TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

 

 

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.

 

 

Table of Contents

 

Background

Results of Review

Legislative Requirements Were Met When Awarding Credits and Grants to Qualifying Therapeutic Discovery Project Program Recipients

Recommendation 1:

Some Award Recipients Owe Federal Taxes

A Compliance Plan to Monitor Credit and Grant Recipient Tax Returns Is Being Implemented

Recommendation 2:

Appendices

Appendix I – Detailed Objectives, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program

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

 

 

Background

 

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.

 

 

Results of Review

 

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
Penalties Owed

<$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

 

Report Distribution List

 

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.