The construction and maintenance of our nation's system of roads and highways is a major financial challenge. A majority of the responsibility for financing public roads and highways lies with state governments. Almost all states have special funds called Road Funds into which user fees and taxes associated with highway use are deposited. Unfortunately, Road Fund revenue growth has been slow due to the relative inelasticity of its revenue sources. At the same time, states face resistance to tax increases designed to enhance Road Fund revenues. One method of increasing such revenues, without increasing taxes, is to reduce evasion. Increased auditing is the primary means available to the states to reduce evasion. Kentucky utilized TEA-21 federal funds to create an innovative pilot program to identify the best practices and methods for auditing tax payers of transportation related taxes. This program involved a four-year experimental program called the Fuel Tax Compliance Unit (FTCU) program. This study analyzes the overall effectiveness of the FTCU as well as specific auditing strategies employed by the FTCU staff.

The FTCU initiative benefited Kentucky's Road Fund in two ways. First, enhanced auditing increased Kentucky Road Fund revenue collections as a result of assessments and subsequent collections generated by FTCU auditors. Second, and perhaps more importantly, taxpayer behavior was probably affected by the perceived increased likelihood of an audit as information regarding the enhanced audit initiative spread among commercial carriers. As a consequence, voluntary tax payments and Road Fund revenue was probably increased as a result of this initiative. The assessment of these indirect audit impacts was beyond the scope of this study.

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The contents of this report reflect the views of the author who is responsible for the facts and accuracy of the data presented herein. The contents do not necessarily reflect the views or policies of the University of Kentucky, the Kentucky Transportation Center, nor the Federal Highway Administration. This report does not constitute a standard, specification, or regulation. The inclusion of manufacturer names and trade names are for identification purposes and are not to be considered as endorsements.