Pursuant to a congressional request, GAO reviewed the major tax benefits used by the pharmaceutical industry, focusing on: (1) the characteristics of the companies claiming research tax credits; and (2) whether Internal Revenue Service (IRS) tax administration efforts adequately ensure that pharmaceutical companies comply with tax credit legislation.

GAO found that: (1) between 1981 and 1990, the pharmaceutical industry's share of research tax credits increased by 12 percent and totalled $1.24 billion; (2) large pharmaceutical companies with assets of $250 million or more are the primary beneficiaries of research tax credits; (3) although small biotechnology companies invest more of their resources in research and development than large companies, they do not have sufficient tax liabilities to benefit from the tax credit; (4) the research tax credit is difficult for IRS to administer because auditors cannot adequately distinguish research stages, audit issues are often highly technical, and proposed regulations are confusing; and (5) although Treasury plans to clarify and finalize tax credit regulations, the regulations are not expected to distinguish between research for product innovation and research for product development.