Tax Administration

Recent indictments of several firms for excise tax evasion have bolstered claims by the petroleum industry that millions of dollars in federal motor fuel taxes are not being collected. To counter losses from tax evasion schemes such as the "daisy chain"--in which a product like gasoline is fraudulently sold to retailers as tax free by manipulating paper-based ownership of several companies--the collection point for gasoline was moved from wholesale distributors to the terminal, where gasoline is pumped into a rail car or truck. GAO, due to a lack of data, could not determine if recent efforts by Congress and the Internal Revenue Service (IRS) have thwarted evasion of motor fuel excise taxes. Because of concerns that evasion may still be a problem, IRS and Federal Highway Administration officials are taking further steps to reduce and detect evasion. Moving the collection point to reduce the number of liable firms, as has been proposed, should help minimize evasion attempts. Refinery-level taxation bears consideration on efficiency grounds alone, since the number of taxpayers would be reduced. In addition, refinery-level taxation would also improve controls against evasion. Industry members, citing concerns about competitive disadvantages, disagree about the desirability of such a move. GAO notes that it is unclear whether the addition of a 2- to 4-cent per barrel cost would significantly affect the industry.

GAO found that: (1) no reliable statistics are available to estimate the level of fuel tax evasion; (2) IRS has recognized this problem and is investigating alternative methods for estimating motor fuel excise tax evasion; (3) government and private officials agree that legislative changes have reduced some forms of motor fuel excise tax evasion, but disagreements exist about the extent of the reductions; (4) the Department of Justice believes that as much as $1 billion in motor fuel excise taxes may be evaded annually; (5) the effectiveness of IRS compliance programs cannot be assessed because of the lack of data on the level of evasion; (6) IRS does not have national programs in place that address tax evasion schemes, but several initiatives are under way; (7) IRS is working with the Federal Highway Administration and selected states to determine whether joint enforcement efforts can improve compliance; (8) IRS is developing a database that will include information on all firms authorized to deal in tax-free motor fuels; (9) the applicability of states' compliance initiatives to federal motor fuel excise tax enforcement is difficult to gauge because of differences between state and federal taxes and collection systems; and (10) moving the gasoline excise tax collection point to the refinery may improve the efficiency of tax administration and increase controls over evasion at the federal level, but questions remain regarding competitive consequences and overall cost-effectiveness.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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