Indian  tribes are sovereign governments that generally are exempt from federal  income taxation, but individual Indians are not exempt from income taxes. Amount of IRD Use and Its Effect on Reservation Economic Development Cannot Be Determined with Available Data

In 2005, we reported that information on tax expenditures, such as IRD,  was needed to evaluate their effectiveness as a means of accomplishing  federal objectives and to ensure that they are achieving their intended  purpose. A wide variety of data could be useful for determining whether  IRD is stimulating economic development on Indian reservations, but  three essential pieces of information include which taxpayers claim IRD,  how much they invest in IRD properties, and on which reservations they  have placed IRD properties. The identity of IRD claimants also could be used to  determine whether IRD overlaps other programs designed to assist Indians  in a way that affects the incentive to invest on Indian reservations. Although IRD properties have unique recovery periods compared to other  depreciation recovery periods and Form 4562 does provide space for  taxpayers to report the recovery period, depreciation deduction, and basis  by property class, this information is insufficient to determine whether the  depreciation is IRD in all cases. These taxpayers may have recorded that the property  with a 3-year recovery period simply because the name of the property  class is “3-year property.”
IRS does not collect the other essential information to assess the  effectiveness of IRD in promoting economic development on reservations. It also is impossible to distinguish between the effect on  economic growth of IRD investment and other kinds of investment that  may occur on reservations, such as the growth of gaming facilities. For example, Schedule  E requires those renting properties to list the location of each rental  property that they claim and the low income housing tax credit form  (Form 8609) also requires taxpayers to list the address of each claimed  property. For example, we were  able to analyze the New Markets Tax Credit (NMTC) partly because its  overseeing agency, the Community Development Financial Institutions  Fund, collected data on NMTC investors and on the location, type and size  of the investment. Nevertheless, without these data on taxpayers’ use of IRD no valid  assessment can be made on the effect of the IRD provision. The model may be able to identify taxpayers who likely are  noncompliant overall in claiming depreciation deductions, but it could not  do so for IRD itself, because, as we found, it is impossible to accurately  identify each taxpayer who uses IRD with existing data. Although an IRS manager said that IRS would not collect data when the  available data are sufficient to enforce IRD, some other IRS officials  involved with audits said that additional, more accurate information on  items taxpayers use to calculate their deductions would be helpful. IRD Offers Greater Potential for Tax Savings Than Regular Depreciation, Especially for Long- Term Investments

A taxpayer who depreciates property under the IRD schedule will be able  to make larger deductions in the near term than under the GDS schedule  for the same property, and the advantage of using IRD grows as property- class recovery periods become longer. Matter for Congressional Consideration

Given the lack of information on IRD users and where property claimed  under IRD is placed in service, Congress should consider requiring IRS to  collect information identifying which taxpayers use IRD and the  reservation and/or address where they have placed the property into  service. The updated directions also should include an example of how to  fill out Form 4562 properly. Further  calculations included 30 percent bonus depreciation and 50 percent bonus  depreciation for both regular depreciation and accelerated depreciation. We chose a basis value of $50,000 to determine the present value for all the  types of depreciation.
Why GAO Did This Study

Indians lag behind other Americans on many key economic indicators, such as median household income. To improve such conditions, Congress in 1993 created Indian reservation depreciation (IRD), a tax expenditure offering accelerated depreciation for property invested on Indian reservations. GAO was asked to (1) describe which taxpayers claimed IRD, (2) analyze the effect of IRD on the economic development of reservations, and (3) describe the tax benefits offered by IRD. GAO used the Internal Revenue Service's (IRS) Statistics of Income data to try to identify IRD users and measure IRD's effects; however, the data were unreliable for those purposes. GAO also calculated examples of potential IRD tax benefits for different property classes.

What GAO Found

Available data are insufficient to identify users of the Indian reservation depreciation (IRD) provision. Although IRD is to be calculated using unique recovery periods, this and other information that taxpayers report are not sufficient to infer from the tax returns which taxpayers are using IRD, in part because taxpayers appear to have reported IRD in combination with other depreciation on their tax forms. In some instances, taxpayers also appear to have made mistakes filling out Form 4562, listing recovery periods inconsistent with IRD when the deduction and basis amounts they reported suggest IRD was in fact used. Data are also insufficient to determine whether IRD increases economic development on Indian reservations. Taxpayers are not required to identify the reservation on which the depreciated property is located. This location data is critical for determining the effects of IRD on the economic development of reservations. Such a determination requires linking IRD investment to economic indicators on specific reservations and controlling for the influence of other economic trends, such as the growth of gaming facilities on these reservations. The lack of data on IRD also may affect how well the Internal Revenue Service (IRS) enforces IRD compliance with the tax law. IRS does not track compliance issues related to IRD and could fail to detect taxpayers who claim IRD deductions but do not in fact have property on a reservation. IRS officials said getting additional information could be costly to obtain, but auditors told us it would be useful. In fact, IRS collects data on some other tax expenditures that allow closer examination of compliance and use. For example, the low-income housing tax credit requires taxpayers to list the address for the property they are claiming, and New Markets Tax Credits users report identifying information for the Department of the Treasury. Tax benefits can accrue to taxpayers who use the IRD schedule because they can achieve higher depreciation deductions, in present value terms, than a taxpayer who claims a depreciation deduction under the usual schedule for the same type of property over the entire life of the property. For example, on a $50,000 property, the savings range from about 1 percent savings over the normal schedule to 22 percent savings, depending on the type of property depreciated. The greatest potential tax savings come from IRD claimed for property with the longest recovery periods. Additional bonus depreciation, when available, however, may decrease the incentive to use IRD.