Tax Policy: Deducting Interest on Funds Borrowed to Purchase or Carry Tax-Exempt Bonds
GGD-89-14
Published: Dec 19, 1988. Publicly Released: Dec 19, 1988.
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Highlights
In response to a congressional request, GAO reviewed various Internal Revenue Code (IRC) provisions that prohibited deduction of interest expenses associated with borrowing funds to purchase or carry tax-exempt obligations to: (1) determine whether the Internal Revenue Service (IRS) could adequately administer the provisions; (2) quantify potential compliance problems; and (3) evaluate the effects of establishing a total mechanical disallowance rule for corporate taxpayers.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | 1. The Commissioner of Internal Revenue should study the costs and benefits of requiring information reporting for tax-exempt interest income. |
IRS TCMP exams will collect some limited information on interest income, but IRS believes it cannot obtain data to do a thorough cost-benefit study.
|
| Internal Revenue Service | 2. The Commissioner of Internal Revenue should consider changing Schedule L on the U.S. Corporation Income Tax Return to separately identify tax-exempt securities from other securities. |
The tax year 1989 Corporation Tax Form will separately identify tax-exempt securities from U.S. Government securities. Corporate Form 1120, partnership, and 1120-S all changed.
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