Legislative Requirements Were Met When Awarding Credits and Grants for the Qualifying Therapeutic Discovery Project Program
September 14, 2011
Reference Number: 2011-40-100
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.
Redaction Legend:
1 = Tax Return/Return Information
2(f) = Risk Circumvention of Agency Regulation or Statute
Phone
Number | 202-622-6500
Email Address | TIGTACommunications@tigta.treas.gov
Web Site |
http://www.tigta.gov
HIGHLIGHTS
Legislative Requirements Were
Met When Awarding Credits and Grants for the Qualifying Therapeutic Discovery
Project Program
Highlights
Final
Report issued on September 14, 2011
Highlights
of Reference Number: 2011-40-100 to the
Internal Revenue Service Commissioner for the Small Business/Self-Employed
Division.
IMPACT ON TAXPAYERS
The
Qualifying Therapeutic Discovery Project (QTDP)
Program is a tax benefit (a credit or a grant) targeted to therapeutic
discovery projects that show a reasonable potential to: 1) result in new therapies to treat areas of
unmet medical need; 2) reduce the long-term growth of health care costs; and 3)
advance the goal of curing cancer within 30 years. The QTDP Program’s tax benefit is available only to taxpayers with no more than
250 employees and covers up to 50 percent of a taxpayer’s qualified
investment. The Internal Revenue
Service (IRS) distributed $1 billion in credits and grants to 4,606 recipients.
WHY TIGTA DID THE AUDIT
This
audit was initiated to determine whether the QTDP Program met legislative
requirements when considering and awarding credits and grants to qualifying
therapeutic discovery project applicants, and whether the IRS implemented
adequate controls to monitor the credits and grants.
WHAT TIGTA FOUND
The IRS met
legislative requirements when awarding credits and grants to QTDP Program recipients.
Despite the unprecedented short time period allotted by the law
for creating the QTDP Program, the IRS
achieved its goal.
The IRS team administering
the QTDP Program, in consultation with the Department of Health and Human
Services, processed 5,663 Applications for Certification of Qualified
Investments Eligible for Credits and Grants Under the
Qualifying Therapeutic Discovery Project Program (Form 8942). Of the 5,663 Forms 8942 received, 4,606 (81.3 percent)
were approved for a credit or grant.
All
QTDP Program certified applicants were listed by State on IRS.gov, as required
by law. The IRS has internally revised
and corrected the number of entities receiving credits or grants, but it has
not updated IRS.gov since November 1, 2010.
The
IRS prepared numerous documents that record the process for implementing the
QTDP Program. These documents will be
helpful for implementing future unique and similar projects.
A
compliance plan was developed and is being implemented. The plan includes reviewing the tax returns
of taxpayers who accepted QTDP Program credits and grants. The IRS mailed 326 letters to grant
recipients that had not yet filed an amended Tax Year 2009 tax return.
WHAT TIGTA RECOMMENDED
TIGTA
recommended that the Commissioner, Small Business/Self-Employed Division,
ensure: 1) the information
regarding the applicant names and amounts allocated are updated on IRS.gov to
accurately show which taxpayers and projects were originally awarded QTDP Program
credits and grants; and 2) the QTDP Program line item is removed from
Investment Credit (Form 3468) after a determination is made that all QTDP
Program taxpayers have filed their Tax Year 2010 returns.
The IRS agreed with the recommendations. The IRS plans to: 1) update the information on IRS.gov regarding the applicant names and amounts allocated through July 31, 2011; and 2) by July 15, 2012, make a final update to IRS.gov to reflect any activity from August 1, 2011, to the end of the QTDP Program. Concerning the second recommendation, the IRS has notified the Forms and Publications function of the need to remove the QTDP Program line from Form 3468 once it has determined that all QTDP Program taxpayers have filed their Tax Year 2010 returns.
September 14, 2011
MEMORANDUM FOR COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
FROM: (for) Michael R. Phillips /s/ Margaret E. Begg
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Legislative Requirements Were Met When Awarding Credits and Grants for the Qualifying Therapeutic Discovery Project Program (Audit # 201140040)
This report presents the results of our review to determine whether the Qualifying Therapeutic Discovery Project Program met legislative requirements when considering and awarding credits and grants to qualifying therapeutic discovery project applicants. We also determined whether the Internal Revenue Service implemented adequate controls to monitor the credits and grants. This audit was added to our Fiscal Year 2011 Annual Audit Plan and addresses the major management challenge of Implementing Health Care and Other Tax Law Changes.
Management’s complete response to the draft report is included as Appendix VI.
Copies of this report are also being sent to the Internal Revenue Service managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Michael E. McKenney, Assistant Inspector General for Audit (Returns Processing and Account Services), at (202) 622-5916.
Some Award Recipients Owe Federal Taxes
A Compliance Plan to Monitor Credit and Grant Recipient Tax
Returns Is Being Implemented
Appendices
Appendix
I – Detailed Objectives, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
V – Credits and Grants Distributed by
State
Appendix
VI – Management’s Response to the Draft Report
Abbreviations
|
HHS |
Department of Health and Human
Services |
|
IRS QTDP |
Internal Revenue Service Qualifying Therapeutic Discovery
Project |
The
Qualifying Therapeutic Discovery Project (QTDP) Program is a tax benefit (a tax
credit or grant) to small firms that show significant potential to produce new
and cost-saving therapies, support United States jobs, and increase United
States competitiveness. A Qualifying Therapeutic Discovery Project is a
project that is designed to:
1. Treat or prevent diseases or conditions by conducting pre-clinical
activities, clinical trials, and clinical studies, or carrying out
research protocols, for the purpose of securing approval of a product under section 505(b) of the Federal
Food, Drug, and Cosmetic Act[1] or section 351(a) of the Public Health
Services Act.[2]
2. Diagnose
diseases or conditions or to determine molecular factors related to
diseases or conditions by developing molecular diagnostics to guide
therapeutic decisions.
3. Develop
a product, process, or technology to further the delivery or administration of
therapeutics.
The QTDP Program is targeted to projects that show a reasonable
potential to:
On June 18, 2010, the Internal Revenue Service announced it was
accepting applications for the new QTDP Program.
“This new tax credit was designed to promote
medical research that could improve health and save lives,” Internal Revenue
Service Commissioner Doug Shulman said. “I encourage taxpayers that are involved in
this groundbreaking type of work to apply.”
Allocation
of the credit or grant included consideration of which projects showed the
greatest potential to create and sustain high-quality, high-paying United
States jobs and to advance United States competitiveness in life, biological,
and medical sciences.
The
QTDP Program is part of the new health care law, the Patient Protection and
Affordable Care Act of 2010,[3] and is included in Internal
Revenue Code Section 48D. The Internal
Revenue Service (IRS), in consultation with the United States Department of Health
and Human Services (HHS), implemented the QTDP Program. The IRS entered into an agreement with the HHS
to pay more than $1.5 million to the HHS for its review of packages that taxpayers
submitted requesting a credit or a grant during the period June 25 to
September 30, 2010.
The QTDP Program’s tax benefit is available only to taxpayers with no more than 250 employees.
It covers up to 50 percent of a
taxpayer’s qualified investment. To provide
an immediate boost to United States biomedical research, the credit or grant was
available for qualified investments made, or to be made, in Tax Years[4] 2009 and 2010.
To claim
the credit or grant, a taxpayer must have applied for certification of its qualified
investments. The amount of the credit or
grant was limited to a maximum of $5 million per taxpayer, and the total
amount available to all taxpayers was limited to $1 billion.
Application Process
IRS Notice 2010-45, released on May 21, 2010, established the Program as required by law, and described the application process taxpayers were to use to have a therapeutic discovery project certified as eligible for a credit or grant. Applicants were instructed to submit an Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program (Form 8942).[5] Form 8942 had to be postmarked no later than July 21, 2010, and had to include a Project Information Memorandum. The Memorandum should provide an overview of the project, including a description of the product, process, or technology under development. The law required that the IRS issue certifications by October 29, 2010.
The
IRS could certify an applicant’s qualified investment as eligible under the
QTDP Program, only if:
·
The
HHS determined the applicant’s project qualified as a therapeutic discovery
project.
·
The
HHS determined the applicant’s project showed reasonable potential to: a) result in new therapies (i) treat areas of
unmet medical need or (ii) prevent, detect, or treat chronic or acute diseases
and conditions; b) reduce long-term health care costs in the United States; or
c) significantly advance the goal of curing cancer within the 30-year period
beginning on May 21, 2010.
·
The
IRS determined that the applicant’s project was among those projects that have
the greatest potential to: a) create and
sustain (directly or indirectly) high-quality, high‑paying jobs in the United
States; and b) advance United States competitiveness in the fields of life,
biological, and medical sciences.
This review was performed at the Small Business/Self-Employed Division Headquarters in Lanham, Maryland; the Accounts Management and Campus Compliance Operations, Cincinnati functions in Covington, Kentucky; and the Small Business/Self-Employed Division Campus Compliance Operations function in Ogden, Utah, during the period November 2010 through May 2011. 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 objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Detailed information on our audit objectives, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Legislative
Requirements Were Met When Awarding Credits and Grants to Qualifying Therapeutic
Discovery Project Program Recipients
The IRS achieved its Program goals and met legislative requirements when awarding credits and grants to QTDP Program recipients. Within 3 months of the enactment of the law, the IRS established the QTDP Program and began soliciting applications. Within 8 months, it had awarded the credits and grants.
Within 3 months of the enactment of the law, the IRS established
the QTDP Program and began soliciting applications.
The law required
that no later than 60 days after the date of the enactment of the law, March 23, 2010,
the IRS, in consultation with the HHS, was to establish a QTDP Program. Immediately after the law was enacted, the
IRS quickly established the process and procedures for implementing the law. The IRS:
Figure 1 shows the milestones for the QTDP Program from establishment of the Program to November 3, 2010, when the Program recipients were announced.
Figure 1: QTDP Program Milestones
•
May 2010
•
On May 21, 58
days after the enactment of the law, the IRS issued Notice 2010-45 establishing
the Program and informing the public about the credits and grants. At the time of the Notice, the IRS estimated
the number of applicants would be 1,200.
Further, the Notice established that applications would be considered
submitted for purposes of the law on October 1, 2010
•
June 2010
•
On June 18, the
IRS issued a news release announcing that small firms could now begin applying
for certification for credits or grants available under the QTDP Program. It provided electronic links and instructions
for Form 8942. Applications were to be
postmarked no later than July 21, 2010.
•
July 2010
•
The IRS received
5,663 applications, 4,463 more than expected.
The total credits and grants requested was about $10.5 billion, or an
average of approximately $1.85 million per application. Most applications were received just days
before the July 21 deadline. From
June 25 to August 13, 2010, as applications were being reviewed, the IRS
shipped the Project Information Memorandums to the HHS for its review. The Memorandums provided overviews of the
projects, including descriptions of the products, processes, or technologies
under development.
•
November 2010
•
On November 3,
the Secretary of the Treasury and the Secretary of Health and Human Services
joined with the National Institute of Health Director to announce the
recipients of the $1 billion in new therapeutic discovery project credits and
grants created by The Affordable Care Act.
•
The $1 billion in
credits and grants was awarded to 2,923 applicants specializing in
biotechnology and medical research in 47 States, Washington D.C., and 3 foreign
entities. As required by law, all QTDP
Program applicants eligible for a credit or grant were posted by State on
IRS.gov. See Appendix V for the list of
States and total credits and grants awarded.
Source: IRS news releases and the QTDP Program Implementation Team.
The QTDP Program Implementation Team conducted 156 stakeholder
presentations and produced 11 external and 4 internal articles.
The cost of implementing the QTDP Program and processing
Forms 8942 was approximately $5.4 million in Fiscal Year 2010 and approximately
$0.8 million for Fiscal Year 2011, as of January 31, 2011. In addition, more than $1.5 million was paid
to the HHS for determining whether the taxpayer projects met the health care
requirements. The cost to the IRS was
about $1,360 for each Form 8942 processed.
Of the 5,663 Forms 8942 received, 4,606 (81.3 percent) projects were certified and awarded either a credit or a grant. Figure 2 shows the number of applications initially processed and the amounts and types of the awards initially granted.
Figure 2: Initial
Number of QTDP Program Credit and
Grant Applications (as of November 1, 2010)
|
Number
of Applications Received |
5,663 |
100.0% |
|
|
Not Certified by the
HHS |
1,025 |
18.1% |
|
|
Not Certified by the
IRS |
32 |
0.6% |
|
|
Number
Approved for Credits/Grants |
4,606 |
81.3% |
|
|
Grants Awarded |
4,516 |
98.0% |
|
|
Credits Awarded |
90 |
2.0% |
|
|
Total
Amount Awarded |
$1,000,000,000 |
|
||
Source: IRS analysis of credits and grants as of November 1, 2010.
After announcing the recipients of the awards, the QTDP Program Implementation Team identified processing errors and some applicants questioned why they had not received awards. Subsequently, the IRS and the HHS reviewed the applications again and determined four projects qualified for awards.
In addition, after the credits and grants were posted to IRS.gov, 20 award recipients requested that their awards be changed from credits to grants and/or from grants to credits.[6]
Sixty taxpayers (76 projects) amended their applications to reduce qualified expenses and, therefore, reduce the award amounts. In addition, 11 award recipients (13 projects) have amended their applications to withdraw completely from the QTDP Program. This happened because the projects were not undertaken as planned. Form 8942 instructions advise applicants to:
File an amended Form 8942 to correct
the amount of qualified investment previously reported if the applicant requested
a grant. If the applicant requested a
grant and amount of actual costs paid or incurred for qualified investment is
less than the amount included on line 35, for which certification was requested,
file an amended Form 8942 within 15 days after the close of the applicant’s tax
year to show the actual costs paid or incurred for qualified investment.
Figure 3 reflects the disposition of awards as of April 30, 2011.
Figure 3: QTDP Program Credit and Grant Dispositions
|
Number of Applications Approved for Credit or Grant |
4,597[7] |
|
Grants Awarded |
4,527 |
|
Credits Awarded |
91 |
|
Adjusted Amount Awarded |
$991,610,727 |
Source: Our reconciliation of IRS records from November 1, 2010, to April 29, 2011.
Applications were appropriately processed and most funds were correctly distributed
The IRS had internal controls in place to track, monitor, and control all applications. For example:
The law stated that the credit or grant was to cover up to 50 percent of a taxpayer’s qualified investment made or to be made in Tax Years 2009 and 2010. The IRS was not required to and did not verify the qualified investments the applicants used to qualify for the credits or grants. It plans to conduct compliance reviews, if necessary, to verify qualified investments.
Test results showed applications were timely processed
A statistical sample of 109 QTDP Program applications (85 certified
and 24 denied) showed:
·
All
applications accepted were complete.
When applications were submitted without all the required information,
the Implementation Team followed up with the applicants to obtain the necessary
information. The Implementation Team
denied the application if all necessary information was not eventually
acquired.
·
None of
the applicants receiving grants were specifically excluded by the Patient Protection and Affordable Care
Act. The Act precluded a Federal, State, or local Government
(or any political subdivision, agency, or instrumentality), a tax exempt organization,
or others[9] from receiving a therapeutic discovery
project grant.
·
No
certified applicants were excluded by law from receiving Federal contracts,
certain subcontracts, and certain Federal financial and nonfinancial assistance
and benefits.
· All award recipients had been certified by the HHS.
·
The
amounts awarded, either as a credit or a grant, met the
requirements of the law and were accurately calculated.
In addition, all applicants were appropriately notified and, as required by law, all 2,923 original recipients of therapeutic discovery project credits and grants were listed by State[10] on IRS.gov. However, when the original recipients were announced and posted on IRS.gov, *************1************
*******************1******************************************************************************************** The IRS has not corrected IRS.gov.
The IRS did not rank the applicants or the
projects, but allocated the award money using a multi‑tier formula
After the HHS certified the projects, the
IRS allocated the $1 billion award money using a multi‑tier formula. The total amount of the grant money was
apportioned with the smaller projects under a certain amount receiving grants
for the full 50 percent of their qualified investment as allowed by law. The remaining funds were then apportioned to the
remaining applicants. This was repeated
until the funds were completely allocated.
The certification and award amounts were
accurate based on the formula. No award exceeded
the $5 million in credits or grants allowed by the law for any single taxpayer.
************************************1******************************************************************.
Funds were generally entered correctly into the HHS Payment
Management System for distribution to the grantees
Generally, funds were correctly accounted for and information was correctly entered into the HHS Payment Management System, which maintains and distributes the grant funds. The IRS enters the grantees and their award amounts and grantees draw funds directly from the System via electronic transfers.
Changes to grant amounts occurred that required the IRS to update the award amounts and available funds on the System. *****************1******
*********************************************1***********************************************************************
********************************************1*******************************************************************
After the initial
announcement, the IRS received inquiries from applicants questioning why
they had not received awards
The law does not provide appeal rights. Notice 2010-45 includes the following:
Notice
2010-45, Section 7.05
No Right to a Conference or Appeal. A taxpayer does not have a right to a
conference relating to any matters under this notice. Further, a taxpayer does not have a right to
appeal the decisions made under this notice (including the amount of credit
allocated to the project and whether or not to certify the project) to any
official of the HHS or the Service or the Department of the Treasury.
However, if an inquiry was received from an applicant that was denied a credit or grant, the IRS reviewed the application again and, if applicable, referred it to the HHS. The HHS reviewed the actions taken on the case again to determine if an administrative error had occurred. ***1*** cases received a second review. ***********************1************************* The IRS stated that it had not checked all denied applications for scoring errors. In four other cases, the HHS did not change its original assessment of the projects. The IRS notified all ***1*** applicants of the final decisions.
The complexity of the law created confusion and
difficulties in administering the QTDP Program
The law is complex and, like many laws, has
special rules, includes only certain costs, excludes certain costs and
entities, requires recapturing certain credits and reducing the basis of
property by the amount of the QTDP Program credit, and sets very short time
periods for implementation. For example:
The complexity of the law made it difficult to develop a process that would ensure applicants met all requirements. From June 2010 to March 2011, the QTDP Program Implementation Team received and responded to 6,554 telephone calls and 3,206 emails with questions about the Program. During May and June 2010, calls pertained to application preparation. Beginning in October 2010, calls ranged from how to file amended Forms 8942 to questions about projects that were not approved (rejected) and income tax return issues.
Certain taxpayers were required to amend their previously filed income tax returns
All taxpayers that applied for and received a QTDP Program tax credit or grant for Tax Year 2009 and had already filed their Tax Year 2009 returns would, depending on whether they received a credit or a grant, have to file an amended tax return to either:
Certain taxpayers were required to amend their previously filed
income tax returns, including all related flow-through entities.
1) Reduce the amount of otherwise deductible expenses included on their Tax Year 2009 return by the amount of such expenses included in computing the credit and claim the QTDP Program credit.
2) Reduce the expenses included on their Tax Year 2009 return by the amount of the Tax Year 2009 certified qualified investment used to receive a grant.
When amending the tax return, if additional tax is owed, the taxpayer would also be subject to interest. *********1*************************** *************************************************************************.
The short time period to
implement the law and award the credits and grants limited the verification of
information submitted
****************2(f)********************************************************************************************** The law required that consideration be given
to those projects that showed the greatest potential to:
1) Create and sustain (directly or indirectly) high-quality, high-paying jobs in the United
States.
2) Advance
United States competitiveness in the fields of life, biological,
and medical sciences.
***********************************************2(f)****************************************************************
Figure 3: Excerpt From Form 8942
Figure 1 was removed due to its size. To see Figure 1, please go
to the Adobe PDF version of the report on the TIGTA Public Web Page or the
IRS.gov website.
*********************************2(f)******************************************************************************.
*******************************2(f)**********************************************************************************
*******************************2(f)************************************************************** In addition, Form 8942 also contains a
Penalties of Perjury Statement that required the signer to declare he or she has examined the application, including the accompanying
documents, and, to the best of his or her knowledge and belief, all of the
facts contained therein are true, correct, and complete.
The short time period may also have affected the outcome of the QTDP Program
The rejection rate of HHS Small Business Innovative Research health care projects is about 70 percent compared to approximately 20 percent for the QTDP Program. The Small Business Innovative Research Program was created to ensure that small businesses received a greater share of Federal research and development awards. The greater than 80 percent acceptance rate of the QTDP Program was attributed to the streamlined procedures and an expedited process of review.
The rejection rate of HHS Small
Business Innovative Research health care projects is about 70 percent
compared to approximately 20 percent for the QTDP Program.
*********************************************************2(f)*******************************************************
Recommendation
Recommendation 1: The Commissioner, Small Business/Self-Employed Division, should ensure the information regarding the applicant names and amounts allocated are updated on IRS.gov to accurately show the recipients and projects awarded QTDP Program credits and grants.
Management’s Response: IRS management agreed with the recommendation. The IRS will update the information on IRS.gov regarding the applicant names and amounts allocated through July 31, 2011. The IRS will also make a final update to IRS.gov to reflect any activity from August 1, 2011, to the end of the QTDP Program.
Some Award
Recipients Owe Federal Taxes
Eighteen QTDP Program grant recipients owe approximately $800,000
in delinquent taxes,[11] extending
as far back as Tax Year 2005. These 18 recipients received more than $5 milllion in QTDP Program grants.
***************1************************************************ See
Figure 4 for the range of grants and the amount of taxes owed.
Figure 4: Range of Grants and Taxes
Owed
|
Range of Grants |
Taxes and |
|
<$250,000 |
$528,619 |
|
$250,000 - $349,999 |
$102,826 |
|
$350,000 - $499,999 |
$115,120 |
|
$500,000 - $749,999 |
$10,210 |
|
$750,000
- $1,000,000 |
$36,874 |
|
Total Delinquent Taxes |
$793,649 |
Source: Our analysis of QTDP Program records.
The majority of the $793,649 delinquent taxes is for employment
taxes (Federal income tax withholding, Social Security and Medicare taxes, and
Federal unemployment tax). However, it
also includes
***********************************1******************************************.
These taxes are owed by the organizations that
received the QTDP Program grants. The Affordable
Care Act did not require that applicants or award reciptients be compliant with
their Federal tax obligations or not have any outstanding unpaid taxes. The IRS verified the Taxpayer Identification
Numbers for all applicants and validated certain other information submitted
that was available on IRS computer systems but not whether the applicants had
paid all their Federal taxes.
A Compliance
Plan to Monitor Credit and Grant Recipient Tax Returns Is Being Implemented
The QTDP Program Implementation Team drafted a Compliance Plan that includes a review of the tax returns filed by taxpayers that accepted QTDP Program credits and grants. The Compliance Plan includes procedures to determine whether taxpayers that did not apply for a credit or grant attempt to claim an investment credit.
The IRS developed a compliance plan to review tax returns of
taxpayers that accepted credits and grants.
Certain
transaction and action codes[12]
were to be posted to the Tax Years 2009 and 2010 accounts of the respective
QTDP Program applicants. In
addition, the applicants’ tax accounts were to be updated to reflect the amount
of the approved credit or grant or denial of the credit or grant. For flow‑through entities, partners and
shareholders will be identified so their accounts can be updated.
The IRS currently plans to review tax account
transcripts[13] to
classify and select tax returns for a limited scope examination. The tax returns will be sent to the IRS Small
Business/Self-Employed Division’s Abusive Transaction and Technical Issues function
for screening. If warranted, the tax
return will be sent for a field examination.
Applicants
that have already filed their Tax Year 2009 returns and received a credit for
Tax Year 2009 were advised to file amended returns and to include the credit on
the General Business Credit (Form 3800).
Taxpayers are advised to annotate Form 3468 (Investment Credit), which
is then reviewed by the IRS for accuracy. For applicants filing Tax Year 2010 tax
returns, a line was added to the Form 3468 and the QTDP credit amount is
to be carried over to Form 3800. Tax
Year 2010 taxpayers are required to project qualified expenditures.
As
of April 18, 2011, the IRS has mailed 326 letters to grant recipients that have
not filed an amended Tax Year 2009 return.
Although there were about 2,000 applicants that have yet to file amended
returns, the IRS stated most do not appear to have an additional tax liability due
to large, unused losses or a lack of taxable receipts. The IRS will also be reviewing all QTDP
Program credit recipients’ tax returns to ensure they have included a
corresponding reduction in qualifying expenses on amended returns for those recipients
claiming Tax Year 2009 credits.
Specific
Compliance Initiative Projects, which will focus on grant recipients, are also planned
to identify potential noncompliance. The
amount of the qualified expenditures reported on Form 8942 will be
verified.
********************************************2(f)******************************************************************:
·
[14]
*************************2(f)****************************************************************************.
·
******************************2(f)*************************************************************************
·
**************************************************2(f)******************************************************.
In addition, once the IRS
determines all eligible taxpayers have filed their Tax Year 2010 tax returns, the
IRS should remove the QTDP Program line item from Form 3468. This would prevent unscrupulous taxpayers from
using the form to claim QTDP Program investment credits for which they are not
entitled.
Recommendation
Recommendation 2: The Commissioner, Small Business/Self-Employed Division, should ensure the QTDP Program line item is removed from Form 3468 after it is determined that all QTDP Program taxpayers have filed their Tax Year 2010 returns.
Management’s Response: IRS management agreed with the recommendation. The IRS has notified the Forms and Publications function of the need to remove the QTDP Program line from Form 3468. The IRS will request such action once it has determined that all QTDP Program taxpayers have filed their Tax Year 2010 returns.
Appendix I
Detailed Objectives, Scope, and Methodology
Our overall objective was to determine whether the QTDP Program met legislative requirements when considering and awarding credits and grants to QTDP Program applicants. We also determined whether the IRS implemented adequate controls to monitor the credits and grants. To accomplish our objectives, we:
I. Obtained a clear understanding of the law and its requirements by reviewing the laws and related Committee reports; IRS notices, forms, and publications; and all IRS communications to taxpayers and news releases relating to the Program. We also discussed the concerns and challenges with administration of the Program with the IRS and HHS officials responsible for the Program.
II. Determined whether the IRS complied with the laws establishing the Program and certifying applicants.
A. Determined whether the IRS communication and application process complied with the law and was sufficient to ensure all taxpayers wanting to apply were able to apply.
B. Determined whether the verification of applicant information performed prior to the awards was adequate to ensure compliance with all laws.
III.
Selected a statistically valid sample of 96 applicants from
a population of 5,663 QDTP Program applicants. We oversampled by 13 applicants to ensure the
sample selected included a representative number of denied and approved
applications. The result of the
oversample brought the total applicants selected to 109. We used a ±5 percent precision level, a 90
percent confidence interval, and a 10 percent error rate to select the
statistical sample. The sample was used
to determine:
A.
Whether applicants met the criteria for receiving the
QTDP Program credit or grant.
B.
Whether Applications
for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program
(Form 8942)[15]
were accurate and complete.
C.
Whether the applicants were recorded accurately on the
QTDP Program database. We assessed the
reliability of the QTDP Program database by matching 10 taxpayer applications
to all fields to determine any inaccuracies or missing data.
D.
Whether any of the sample applicants were on the
Excluded Parties List System.[16]
E.
Whether approved applicants were posted to IRS.gov.
F. Whether the proper posting of transaction and action codes[17] and denial and approval results were accurately posted to the taxpayers’ accounts.
G. Whether taxpayers correctly filed amended and/or original tax returns as required, to offset credits taken for expenditures.
H. Whether the applicant awards were correctly posted to the HHS Payment Management System. We assessed the reliability of the HHS Payment Management System by assessing data validation performed by the database administrator and by verifying the contents and relationship of the data fields.
I. Whether there were any tax liabilities for the QTDP Program applicants. We assessed the reliability of IRS Integrated Collection System[18] used to determine if there were Federal tax liabilities. We matched applicant data to the IRS Integrated Collection System and to the IRS Integrated Data Retrieval System[19] to determine if the information was accurate and consistent.
IV. Determined whether internal controls were and are in place to accurately distribute and track funds allocated to the recipients.
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 the following internal controls were relevant to our audit objectives: the IRS’s policies, procedures, and practices relative to implementing the QTDP Program and processing the applications. We evaluated related controls by assessing the internal control environment, interviewing IRS and HHS officials, and reviewing QTDP Program management reports. We also assessed the QTDP Program database developed for recording and tracking QTDP Program applications.
Appendix II
Major Contributors to This Report
Michael E. McKenney, Assistant Inspector General for Audit
(Returns Processing and Account Services)
Augusta R. Cook, Director
Lena Dietles, Audit Manager
Tracy Harper, Lead Auditor
Tanya Adams, Senior Auditor
Jerry Douglas, Senior Auditor
Kathy Coote, Auditor
Johnathan Elder, Auditor
Nelva Usher, Auditor
Appendix III
Commissioner
C
Office of the Commissioner – Attn:
Chief of Staff C
Deputy Commissioner for Operations Support OS
Deputy Commissioner for Services and Enforcement SE
Chief Technology Officer OS:CTO
Deputy Commissioner, Small Business/Self-Employed Division SE:S
Director, Strategy and Finance, Wage and Investment Division SE:W:S
Director, Campus Compliance Operations, Cincinnati, Small
Business/Self-Employed Division SE:S:CCS:CCO:CIN
Chief Counsel
CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaisons:
Chief Technology Officer OS:CTO
Commissioner, Small
Business/Self-Employed Division SE:S
Chief, Program Evaluation and Improvement, Wage and Investment Division SE:W:S:PEI
Appendix IV
Application for Certification of Qualified Investments Eligible
for Credits and Grants Under the Qualifying
Therapeutic Discovery Project Program
The form was removed due to its size. To see the form, please go
to the Adobe PDF version of the report on the TIGTA Public Web Page or the
IRS.gov website.
Source: IRS.gov and Form 8942.
Appendix V
Credits and Grants Distributed by State[20]
|
Credits |
Grants |
|||
|
Tax
Year 2009 |
Tax
Year 2010 |
Tax
Year 2009 |
Tax
Year 2010 |
|
|
Alabama |
$294,009 |
$376 |
$3,132,530 |
$575,775 |
|
Arizona |
$749,192 |
$352,576 |
$4,342,604 |
$3,645,232 |
|
Arkansas |
|
|
$535,229 |
$195,065 |
|
California |
$2,218,169 |
$1,084,667 |
$214,448,844 |
$63,640,722 |
|
Colorado |
$362,108 |
$126,851 |
$15,790,023 |
$6,986,495 |
|
Connecticut |
$520,019 |
$509,003 |
$11,500,143 |
$2,562,681 |
|
Delaware |
|
|
$1,047,339 |
$1,177,462 |
|
District
of Columbia |
$451,115 |
$244,479 |
$377,597 |
$342,494 |
|
Florida |
$102,657 |
$239,306 |
$16,709,462 |
$9,507,260 |
|
Foreign[21] |
|
|
$733,438 |
|
|
Georgia |
$244,479 |
|
$10,554,302 |
$4,856,124 |
|
Hawaii |
|
|
$3,916,381 |
$871,969 |
|
Illinois |
$84,816 |
$95,347 |
$8,985,727 |
$5,178,174 |
|
Indiana |
|
|
$7,198,044 |
$3,111,122 |
|
Iowa |
|
|
$1,427,740 |
$343,488 |
|
Kansas |
|
|
$2,476,966 |
$1,554,290 |
|
Kentucky |
$578,894 |
$154,544 |
$2,395,705 |
$1,896,883 |
|
Louisiana |
$127,834 |
$116,645 |
$1,633,927 |
$504,540 |
|
Maine |
$217,486 |
$117,118 |
$149,768 |
$82,019 |
|
Maryland |
$244,479 |
|
$35,437,612 |
$13,330,875 |
|
Massachusetts |
$2,391,671 |
$253,279 |
$96,270,166 |
$29,695,570 |
|
Michigan |
|
|
$11,287,706 |
$7,086,991 |
|
Minnesota |
$226,991 |
$461,968 |
$14,311,920 |
$8,907,998 |
|
Mississippi |
|
|
$463,796 |
$461,023 |
|
Missouri |
$244,479 |
|
$4,828,826 |
$2,892,649 |
|
Montana |
$239,204 |
$249,754 |
$885,792 |
$411,179 |
|
Nebraska |
$39,145 |
$205,334 |
$1,101,229 |
$1,072,500 |
|
Nevada |
|
|
$1,214,502 |
$1,888,782 |
|
New
Hampshire |
|
|
$836,591 |
$1,807,359 |
|
New
Jersey |
$365,479 |
$123,479 |
$41,091,787 |
$10,864,362 |
|
New
Mexico |
|
|
$3,043,477 |
$1,682,399 |
|
New
York |
$308,689 |
$147,249 |
$32,774,141 |
$15,240,814 |
|
North
Carolina |
|
|
$27,547,804 |
$8,487,967 |
|
North
Dakota |
|
|
$296,494 |
$436,943 |
|
Ohio |
$696,067 |
$87,495 |
$9,104,250 |
$6,022,597 |
|
Oklahoma |
|
|
$1,833,173 |
$1,152,365 |
|
Oregon |
|
|
$3,714,454 |
$1,732,863 |
|
Pennsylvania |
$576,527 |
$645,869 |
$32,723,388 |
$15,381,713 |
|
Rhode
Island |
$120,704 |
$123,309 |
$3,104,983 |
$1,453,645 |
|
South
Carolina |
|
|
$1,172,404 |
$1,415,873 |
|
South
Dakota |
|
|
$11,738 |
$232,742 |
|
Tennessee |
|
$244,479 |
$5,042,706 |
$1,688,745 |
|
Texas |
$1,000,995 |
$188,668 |
$22,160,281 |
$11,974,635 |
|
Utah |
$17,834 |
$35,892 |
$8,302,851 |
$4,381,667 |
|
Vermont |
|
|
$120,659 |
$123,820 |
|
Virginia |
$352,198 |
$13,820 |
$6,706,613 |
$4,019,720 |
|
Washington |
|
|
$24,695,119 |
$9,407,220 |
|
West
Virginia |
|
|
$392,379 |
$96,580 |
|
Wisconsin |
$12,975 |
$120,156 |
$8,490,228 |
$4,563,893 |
|
Totals[22] |
$12,788,214 |
$5,941,662 |
$706,322,840 |
$274,947,284 |
Source: Data posted to IRS.gov, dated November 2010.
Appendix VI
Management’s Response to the Draft Report
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON,
D.C. 20224
COMMISSIONER
SMALL BUSINESS/SELF-EMPLOYED DIVISION
AUG 18 2011
MEMORANDUM
FOR MICHAEL R. PHILLIPS
DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Faris R. Fink /s/ Faris R. Fink
Commissioner, Small Business/Self-Employed
Division
SUBJECT: Draft Audit Report -
Legislative Requirements Were Met When Awarding Grants and Tax Credits for the Qualifying
Therapeutic Discovery Project Program (201140040)
Thank you for
the opportunity to review TIGTA's draft report titled: "Legislative Requirements
Were Met When Awarding Grants and Tax Credits for the Qualifying Therapeutic
Discovery Project Program."
We appreciate
your acknowledgement of our efforts to implement this legislation within an
extraordinarily short timeframe. As highlighted in your report, we established
the Qualifying Therapeutic Discovery Project (QTDP) Program and began
soliciting applications within 3 months of enactment of the law, and awarded credits
and grants to certified applicants within 8 months of enactment. To satisfy the
objectives of this program, we established the necessary infrastructure to
receive, process, and review applications within a short period of time. We
also developed interagency procedures and agreements, created Form 8942 and instructions,
created internal training materials, and provided a variety of external
communications. As a result of our efforts, we received and were able to timely
process over 5,663 applications and approve 4,606 credits and grants in lieu of
credits to certified applicants.
All credits
and grants in lieu of credits were awarded and timely published on IRS.gov by
state in accordance with the statutory timeframe. As your report notes,
however, updates are needed to reflect the actual results of the program based
on events subsequent to the initial web posting. For example, following the
initial posting, the IRS discovered that ******************1*************** and three additional taxpayers' projects were
subsequently certified and notified accordingly. In concurrence with your
recommendation, we will update the published list to reflect these subsequent
events.
We concur
with all of your recommendations. Attached is a detailed response outlining our
corrective actions. If you have any questions, please contact me or a member of your
staff may contact Shenita Hicks, Director,
Examination, Small Business/Self-Employed Division (SB/SE), at (859) 669-5526.
Attachment
Attachment
RECOMMENDATION
1:
The
Commissioner, Small Business/Self-Employed Division should ensure the information
regarding the applicant names and amounts allocated are updated on IRS.gov to
accurately show the taxpayers and projects originally awarded QTDP Program
grants and credits.
CORRECTIVE
ACTION:
We concur
with this recommendation. 1) We will update the information on IRS.gov regarding
the applicant names and amounts allocated through July 31, 2011. 2) We will make a final
update to IRS.gov to reflect any activity from August 1, 2011, to the end of the QTDP
program.
IMPLEMENTATION
DATE:
1) October
15, 2011
2) July 15,
2012
RESPONSIBLE
OFFICIAL(S):
Director,
Abusive Transactions and Technical Issues, Small Business/Self-Employed Division
(SB/SE)
CORRECTIVE
ACTION MONITORING PLAN:
We will
monitor this action as part of our internal management control process.
RECOMMENDATION
2:
The
Commissioner, Small Business/Self-Employed Division, should ensure the QTDP Program
line item is removed from Form 3468 after it is determined that all QTDP Program
taxpayers have filed their Tax Year 2010 returns.
CORRECTIVE
ACTION:
We concur with
this recommendation. We have notified Forms and Publications of the need to
remove the QTDP Program line from Form 3468, Investment Credit. We will request
such action once we have determined that all QTDP Program taxpayers have filed
their Tax Year 2010 returns.
IMPLEMENTATION
DATE:
July 15, 2012
RESPONSIBLE
OFFICIAL(S):
Director,
Abusive Transactions and Technical Issues, Small Business/Self-Employed Division
(SB/SE)
CORRECTIVE
ACTION MONITORING PLAN:
We will monitor this action as part of our internal
management control.
[1]
Pub. L. No. 75-717, 52 Stat. 1040
(1938).
[2]
Pub. L. No. 78-410, 58 Stat. 682 (1944).
[3] Pub. L. No. 111-148, 124 Stat. 119 (2010).
[4] 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.
[5] See Appendix IV for a copy of Form 8942.
[6] As of April 29, 2011.
[7] The number of credits and grants awarded exceeds the number of total grants because 21 projects receiving credits in Tax Year 2009 switched to grants for Tax Year 2010.
[8] The IRS computer system capable of retrieving or updating stored information. It works in conjunction with a taxpayer’s account records.
[9] A direct or indirect holder of equity or profit interest.
[10] See Appendix V for a list of the total credits and grants awarded by State.
[11] As of May 25, 2011.
[12] Transaction Codes are used to identify a transaction being processed and to maintain a history of actions posted to a taxpayer’s account on the Master File. Action Codes provide additional definitions for certain Transaction Codes.
[13] Transcripts provide most of the information contained in a tax return.
[14] A tax module is part of a taxpayer’s account that reflects tax data for one tax type and one tax period.
[15] See Appendix IV for a copy of Form 8942.
[16] A worldwide web site, provided as a public service by the General Services Administration, for the purpose of disseminating information on parties excluded from receiving Federal contracts, certain subcontracts, and certain Federal financial and nonfinancial assistance and benefits.
[17] Transaction Codes are used to identify a transaction being processed and to maintain a history of actions posted to a taxpayer’s account on the Master File. Action Codes provide additional definitions for certain transaction codes.
[18] An automated system used to control and monitor delinquent tax cases assigned to IRS employees.
[19] IRS computer system capable of retrieving or updating stored information. It works in conjunction with a taxpayer’s account records.
[20] These data do not reflect the updates of the applicants that changed tax credits to grants and grants to tax credits.
[21] Three grants were issued to foreign entities.
[22] Due to rounding, the totals may not equal the sum of
the column amounts.