The Treasury Inspector General for Tax Administration, (TIGTA) today publicly released its review of the Internal Revenue Service's (IRS) Fuel Excise Tax Compliance Program.
TIGTA conducted the audit as a follow-up to its October 2005 report on the IRS's implementation of its electronic system for reporting and tracking compliance with the excise tax: The Excise Files Information Retrieval System Has Not Been Effectively Implemented (Reference Number 2006-20-00).
The motor fuel excise tax is a major source of funding for the Highway Trust Fund, which helps States pay for highway and transit projects. Currently at 18.3 cents per gallon, the tax on gasoline, diesel fuel and kerosene is paid upon removal from a fuel terminal. The terminal operator is responsible for paying the tax.
TIGTA's new report found that neither the IRS nor the Federal Highway Administration (FHWA) knows how much motor fuel excise tax is not collected. An accurate estimate of the potential motor fuel excise tax compliance gap is necessary to ensure program resources are effectively focused on identified tax gap areas and to measure the effectiveness of the IRS's compliance program.
"The IRS has made significant progress in improved motor fuel excise tax compliance by requiring electronic reporting," commented J. Russell George, the Treasury Inspector General for Tax Administration. "However, significant challenges remain.
"The IRS does not have an accurate estimate of the motor fuel excise tax compliance gap. The FHWA estimates the motor fuel excise tax gap at a minimum $1 billion annually, but could be as much as 25 percent of total revenues. With billions of dollars in unmet transportation needs, the IRS needs to ensure that every penny of the motor fuel excise tax goes for its intended purpose," George added.
The report also found that the IRS has made significant progress in improving motor fuel excise tax compliance, including: implementing electronic filing requirements for excise tax reporting documents; increasing outreach initiatives to improve awareness of electronic filing requirements; developing strategies aimed at understanding areas of noncompliance; and assessing nearly $135 million in additional taxes through April 2008.
The effectiveness of the compliance program is limited because the IRS does not receive product receipt and disbursement information from refineries similar to the information received from fuel terminals, resulting in a fuel information reporting gap, the report found. Further, the IRS has increased the penalties for failing to file fuel transactions electronically from $50 per failure to $10,000 per failure, but uses the penalty primarily as a tool to compel compliance rather than as a sanction.
TIGTA made 10 recommendations to the IRS, including developing a reliable estimate of the motor fuel excise tax gap, implementing reporting of fuel received at refineries and applying the penalty for failure to file timely and accurate information documents consistently to all taxpayers.
The IRS agreed with or agreed in principle with eight recommendations, including developing a strategy for implementing information reporting at refineries; working with the FHWA and other Federal and State partners to determine the feasibility of developing the methodologies needed to estimating the tax gap.
"Until a valid estimate of the tax gap and compliance rate is identified, the IRS and the FHWA continue to risk inefficiently expending resources on initiatives that might not contribute to the reduction of the excise tax gap, not increase the compliance rate, and not significantly increase Highway Trust Fund receipts," George said.