Uncertainties About the Definition and Scope of the Property Concept May Reduce Windfall Profit Tax Revenues

GGD-82-48: Published: May 13, 1982. Publicly Released: May 13, 1982.

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GAO surveyed the Treasury Department's and Internal Revenue Service's (IRS) administration of the Crude Oil Windfall Profit Tax Act of 1980. The Act contains a target revenue amount to be collected over an approximate 10-year period. The basic determinant of the windfall profit tax rate is property, a concept incorporated into the Act by reference to the Department of Energy (DOE) regulations. Thus, property has the same meaning for windfall profit tax rate purposes as it has for DOE price control purposes. The property concept is singularly important because it controls the category or tier of crude oil which establishes the applicable windfall profit tax rate.

Despite its importance, GAO found that considerable uncertainty surrounds the property concept within IRS. Although the property concept is fundamentally important to the administration of the windfall profit tax, it has been afforded little attention by Treasury and IRS. GAO attributes this to the complexity of the tax-rate structure and the fact that Treasury and IRS have been faced with an enormous task in seeking to develop and implement a compliance program. District office personnel did not understand the property concept and its relation to tax tiering, and the IRS examiners did not know that the term property, as incorporated from DOE regulations, refers to the right to produce oil as that right existed in 1972. The seriousness of the findings prompted GAO to discuss the property issue with a representative from the IRS Southwest Regional Office. It was determined that the examiners had verified oil tier classifications without determining the status of each lease with reference to the base year. To the extent possible, the Southwest Region has initiated corrective action. However, the property issue is not limited to one region, but has programwide significance. To prevent compliance abuses, the definition of property must be fixed at a particular point in time. Otherwise, the windfall profit tax could be reduced substantially through creation of new properties.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of the Treasury should require the Commissioner of Internal Revenue to provide IRS examiners with more specific guidance on how to make property determinations.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of the Treasury should give a high priority to clarifying the property concept for windfall profit tax purposes. Specifically, the Secretary should clarify the definition and scope of property for tax tier purposes, including the correct reference year for making property determinations and the proper treatment of land tracts which were unleased and/or did not produce oil in 1972.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of the Treasury should require the Commissioner of Internal Revenue to revise windfall profit tax training materials.

    Agency Affected: Department of the Treasury

 

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