IRS Generally Not Planning to Collect or Report Information about the Use of Liberty Zone Tax Benefits or Reductions in Taxpayers’ Tax Liabilities

For one of the seven Liberty Zone tax benefits, the business employee  credit, IRS is collecting but not planning to report some information about  use—the number of taxpayers claiming the credit and the amount of credit  claimed—nor is it planning to use this information to report on how the  benefit has reduced taxpayers’ tax liabilities. For the other six benefits, IRS officials  said that without information about use, they cannot collect or report on  the extent to which the benefits reduced taxpayers’ tax liabilities. According to IRS officials, the agency followed its usual procedures in  determining the type of information to collect about the Liberty Zone tax  benefits. They added that IRS would collect and report information that  would help it to administer the tax laws or if it was legislatively mandated  to collect or report information. Also, although the additional information would enable IRS to  make an estimate of the revenue loss due to the benefits, it would not be  able to produce a verifiable measure of the loss. Several Changes Needed If IRS Were to Report on Use of Benefits and Reduction in Taxpayers’ Tax Liabilities

For six of seven of the Liberty Zone tax benefits, IRS would need to revise  forms, tax return processing procedures, and computer programming if it  were to collect and report information about the number of taxpayers  claiming the benefit and the amount they claimed. Since IRS currently does not have any plans to make these changes,  officials were unable to estimate the costs involved in accomplishing these  actions or the number of staff needed to do so. To produce the estimate, IRS would have to make assumptions about  how taxpayers would have behaved in the absence of the benefits. IRS said the earliest it would be able to collect information on the number  of taxpayers using the benefits and the amounts each claimed would be  for tax year 2004 returns, which IRS would not process until calendar year  2005. As a result, IRS would not have information for two of the years that  the benefits were in effect, which is significant because most of the  benefits expire by the end of 2006. We  also analyzed the data the Joint Committee on Taxation (JCT) provided  about its estimate of the reduction in federal tax revenues. Our second objective was to determine what steps IRS would need to take  and the resources it would need to collect and report information on the  use and value of the Liberty Zone tax benefits if it is not already doing so. The building  replaces real property  damaged as a result of the  September 11, 2001,  terrorist attacks.
Why GAO Did This Study

The President pledged a minimum of $20 billion in assistance to New York for response and recovery efforts after the September 11, 2001, terrorist attacks. This includes tax benefits, commonly referred to as the Liberty Zone tax benefits, that the Joint Committee on Taxation (JCT) estimated would reduce federal tax revenues by about $5 billion. The actual amount of benefits realized, however, will depend on the extent to which taxpayers and the city and state of New York take advantage of them. GAO was asked to determine (1) the extent to which the Internal Revenue Service (IRS) is collecting and reporting information about the number of taxpayers using each of the seven Liberty Zone tax benefits and the revenue loss associated with those benefits and (2) if IRS is not collecting and reporting this information, what steps it would need to take and what resources would be needed to do so.

What GAO Found

For one of the seven Liberty Zone tax benefits, the business employee credit, IRS is collecting but not planning to report some information about use--the number of taxpayers claiming the credit and the amount of credit claimed--nor is it planning to use this information to report the revenue loss associated with that benefit. IRS is not planning to collect or report information about the use of the other six benefits or the revenue loss associated with those benefits. According to IRS officials, the agency followed its usual procedures in determining whether to collect information about benefit use and revenue loss. IRS officials said they would collect and report these data if (1) it would help the agency administer the tax laws or (2) IRS was legislatively mandated to do so. IRS would need to make several changes if it were to collect more information on the use of the benefits and the associated revenue loss, and this information would not be complete or lead to a verifiable measure of the reduction in federal tax revenues due to the benefits. IRS would need to change forms, processing procedures, and computer programming, which would add to taxpayer burden and IRS's workload. IRS officials were unable to estimate the costs involved in accomplishing these actions or the number of staff needed to do so. The officials said that the earliest they could make these changes would be for tax year 2004 returns. As a result, IRS would not have information for two of the years that the benefits were in effect, which is significant because most of the benefits expire by the end of 2006. In addition, if IRS were to collect data on the use of the Liberty Zone benefits, it would be able to make an estimate, but could not produce a verifiable measure, of the revenue loss due to the benefits because, for example, IRS would have to make assumptions about how taxpayers would have behaved in the absence of the benefits.