Recovery Act: IRS Quickly Implemented Tax Provisions, but Reporting and Enforcement Improvements Are Needed
Highlights
The American Recovery and Reinvestment Act of 2009 (Recovery Act), was enacted to bolster the struggling U.S. economy at an estimated cost of $787 billion, of which more than a third was in the form of tax relief to the public. This report (1) describes the status of the Internal Revenue Service's (IRS) implementation of Recovery Act tax provisions; (2) examines whether IRS captured or planned to capture data on the use of the provisions; (3) assesses IRS's efforts to determine potential abuse of the provisions; and (4) discusses possible lessons learned for future tax administration. GAO analyzed IRS's implementation and data-collection plans for each provision; reviewed IRS and Department of the Treasury (Treasury) risk-management documents; interviewed federal and industry officials; and focused on five provisions implemented in 2009: Build America Bonds (BAB), Consolidated Omnibus Budget Reconciliation Act (COBRA), First-Time Homebuyer Credit (FTHBC), Making Work Pay Credit, and Net Operating Loss carrybacks.
The Recovery Act posed significant implementation challenges for IRS because it had more than 50 provisions, many of which were immediately or retroactively available and had to be implemented during the tax filing season--IRS's busiest time. Some provisions affected the 2009 filing season (2008 tax year), while others mainly will affect the 2010 and 2011 filing seasons. IRS responded quickly to its challenges. IRS went beyond its typical data-collection efforts and plans to collect some data to track many Recovery Act provisions. Specifically, IRS currently has detailed data-collection plans for 17 or about 31 percent of the provisions and 63 percent of the total estimated cost of the tax provisions. Initial collections did not fully or accurately capture the use of some provisions. In addition, very little of the data that IRS has collected on the tax provisions has been released publicly. Similar to what GAO has found about the act's spending projects, the tax provisions' economic stimulus effect cannot be precisely isolated. Economists use evidence from macroeconomic forecasting models and models that extrapolate from historical data to assess stimulus effects. These approaches, however, are imprecise because historical experience may not apply well given the magnitude of the Recovery Act. The effect of some provisions on specific aspects of the economy may be described in general terms. For example, the Council of Economic Advisers noted that in addition to other policy actions affecting residential real estate, the FTHBC may have moderated construction-industry job losses. As a result of IRS's FTHBC prerefund compliance reviews, as of February 1, 2010, IRS had frozen about 140,000 refunds pending civil or criminal examination, and, as of December 2, 2009, had identified 175 criminal schemes and had 123 criminal investigations open. Although IRS addressed some challenges with the FTHBC in these ways, it still needs to finalize a way to identify individuals who fail to report home sales and might be required to repay part of the credit because their homes ceased to be their principal places of residence within 3 years of purchase. A form already exists that could be used for this purpose--Form 1099-S, "Proceeds from Real Estate Transactions," but it is not clear IRS could use the form for this purpose under current legislative authority. As GAO's review ended, IRS identified third-party data that it expected to use and then evaluate the results. Issues IRS encountered in its Recovery Act experience could provide useful guidance for the future. Officials intend to do a lessons-learned study after the 2010 filing season but have yet to develop plans for doing so.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| The Congress may wish to consider granting IRS the authority to publicly release information on Build America Bonds (BAB), such as project purpose, beginning and ending dates, and costs; this approach would be broadly consistent with the Recovery Act reporting and transparency provisions for direct spending programs. | As of December 2013, there had been no congressional action. | |
| The Congress may wish to consider broadening IRS's ability to use math error authority (MEA), with appropriate safeguards against misuse of that authority. | Congress has expanded IRS's math error authority several times under certain circumstances, but not as broadly as GAO suggested in February 2010. The President's budgets have previously requested that Congress expand IRS's math error authority. For example, the President's budget proposal for fiscal year 2021 requested authority to correct a taxpayer's return in the following circumstances: (1) the information provided by the taxpayer does not match the information contained in government databases; (2) the taxpayer has exceeded the lifetime limit for claiming a deduction or credit; or (3) the taxpayer has failed to include with his or her return certain documentation that is required to be included in or attached to the return. As of March 2024, Congress had not provided IRS with such authority. We maintain that a broader authorization of math error authority with appropriate controls that would enable IRS to correct obvious noncompliance would be less intrusive and burdensome to taxpayers than audits and would potentially help taxpayers who underclaim tax benefits to which they are entitled. Extending math error authority could help reduce the tax gap--the difference between the amount taxpayers pay and the amount they owe. Controls--such as requiring IRS to report on its use of math error authority--may be needed to ensure proper use of this authority. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | The Commissioner of Internal Revenue should require governmental issuers to submit additional information on Build America Bond (BAB)-financed projects, including information on project purpose, beginning and ending dates, and costs. This reporting could be similar to the bond reporting required for charitable organizations on the Schedule K of Form 990, "Supplemental Information on Tax-Exempt Bonds." Should the Congress grant the authority, IRS should publish the information in a report available to the public. |
This recommendation depends on congressional action, which had not occurred as of December 2013.
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| Internal Revenue Service | The Commissioner of Internal Revenue should direct officials to conduct a compliance initiative project to determine if individuals are receiving COBRA or employers are claiming individual COBRA subsidies for longer than 15 months. IRS can use existing information to determine if significant noncompliance with the 15-month provision is apparent. If significant noncompliance is found, IRS should issue soft notices to all employers to remind them of COBRA eligibility requirements and urge them to correct errors that may have been made. |
IRS implemented the recommendation by doing the compliance initiative project based on our 15-month criterion. In the project, IRS found substantial compliance with the 15-month rule, identifying additional taxes due of only $96,897. It decided not to issue soft notices to all employees reminding them of COBRA eligibility requirements because compliance levels appeared high.
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| Internal Revenue Service | The Commissioner of Internal Revenue should prepare a report detailing the lessons learned from its Recovery Act experiences and implementation and publish the results |
IRS contracted with MITRE Corporation to conduct a lessons learned study on the Recovery Act. The study was released in October 2010. It provides descriptions of the findings and lessons learned in nine topical areas. An IRS official told us IRS used the report internally, including in its team implementing recent health care legislation.
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