Tax Expenditures:

Available Data Are Insufficient to Determine the Use and Impact of Indian Reservation Depreciation

GAO-08-731: Published: Jun 26, 2008. Publicly Released: Jul 28, 2008.

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Indians lag behind other Americans on many key economic indicators, such as median household income. To improve such conditions, Congress in 1993 created Indian reservation depreciation (IRD), a tax expenditure offering accelerated depreciation for property invested on Indian reservations. GAO was asked to (1) describe which taxpayers claimed IRD, (2) analyze the effect of IRD on the economic development of reservations, and (3) describe the tax benefits offered by IRD. GAO used the Internal Revenue Service's (IRS) Statistics of Income data to try to identify IRD users and measure IRD's effects; however, the data were unreliable for those purposes. GAO also calculated examples of potential IRD tax benefits for different property classes.

Available data are insufficient to identify users of the Indian reservation depreciation (IRD) provision. Although IRD is to be calculated using unique recovery periods, this and other information that taxpayers report are not sufficient to infer from the tax returns which taxpayers are using IRD, in part because taxpayers appear to have reported IRD in combination with other depreciation on their tax forms. In some instances, taxpayers also appear to have made mistakes filling out Form 4562, listing recovery periods inconsistent with IRD when the deduction and basis amounts they reported suggest IRD was in fact used. Data are also insufficient to determine whether IRD increases economic development on Indian reservations. Taxpayers are not required to identify the reservation on which the depreciated property is located. This location data is critical for determining the effects of IRD on the economic development of reservations. Such a determination requires linking IRD investment to economic indicators on specific reservations and controlling for the influence of other economic trends, such as the growth of gaming facilities on these reservations. The lack of data on IRD also may affect how well the Internal Revenue Service (IRS) enforces IRD compliance with the tax law. IRS does not track compliance issues related to IRD and could fail to detect taxpayers who claim IRD deductions but do not in fact have property on a reservation. IRS officials said getting additional information could be costly to obtain, but auditors told us it would be useful. In fact, IRS collects data on some other tax expenditures that allow closer examination of compliance and use. For example, the low-income housing tax credit requires taxpayers to list the address for the property they are claiming, and New Markets Tax Credits users report identifying information for the Department of the Treasury. Tax benefits can accrue to taxpayers who use the IRD schedule because they can achieve higher depreciation deductions, in present value terms, than a taxpayer who claims a depreciation deduction under the usual schedule for the same type of property over the entire life of the property. For example, on a $50,000 property, the savings range from about 1 percent savings over the normal schedule to 22 percent savings, depending on the type of property depreciated. The greatest potential tax savings come from IRD claimed for property with the longest recovery periods. Additional bonus depreciation, when available, however, may decrease the incentive to use IRD.

Matter for Congressional Consideration

  1. Status: Open

    Comments: As of March 2014, we continue to monitor for congressional action.

    Matter: Given the lack of information on IRD users and where property claimed under IRD is placed in service, Congress may wish to consider requiring IRS to collect information identifying which taxpayers use IRD and the reservation and/or address where they have placed the property into service. In deliberating additional requirements, Congress should weigh the need for more IRD information with the associated costs of collecting and analyzing the information as well as the effects on IRS's other priorities.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: In our April 2008 report on Indian reservation depreciation (IRD), we found that taxpayers made mistakes in reporting the special recovery periods for depreciating property on Indian reservations, which limits IRS's ability to assess the accuracy of the depreciation deduction. Consequently, we recommended that IRS change instructions on Form 4562 to better ensure that taxpayers report the correct recovery periods for depreciating Indian reservation property. In its official response to our report, IRS said that it would consider changes to the instructions to better clarify how to depreciate property on Indian reservations. On November 14, 2008, IRS released new instructions for filling out Form 4562, which unlike in past years, contained a paragraph clarifying how to report depreciated property on Indian reservations and gave an example of what to write on Form 4562. The change will help IRS better identify taxpayers claiming IRD and help taxpayers report depreciation on Indian reservations more accurately.

    Recommendation: The Commissioner of Internal Revenue should change the instructions on the directions for Form 4562 so that it is clear that taxpayers depreciating IRD property should use different recovery periods. The updated directions also should include an example of how to fill out Form 4562 properly.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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