acquisition Regulation,” Issa writes. “At worst, the IRS may
have a situation in which a contracting official is awarding sole source
contracts based on false justifications, or receiving kickbacks in
exchange for government contracts.” ... The IRS’ contracts with
Signet Computers also may have been tailored so that Signet was the only
company that could win them in open bidding, Issa writes.
Fiscal Year 2011, the IRS had approximately 35,000 active aircards and more
than 4,400 BlackBerrys assigned to employees, providing them with mobile
Internet and e-mail access. TIGTA found that cost savings can be achieved if the
IRS ensures that only those employees with a valid business need are assigned
an aircard and/or BlackBerry and provides more effective oversight and
monitoring of these devices. Improved policies and procedures can result in
savings of $5.9 million over five years. ...
for assigning and monitoring the use of aircards and BlackBerrys are not adequate
to ensure that employees have a business need for the devices. Assignment of
these devices is generally based on job series classifications without
adequately ensuring a business need exists.
addition, the IRS paid approximately $1.1 million
during Fiscal Year 2011 for 13,878 aircards and 754 BlackBerrys that were
not used for periods of three months to one year. For example, TIGTA
identified 45 aircards and 68 BlackBerrys that were not used at all for the
entire 12 months of the fiscal year.
2,560 employees may have been assigned an
aircard or BlackBerry without required management approval. These devices cost
the IRS more than $950,000 in Fiscal Year 2011, or about $4.8 million over
This letter responds to concerns you raised about the CBO's report, Options for Taxing U.S. Multinational Corporations, which was released on January 8, 2013. We continue to believe that it presents the key issues fairly and objectively and that its findings are well grounded in economic theory and are consistent with empirical studies in this area. Nevertheless, because of the complexity of the subject and the diverse views of experts in the field, we agree that it would have been desirable to seek comments from more outside reviewers. It is always our goal to seek outside reviewers for CBO studies who represent a broad range of views and perspectives.
Following is a discussion of the various issues you raised regarding the report.
IRS Business Systems Modernization. The IRS made progress in addressing significant weaknesses in information technology and financial management capabilities. IRS delivered the initial phase of its cornerstone tax processing project and began the daily processing and posting of individual taxpayer accounts in January 2012. This enhanced tax administration and improved service by enabling faster refunds for more taxpayers, allowing more timely account updates, and faster issuance of taxpayer notices. In addition, IRS has put in place close to 80% of the practices needed for an effective investment management process, including all of the processes needed for effective project oversight.
But Enforcement of Tax Laws remains a high-risk area:
The IRS recently estimated that the gross tax gap—the difference between taxes owed and taxes paid on time—was $450 billion for tax year 2006. For a portion of the gap, IRS is able to identify the responsible taxpayers. IRS estimated that it would collect $65 billion from these taxpayers through enforcement actions and late payments, leaving a net tax gap of $385 billion. The tax gap has been a persistent problem in spite of a myriad of congressional and IRS efforts to reduce it, as the rate at which taxpayers voluntarily comply with U.S. tax laws has changed little over the past three decades. Given that the tax gap has been persistent and dispersed across different types of taxes and taxpayers, coupled with tax code complexity and a globalizing economy, reducing the tax gap will require applying multiple strategies over a sustained period of time.
IRS enforcement of the tax laws is vital for financing the U.S. government. Through enforcement, IRS collects revenue from noncompliant taxpayers and, perhaps more importantly, promotes voluntary compliance by giving taxpayers confidence that others are paying their fair share. GAO designated the enforcement of tax laws as a high-risk area in 1990.
Tax expenditure analysis can help both
policymakers and the public to understand the actual size of government,
the uses to which government resources are put, and the tax and
economic policy consequences that follow from the implicit or explicit
choices made in fashioning legislation. This report on tax expenditures
for fiscal years 2012-2017 is prepared by the staff of the Joint
Committee on Taxation. ... As in the case of earlier reports, the
estimates of tax expenditures in this report were prepared in
consultation with the staff of the Office of Tax Analysis in the
Department of the Treasury.
The Joint Committee staff has made its
estimates (as shown in Table 1) based on the provisions in Federal tax
law as enacted through January 2, 2013. Expired or repealed provisions
are not listed unless they have continuing revenue effects that are
associated with ongoing taxpayer activity. Proposed extensions or
modifications of expiring provisions are not included until they have
been enacted into law. The tax expenditure calculations in this report
are based on the January 2012 Congressional Budget Office revenue
baseline and Joint Committee staff projections of the gross income,
deductions, and expenditures of individuals and corporations for
calendar years 2011-2017.
Part I of this report contains a
discussion of the concept of tax expenditures. Part II is a discussion
of the measurement of tax expenditures. Estimates of tax expenditures
for fiscal years 2012-2017 are presented in Table 1 in Part III. Table 2
shows the distribution of tax returns by income class, and Table 3
presents distributions of selected individual tax expenditures by income
The number and total costs of the refundable credits in
the income tax system have grown considerably since
1975. The number of credits peaked at 11 in 2010 before
dropping to 6 in 2013 (see Figure 1). Their total costs
(that is, the reduction in revenues and the increase in
outlays) reached a high of $238 billion in 2008. (That
amount and other annual costs discussed in this report
are expressed in 2013 dollars.) Those costs will drop to
$149 billion in 2013, the CBO estimates, mostly for the earned income tax credit
(EITC) and the child tax credit. By 2018, three more
credits will have expired, and the EITC and the child tax
credit will have been scaled back.
Those cutbacks in refundable tax credits will be more
than offset, however, by new health-related subsidies
provided through the tax system. Starting in 2014, a
new refundable tax credit will be available to some people
for the purchase of health insurance through newly
created exchanges. The cost of that credit will be about. $110 billion by 2021, CBO and the staff of the Joint
Committee on Taxation (JCT) project, bringing the total
cost of refundable tax credits in that year to $213 billion—
roughly the same as the costs in 2009 and 2010,
even though the number of refundable tax credits will
have fallen by more than half between 2010 and 2021.
While there have been efficiency gains and efforts to improve
service, the IRS faced challenges providing
telephone service and responding to correspondence, continuing trends
experienced in recent years. In 2012, 82 percent of individual taxpayers
filed their returns electronically (e-filed), reducing IRS's processing
costs. IRS also increased calls answered using automated service and
added a variety of self service tools, which helped gain efficiencies.
However, IRS's level of telephone service (the percentage of callers
seeking live assistance who receive it) declined to 68 percent. In
addition, of the 21 million pieces of paper correspondence IRS received,
about 40 percent were considered overage (meaning that IRS did not
respond within 45 days of receipt), an increase compared to last year.
While IRS plans to continue to pursue efficiency gains, its strategy for
future years does not specifically address how it plans to reverse
these negative trends. Reversing the declines in telephone and
correspondence services may require IRS to consider difficult tradeoffs,
such as reassessing which phone calls IRS should answer with a live
assistor and which it should not because automated services are