Neither the Internal Revenue Service nor the FederalHighway Administration knows how much money in excise taxes for motor fuel goesuncollected every year, according to a new
The Treasury Department's Inspector General for TaxAdministration audited the IRS's implementation of an electronic system forreporting and tracking compliance with the fuel excise tax, following up on a2005 report. TIGTA noted in its new report that an accurate estimate of thepotential motor fuel excise tax compliance gap is necessary to ensure thatprogram resources are effectively focused on previously identified tax gapareas and to measure the overall effectiveness of the IRS's compliance program.
"The IRS has made significant progress in improvedmotor fuel excise tax compliance by requiring electronic reporting," saidTIGTA Inspector General J. Russell George in a statement. "However,significant challenges remain."
The IRS does not have an accurate estimate of the motorfuel excise tax compliance gap, he noted. The Federal Highway Administrationestimates the motor fuel excise tax gap to be a minimum of $1 billion annually,but it could be as much as 25 percent of total revenues. "With billions ofdollars in unmet transportation needs, the IRS needs to ensure that every pennyof the motor fuel excise tax goes for its intended purpose," said George.
TIGTA's report acknowledged that the IRS has madesignificant progress in improving motor fuel excise tax compliance, includingimplementing electronic filing requirements for excise tax reporting documents;increasing outreach initiatives to improve awareness of electronic filingrequirements; developing strategies aimed at understanding areas ofnoncompliance; and assessing nearly $135 million in additional taxes throughApril 2008.
The effectiveness of the compliance program is limited,however, because the IRS does not receive product receipt and disbursementinformation from refineries similar to the information it receives from fuelterminals, resulting in a fuel information reporting gap, the report found. TheIRS has increased the penalties for failing to file fuel transactionselectronically from $50 per failure to $10,000 per failure, but it uses thepenalty primarily as a tool to compel compliance, rather than as a sanction.
TIGTA made 10 recommendations to the IRS, includingdeveloping a reliable estimate of the motor fuel excise tax gap, implementingreporting of fuel received at refineries, and applying the penalty for failureto file timely and accurate information documents consistently to alltaxpayers.
The IRS agreed with or agreed in principle with eight ofTIGTA's recommendations, including developing a strategy for implementinginformation reporting at refineries; and working with the Federal HighwayAdministration and other federal and state partners to determine thefeasibility of developing the methodologies needed to estimating the tax gap.
"The excise tax program will continue its work withindustry representatives to implement information reporting atrefineries," wrote IRS Small Business/Self-Employed Division commissionerChristopher Wagner in a letter to TIGTA. "We will continue to capture datareflecting fuel strategy cases and aggregate it in a monthly report formanagement."
However, he noted that the IRS did not agree with TIGTA'srecommendation that the IRS's Integrated Data Retrieval System is the propersystem to use in reporting the excise tax program's efforts. Instead, hebelieves the IRS should use the same system it employs for tracking otherenforcement efforts, the Enforcement Revenue Information System.
