AVAILABLE DATA ARE NOT BEING USED TO
PROACTIVELY IDENTIFY POTENTIALLY ERRONEOUS
REHABILITATION CREDIT CLAIMS
Final Report issued on April 29, 2016
Highlights of Reference Number: 2016-40-024 to the Internal Revenue Service Deputy Commissioner for Services and Enforcement.
IMPACT ON TAXPAYERS
The Rehabilitation Credit is jointly administered by both the IRS and the National Park Service (NPS). The Rehabilitation Credit uses tax incentives to encourage the private sector to restore and maintain historic structures. Qualified applicants may claim as much as 20 percent of their expenditures as a credit to reduce their overall tax liability. For Tax Year (TY) 2013, approximately $732 million in Rehabilitation Credits was claimed on 2,168 tax returns.
WHY TIGTA DID THE AUDIT
Similar to other general business credits, the IRS does not determine the primary qualifications of the project for which the Rehabilitation Credit is based. Rather, the IRS relies on the certification provided by the NPS, i.e., the NPS assigns a project number to each rehabilitation project when the certification application is submitted. The overall objective of this review was to assess the effectiveness of the IRS’s controls to ensure that business taxpayer claims for the Rehabilitation Credit were valid.
WHAT TIGTA FOUND
Third-party data received from the NPS are not being proactively used to identify potentially erroneous Rehabilitation Credit claims. The cornerstone of the IRS’s ability to ensure compliance with many tax provisions is the ability to obtain reliable third-party data. Although the IRS receives a complete electronic copy of the NPS database twice a year, it has not established effective processes to use the data to identify potentially erroneous claims, both during tax return processing and in post-processing compliance efforts.
Also, processes are needed to ensure that required information to claim the Rehabilitation Credit is provided and is accurate on all tax forms. A review of 2,720 TY 2013 Forms 3468, Investment Credit, identified 39 taxpayers claiming almost $47 million in Rehabilitation Credits that did not provide either the required NPS project number or Employer Identification Number (EIN) of a pass-through entity.
Finally, the IRS does not have a process to identify invalid NPS project numbers or pass-through entity EINs during processing of tax returns. TIGTA’s review of the 2,720 TY 2013 Forms 3468 identified 12 taxpayers claiming $154,639 in Rehabilitation Credits that provided an invalid NPS project number or pass-through entity EIN.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the IRS develop processes and procedures to use NPS data to identify potentially erroneous claims and revise programming to identify and reject electronically filed business tax returns claiming the Rehabilitation Credit in which the required information is not provided on Form 3468 and when the information provided is invalid. TIGTA also recommended that the IRS work with the Department of the Treasury’s Office of Tax Policy and propose existing regulations to provide clear reporting requirements for claiming the Rehabilitation Credit.
The IRS agreed with four recommendations, partially agreed with one recommendation, and disagreed with three recommendations.
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to:
Phone Number / 202-622-6500
E-mail Address / TIGTACommunications@tigta.treas.gov
Website / https://www.treasury.gov/tigta