Actions Have Been Taken to Enhance Fuel Tax Credit
Screening and Examination Processes;
However, Improvements Are Still Needed
September 7, 2023
Report Number: 2023-30-053
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted from this document.
TIGTACommunications@tigta.treas.gov | www.tigta.gov
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
HIGHLIGHTS: Actions Have Been Taken to Enhance Fuel Tax Credit
Screening and Examination Processes; However, Improvements Are Still Needed
Final Audit Report issued on September 7, 2023 Report Number 2023-30-053
Why TIGTA Did This Audit
As recently as March 2023, the IRS identified
the Fuel Tax Credit (FTC) on its annual “Dirty
Dozen” list of the worst tax scams. TIGTA
previously recommended that the IRS
improve systemic controls over FTC
submissions and examine returns with lower
FTCs as resources permitted. This audit was
initiated to determine whether our prior
recommendations were addressed and to
evaluate the current FTC screening and
examination processes for individual
taxpayers claiming the credit.
Impact on Tax Administration
The Federal Government imposes an excise
tax on the purchase of certain fuels, including
an $0.184 per gallon tax on gasoline and a
$0.244 per gallon tax on diesel. A refundable
credit for these taxes may be claimed for
various nontaxable uses of fuel, including
off-highway business and farming use. An
individual claiming the FTC without a
business purpose, being engaged in a
business activity that does not qualify for the
credit, or filing a tax return with no indication
of a business purpose makes the FTC claim
questionable. This audit focused on FTC
claims made by individuals on Form 4136,
Credit for Federal Tax Paid on Fuels
, attached
to Form 1040,
U.S. Individual Income Tax
Return
. From January 2018 through
December 2021, the IRS processed
approximately 1.2 million Forms 1040 with
FTC claims totaling $797 million.
What TIGTA Found
While the IRS has updated its method of screening and
examining questionable FTC claims, improvements to
FTC compliance processes are needed. For example, of
the 1,172,732 Forms 1040 with FTC claims processed
from January 1, 2018, through December 31, 2021,
263,522 returns had no business purpose and 24,769 of
these returns had FTC claims above the examination
threshold. The IRS did not examine 15,779 of the 24,769
returns with $32.5 million in FTC claims. The IRS
considers an FTC claim without a business purpose as a
frivolous position and subject to a $5,000 frivolous filing
penalty. The IRS examined 10,026 returns filed by
individual taxpayers from October 1, 2017, through
December 31, 2021, which had no business purpose
indicated on the return. The IRS decreased the FTC on
7,070 returns but assessed a penalty on only 13 returns.
The 7,057 remaining returns may have been subject to
$35.3 million in frivolous filing penalties.
The IRS does not require taxpayers to certify on
Form 4136 that FTC claims are from use in a vehicle not
registered, or required to be registered, for highway use
(a requirement of Internal Revenue Code § 6421) and
does not examine FTC claims adequately to ensure that
taxpayers are engaged in a trade or business. In
addition, the IRS Submission Processing function
routinely increases problematic FTC claims under certain
circumstances but rarely decreases claims due to
taxpayer errors. Finally, TIGTA found a disproportionate
number of tax returns that claimed an FTC with common
tax return characteristics that could indicate
unscrupulous filing scheme activity.
What TIGTA Recommended
TIGTA made seven recommendations, with the IRS
agreeing to five and partially agreeing to one, including
examining additional high-dollar FTC claims, increasing
use of the frivolous filing penalty to deter filing
improper claims, revising Form 4136 to require
certification that the FTC is not claimed for a vehicle
registered for highway use, and examining potential FTC
schemes with common tax return characteristics.
The IRS did not agree to develop a process to validate
FTC claims where the taxpayer completed Form 4136
but did not correctly transfer the claim amount to the
Form 1040. TIGTA believes that presuming the validity
of the claim is inconsistent with the IRS’s placement of
the FTC on its “Dirty Dozen” list.
U.S. DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20024
TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
September 7, 2023
MEMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE
FROM: Heather M. Hill
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Actions Have Been Taken to Enhance Fuel Tax
Credit Screening and Examination Processes; However, Improvements
Are Still Needed (Audit # 202230015)
This report presents the results of our review to determine whether the Internal Revenue Service
is adequately considering the Fuel Tax Credit claimed by individual taxpayers and to follow up
on past recommendations. This review is part of our Fiscal Year 2023 Annual Audit Plan and
addresses the major management and performance challenge of
Increasing Domestic and
International Tax Compliance and Enforcement.
Management’s complete response to the draft report is included as Appendix III. If you have
any questions, please contact me or Matthew A. Weir, Assistant Inspector General for Audit
(Compliance and Enforcement Operations).
Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
Table of Contents
Background .....................................................................................................................................Page 1
Results of Review .......................................................................................................................Page 3
Examinations of Improper Fuel Tax Credit Claims Have
Improved .................................................................................................................................Page 3
Not All Fuel Tax Credit Claims Above the Threshold Are Examined.................Page 6
Recommendations 1 and 2: .....................................................Page 8
The Frivolous Filing Penalty Is Not Being Used for
Improper Fuel Tax Credit Claims ....................................................................................Page 8
Recommendation 3: ...................................................................Page 9
Taxpayers Claiming the Fuel Tax Credit for Off-Highway
Business Use Are Not Required to Affirm Whether the
Fuel Was Used in Vehicles Registered or Required to Be
Registered for Use on Public Highways .......................................................................Page 9
Recommendation 4: ...................................................................Page 10
Thousands of Fuel Tax Credit Claim Amounts Were
Increased During Processing ...........................................................................................Page 11
Recommendation 5: ...................................................................Page 12
Some Examination Closures Resulted in Erroneous
Changes to the Fuel Tax Credit .......................................................................................Page 12
Recommendation 6: ...................................................................Page 13
Potential Fuel Tax Credit Claim Schemes Are Not Being Addressed ...............Page 14
Recommendation 7: ...................................................................Page 15
Appendices
Appendix I – Detailed Objective, Scope, and Methodology ................................Page 16
Appendix II – Outcome Measures .................................................................................Page 18
Appendix III – Management’s Response to the Draft Report .............................Page 21
Appendix IV – Abbreviations ...........................................................................................Page. 27
Page 1
Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
Background
The Federal Government imposes an excise tax on the purchase of certain fuels, including the
Federal excise tax at $0.184 per gallon on gasoline and $0.244 per gallon on diesel.
1
The Fuel
Tax Credit (FTC) is a tax credit that may be claimed for various nontaxable uses of fuel, including
farming and off-highway business use. Depending on the taxpayer’s situation, the FTC claim is
made as an excise claim on either Form 720,
Quarterly Federal Excise Tax Return
, or Form 8849,
Claim for Refund of Excise Taxes
. Amounts not claimed on these forms may be claimed as a
refundable income tax credit on a Form 4136,
Credit for Federal Tax Paid on Fuels
, attached to
an income tax return.
The FTC for farming requires fuel to be used on a farm for
farming purposes.
2
The FTC for off-highway use requires
fuel to be used in a trade or business.
3
The FTC for
off-highway business use of gasoline does not apply to
passenger cars or, generally, to other vehicles that are
registered or required to be registered to drive on public
highways.
4
For an individual taxpayer, the business purpose
is typically shown by including a Schedule C,
Profit or Loss
From Business
, or Schedule F,
Profit or Loss From Farming
,
with the Form 1040.
Some individuals could receive the FTC
from a pass-through activity, like a partnership, shown on a Schedule E,
Supplemental Income
and Loss
, submitted with the Form 1040. An individual taxpayer claiming the FTC without a
business purpose, or being engaged in a business activity that does not typically qualify for the
credit, makes the FTC claim questionable. The amount of fuel in proportion to business activity
could also make the FTC claim questionable. For example, a $1,000 FTC claim would require use
of 5,464 gallons of gasoline (at the FTC rate of $0.183 per gallon) or 4,115 gallons of diesel (at
the FTC rate of $0.243 per gallon).
5
Business activity in relation to the amount of credit claimed
is important in determining a questionable FTC claim. This review focused on individual
taxpayers claiming the FTC on Form 4136 attached to Form 1040,
U.S. Individual Income Tax
Return
, without a business purpose.
For the purposes of this review, business activity for an individual taxpayer is indicated by the
presence of a Schedule C, E, or F attached to their Form 1040.
1
Internal Revenue Code (I.R.C.) §§ 4081 and 4041. The tax includes a $0.001 per gallon tax for the Leaking
Underground Storage Tank Trust Fund, which Congress created in 1986 to address petroleum leaks from Federally
regulated underground storage tanks. The Leaking Underground Storage Tank Trust Fund provides money for
oversight and enforcement of cleanups of petroleum as well as inspections and other prevention activities.
I.R.C. § 6430 generally does not allow a credit for the $0.001 Leaking Underground Storage Tank Trust Fund.
2
I.R.C. § 6420(c), where a credit is allowed if the farming activity is carried on as a trade or business.
3
I.R.C. § 6421(e)(2)(A).
4
I.R.C. § 6421(e)(2)(A); Internal Revenue Manual 4.19.15.16(2) (Nov. 4, 2019).
5
Figures are rounded.
The FTC for off-highway
business use of gasoline does
not apply to passenger cars or,
generally, to other vehicles that
are registered, or required to
be registered, to drive on
public highways.
Page 2
Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
Unscrupulous individuals have been known to file fraudulent tax returns claiming improper FTCs
to reduce taxes or receive improper refunds.
6
The Internal Revenue Service (IRS) regularly
identifies the FTC on its annual “Dirty Dozen” list of the worst tax scams. As recently as
March 2023, the IRS stated that:
The fuel tax credit is meant for off-highway business and farming use and, as such, is not
available to most taxpayers. However, unscrupulous tax return preparers and promoters
are enticing taxpayers to inflate their refunds by erroneously claiming the credit
.
7
In March 2019, the IRS noted:
Improper claims for the fuel tax credit generally come in two forms. First, an individual
or business may make an erroneous claim on their otherwise legitimate tax return.
Second, identity thieves file bogus claims, often as part of a broader fraudulent scheme.
The IRS has stepped up efforts to improve Fuel Tax Credit compliance. IRS processing
systems, including new identity theft screening filters, are now stopping a significant
number of questionable Fuel Tax Credit refund claims.
Fraud involving the Fuel Tax Credit is considered a frivolous tax claim and can result in a
penalty of $5,000.
8
Taxpayers submitted approximately 640 million individual returns to the IRS during Processing
Years (PY) 2018 through 2021, which included approximately 1.2 million returns claiming a total
of $797 million in the FTC.
9
Figure 1 provides the approximate number of individual income tax
returns submitted by processing year and those with FTC claims. Most of the returns with FTC
claims were electronically submitted to the IRS, with 117,200 (10 percent) submitted by paper.
Figure 1: Individual Income Tax Returns Submitted
During PYs 2018 Through 2021 and Those With FTC Claims
PY All Individual Returns
Individual Returns
With FTC Claims
Total Amount of
FTC Claims
2018 155 million 290,000 $134 million
2019 155 million 289,000 $233 million
2020 163 million 296,000 $199 million
2021 167 million 298,000 $231 million
Total
640 million
1.2 million
$797 million
Source: Treasury Inspector General for Tax Administration (TIGTA) analysis of data from the IRS’s
Individual Return Transaction File (IRTF).
10
6
U.S. v. St. Jean
, 122 American Federal Tax Reports 2d 2018-5601 (N.D. Ga. 2018) and
U.S. v. Demesmin
123 American
Federal Tax Reports 2d 2019-553 (M.D. Fla. 2019), in which tax return preparers who submitted false FTC claims were
enjoined by the Government from preparing tax returns due to fraudulent claims; and
U.S. v. Bates
, 68 F.3d 471
(5
th
Cir. 1995), in which the defendant filed false FTC claims and when imprisoned, assisted fellow prisoners to file their
own false FTC claims.
7
IR-2023-55, March 23, 2023.
8
IR-2019-42, March 14, 2019.
9
A processing year is the calendar year in which a tax return or document is processed by the IRS.
10
The IRTF is a database maintained by the IRS that contains information on the individual tax returns it receives.
Page 3
Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
When a Form 1040 is filed, the Wage and Investment (W&I) Division’s Submission Processing
function reviews the return for completeness and accuracy, including misplaced entries,
computations, and missing attachments. Once a return is processed by Submission Processing,
it goes through an automated selection system intended to identify returns meeting specific
criteria for pre-refund examination. Due to limited examination resources, the criteria to identify
questionable FTC returns includes dollar thresholds. If the return is selected for examination, the
portion of the refund attributable to the FTC is frozen to prevent payment until conclusion of
the examination. The Small Business/Self-Employed (SB/SE) and Large Business and
International Divisions can also select the return for a post-refund examination based on
selection criteria that may or may not include the FTC claim.
Results of Review
Since TIGTA’s last review in Fiscal Year 2014, the IRS has improved its method of identifying and
examining individual returns that have questionable FTC claims. However, there are areas where
further improvements could be made that include: 1) examining additional high-dollar claims;
2) examining repeat filers of potentially improper claims; 3) increasing the use of the frivolous
filing penalty where applicable; 4) ensuring that the FTC for off-highway business use is claimed
only for equipment and vehicles not registered, or required to be registered, for highway use;
5) validating the FTC when the amount claimed on the Form 1040 is less than the amount on
Form 4136; 6) reducing closure errors by Examination to tax accounts; and 7) examining
potential schemes based on common tax return characteristics.
Examinations of Improper Fuel Tax Credit Claims Have Improved
In September 2014, TIGTA reported additional actions were needed to ensure that improper FTC
claims are disallowed and recommended that the IRS: 1) create systemic controls to ensure that
Forms 1040 claiming an FTC at or above a threshold were reviewed prior to refund issuance;
2) lower the threshold amount for selecting and reviewing Form 1040 returns; and 3) provide
training to assist in evaluating acceptable documentation required by taxpayers to claim an
FTC.
11
As a result of TIGTA’s review, the W&I Division implemented a screening process to
identify FTC returns above a dollar threshold and review them before issuing a refund. However,
the process had difficulty tracking cases, which produced a large number of return reviews that
were not productive.
To address these recommendations, the W&I Division updated its screening process for PY 2017
to identify improper FTC claims, which is still used today. In addition, the dollar threshold was
lowered to allow more questionable returns to be identified for further review. The
SB/SE Division examination process was also updated to use different filtering criteria to
consider the presence of a qualified business and analyze business activity relative to the FTC
claim. Training was also conducted for consistency among screeners and examiners when
accepting proper substantiation of FTC claims.
11
TIGTA, Report No. 2014-30-067,
Additional Actions Are Needed to Ensure That Improper Fuel Tax Credit Claims Are
Disallowed
(Sept. 2014).
Page 4
Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
Our review of the examination results of FTC claims shows higher productivity measures than
the overall statistics for individual examinations. Figures 2 and 3 provide a comparison of
examination statistics and results for individual returns with FTC claims, individual returns with
FTC claims and no business purpose, and all individual returns regardless of the existence of FTC
claims examined from October 2017 to December 2021.
Figure 2 addresses examination coverage and the percentage of those returns resulting in no
examination changes to the filed return. Productivity statistics for examinations of FTC claims
with no business purpose are more favorable than other examinations of individual returns, as
measured by the higher percentage of returns examined and lower no-change rate.
Figure 2: Examination Statistics for Individual
Returns Submitted During PYs 2018 Through 2021 and
Completed From October 2017 to December 2021
Source: TIGTA analysis of data from the IRS’s IRTF and Audit Information Management System (AIMS)
for individual returns with FTC claims and IRS Data Book Table 37 and Table 38 for all individual
returns.
12
Figure 3 shows that examination productivity for FTC claims with no business purpose remains
high, with fewer hours per return spent on examinations and higher assessment dollars
generated per hour of an examination.
12
AIMS is a system that provides inventory and activity controls of active examination cases. It uses linkage to the
Integrated Data Retrieval System to input status changes, adjustments, and case closing actions.
Page 5
Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
Figure 3: Examination Results of Individual
Returns Submitted During PYs 2018 Through 2021
and Completed From October 2017 to December 2021
Source: TIGTA analysis of data from the IRS IRTF and AIMS for individual returns with FTC claims and
IRS Data Book Table 37 and Table 38 for all individual returns.
The W&I Division conducted the majority of the examinations involving FTC claims. Figure 4
provides a comparison of examination productivity of individual returns with FTC claims among
divisions from October 2017 to December 2021. The total amount of assessments in Figure 4
represents assessments of individual returns with FTC claims. Overall, the W&I Division had
more productive FTC examinations than the Large Business and International Division or the
SB/SE Division when comparing the no-change rate, average hours per return, and average
assessments per hour.
Page 6
Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
Figure 4: Examinations Within IRS Divisions Completed
From October 2017 to December 2021 of Individual
Returns With FTC Claims Submitted During PYs 2018 Through 2021
Source: TIGTA analysis of data from the IRS’s IRTF and AIMS for individual returns with FTC claims.
LB&I = Large Business and International.
Not All Fuel Tax Credit Claims Above the Threshold Are Examined
Although the IRS lowered the FTC claim threshold for W&I Division examinations, TIGTA
identified FTC claims above the threshold that were not being examined. Of the
1,172,732 individual returns with FTC claims submitted during PYs 2018 through 2021,
263,522 had no business purpose, which included a total of 24,769 returns with FTC claims
above the W&I Division examination threshold. Of these, our analysis found 15,779 returns with
FTC claims totaling $32.5 million that had no examination activity. Figure 5 provides our analysis
for examinations of individual returns without a business purpose and with FTC claims above the
W&I Division Examination threshold.
Figure 5: Examination Activity From October 2017 to December 2021 of
Individual Returns Without a Business Purpose and With FTC Claims Above the
W&I Division Examination Threshold Submitted During PYs 2018 Through 2021
Examination Activity Number of Returns Amount of FTC Claims
Completed Examination 7,057 $20.5 million
In-Process Examination 1,703 $10.3 million
Selected but Closed Before Examination 230 $0.5 million
No Examination Activity 15,779 $32.5 million
Total
24,769
$63.8 million
Source: TIGTA analysis of data from the IRS’s IRTF and AIMS for individual returns with FTC claims.
Individual returns with FTC claims are identified for review if the return meets certain criteria and
the FTC amount is above the threshold. The 15,779 questionable returns above the threshold
Page 7
Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
that were not selected for examination put $32.5 million at risk for revenue lost due to
improper FTC claims. Even though the IRS does not have the resources to examine every return,
those with higher FTC claim amounts that are not examined represent potentially greater losses
of revenue. For example, if the IRS had examined 955 additional returns (out of the
15,779 questionable returns) with the highest FTC claims the additional examinations would
have covered $10.7 million (out of $32.5 million) in FTC claims. Based on historic productivity
results discussed previously, such as the no-change rate of 1.4 percent, not examining the
955 highest dollar returns without a business purpose puts $10.6 million of tax revenue at risk.
13
IRS representatives stated that higher dollar FTC claims without a business purpose may not
have been examined because once the volume of cases selected for examination meets the
planned number of cases during a particular cycle, no additional cases are selected for
examination. This lack of flexibility inhibits the IRS’s ability to work additional productive FTC
cases.
Repeated FTC claims with no business purpose are not being addressed
TIGTA’s analysis of the 1,172,732 individual income tax returns with FTC claims that were
submitted during PYs 2018 through 2021 also identified 297,183 taxpayers who submitted a
return for two or more of the tax years from 2017 to 2020.
14
Making repeated FTC claims is not
questionable by itself unless those claims are not associated with a business purpose. Figure 6
shows examination activity of taxpayers who filed individual returns for multiple years that
claimed FTC amounts above the threshold without a business purpose.
Figure 6: Examination Activity From October 2017 to December 2021
for Taxpayers Who Filed Individual Returns During PYs 2018 Through 2021
for Multiple Years Without a Business Purpose and Claimed the FTC
Above the W&I Division Examination Threshold
Tax Years 2017 Through 2020 Taxpayers
Number of
Returns Filed
Amount of
Improper
FTC Claims
No examination activity 923 2,026 $4.4 million
Only one examination for multiple years 733 1,528 $1.5 million
Source: TIGTA analysis of data from the IRS’s IRTF and AIMS for individual returns with FTC claims.
The 923 taxpayers with repeated FTC claims without a business purpose and no examination
activity are putting $4.4 million of tax revenue at risk due to improper FTC claims. The
733 taxpayers with repeated FTC claims without a business purpose and only one return being
examined are putting an additional $1.5 million of tax revenue at risk for revenue lost due to
improper FTC claims. In addition to the potential revenue lost due to improper FTC claims, the
failure to address repeated tax law violations will tarnish the public’s view of tax fairness and
could encourage more improper FTC claim activity.
13
Accounting for 1.4 percent no-change rate: $10.7 million multiplied by 98.6 percent = $10.6 million.
14
A tax year is a 12-month accounting period for keeping records on income and expenses used as the basis for
calculating the annual taxes due. For most individual taxpayers, the tax year is synonymous with the calendar year.
Page 8
Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
The W&I Division conducts the majority of FTC claim examinations, and its procedures do not
require consideration of subsequent year returns submitted by the taxpayer for related
noncompliance. In addition, W&I Division examination selection criteria does not consider prior
improper FTC claims as a potential indication of noncompliance.
The Commissioner, W&I Division, should:
Recommendation 1: Ensure that the FTC examination workplan maintains flexibility to address
higher dollar FTC claims without a business purpose. In addition, the W&I Division should
perform ongoing analysis for high-dollar questionable FTC claims that are not being selected for
examination to determine if the selection process should be adjusted.
Management’s Response: The IRS agreed with this recommendation and is preparing
an enterprise-wide workplan to forecast business needs, determine how best to use IRS
resources, and provide needed compliance coverage to other areas of interest. The
Examination workplan was revised to include high-dollar questionable FTC claims that
will be selected continually throughout the year.
Recommendation 2: Require all examinations that identify improper FTC claims to check prior
year taxpayer returns for additional improper FTC claims. In addition, future examination
selection criteria should include repeated filers with improper FTC claims who continue to
submit returns with FTC claims.
Management’s Response: The IRS agreed with this recommendation and will request
programming changes to revise the selection process to include repeat FTC claimants.
The Frivolous Filing Penalty Is Not Being Used for Improper Fuel Tax
Credit Claims
The IRS assessed the frivolous filing penalty on only a limited number of taxpayers who
submitted returns with FTC claims and no business purpose. Of the 1,172,732 individual income
tax returns with FTC claims submitted during PYs 2018 through 2021, there were 263,522 returns
with no business purpose. The IRS completed 10,026 examinations involving returns with FTC
claims without a business purpose and decreased the claimed FTC on 7,070 returns. However,
the frivolous filing penalty was assessed on only 13 returns. The 7,057 returns that had the FTC
decreased and were not assessed a $5,000 frivolous filing penalty could be subject to
approximately $35.3 million in penalties.
Taxpayers who do not meet their tax obligation may owe a penalty. An FTC claim without a
business purpose is a frivolous position, as listed in IRS Notice 2010-33. A frivolous position is
subject to a $5,000 frivolous filing penalty.
15
As discussed previously, the IRS most recently
mentioned the FTC and the frivolous filing penalty in its annual list of “Dirty Dozen” tax scams in
March 2023.
The IRS is not using the frivolous filing penalty as a deterrent to prevent the submission of
improper FTC claims. Over the last several years, the W&I Division’s Return Integrity Verification
Program Management function stated that it has considered procedures to screen FTC claims
15
I.R.C. § 6702.
Page 9
Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
for frivolous filing penalty application but does not have them in place. Taxpayers can attempt
to file improper FTC claims every year with no repercussions other than having the claim
disallowed in an examination. Penalties are used to deter unacceptable behavior. IRS resources
used for examining FTC claims could be used elsewhere if taxpayers submitted fewer improper
FTC claims.
Recommendation 3: The Commissioner, W&I Division, should develop and implement
procedures to assess the frivolous filing penalty, where applicable, as a deterrent for filing
improper FTC claims without a business purpose.
Management’s Response: The IRS agreed with this recommendation and will develop
procedures to identify the returns meeting selection conditions after an FTC claim is
examined and fully disallowed.
Taxpayers Claiming the Fuel Tax Credit for Off-Highway Business Use Are Not
Required to Affirm Whether the Fuel Was Used in Vehicles Registered or
Required to Be Registered for Use on Public Highways
As noted previously, the regulations state that the FTC for off-highway business use cannot be
claimed for vehicles that are registered, or required to be registered, for use on public highways.
The instructions for Form 4136, used by individual taxpayers to document their FTC claim, state
that the nontaxable use of gasoline claimed for the FTC must have been used “for a business use
other than in a highway vehicle registered (or required to be registered) for highway use.” The
Form 4136 instructions for claiming the FTC for the use of undyed diesel fuel also prohibits use
in a diesel-powered highway vehicle registered, or required to be registered, for use on public
highways.
Figure 7 shows that Part 1 of the Form 4136 does not require the taxpayer to specify the type of
vehicle or at least certify that the vehicle was not registered, or required to be registered, for use
on public highways while using the fuel for a non-taxable purpose.
Page 10
Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
Figure 7: Portions of Form 4136 Used to
Claim the FTC for Nontaxable Use of Gasoline
Source: IRS Form 4136 (2022).
If the FTC claim is selected for examination, the substantiation form sent by the IRS in most
cases requires the taxpayer to list the vehicles and equipment used in the off-highway business.
However, because the Form 4136 has no information on the type of equipment or vehicle using
the fuel, the IRS cannot determine whether taxpayers are in compliance with the requirements
for claiming the FTC without initiating an examination. If required to attest that the nontaxable
fuel was used for equipment, or a vehicle that was not registered for use on public highways,
taxpayers would be educated on the requirements of the law and the IRS could more easily
identify and correct noncompliant claims. Precedent exists for requesting taxpayers to provide
specific information on tax returns to reduce improper claims and tax deductions. For example,
Congress has noted that the requirement to provide a Social Security Number for children
claimed as dependents on individual tax returns significantly reduced the improper claiming of
dependents.
16
Recommendation 4: The Commissioner, W&I Division, should revise Form 4136 to require the
taxpayer to certify that the FTC for off-highway business use is being claimed for equipment or a
vehicle that was not registered, or required to be registered, for use on public highways.
Management’s Response: The IRS partially agreed with this recommendation and will
consider updating Form 4136 to require the taxpayer, when applicable, to certify that the
16
H.R. Rep. No. 103-826(l) (1994).
Page 11
Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
FTC for off-highway business use is being claimed for equipment or a vehicle that was
not registered, or required to be registered, for use on public highways. However, the
IRS also stated that claims for the FTC are already made under penalties of perjury,
whereby the taxpayer declares the return and accompanying schedules and statements
were examined, and to the best of their knowledge and belief, are true, correct, and
complete.
Office of Audit Comment: This recommendation is intended to provide
additional confirmation that the amounts relate to claims for off-highway
business use because the current Form 4136 has no information on the type of
equipment or vehicle using the fuel. We believe the recommended modification
would reduce erroneous FTC claims.
Thousands of Fuel Tax Credit Claim Amounts Were Increased During
Processing
Of the $797 million in FTC claims by individual taxpayers during PYs 2018 through 2021,
Submission Processing accepted $687 million (86 percent) as filed. Submission Processing also
decreased FTC claim amounts on 3,415 returns. However, Submission Processing increased the
FTC claim amounts on 5,269 returns from $239,585 to more than $3 million. Figure 8 shows the
actions taken by Submission Processing for FTC claims.
Figure 8: Submission Processing Actions for
FTC Claims Submitted During PY 2018 Through 2021
Submission
Processing
Action
Individual Returns
With FTC Claims
FTC Claims
by Taxpayer
FTC Claims
Accepted
by the IRS
Accepted FTC claim 1,164,048 $683,360,456 $683,360,456
Accepted but increased FTC claim 5,269 $239,585 $3,061,352
Accepted but decreased FTC claim 291 $716,498 $180,260
Fully Disallowed FTC claim 3,124 $112,498,850 $0
Total
1,172,732
$796,815,388
17
$686,602,068
Source: TIGTA analysis of data from the IRS’s IRTF.
Almost all of the Submission Processing changes shown in Figure 8 involved paper-submitted
returns. Some claims were disallowed because Form 4136 was not attached to Form 1040 as
support for the claim. Some increases or decreases in FTC claims occurred when the Form 4136
amount did not match the amount on Form 1040. Another mismatch involved returns that did
not have an FTC amount on the Form 1040 but had an attached Form 4136 with an FTC amount.
With these mismatches, Submission Processing changed the Form 1040 amount to match the
Form 4136 support amount.
17
Does not total due to rounding.
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
If Form 4136 is not attached, Submission Processing will request the taxpayer provide the form
before the credit is allowed.
18
For cases where the Form 4136 does not match the Form 1040,
the taxpayer is notified of the change and is provided the opportunity to respond to the notice.
However, when Form 4136 contains a greater amount than shown on Form 1040, the
adjustment increases the claim and potential refund to taxpayers. This may occur when an FTC
calculation is present on Form 4136 but not shown on the actual Form 1040. Submission
Processing will resolve the error in the taxpayer’s favor and move the credit to the Form 1040
to continue processing the FTC claim. While Submission Processing will notify the taxpayer that
the credit has been increased due to the mismatching forms, it does not have to verify the
correct amount. Submission Processing stated that assessment authority under Internal
Revenue Code (I.R.C.) § 6201(a)(1) allows it to increase a credit filed on a Form 1040.
I.R.C. § 6201 authorizes the IRS to make inquiries, determinations, and assessments of all taxes.
Increasing an FTC claim without validating the correct amount raises the risk of improper
payments to taxpayers. Although Submission Processing might have the authority to increase
an FTC claim, it would be prudent to take additional steps to validate the credit before
increasing the amount claimed on Form 1040, given that this credit is included in the “Dirty
Dozen” list of the worst tax scams.
Recommendation 5: The Commissioner, W&I Division, should develop procedures to validate
the FTC claim amount before increasing it on a taxpayer submitted Form 1040.
Management’s Response: The IRS disagreed with this recommendation. Specifically,
during processing of both paper and electronic tax returns, when programming detects a
mismatch between the credit calculated on Form 4136 and the amount carried forward
to the credits and payments section of the tax return, I.R.C. § 6201(a)(1) provides general
authority to assess tax in an amount determined by the IRS to be correct based on the
information reported on a particular return. The IRS considers the amount of credit
calculated on Form 4136 to be the amount of credit available to the taxpayer. The IRS
resolves inconsistencies in carrying the credit amount to the credits and payment section
of the return in favor of the amount shown on Form 4136.
Office of Audit Comment: The IRS should determine whether the amount on
the Form 4136 or the Form 1040 is correct before increasing the credit.
Considering the FTC’s recent inclusion on the IRS’s annual “Dirty Dozen” list of
the worst tax scams, the IRS should not presume to include the FTC on the
Form 1040 when the taxpayer omitted it.
Some Examination Closures Resulted in Erroneous Changes to the Fuel Tax
Credit
Of the 22,403 FTC examinations completed through December 31, 2021, TIGTA found that the
FTC claim was increased during the examination closure process in 58 instances and was
partially decreased in 76 instances. For these examinations, we found a total of 89 closure
errors:
18
Internal Revenue Manual 3.11.3.17.11(1) (Dec. 11, 2020).
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
• 56 (96.6 percent) of 58 examinations that increased FTC claims had closure errors.
• 33 (43.4 percent) of 76 examinations that partially decreased FTC claims had closure
errors.
Examination closures should be free of errors when posted to taxpayer accounts, which supports
the IRS’s mission of providing quality service and promoting integrity and fairness to all
taxpayers. For the 56 examinations with errors that increased the FTC claim, the examination
result was to decrease the FTC claim, but employees entered the adjustment amount
erroneously as a positive on the examination closing document (Form 5344,
Examination Closing
Record
) when the adjustment should have been a negative amount to decrease the FTC claim,
resulting in $381,053 of erroneously allowed claims.
19
For the 33 examinations with errors that
partially decreased the FTC claim, the examination result was to decrease the FTC claim, but
employees entered an erroneous adjusted FTC amount on the examination closing document.
In 18 instances, the taxpayer's FTC claim amount was used instead of Submission Processing's
corrected amount from return processing before the examination started, resulting in claims
totaling $15,542 being allowed in error.
20
In 15 instances, employees made entry errors, such as
typos or transposition of numbers, resulting in $6,675 of erroneously allowed claims.
21
Overall,
our review found, and the IRS confirmed, that 89 examinations had closure errors that should
have decreased FTC claims but erroneously increased FTC claims by a total of $403,270.
22
The W&I Division examined 52 of the 56 cases with closing errors that increased the FTC claim
and has initiated or plans to initiate erroneous refund procedures on all 52 cases. As of
June 2022, the IRS began using a different data source for FTC claims that is expected to prevent
future errors due to not using the amount of Submission Processing's allowed FTC claim. For
closure entry errors, the IRS plans to remind employees to review entries for accuracy and
ensure that proper FTC adjustments are reflected during examination closures.
Recommendation 6: The Commissioner, W&I Division, and Commissioner, SB/SE Division,
should develop a process to identify and check future FTC examination closure anomalies, such
19
For the 22,403 completed examinations, the FTC was increased 58 times. Fifty-three of the 58 examination results
increased the FTC by the same amount as the FTC claimed on the return. Our review of 12 of these 53 results showed
that the FTC was erroneously entered on Form 5344 to increase the claim by the same amount that the examination
intended to decrease. Our review of the other five examination results found that three were entered erroneously as
increases to FTC on Form 5344 rather than the intended decreases. **************************1********************
*********1************ The IRS confirmed that all 56 returns (53+3) were intended to reduce FTC, but were incorrectly
posted on Form 5344, resulting in $381,053 of erroneous claims.
20
The FTC was partially decreased 76 times in 22,403 completed examinations. Eighteen of the 76 claims were
decreased using the amount submitted by the taxpayer and not the amount Submission Processing accepted. A
review of seven cases showed that examiners did not adjust the FTC based on the proper Submission Processing
amount. The IRS confirmed that that all 18 returns totaling $15,542 were errors because the Submission Processing
amount was not used for examination.
21
Fifteen of the remaining 58 partially decreased FTCs appeared to be typos made during the posting of the FTC
adjustment on Form 5344. For example, the FTC was filed and processed as $826 but the examination adjustment
was $8.26. We researched six examples and identified that the IRS intended to fully disallow the FTC claim on five, but
the adjustments were incorrectly posted on Form 5344. The Form 5344 posting for the sixth example matched the
intended examined FTC claim. The IRS confirmed that all 15 adjustments were intended to reduce FTC by $6,675 but
were incorrectly posted on Form 5344.
22
The 89 confirmed errors of $403,270 are comprised of the 56 errors of $381,053, the 18 errors of $15,542, and the
15 errors of $6,675.
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
as an increased or partially decreased FTC claim, to ensure that examination adjustments are
posting properly to taxpayer accounts.
Management’s Response: The IRS agreed with this recommendation and has updated
guidance for reviewing examination closing reports for accuracy. The IRS is reviewing
recent closures at each campus to evaluate the effectiveness of the guidance and ensure
that the adjustments are posting correctly. Additionally, the IRS will remind SB/SE
Division managers, reviewers, and employees of the importance of ensuring the accuracy
of FTC adjustments.
Potential Fuel Tax Credit Claim Schemes Are Not Being Addressed
Generally, a fraudulent multi-return scheme could have common return characteristics like
location, amounts, preparer, and submission method. Figure 9 provides the number of FTC
claim returns submitted during PYs 2018 through 2021 by State.
Figure 9: Number of FTC Claim Returns by
State Submitted During PYs 2018 Through 2021
Source: TIGTA analysis of data from the IRS’s IRTF.
For example, TIGTA found that Florida residents filed significantly more FTC claims than the
larger populated states of California and Texas, both of which are heavily involved in agriculture.
This discrepancy could indicate the general location of possible fraudulent claim schemes.
TIGTA analyzed the 1,172,732 individual income tax returns with FTC claims that were submitted
during PYs 2018 through 2021 and identified 11 potential FTC claim schemes involving
18,032 returns that included common characteristics such as location, amounts, preparer, and
submission method. Of these returns, 8,108 included FTC claims totaling $6.9 million that had
no business purpose listed. Six potential FTC schemes involved 9,715 returns submitted on
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
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paper tax returns (as opposed to electronic submission) and did not have a return preparer
listed, which could indicate a possible “ghost” preparer.
23
The other five potential FTC schemes
involved 8,317 returns that were prepared by the same eight tax return preparers.
24
Most of the
returns within these potential schemes have addresses in Florida. Based on our preliminary
analysis on potential schemes, we believe the IRS could adopt a more data-driven approach to
identifying and addressing potential FTC schemes.
The IRS makes it known to the public that it reviews for schemes through its publication of the
annual “Dirty Dozen” list, which included FTC claims as recently as March 2023. Addressing
schemes supports the IRS mission to enforce the law with integrity and fairness to all. The
11
potential FTC claim schemes involved 18,032 returns with FTC claims totaling $15.3 million, of
which 16,215 (89.9 percent) received FTC claims of $13.2 million (86.2 percent), as of
December 31, 2021.
25
Examinations were started for 2,289 potential FTC claim scheme returns,
of which 2,029 examinations have been completed and resulted in decreasing FTC claims by
approximately $2 million. Only 15 completed examinations resulted in no changes to returns.
The remaining 15,743 potential FTC scheme returns were not selected for examinations as of
December 31, 2021. In addition to the revenue lost due to improper FTC claims, the lack of tax
law enforcement to address schemes could affect the public’s view of tax fairness and could
encourage more noncompliant filings.
The IRS has a process to analyze FTC claims for scheme characteristics like location, amounts,
and return preparers. However, the returns analysis is limited by criteria that includes an FTC
claim threshold that is higher than the amount used by Examination for its case selection. The
returns for the 11 potential FTC claim schemes we identified do not meet the current criteria to
be included in the IRS’s analysis for scheme identification. However, the total dollar amounts of
the large number of potential FTC claim schemes below the threshold potentially put millions of
dollars of tax revenue at risk.
Recommendation 7: The Commissioner, W&I Division, should lower the threshold criteria for
FTC claim scheme analysis to expand the scope of returns considered, particularly to identify
schemes with large numbers of returns below the IRS’s compliance threshold. Analysis should
also focus on preparer misconduct schemes committed by unscrupulous tax return preparers
and ghost preparers.
Management’s Response: The IRS agreed with this recommendation and will ensure
that the established procedures for FTC scheme analysis include lower thresholds to
expand the scope of returns considered and allow focus on the most unscrupulous tax
return preparers.
23
From these 9,715 returns filed, taxpayers received $7.2 million in FTC on 8,011 returns. A ghost preparer is
someone who prepares tax returns but does not sign the tax returns prepared.
24
From these 8,317 returns filed, taxpayers received $6.0 million in FTC claims on 8,204 returns.
25
The $7.2 million in FTC claims taxpayers received on 8,011 returns filed from the first six potential schemes and the
$6 million received on 8,204 returns filed from the additional five schemes total $13.2 million that taxpayers received
from the 11 potential schemes on 16,215 returns. TIGTA’s review of possible scheme activity did not include an
examination threshold. Of the $13.2 million on 16,215 returns, $6,2 million on 5,483 returns were over the threshold
and the remaining $7 million on 10,732 returns were below the threshold. In order to not overstate the measurable
benefits of potential tax revenue protection, the potential scheme amounts of $6.2 million on 5,483 returns are
included in the $32.5 million on 15,779 returns that were not examined over the threshold (see earlier section of this
report).
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Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to determine whether the IRS is adequately considering
the FTC claimed by individual taxpayers and to follow up on past recommendations. To
accomplish our objective, we:
• Identified and documented the policies, procedures, and training related to selecting
FTCs claimed by individual filers for examination, including Form 4136, Form 8849, and
Form 720. In addition, we reviewed the IRS’s implementation of recommendations
proposed during TIGTA’s FTC audit in Fiscal Year 2014.
• Assessed the effectiveness of the IRS’s selection process, based on system controls, for
identifying questionable FTCs for further analysis from the total population of FTC claims
filed by individuals. We obtained information and held discussions with the IRS on
processing returns and enhancements made in the selection process.
• Assessed the effectiveness of reviewing individual taxpayer returns with FTCs that were
selected for examination. We reviewed examination metrics including hours spent
examining FTC returns, assessments per hour spent examining FTC returns, and
no-change rates on examined FTC returns. We reviewed examination coverage,
identified posting errors on closed examinations, and assessed the frequency of applying
the frivolous filing penalty. We evaluated the risk for fraud, waste, and abuse of closed
examinations and non-examined returns to obtain reasonable assurance that widespread
improprieties do not exist. We identified potential unscrupulous filing scheme activity
and taxpayers who repeatedly filed returns with questionable FTC claims.
Performance of This Review
This review was performed with information obtained from the W&I and SB/SE Divisions located
in Washington, D.C.; Austin, Texas; and Ogden, Utah, during the period November 2021 through
February 2023. We conducted this performance audit in accordance with generally accepted
government auditing standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objective. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit objective.
Major contributors to the report were Matthew A. Weir, Assistant Inspector General for Audit
(Compliance and Enforcement Operations); Robert Jenness, Director; John Park, Audit Manager;
Kenneth Krause, Lead Auditor; Aaron Foote, Senior Auditor; and Julia Woods, Applied Research
and Technology Data Analyst.
Validity and Reliability of Data From Computer-Based Systems
We performed tests to assess the reliability of data from the IRS’s IRTF, AIMS, and the Individual
Master File (IMF) for individual taxpayer-filed returns (Form 1040) with FTC claims. We accessed
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
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these files through TIGTA’s Data Center Warehouse (DCW).
1
We evaluated the data by
1) performing electronic testing of required data elements, 2) reviewing existing information
about the data and the system that produced them, 3) reviewing selected judgmental samples
to validate against IRS source data using the Integrated Data Retrieval System, and
4) interviewing agency officials knowledgeable about the data.
2
We determined that the data
were sufficiently reliable for purposes of this report.
Internal Controls Methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance. We determined that the
following internal controls were relevant to our audit objective: IRS policies, procedures, and
practices for processing and examining returns filed by individual taxpayers claiming the FTC.
We evaluated these controls by reviewing source materials, having discussions with
management and staff, and reviewing closed examination cases.
1
The DCW is a collection of IRS databases containing various types of taxpayer accounts and IRS and TIGTA
employee information that is maintained by TIGTA for the purpose of analyzing data for ongoing audits.
2
The Integrated Data Retrieval System is an IRS computer system capable of retrieving or updating stored
information. It works in conjunction with a taxpayer’s account records. A judgmental sample is a nonprobability
sample, the results of which cannot be used to project to the population.
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
Appendix II
Outcome Measures
This appendix presents detailed information on the measurable impact that our recommended
corrective actions will have on tax administration. These benefits will be incorporated into our
Semiannual Report to Congress.
Type and Value of Outcome Measure:
• Revenue Protection – Potential; $32.5 million on 15,779 questionable returns received
during PYs 2018 through 2021 with FTC claims above the threshold that were not
examined through December 31, 2021 (see Recommendation 1).
Methodology Used to Measure the Reported Benefit:
We extracted data using the IRTF and AIMS from TIGTA’s DCW to identify 1,172,732 individual
income tax returns (Form 1040) filed during PYs 2018 through 2021 that claimed the FTC. In
addition, these FTC returns were matched to the IMF to obtain FTC postings to taxpayer
accounts.
The various data extracts were combined into one record for each FTC return. Of the
1,172,732 individual returns, 263,522 questionable returns had no business purpose based on
the lack of a Schedule C, E, or F included with the Form 1040. FTC amounts for these
263,522 returns were assigned dollar ranges that identified 24,769 returns with the FTC above
the W&I Division’s examination threshold. Of these 24,769 returns, we determined that
15,779 returns were not examined as of December 31, 2021. The total FTC amount of the
15,779 returns not examined was $32,493,447.
Type and Value of Outcome Measure:
• Increased Revenue – Potential; $35.3 million on 7,057 tax returns that had the FTC claim
decreased and were not assessed a $5,000 frivolous filing penalty under I.R.C. § 6702
(see Recommendation 3).
Methodology Used to Measure the Reported Benefit:
We extracted data using the IRTF and AIMS from TIGTA’s DCW to identify 1,172,732 individual
income tax returns (Form 1040) filed during PYs 2018 through 2021 that claimed
the FTC. In addition, these FTC returns were matched to the IMF to obtain FTC postings to
taxpayer accounts and frivolous filing penalty activity. Of the 1,172,732 individual returns,
263,522 questionable returns were identified that had no business purpose based on the lack of
a Schedule C, E, or F included with Form 1040. Of the 263,522 returns, 10,026 returns were
examined and 7,070 of these returns had FTC amounts decreased. However, only 13 returns
with decreased FTC claims were assessed the frivolous filing penalty. The remaining
7,057 returns may be subject to the $5,000 frivolous filing penalty per filing under I.R.C. § 6702,
providing $35,285,000 in potential revenue (7,057 returns multiplied by the $5,000 penalty per
return).
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
Type and Value of Outcome Measure:
• Revenue Protection – Potential; $381,053 on 56 examinations completed through
December 31, 2021, in which the examinations showed the FTC adjustment was entered
as a positive amount to increase the credit on the examination closing document when it
should have been entered as a negative amount to decrease the FTC claim. This
erroneously gave taxpayers FTC refunds of $381,053 (see Recommendation 6).
• Revenue Protection – Potential; $15,542 on 18 examinations completed through
December 31, 2021, in which the taxpayers’ filed claim amounts were used by examiners
instead of Submission Processing’s accepted amounts. This erroneously gave taxpayers
FTC refunds of $15,542 (see Recommendation 6).
• Revenue Protection – Potential; $6,675 on 15 examinations completed through
December 31, 2021, in which employees made typographic errors or transposed
numbers on the examination closing document. This erroneously gave taxpayers FTC
refunds of $6,675 (see Recommendation 6).
Methodology Used to Measure the Reported Benefit:
We extracted data using the IRTF and AIMS from TIGTA’s DCW to identify 1,172,732 individual
income tax returns (Form 1040) filed during PYs 2018 through 2021 that claimed the FTC. In
addition, these FTC returns were matched to the IMF to obtain FTC postings to taxpayer
accounts.
The various data extracts were combined into one record for each FTC return. Of the
1,172,732 individual income tax returns submitted, the IRS completed 22,403 examinations
as of December 31, 2021. Of the 22,403 completed examinations, the FTC was increased only
58 times. Of the 58 examinations, 53 had the FTC increased through examination by exactly the
same amount as the taxpayer claimed on the return. We researched 12 examples using the IRS’s
Correspondence Examination Automation Support (CEAS) system and found the FTC adjustment
was entered as a positive amount to increase the credit on the examination closing document
when it should have been entered as a negative amount to decrease the FTC claim.
1
Five of the
58 examinations had the FTC increased by an amount different than the taxpayer claimed
amount on the return. TIGTA researched these five examinations using the CEAS system and
determined that three of the five examinations intended to decrease the FTC. The amounts
were posted incorrectly on the closing document. *********************1**********************
***********1***************** The 56 returns (53 where the FTC appeared to be increased by the
same amount of the credit taken on the returns and three other questionable increases) were
sent to the IRS to review, and the IRS confirmed that all 56 returns were intended to reduce the
FTC but were incorrectly posted on the examination closing document, resulting in $381,053 of
erroneously allowed claims.
Of the 22,403 completed examinations, the FTC was partially decreased 18 times by the amount
submitted by the taxpayer and not by the amount Submission Processing accepted,
i.e.
, the
examination disallowed the incorrect FTC amount. We researched seven examples on the CEAS
system and found that the examiners adjusted the taxpayer’s filed FTC and not the accepted
1
The IRS’s CEAS system is a suite of web-based applications developed to enhance the examination process. The
application also enables case assignment and transfer between examination groups and batch groups. It facilitates
universal view of the campus examination case inventory records and also allows the display of client-generated tax
reports and letters associated with the examination case.
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
Submission Processing amount. The 18 returns were sent to the IRS to review, and the IRS
confirmed that the 18 returns contained errors totaling $15,542 because the accepted
Submission Processing amount was not used for the examination.
Of the 22,403 completed examinations, the FTC was partially decreased 58 times. A visual
review found that 15 of the 58 adjustments appeared to be typos made during the posting of
the FTC adjustment on the examination closing document resulting in an incorrect amount. For
example, the FTC was filed and processed as $826 but the examination adjustment was $8.26.
We researched six examples on the CEAS system and identified that the IRS intended to fully
disallow the FTC claim on five returns, but the adjustments were incorrectly posted on the
closing document. The examination adjustment posted for the sixth return matched the
intended examined FTC claim. The 15 returns were sent to the IRS to review, and it confirmed
that all 15 returns were intended to reduce FTC but were incorrectly posted on the examination
closing document leading to $6,675 of erroneously allowed claims.
The IRS confirmed that 89 examinations (56 + 18 + 15) had closure errors that should have
decreased FTC claims but erroneously increased FTC claims by a total of $403,270
($381,053 + $15,542 + $6,675).
Type and Value of Outcome Measure:
• Revenue Protection – Potential; $7.0 million on 10,732 returns possibly involved in
schemes (see Recommendation 7).
Methodology Used to Measure the Reported Benefit:
We extracted data using the IRTF and AIMS from TIGTA’s DCW to identify 1,172,732 individual
income tax returns (Form 1040) filed during PYs 2018 through 2021 that claimed the FTC. In
addition, these FTC returns were matched to the IMF to obtain FTC postings to taxpayer
accounts. We reviewed common tax return characteristics from the population of
1,172,372 returns, including location, FTC amounts, preparer, and submission method (paper
versus electronic filing) and found 11 potential FTC schemes. Six of the 11 potential schemes
involved 9,715 returns that were filed using paper forms, had a common filing location, had
common FTC amounts, and had no preparer listed. From these filings, taxpayers received
$7,169,301 in FTC on 8,011 returns. The remaining five schemes involved eight tax preparer
firms listed on 8,317 returns that had common claim amounts. From these filings, taxpayers
received $6,014,984 in FTC claims on 8,204 returns. The $7,169,301 in FTC received by taxpayers
on 8,011 returns filed from the first six potential schemes and the $6,014,984 received on 8,204
returns filed from the additional five schemes total $13,184,285 that taxpayers received from the
16,215 returns involved in the 11 potential schemes.
Our analysis for schemes did not include an FTC examination threshold. Of the $13,184,285
on 16,215 returns related to the 11 schemes, $6,188,366 on 5,483 returns are included in
the $32,493,477 on 15,779 returns over the threshold that were not examined as of
December 31, 2021. The remaining $6,995,919 on 10,732 returns are below the threshold and
identified as an outcome measure.
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
Examination Processes; However, Improvements Are Still Needed
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Actions Have Been Taken to Enhance Fuel Tax Credit Screening and
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Appendix IV
Abbreviations
AIMS Audit Information Management System
CEAS Correspondence Examination Automation Support
DCW Data Center Warehouse
FTC Fuel Tax Credit
IMF Individual Master File
I.R.C. Internal Revenue Code
IRS Internal Revenue Service
IRTF Individual Return Transaction File
PY Processing Year
SB/SE Small Business/Self-Employed
TIGTA Treasury Inspector General for Tax Administration
W&I Wage and Investment
