AUGUST 3, 2016 — A recent U.S. Government Accountability Office (GAO) report (GAO-16-682) finds that, based on results of audits, the Internal Revenue Service (IRS) views vessel operators to be substantially in compliance with requirements to report and pay the Inland Waterways Fuel Tax .
The report has been made in accordance with a provision of the Water Resources Reform and Development Act of 2014 requiring GAO to evaluate the efficiency of collecting the fuel tax and to assess alternative collection methods. The $0.29 per-gallon tax provides partial funding for new construction and major rehabilitation of navigation infrastructure, such as locks and dams, on the waterways. From 2005 through 2014, the fuel tax generated about $83 million per year. Any non-compliance, such as not filing or under-reporting the tax, would reduce available funding.
IRS data show that IRS generally audited a higher percentage of fuel tax returns compared to all excise-tax returns from 2005 through 2014, with the percentage those examined that IRS accepted as filed exceeding 50 percent in eight of the ten years. According to IRS officials, this figure is a relatively high percentage of tax returns examined with no change, which suggests that vessel operators are generally properly reporting their fuel taxes. Where IRS determined additional taxes were owed, the average amount assessed per audit for each year varied, ranging from $194 to $7,192.
Non-filer audits: In 2010, IRS began an effort to identify potential nonfilers and increase the number of non-filer audits. To identify nonfilers, IRS obtains vessel operator information published by the U.S. Army Corps of Engineers (Corps) and compares that information with tax filings. The average amount assessed per non-filer audit for each year from 2005 to 2014 varied, ranging from $592 to $12,550.
GAO says that IRS and vessel operators face some challenges determining fuel taxes owed because, for example, only fuel used for propulsion purposes is taxed. Vessel operators may overstate or understate the gallons of fuel claimed for non-propulsion purposes, especially when the fuel is drawn from the same tank as the vessel's propulsion engines.
The IRS also does not have access to proprietary Corps of Engineers data, such as vessel identification and route data, that may be useful in evaluating whether taxpayers are under-reporting their fuel taxes.Though IRS is using the Corps' public waterborne commerce and lock performance data, obtaining the proprietary data could help enhance IRS efforts to ensure compliance and potentially increase fuel tax revenues.
GAO identified a potential alternative collection method. Taxing the fuel at the wholesale or vendor level effectively removes the operators' tax-filing burden. This method could increase compliance, according to Department of the Treasury officials, as there would likely be fewer taxpayers responsible for reporting the fuel tax, but there could be increased administrative costs for operators seeking to file refunds for taxes paid on fuel used on nontaxable waterways or for non-propulsion purposes.
Fuel-monitoring systems and Global Positioning System-enabled software could facilitate accurate fuel consumption readings and thus tax reporting under the current system, but according to vessel operators, the cost to equip vessels, such as towboats and tugboats, may be high, especially for smaller operators.
The GAO recommends that IRS should consult with the Corps to explore options to obtain relevant proprietary data to enhance efforts to ensure compliance with the inland waterways fuel tax. The IRS agreed with the recommendation.
Download the report HERE