The Passage of Late Legislation and Incorrect Computer
Programming Delayed Refunds for Some Taxpayers During
the 2011 Filing Season
September 28, 2011
Reference Number: 2011-40-128
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Redaction Legend:
2(f) = Risk Circumvention of Agency Regulation or Statute
Phone
Number | 202-622-6500
Email Address | TIGTACommunications@tigta.treas.gov
Web Site |
http://www.tigta.gov
HIGHLIGHTS
THE PASSAGE OF LATE LEGISLATION AND
INCORRECT COMPUTER PROGRAMMING DELAYED REFUNDS FOR SOME TAXPAYERS DURING THE
2011 FILING SEASON
Highlights
Final
Report issued on September 28, 2011
Highlights of Reference Number:
2011-40-128 to the Internal Revenue Service Commissioner for the
Wage and Investment Division.
IMPACT ON TAXPAYERS
One of the challenges the Internal Revenue Service
(IRS) confronts each year in processing tax returns is the implementation of
new tax law changes. The passage of three
significant tax laws affected the 2011 Filing Season. As of April 30, 2011, the IRS received 130.7
million individual income tax returns and issued approximately 98.2 million
refunds totaling $277.1 billion.
WHY TIGTA DID THE AUDIT
The
filing season is critical for the IRS because it is during this time that most taxpayers
file their tax returns and contact the IRS if they have questions about
specific tax laws or filing procedures.
The overall objective of this review was to evaluate whether the IRS
timely and accurately processed individual paper and electronically filed tax
returns during the 2011 Filing Season.
WHAT TIGTA FOUND
The
IRS timely processed the majority of individual income tax returns during the
2011 Filing Season. However, because
of the late passage of legislation, taxpayers claiming certain deductions or
itemizing deductions were delayed in filing their individual tax returns. Electronic Return Originators held approximately 6.5 million electronically
filed tax returns and the IRS had received and held approximately
100,000 paper tax returns until February 14.
As
of April 30, 2011, the IRS had identified 775,723 tax returns with $4.6 billion
claimed in fraudulent refunds and prevented the issuance of $4.4 billion (96 percent)
of those fraudulent refunds. The IRS
also selected 199,854 tax returns filed by prisoners for fraud screening, a 256
percent increase compared to last year.
However,
our review found that implementing some legislative provisions such as the
First‑Time Homebuyer Credit, Adoption Credit, Nonbusiness Energy Property
Credits, and Plug‑in Electric and Alternative Motor Vehicle Credits resulted
in an inability to identify 140,596 taxpayers erroneously claiming $140.2 million
when tax returns
are processed. In
addition, 26,649 taxpayers had their Homebuyer Credit inaccurately processed, $5.8 million
in repayment amounts was not assessed, and $675,063 in repayment amounts was
erroneously assessed.
WHAT TIGTA RECOMMENDED
TIGTA
made a number of recommendations. The
most significant included that the IRS ensure taxpayers identified as erroneously claiming
the credits and deductions detailed in the report are entitled to claim them, initiate
a recovery program for erroneously paid claims, revise the programming for Homebuyer Credit repayments, and seek math error authority for
certain credits detailed in the report.
The
IRS agreed with 12 of 14 recommendations and plans to take corrective action. For the two disagreed recommendations, TIGTA continues
to believe the IRS needs to take action.
Related to our recommendation to establish a Homebuyer Credit Entity
Section for each taxpayer who received the Homebuyer Credit rather than
grouping information by primary and secondary Social Security Number, the lack
of IRS action could result in continued problems, with delays in refunds to
some taxpayers. For the issue of allocating
installment repayments, TIGTA does not agree that the IRS’s issuance of an
alert will ensure that tax examiners accurately allocate installment
repayments.
September 28, 2011
MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – The Passage of Late Legislation and Incorrect Computer Programming Delayed Refunds for Some Taxpayers During the 2011 Filing Season (Audit # 201140029)
This report presents the results of our review to evaluate whether the Internal Revenue Service (IRS) timely and accurately processed individual paper and electronically filed tax returns during the 2011 Filing Season.[1] This review is included in our Fiscal Year 2011 Annual Audit Plan and addresses the major management challenge of Implementing Health Care and Other Tax Law Changes.
The IRS agreed with 12 of our 14 recommendations. For the two disagreed recommendations, we continue to believe the IRS needs to take action. Related to our recommendation to establish a Homebuyer Credit Entity Section for each taxpayer who received the Homebuyer Credit rather than grouping information by primary and secondary Social Security Number, the lack of IRS action could result in continued problems with delays in refunds to some taxpayers. For the issue of allocating installment repayments, we do not agree that the IRS’s issuance of an alert will ensure that tax examiners accurately allocate installment repayments. These issues are discussed in more detail in the report.
Management’s complete response to the draft report is included in Appendix VII.
Copies of this report are also being sent to the IRS managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Michael E. McKenney, Assistant Inspector General for Audit (Returns Processing and Account Services), at (202) 622-5916.
Taxpayers
Appear to Be Erroneously Claiming Motor Vehicle Deductions
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Outcome Measures
Appendix
V – List of Tax Forms and Schedules Processed Through the Modernized E-File System
Appendix
VI – Glossary of Terms
Appendix
VII – Management’s Response to the Draft Report
Abbreviations
|
e-file(d);
e-file(ing) |
Electronically file(d); electronic
filing |
|
IRS |
Internal Revenue Service |
|
MeF |
Modernized e-File |
|
QMV |
Qualified Motor Vehicle |
|
SSN |
Social Security Number |
|
TIGTA |
Treasury Inspector General for Tax
Administration |
|
TY |
Tax Year |
The IRS received 130.7 million individual tax returns as of April
30, 2011. Three significant tax laws
affected the 2011 Filing Season.
The filing season[2] is critical for
the Internal Revenue Service (IRS) because it is during this time that most taxpayers
file their income tax returns and contact the IRS if they have questions about
specific tax laws or filing procedures. As
of April 30, 2011, the IRS received 130.7 million individual income tax
returns. One of the challenges the IRS confronts each year
in processing tax returns is the implementation of new tax law changes. Before
the filing season begins, the IRS must identify new tax law and administrative
changes and, when necessary, revise the various tax forms, instructions, and
publications. It must also reprogram its
computer systems to ensure tax returns are accurately processed. Problems with tax return processing could
delay refunds, affect the accuracy of accounts, and generate incorrect notices. Along with the usual required updates,[3] three significant
tax laws affected the 2011 Filing Season:
·
Tax
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010[4] – Enacted on December 17, 2010, this law extended a number of tax
deductions and credits, including the Earned Income Tax Credit and the American
Opportunity Tax Credit. This new law required the IRS to reprogram
its computer systems to accommodate three provisions extended by this law: 1) State and local sales tax deduction, 2)
higher education tuition and fees deduction, and 3) educator expenses deduction. As a result, taxpayers who claimed one or
more of these three deductions or who itemized deductions on their U.S. Individual
Income Tax Return (Form 1040), Itemized Deductions (Schedule A), were unable to
file their tax returns until February 14, 2011.
Based on historical filing patterns, the IRS anticipated the filing
delay would affect approximately 9 million taxpayers; however, only approximately
6.6 million taxpayers were affected as of February 14, 2011.
·
Housing
and Economic Recovery Act of 2008[5] – Enacted on July 30, 2008, this law includes a provision that requires taxpayers
who purchased a home between April 9 and December 31, 2008, and claimed
the First-Time Homebuyer Credit (Homebuyer Credit) to begin repaying the credit
on their Tax Year (TY) 2010 tax return.
The credit is intended to be repaid over 15 years, in equal annual
installments. More than 1.5 million taxpayers
were required to begin repaying the credit on their TY 2010 tax returns.
·
The
Patient Protection and Affordable Care Act (Affordable Care Act)[6] – Enacted on March 23, 2010, this law included
a provision that increased the Adoption Credit from $12,150 to $13,170 and made
the tax credit refundable.[7]
Figure 1:
Summarization of Repayments and Claims for the First-Time
Homebuyer Credit and Claims for the Adoption Credit as of April 30, 2011
|
|
Tax Returns With These Credits as of April
30, 2011 |
Amount Repaid/Claimed as of April 30,
2011 |
|
First-Time Homebuyer
Credit |
|
|
|
·
Taxpayers Reporting Homebuyer Credit Installment Repayments |
792,554 |
$378 million repaid |
|
· Taxpayers Filing New Claims
for the Homebuyer Credit |
271,390 |
$1.9 billion claimed |
|
Adoption Credit |
72,330 |
$895 million claimed |
Source:
Treasury Inspector General for Tax Administration (TIGTA) analysis of
2011 Filing
Season tax return volumes through April 30, 2011.
During the 2011 Filing Season,
the IRS processed individual income tax returns at four Wage and Investment
Division Submission Processing sites.[8] All four sites processed paper individual
income tax returns, and all but the Atlanta, Georgia, Submission Processing
Site also processed electronically filed (e-filed)
individual income tax returns. Andover,
Massachusetts, and Philadelphia, Pennsylvania, also processed e-filed individual income tax returns.
This
review was performed at the Wage and Investment Division Headquarters in
Atlanta, Georgia; the Submission Processing function offices in Lanham,
Maryland; and the Austin Submission Processing Site in Austin, Texas, during
the period December 2010 through June 2011. We conducted this performance audit in
accordance with generally accepted government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit objective.
We believe that the evidence obtained
provides a reasonable basis for our findings and conclusions based on our audit
objective. Detailed information on our
audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in
Appendix II.
The Majority of Individual Income Tax Returns Were Timely Processed; However, Late Legislation Caused a Delay in Processing Some Tax Returns
Programming to implement late legislation required Electronic
Return Originators to hold approximately 6.5 million e-file tax
returns to be transmitted on February 14, 2011.
The IRS timely processed the
majority of individual income tax returns during the 2011 Filing Season and issued
associated tax refunds within the required 45 calendar days of the April 18, 2011,
due date. The majority of taxpayers
could begin filing their TY 2010 tax returns on January 14, 2011. However, because of the late passage of the Tax
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (enacted December 17, 2010), taxpayers claiming certain
deductions or itemizing deductions (see page 1) had to wait until February 14,
2011, to file their individual tax returns.
The delay affected both taxpayers who e-filed and paper filed. The IRS reported it had Electronic Return
Originators hold
approximately 6.5 million e-file tax returns for transmission until
February 14, 2011. In addition, as of
February 11, 2011, the IRS had received and held for processing
approximately 100,000 paper tax returns.
As of April 30, 2011, the IRS received nearly 130.7 million tax returns. Of those, 105 million (80 percent) were e-filed and nearly 25.8 million (20 percent) were filed on paper (a decrease of 28.1 percent in paper-filed returns from this time last year).[9] In addition, nearly 98.2 million tax refunds totaling approximately $277.1 billion were issued. Figure 2 presents a summary of tax return filing statistics as of April 30, 2011.
Figure 2: Comparative Filing Season Statistics as of April 30, 2011
|
Cumulative Filing Season Data |
2010 Actual |
2011 Actual |
% Change |
|
Individual
Income Tax Returns |
|
|
|
|
Total
Returns Received (in thousands) |
129,268 |
130,706 |
1.1% |
|
Paper Returns Received (in
thousands) |
35,807 |
25,756 |
-28.1% |
|
E-Filed Returns Received (in
thousands) |
93,460 |
104,951 |
12.3% |
|
Practitioner Prepared |
59,784 |
67,082 |
12.2% |
|
Home Computer |
33,677 |
37,854 |
12.4% |
|
Free File (also included in Home Computer total) |
3,119 |
3,054 |
-2.1% |
|
Fillable Forms (also included in Home Computer total) |
282 |
410 |
45.5% |
|
Refunds |
|
|
|
|
Total
Number Issued (in thousands) |
96,292 |
98,213 |
2.0% |
|
Total
$ (in millions) |
$277,983 |
$277,149 |
-0.3% |
|
Average $ |
$2,887 |
$2,822 |
-2.3% |
|
Total
Number of Direct Deposits (in thousands) |
70,332 |
74,653 |
6.1% |
|
Total
Direct Deposit $ (in millions) |
$220,044 |
$227,211 |
3.3% |
Source: IRS 2011 Weekly Filing Season Reports. Totals and percentages may not compute to those presented due to rounding.
The e-filing rate and use of fillable forms is higher;
however, use of the Free File Program continues to decrease
This year marks the 21st year of e-filing, with the IRS approaching a major milestone of one billion e-filed tax returns processed since implementation. As of April 30, 2011, e-file volumes were 12.3 percent higher than the volumes for the same period in 2010. The e-file volumes increase in Calendar Year 2011 was partially due to the preparer mandate.[10] The largest increase over last year (12.4 percent) is from taxpayers e-filing their tax returns from home computers, which includes Free File and fillable forms.
For the third year, the IRS and its private-sector tax software partners are offering Free File Fillable Tax Forms, which opens up the Free File Program to nearly everyone, with no income limitations. In comparison to the 2010 Filing Season, more taxpayers are taking advantage of this filing option. Approximately 410,000 taxpayers used Fillable Forms, which is an increase of 45.5 percent over the same period in 2010. However, participation in the traditional Free File Program has decreased by 2.1 percent compared to the same period in 2010. The traditional IRS Free File Program is a free Federal online tax preparation and e-filing program for eligible taxpayers developed through a partnership between the IRS and the Free File Alliance LLC (a group of private-sector tax preparation companies). The program enables eligible taxpayers to use commercial tax software for free, accessible only through the IRS’s web site, IRS.gov.
The IRS continues to transition the e-filing of individual tax returns to the Modernized e-File (MeF) system
The
IRS continues the transition from its existing e-filing platform, the Legacy e‑File
system, to a modernized, Internet-based system, the MeF system. The MeF system provides real-time processing
of tax returns and extensions that will improve error detection, standardize
business rules, and expedite acknowledgments for the electronic receipt of tax
returns. The IRS first deployed the MeF
system for individual tax returns during the 2010 Filing Season. The first phase of the MeF system for
individual income tax returns included the Form 1040, Application for
Automatic Extension of Time to File U.S. Individual Income Tax Return (Form
4868), and 21 forms and schedules related to the Form 1040 for TY
2009. For the 2010 Filing Season, the
MeF system successfully accepted 816,012 individual tax returns for processing.
For the 2011 Filing Season, the MeF system did not provide for the
filing of any additional tax forms or schedules. The primary difference between the 2010 and
2011 Filing Season releases is the ability for individual taxpayers to file
prior year tax returns. Beginning with
the 2011 Filing Season, the MeF system will be able to accept both TY 2009
and TY 2010 tax returns. Appendix V
details specific tax forms and schedules that are accepted by the MeF system
for individual filers. The number of
individual tax returns transmitted through the MeF system as of April 30, 2011,
(9.2 million) is significantly lower than the 35 million individual tax returns
the IRS anticipated for the 2011 Filing Season.
We have a separate review to evaluate the IRS’s continued efforts to
transition individual tax return e-filing
to the MeF system. The overall objective
of that review is to evaluate the continued implementation of the MeF system to
determine whether individual income tax returns will be accurately and timely
processed and whether sufficient progress is being made to replace the Legacy e-File system. As such, we are not including specific
recommendations in this audit report.
More erroneous refunds are being detected and stopped
Unscrupulous taxpayers continue to submit tax returns with false income documents to the IRS for the sole purpose of receiving a fraudulent tax refund from the Government. As of April 30, 2011, the IRS reported that it had identified 775,723 tax returns with more than $4.6 billion claimed in fraudulent tax refunds and prevented the issuance of more than $4.4 billion (96 percent) of the refunds.[11] This represents a 171 percent increase in the number of fraudulent tax returns identified as of this period last filing season (286,670). Figure 3 shows the number of fraudulent tax returns identified by the IRS for Processing Years 2008 through 2010, as well as the tax refund amounts that were identified and stopped.
Figure 3:
Fraudulent Tax Returns and Refunds
Identified and Stopped in Processing Years 2008–2010
|
Processing Year |
Number of Fraudulent Refund Tax Returns Identified |
Number of Fraudulent Refund Tax Returns Stopped |
Amount of Fraudulent Refunds Identified |
Amount of Fraudulent Refunds Stopped |
|
2008 |
380,656 |
306,128 |
$1,959,992,377 |
$1,683,912,973 |
|
2009 |
457,369 |
369,257 |
$2,988,945,590 |
$2,517,094,116 |
|
2010 |
971,511 |
881,303 |
$7,300,996,194 |
$6,931,931,314 |
Source: IRS
fraudulent tax return statistics for Processing Years 2008–2010.
In addition, the screening of prisoner tax returns has increased significantly. In a prior TIGTA review assessing the IRS fraudulent tax return screening process,[12] we reported that the majority of tax returns identified as being filed by prisoners are not sent to a tax examiner for screening to assess the potential that the tax return is fraudulent. As of April 30, 2011, the IRS reported that it had selected 199,854 tax returns filed by prisoners for screening. This represents a 256 percent increase in the number of prisoner tax returns identified and sent to screening when compared with the same period last processing year. Figure 4 shows a comparison of the number of tax returns filed by prisoners that were sent to a tax examiner for screening as of the end of April for Processing Years 2010 and 2011.
Figure 4:
Prisoner Tax Returns Identified for Screening
in Filing Seasons 2010 and 2011 (as of the end of April)
|
Processing
Year |
Number
of Prisoner |
Prisoner
Tax Return Percentage Change |
|
2010 |
56,101 |
|
|
2011 |
199,854 |
256% |
Source:
IRS fraudulent return statistics for Processing Years 2010 and 2011 as
of
the end of April.
Not many taxpayers elected to participate in a new pilot which provides the option to receive tax refunds on a prepaid debit card
The Department of
the Treasury launched a pilot program this tax season offering taxpayers a
safe, convenient, and low-cost financial account for the electronic delivery of
Federal tax refunds. The new account option has the potential to
streamline the tax administration process.
For the pilot, the Department of the Treasury mailed letters to 808,000 taxpayers
nationwide who are likely to have low or
moderate income. The letters contained
different offers inviting these taxpayers to consider activating a
MyAccountCard Visa® Prepaid Debit Card in time to have their
TY 2010 Federal tax refund direct deposited to the card. The MyAccountCard is a reloadable, prepaid
Visa debit card that is accepted everywhere Visa debit is accepted.
The letters mailed
to taxpayers about the MyAccountCard contain information about the card’s
features, including free services and the fee structure for optional services.
The information also explains how to sign up and how to use the card to
receive a Federal tax refund and conduct everyday financial transactions.
As part of the pilot, the Department of the Treasury randomly offered 8 different
variations of the MyAccountCard to 101,000 taxpayers each in order to evaluate
which product features, fee structures, and marketing messages generate the
greatest positive response from taxpayers.
The results of the pilot will help determine the benefits and
feasibility of a card account as an integrated part of the tax filing and
refund process.
As of April 30,
2011, 239 taxpayers took advantage of this option for tax refunds totaling more
than $638,000. The response rate appears
to be lower than the average direct mail offer rates; however, this program is
new for taxpayers and was intentionally not publicized in order not to
bias the offer test. In addition, a large percentage of the
population has their tax returns prepared by a tax return preparer, and any fee
for these services cannot be paid for with the tax refund.
Taxpayers have increased their use of the savings bond and split refund option
Beginning in Calendar Year 2010, taxpayers had the ability to use their tax refunds to purchase United States Series I Savings Bonds by requesting them on their tax returns. Taxpayers may request any portion of their refund that is an exact multiple of $50 and less than $5,000 be used to purchase up to 3 savings bonds for themselves or other persons by simply filling out the Allocation of Refund (Including Savings Bond Purchases) (Form 8888). As of April 30, 2011, 30,263 taxpayers requested savings bond tax refunds totaling more than $10.8 million. This represents a 26 percent increase over the number of taxpayers electing to convert their tax refunds to savings bonds during the same period last filing season.
Taxpayers can also elect to have Federal income tax refunds split and electronically deposited in up to three accounts (checking, savings, or Individual Retirement Arrangement) and up to three different United States financial institutions, including banks, brokerage firms, or credit unions. Form 8888 must be prepared for this option. As of April 30, 2011, 757,561 taxpayers requested split tax refunds totaling more than $3.2 billion between 2 or 3 different checking and savings accounts. The number of taxpayers requesting the split refund option increased 36 percent over the same period in 2010, and the amount of refunds requested increased by almost 35 percent.
Implementing new laws for the 2011 Filing Season required
the IRS to update many tax products and perform extensive computer programming
in an effort to ensure tax returns would be processed accurately. We selected 25 tax products to review (13 tax
forms, 5 instructions, and 7 publications) that required updating due to new
laws. Our review determined that the 25
tax products were updated clearly and accurately in accordance with the new tax
law provisions. Furthermore, of the significant new or expanded credits/deductions we
reviewed, the IRS took actions to minimize taxpayer burden and to reduce the risk
of improper claims. For example:
The IRS also addressed issues
we reported related to whether it
timely and accurately processed individual paper and e-file tax returns during the 2010 Filing Season.[13] These included:
However, our review found that implementing late legislation and some legislative provisions presented challenges for the IRS. These challenges resulted in delays in completing computer programming, delays in the ability of taxpayers to file tax returns with certain deductions, and the inability to identify and prevent some erroneous claims at the time tax returns are processed.
Implementing Homebuyer Credit Provisions Continues to Present Challenges for the Internal Revenue Service
We reported in our 2010 Filing Season report that erroneous Homebuyer Credits were claimed by taxpayers with ineligible home purchase dates. As of May 28, 2010, we had identified 10,581 taxpayers claiming $65.6 million in Homebuyer Credits that appeared to be erroneous. During this review, we identified an additional 4,417 taxpayers who filed tax returns during the period May 30 through December 25, 2010, who were allowed $27.8 million in erroneous Homebuyer Credits.
·
2,812
taxpayers were allowed $16.4 million in erroneous Homebuyer Credits as a long‑time
resident with a purchase date prior to November 7, 2009. To qualify for this Credit, the law specifies
that taxpayers must complete the purchase of the new home after November 6, 2009.
·
1,605
taxpayers were allowed $11.4 million in erroneous Homebuyer Credits with a home
purchase date subsequent to the filing date of the tax return. To qualify for the Homebuyer Credit,
taxpayers must complete the purchase of the new home before claiming the
credit.
We
alerted the IRS on February 23, 2011, of our concerns regarding the allowance
of erroneous Homebuyer Credits based on ineligible purchase dates. In
response, the IRS agreed to use third‑party property records by July 2011
to verify whether the taxpayers we identified were entitled to the credit and
to continue identifying erroneous claims based on ineligible purchase dates.
In addition, the IRS
experienced difficulties in implementing its Homebuyer Credit repayment
process. As of April 30, 2011, we
identified 26,649 taxpayers for whom their Homebuyer Credit was inaccurately
processed, which resulted in the IRS not assessing more than $5.8 million in
repayment amounts owed but not paid and $675,063 erroneously assessed as a
repayment amount in excess of what was owed by the taxpayer. These difficulties resulted in:
·
Significant
delays in providing refunds to taxpayers with repayment requirements.
·
Inaccurate
processing of repayments, including erroneously refunding repayments back to
taxpayers and not properly assessing repayment amounts owed but not paid.
·
Crediting
taxpayers for more than the actual amount repaid and erroneously assessing higher
amounts than required to be repaid.
Taxpayers
with repayment requirements experienced significant refund delays
Refunds
for some taxpayers with Homebuyer Credit repayment requirements were delayed up
to 4 months or more because of programming issues. As
early as March 23, 2011, the IRS reported that programming issues were affecting
a small percentage of taxpayers with Homebuyer Credit repayment
requirements. The IRS announced that it
had assigned additional staff and resources to address the issues
promptly. These
programming issues primarily affected:
Due to programming errors,
refunds were delayed for some taxpayers with Homebuyer Credit repayment
requirements.
·
Taxpayers who filed
as married filing jointly and received the Homebuyer Credit on a 2008 home
purchase.
·
Taxpayers who
received the Homebuyer Credit and sent in payments for more than the amount
that was required.
·
Taxpayers who
received the Homebuyer Credit and were reporting the sale or disposition of
their principle residence.
On May
20, 2011, the IRS announced that, while several programming issues had been
resolved, it was still encountering issues such as mismatches related to the
names or Social Security Numbers (SSN) on either the TY 2008 or the TY 2010 tax
return and problems with a repayment amount that did not match the expected
repayment amount for some taxpayers. The
IRS reported that as of May 23, 2011, there were approximately 9,000 taxpayers
whose tax returns were still being held as unresolved. However, the IRS was unable to provide a
definitive number of taxpayers who were affected by programming errors.
In our review of the repayment of
Homebuyer Credits,[14] we identified concerns related
to the processing of Homebuyer Credits. ***************************2(f)************************************************* ********************************************************************************2(f)***************************** ****************************2(f)*****************************************. The IRS’s current practice is to associate
Homebuyer Credit Entity information for a primary and secondary taxpayer under
the primary taxpayer’s SSN, instead of separating each taxpayer’s Homebuyer
Credit information under his or her own SSN.
The Entity Section
contains Homebuyer Credit data for the primary and secondary taxpayer (for
married taxpayers filing jointly), including the amount of the credit received
and the year in which the home was purchased.
The Homebuyer Credit Entity Section will also show the cumulative amount
of the credit that has been repaid.
We notified the IRS of our
concerns on October 29, 2010. We
recommended the IRS modify its computer programming so the Homebuyer Credit
information is reflected under the SSN of each taxpayer that received the
Homebuyer Credit. The IRS did not agree
with this recommendation. This decision contributed
to some of the problems that are delaying refunds to taxpayers.
Some Homebuyer Credit repayments were inaccurately processed
Programming errors caused inaccurate processing of some Homebuyer Credit repayments. As of April 30, 2011, we identified 17,857 taxpayers whose Homebuyer Credit repayments were erroneously refunded back to them or whose repayment amounts owed were not properly assessed. The total amount either refunded erroneously or not assessed was more than $4.4 million.
·
1,901
taxpayers who reported either the required repayment amount or more than the
required repayment amount had $839,130 of the repayments erroneously refunded.
·
15,956
taxpayers who reported repayment amounts less than the required repayment
amount were not properly assessed nearly $3.6 million in additional taxes.
The IRS developed a
process to identify taxpayers who do not report the required Homebuyer Credit
installment repayment amount as an additional tax on their tax return. The IRS established an amount field[15] on its computer systems, which is the amount
the IRS expects the taxpayer to report on the First-Time Homebuyer Credit and
Repayment of the Credit (Form 5405).
When tax returns are filed, the IRS matches the amount reported as an
additional tax on the tax return to the expected amount. If a discrepancy exists, the tax return is
sent to the IRS’s Error Resolution System function for resolution.
However, early in the 2011 Filing Season, we identified that the field in the IRS’s database with the repayment amount expected did not contain an amount for most taxpayers (approximately 80 percent) with a repayment requirement whose tax returns were processed during the period January 22 through February 5, 2011. We alerted the IRS on February 16, 2011, and the IRS responded that the programming was being revised. However, we continued to identify these issues and notified the IRS again in May and June 2011.
Taxpayers were credited for Homebuyer Credit repayment amounts more
than what was repaid or were erroneously assessed more than what was required
to be repaid
On March 23, 2011, the IRS announced that it had to delay tax refunds to
taxpayers who received the Homebuyer Credit for a 2008 home purchase and had a
filing status of married filing jointly.
Joint filers who claimed the credit are responsible separately for half of
the repayment of the credit. The IRS
stated that this delay resulted from having to manually split the repayment
amount between the two taxpayers listed on the joint tax return. These taxpayers submitted a Form 5405 with
their return. Computer programming incorrectly
verified the total amount of the repayment for each taxpayer rather than what
the joint couple owed together. If the repayment
amount was at least equal to the required joint repayment amount, then the programming
would credit only the primary taxpayer for the repayment. The secondary taxpayer’s account would
incorrectly reflect that a repayment was owed because the repayment was not
split and instead was credited to only the primary account. As
of April 30, 2011, we identified 8,792 taxpayers who were joint filers and received
credit for an amount greater than they repaid or were assessed an amount more
than they were required to repay.
·
6,027 taxpayers received payment credits totaling $1.4
million more than what they actually repaid.
While adjusting the affected tax returns, tax examiners erroneously
increased the amount repaid by 50 percent.
The computer program did not correctly split repayment amounts between
primary and secondary filers.
·
2,765 taxpayers were erroneously assessed $675,063
more than what they were required to repay.
While adjusting the affected tax returns, tax examiners erroneously assessed 50 percent
more than the taxpayers were required to repay.
On May 9, 2011, we
alerted IRS to these conditions. We
recommended that the IRS correct the repayment amounts and ensure that
programming changes are made to prevent tax examiners from increasing the
repayment installment amount without increasing the associated tax
liability. The IRS responded that it will
correct the repayment amounts for the 8,792 taxpayers we identified. The IRS noted that it issued procedures to tax
examiners for processing repayments from joint taxpayers. However, the IRS also responded that the
complexity of the Homebuyer Credit and its recordkeeping preclude the recommended
programming changes.
Recommendations
The Commissioner,
Wage and Investment Division, should:
Recommendation 1: Ensure
the 4,417 taxpayers identified as claiming the Homebuyer Credit for ineligible
past purchase dates or future purchase dates are entitled to claim the credit.
Management’s Response: IRS management agreed with this recommendation
and is taking steps to correct the accounts of 4,417 taxpayers not entitled to
the credit. The IRS implemented
processes to identify other individuals who had also claimed the credit with a future
purchase date or who had claimed the long-time resident credit prior to the
implementation date of the provision.
Recommendation 2: Establish a Homebuyer Credit
Entity Section for each taxpayer who received the Homebuyer Credit rather than
grouping information by primary and secondary SSN.
Management’s Response: IRS management agreed with the intent of this
recommendation. However, the IRS has
determined that establishing a Homebuyer Credit Entity Section for each
taxpayer who received the Homebuyer Credit, rather than grouping information by
primary and secondary SSN, is not needed to address the issues identified in the audit report. The issues outlined in our report were not
caused by the absence of First-Time Homebuyer Credit information in the Entity
Section of taxpayer accounts.
Office
of Audit Comment: We disagree
with the IRS’s response to this recommendation. The lack of a unique Homebuyer Credit Entity Section
for each individual contributed to some of the problems that delayed refunds to
taxpayers. We notified the IRS of our
concerns on October 29, 2010, and recommended the IRS modify its computer
programming so the Homebuyer Credit information is reflected under the SSN of
each taxpayer who received the Homebuyer Credit, but the IRS did not take the
recommended action. The lack of IRS
action could result in continued problems with delays in refunds to some
taxpayers.
Recommendation 3: Ensure that the required Homebuyer Credit
installment repayment field is accurately populated with the amount that must
be repaid by each taxpayer.
Management’s Response: IRS management agreed with this recommendation. Error Resolution System programming is in
place to retrieve and retain the data to be displayed by the Error Resolution
System, provided the data are available in the National Account Profile
First-Time Homebuyer Credit database for the taxpayer filing the return. A programming change to the National Account
Profile data file, on April 16, 2011, corrected the problem.
Recommendation 4: Ensure that the tax accounts are corrected for the 17,857 taxpayers who had their Homebuyer Credit repayment erroneously refunded or who owed repayment amounts that were not paid and were not properly assessed.
Management’s Response: IRS management agreed with this
recommendation. The IRS has revised
programming and actions have been taken to recover Homebuyer Credit repayments
erroneously refunded and repayment amounts that were not paid or not properly
assessed.
Recommendation 5: Ensure that the tax accounts are corrected for the 8,792 taxpayers who received an amount
greater than they repaid or who were assessed an amount more than they were
required to repay.
Management’s Response: IRS management agreed with this recommendation
and has already completed the necessary actions to correct the accounts. Actions taken include adjusting the tax and
issuing the appropriate notification to the 2,765 taxpayers whose tax was affected. The accounts of the remaining 6,027 taxpayers
were adjusted to reflect appropriate repayment amounts. Final adjustments to the accounts were
completed in late July 2011.
Recommendation 6: Ensure that programming changes are made to prevent tax examiners from
increasing the installment repayment amount without increasing the associated
tax liability.
Management’s Response: IRS management disagreed with this
recommendation. Systemically preventing
tax examiners from increasing the repayment installment amount is undesirable
because taxpayers
may pay more than the required amount. The
IRS has issued procedures instructing tax examiners of the process to follow
when joint filers each have to repay the First-Time Homebuyer Credit. A Servicewide Electronic Research Program
alert (110446) was issued on June 15, 2011, to reinforce the correct procedures.
Office of Audit Comment: We do not agree that the IRS’s issuance of an
alert will ensure that tax examiners accurately allocate installment
repayments. Our recommendation for a
systemic process would identify situations in which tax examiners erroneously
increase installment repayment amounts without increasing the associated tax
liability. For example, it would
identify if the IRS received a payment of $100 but the tax examiner erroneously
allocated the payment as $150. Our recommendation
was to ensure these types of errors are systemically identified.
Taxpayers Are Erroneously Receiving the Adoption Credit, and the Authority to Address Adoption Credit Noncompliance Is Limited
Our analysis of
Adoption Credit processing controls identified that although the IRS requires taxpayers
to attach documentation to their tax returns supporting Adoption Credit claims,
it does not have math error authority to deny the credits if documentation is
not provided. As a result, tax returns without
required documentation must be sent to the Examination function, increasing costs
for the IRS and burden for the taxpayer.
In addition, some taxpayers are erroneously receiving the Adoption
Credit. As of April 30, 2011, there
were 736 taxpayers who erroneously received more than $4 million in
Adoption Credits. Figure 5 provides an
analysis of the erroneous Adoption Credit claims that were not sent to the Examination
function.
Figure 5: Erroneous Adoption Credit Claims as of April 30, 2011
|
Type of Erroneous Claim |
Number of Claims |
Number Not |
Total Dollar Amount |
|
Inaccurate Unused Adoption Credit Amount Claimed[16] |
11,925 |
499 |
$3,342,708 |
|
Claimed Over the Maximum Limit Per Child Over Multiple
Years |
658 |
237 |
$694,309 |
|
Total |
12,583 |
736 |
$4,037,017 |
Source: TIGTA analysis of the Individual Return
Transaction File and sample review of individual tax returns.
Some refunds were delayed and
IRS additional resources were used because the IRS did not have math error
authority to reject claims with insufficient documentation
As previously
stated, the IRS does not have math error authority to deny the Adoption Credit
at the time tax returns are processed if required documentation is not
provided. Without this authority, the
IRS must deny the credit using the examination process after initial processing
of the returns and related refunds.
On October 29,
2010, we recommended that the IRS work with the Department of the Treasury to seek
legislation from Congress for math error authority. However, the IRS did not agree with the
recommendation and responded that it had developed and implemented sufficient
filters and compliance tools to handle potential Adoption Credit fraud. These filters and compliance tools include
identification of tax returns that do not meet specific requirements for
claiming the Adoption Credit. All tax
returns that do not meet one or more of these requirements are sent to the
Examination function for review.
As of April
30, 2011, the IRS had received 72,330 individual tax returns claiming more than
$895 million in Adoption Credits.
Of the 72,330 Adoption Credit claims, 41,591 (58 percent) met IRS
documentation criteria for sending the tax return to its Examination
function. These claims either had no
required documentation attached to the tax return or the documentation was
invalid or insufficient.[17]
Math error
processing to deny the claims without required documentation at the time the
tax return was processed would have been less burdensome on taxpayers than the
post-processing examinations. For
example, taxpayers would have been notified of the denial of the Adoption
Credit during processing and informed that they could provide the IRS with the
necessary documentation in support of their eligibility. The IRS has a goal to resolve these responses
within 30 days of receipt of the information supporting the individual’s
disagreement with the adjustment.
The IRS was unable
to provide an average time period for resolving Adoption Credit claims sent for
post-processing examinations. The IRS
will not have this information until the end of the fiscal year because of the
limited number of cases closed to date.
However, the IRS estimates that after tax returns are identified as not
meeting the documentation requirements and are selected for examination, taxpayers
should receive notification within 3 to 4 weeks. They have 30 days to respond to the IRS’s
request for the required documentation.
Once the IRS receives the information, it does not have a specific time
period within which to resolve the case.
Taxpayers erroneously claimed
unused Adoption Credit amounts
Prior to TY 2010,
the Adoption Credit was a nonrefundable credit that was limited to the amount
of the tax liability on the tax return. Taxpayers
were allowed to carry any unused amount forward for 5 years. Taxpayers were allowed to claim the Adoption
Credit for qualified adoption expenses plus any amounts carried forward from
prior years up to a maximum limit of $12,150 for each child in TY 2009. Our review identified that taxpayers
erroneously carried forward Adoption Credit amounts. For example:
For TY 2009, Taxpayer A had $10,000 in
qualified adoption expenses, but his tax liability was only $5,000. Therefore, he claimed an Adoption Credit of
$5,000, leaving $5,000 in unused Adoption Credit to be carried forward to the
next year. Then, in TY 2010, Taxpayer A
had $1,000 in new qualified adoption expenses.
He claimed $1,000 in new expenses but claimed $6,000 in unused Adoption
Credit carried forward from the previous year, for a TY 2010 Adoption Credit
total of $7,000. Thus, Taxpayer A
overstated the amount of unused Adoption Credit for which he was eligible. He should have claimed $1,000 in new expenses
and $5,000 in unused Adoption Credit, for a TY 2010 Adoption Credit total
of $6,000.[18]
As of April 30,
2011, we found that 11,925 tax returns overstated unused Adoption Credit claims
by $110.8 million. The IRS caught the
majority of these overstated claims.
However, we identified 499 tax returns with overstated claims that the IRS
did not identify and send to the Examination function. As a result, these taxpayers received $3.3 million
in erroneous Adoption Credits.
We issued an Email
Alert to the IRS on April 5, 2011, that some taxpayers who overstated their
unused Adoption Credit claims had not been selected for audit. We recommended that the IRS implement procedures
to send all tax returns with overstated Adoption Credit claims to the Examination
function and to freeze the refund. IRS
management responded that they reviewed the computer programming and found that
it was not working as intended; the IRS implemented programming corrections on
April 12, 2011.
Taxpayers claimed Adoption Credits over the maximum limit per child
for multiple years
We analyzed individual tax returns claiming
the Adoption Credit in TYs 2008 and 2009 and identified 658 taxpayers who
claimed Adoption Credits for the same child that exceed the allowable
amount. For example:
Taxpayer A was allowed to claim the credit
for qualified adoption expenses of up to $11,650 for TY 2008 and up to $12,150
for TY 2009 for the same child. In TY
2008, Taxpayer A received $11,650 for qualified adoption expenses for 1 child,
plus $15,000 carried forward from TY 2007.
In TY 2009, Taxpayer A again received $12,150 for the same child, plus
$20,000 carried forward from TY 2008.
In total, Taxpayer A received $58,800 in Adoption Credit for the same
child, when Taxpayer A was only entitled to a maximum of $12,150 for the child.[19]
These taxpayers erroneously received more
than $2.2 million in Adoption Credits for 658 children. Although the
IRS has a process to ensure taxpayers do not claim adoption expenses in excess
of the allowed amount in any one tax year, the taxpayers were not limited in
the amount of unused Adoption Credit claimed from a prior year. In addition, prior to this filing season, the
IRS did not have a process to ensure taxpayers do not claim in excess of the
allowed amount when claiming the same child over multiple tax years.
We issued an Email Alert to the IRS on
February 17, 2011, and recommended that the IRS develop a process to prevent taxpayers
from receiving more than the allowable maximum amount of the Adoption Credit
for each child when claiming the credit over multiple tax years. The IRS responded that for the 2011 Filing
Season, it has examination filters in place to address taxpayers claiming more
than the allowable amount after the first year of an Adoption Credit claim. In December 2010, the IRS had identified 421
of the 658 taxpayers we identified. The
remaining 237 taxpayers who were not identified by the IRS had claims totaling
more than $694,000.
Recommendations
The Commissioner,
Wage and Investment Division, should:
Recommendation 7: Verify the claims
on the 499 tax returns that claimed an
incorrect amount of unused Adoption Credit and were not sent to the Examination
function to determine what portion of the Adoption Credit was appropriate.
Management’s Response: IRS management agreed with this recommendation
and has included these cases in their Fiscal Year 2012 Examination plan. The IRS will review these returns and conduct
examinations when warranted.
Recommendation 8: Verify the claims on the 237 tax returns that
claimed over the maximum limit over multiple years but were not selected for
audit by the Examination function to determine what portion of the Adoption
Credit was appropriate.
Management’s Response: IRS management agreed with this recommendation
and has included these cases in their Fiscal Year 2012 Examination plan. The IRS will review these returns and conduct
examinations when warranted.
Legislative
Recommendation
The Commissioner,
Wage and Investment Division, should:
Recommendation 9: Work with the Department of the Treasury to seek math error authority
from Congress for Adoption Credit claims with insufficient documentation.
Management’s Response: IRS management agreed with this recommendation
and will discuss it with the Department of the Treasury, Office of Tax Policy.
Taxpayers Received Erroneous Nonbusiness
Energy Property Credits in Excess of the Maximum Amount Allowed
As of April 30, 2011, we have identified 111,710 taxpayers who erroneously claimed in excess of $76.3 million in Nonbusiness Energy Property Credits. Processes were not developed to ensure taxpayers did not claim more than the maximum allowed $1,500 for the credit for both TY 2009 and TY 2010. In addition, we identified 94 taxpayers filing as married who erroneously claimed in excess of $111,000. These taxpayers were allowed to erroneously claim more than the maximum allowed $3,000 for both TY 2009 and TY 2010.
The American Recovery and Reinvestment Act (Recovery Act)[20] modified the provision for the Nonbusiness Energy Property Credit. The modifications were to encourage the purchase of energy efficient property for an individual’s principal residence that were designed to reduce heat loss during cold months or heat gain during warm months. The Nonbusiness Energy Property Credit allows taxpayers to take a credit of 30 percent of the costs paid or incurred in Calendar Year 2010 for energy efficient products for their principal residence, with a maximum of $1,500 (or $3,000 for married taxpayers filing jointly under certain circumstances).[21]
We alerted the IRS on February 23, 2011, of the above condition and recommended that the IRS immediately develop a process to prevent taxpayers from receiving more than the allowable maximum amount of the Nonbusiness Energy Property Credit. We also recommended the IRS initiate a recovery program for the 111,689 taxpayers that we had identified as claiming more than the allowable maximum amount of the credit as of that point in time. The IRS responded that it had confirmed with Wage and Investment Division Chief Counsel that the IRS does not have the requisite math error authority needed to deny Nonbusiness Energy Property Credits claimed in excess of the $1,500 lifetime limitation provided by Internal Revenue Code Section 25C. The IRS will test a sample of 500 cases from the total number of erroneous claims we identified. The results will be analyzed to determine the volume of cases to be worked based on business results and resource availability.
Recommendation
The Commissioner,
Wage and Investment Division, should:
Recommendation 10: Initiate a recovery program for the review of the 111,804 taxpayers that we identified as claiming more than the 2-year maximum limit of the Nonbusiness Energy Property Credit to recover the $76.4 million in erroneous credits refunded.
Management’s Response: IRS management agreed with this recommendation. As TIGTA notes in the report, the IRS does
not have the legal authority to automatically adjust these returns with math
error authority. Recovery of the credits
must be accomplished by the use of deficiency procedures, which can be a
resource-intensive process. The IRS will
build upon the findings of the subset of these returns that have been
identified for audit to develop a program that will leverage available
resources to maximize recoveries of the credits claimed in excess of allowable
limits.
Legislative
Recommendation
The Commissioner, Wage and Investment
Division, should:
Recommendation 11: Work with the Department of the Treasury to seek math error authority from Congress to prevent the overpayment of credits subject to lifetime limits spanning multiple tax periods.
Management’s Response: IRS management agreed with this recommendation
and will discuss it with the Department of the Treasury, Office of Tax Policy.
Taxpayers Continue
to Erroneously Claim Qualified Plug-in Electric and Alternative Motor Vehicle
Credits
The Recovery Act
included a number of provisions that encourage the purchase of motor vehicles
(or the conversion of motor vehicles to those) that operate on clean renewable
sources of energy. In a prior review,[22]
we identified taxpayers claiming
erroneous plug-in electric and alternative motor vehicle credits. We recommended that the IRS develop a process
to ensure taxpayers are not erroneously claiming credits with nonqualifying
vehicle makes and models. The IRS agreed
with this recommendation and noted that for the 2011 Filing Season, examiners would
be performing a review of the make and model of the vehicle claimed on each Qualified
Plug-in Electric Drive Motor Vehicle Credit (Form 8936) and disallow any
clearly nonqualifying motor vehicles.
However, we continue to identify taxpayers using nonqualifying vehicles to erroneously claim plug-in electric vehicle credits. As of April 30, 2011, we identified 23,639 taxpayers erroneously claiming $32 million in plug-in electric and alternative motor vehicle credits.[23] This includes:
Recommendation
The Commissioner, Wage and Investment Division, should:
Recommendation
12: Initiate actions to recover the $32 million in
plug-in electric and alternative motor vehicle credits claimed by the 23,639 taxpayers
the TIGTA identified as having erroneously claimed these credits.
Management’s Response: IRS management agreed with this recommendation
and has taken steps to address the potential noncompliance in the taxpayer
segment. The Director, Reporting
Compliance, Wage and Investment Division, and the Director, Campus Reporting
Compliance, Small Business/Self-Employed Division, have included a sample of
these cases in the Fiscal Year 2012 Examination plan. The IRS will evaluate the results achieved
through audits of the selected sample of returns and will adjust the plan
accordingly to maximize the effective use of examination resources.
Legislative Recommendation
The Commissioner, Wage and Investment Division, should:
Recommendation 13: Work with the Department of the Treasury to seek
math error authority from Congress to deny Qualified Plug-in Electric Drive Motor Vehicle Credits for nonqualifying
makes of motor vehicles.
Management’s Response: IRS management agreed with this recommendation
and will discuss it with the Department of the Treasury, Office of Tax Policy.
Taxpayers Appear to Be Erroneously
Claiming Motor Vehicle Deductions
The Recovery Act
provides taxpayers with a QMV deduction, which is an additional deduction for
State sales tax and excise tax on the purchase of certain motor vehicles. For TY 2009 only, taxpayers could deduct State
sales tax and excise tax for qualified motor vehicle purchases made after
February 16, 2009, and before January 1, 2010. The expiration date for the QMV deduction was
December 31, 2009.
As of April 30, 2011, there were 437,332 taxpayers who claimed
more than $606.8 million in QMV deductions on TY 2010 tax returns. In our opinion, the circumstances for which an
individual can claim a QMV deduction on a TY 2010 tax return are unusual. As such, there should not be a large number
of these claims. Specifically, for TY
2010, an individual may claim the QMV deduction
for a vehicle that was purchased in 2009, but State and local sales taxes were
paid after December 31, 2009.
In other words, an individual purchased a new vehicle in 2009 but did
not pay sales or excise tax until 2010.
We alerted IRS management on February 23, 2011, of our concerns related to the high volume of TY 2010 QMV deductions and the possibility that taxpayers were erroneously claiming this deduction. The IRS indicated that its research group will perform additional analysis relating to the 127,577 QMV deductions we had identified as of February 20, 2011, to determine the validity of the QMV deductions claimed on Schedule A and Standard Deduction for Certain Filers (Schedule L). The IRS responded on July 5, 2011, that its research group was unable to determine the validity of these claims, but it will be performing examinations on 1,000 of these tax returns.
States requiring sales tax be
paid at the time of vehicle purchase may be an indicator of taxpayers
erroneously claiming Motor Vehicle deduction
**********************************2(f)**************************************************************************** *********************************************2(f)********************.
Taxpayers do not have to provide any third-party documentation to support
that they actually purchased a qualified motor vehicle and, if a qualified
vehicle was purchased, the date the vehicle was purchased and the date and the
amount paid of sales and excise taxes. **************************2(f)********************************************************************************************************
*****************************************2(f)***************************.
Many States require
that sales tax be paid to the motor vehicle dealer at the time of
purchase. Claims from taxpayers in these
States provide the IRS with information that could be used to identify
potentially erroneous QMV deductions.
For example, California, Florida, Illinois, and Texas are examples of
four States that have this requirement.
We identified 136,036 taxpayers who reside in these States and
claimed the QMV deduction in TY 2010. If
the taxpayers who reside in these States also purchased their vehicle in these States,
they could have potentially received more than $235 million in erroneous QMV
deductions since they would not have paid the sales tax in 2010 for a 2009
purchase made in these States. Figure 6 provides
a breakdown of four States where sales tax or excise tax is due at the time of
purchase.
Figure 6: Taxpayers Residing in States That Require
Sales Tax
to Be Paid at the Time of Purchase and Claiming the
QMV Deduction in TY 2010 for Motor Vehicles Purchased in 2009
|
State |
Number of Taxpayers |
Total Qualified Motor Vehicle Tax Deduction Claimed |
Estimated Tax Impact |
|
California |
56,839 |
$112,554,249 |
$11,255,425 |
|
Florida |
26,360 |
$40,865,822 |
$4,086,582 |
|
Illinois |
18,872 |
$29,612,446 |
$2,961,245 |
|
Texas |
33,965 |
$52,698,667 |
$5,269,867 |
|
Total Claims |
136,036 |
$235,731,184 |
$23,573,119 |
Source: TIGTA analysis of the IRS’s Individual Return
Transaction File.
A prior review identified that processes did not ensure excessive
deductions were identified
We previously
reported that the process to identify potentially erroneous QMV deductions was not
effective. The IRS failed to identify
4,257 taxpayers claiming an excessive (as defined by the IRS) QMV deduction
during tax return processing so it could hold and prevent the possible issuance
of erroneous tax refunds. These taxpayers
claimed a total of more than $151.1 million in QMV deductions. The TIGTA also identified 473 taxpayers for
which information that the IRS maintains identifies them as ineligible to claim
about $1.02 million in QMV deductions they were allowed. These taxpayers were in prison, deceased, or
underage. Finally, the processes that the
IRS established to verify the QMV deductions claimed on 3,026 individual tax
returns the IRS identified as excessive are also resulting in the erroneous
release of tax refunds. Our testing
identified that the IRS does not ensure tax examiners are taking the necessary
steps to verify the QMV deductions.
We monitored the IRS’s
progress in verifying potentially erroneous QMV deductions claimed on 7,756
individual tax returns. Based on our
analysis of tax records, an examination has not been initiated on 2,506 (32 percent)
of the 7,756 taxpayers’ tax returns. Assessments
totaling more than $3 million in tax were made for 2,034 taxpayers. Figure 7 shows a breakdown of our analysis of
the 7,756 individual tax returns identified in our prior review.
Figure 7: Taxpayers Indentified in a Prior TIGTA Review
and Referred to IRS for Verification of QMV Deductions
|
Category |
Total
Identified |
Number
With Examinations Not Initiated |
Number
With Examination Indicators |
Number
With Assessments |
Total
Dollar Amount Assessed |
|
Excessive
Claims |
4,257 |
2,073 |
2,184 |
106 |
$142,689 |
|
Ineligible
Taxpayers |
473 |
337 |
136 |
66 |
$0[24] |
|
Refunds
Released |
3,026 |
96 |
2,930 |
1,862 |
$3,038,966 |
|
Total |
7,756 |
2,506 |
5,250 |
2,034 |
$3,181,655 |
Source: TIGTA analysis of the IRS’s Master File as of
May 28, 2011.
Recommendation
The Commissioner, Wage and Investment Division, should:
Recommendation
14: Require taxpayers who claimed a QMV deduction in TY 2010 to provide
documentation for proof of purchase of a qualified vehicle, including the date any
State sales or excise tax was paid.
Management’s Response: IRS management agreed with this recommendation. The Director, Reporting Compliance, Wage and
Investment, will work with the Director, Campus Reporting Compliance, Small
Business/Self-Employed Division, to include a sample in the Fiscal Year 2012
Examination plan. Documentation will be
requested as part of the examination.
The results of these examinations will be used to determine if further
examinations are warranted. The IRS will
evaluate the results achieved through audits of the selected sample of returns
and will adjust the plan accordingly to maximize the effective use of
examination resources.
Appendix I
Detailed Objective, Scope, and Methodology
The overall
objective of this review was to evaluate whether the IRS timely and accurately
processed individual paper and e-filed tax returns during the 2011 Filing Season.[25] To
accomplish our objective, we:
I. Identified new tax legislation and administrative changes for the 2011 Filing Season that would have the greatest potential effect on individual taxpayers.
A. Reviewed tax forms, instructions, and publications to determine whether they were accurately updated with the changes.
B. Reviewed tax return processing procedures and change documentation to determine whether adequate controls were included to accurately process the new tax provisions during tax return processing.
II. Identified volumes of paper and e-filed tax returns received through April 30, 2011, from the IRS Weekly Filing Season reports that provide a year-to-date comparison of scheduled return receipts to actual return receipts. The reports also provide a comparison to 2010 receipts for the same time period.
III. Determined whether the IRS correctly implemented new tax legislation that affected the processing of individual tax returns during the 2011 Filing Season. We used computer analysis of 100 percent of the TY 2010 individual income tax returns processed nationally on the Individual Return Transaction File between January 1 and April 30, 2011,[26] to identify returns affected by recent tax legislation and determined if they were processed correctly. We electronically identified:
A. First-Time Homebuyer Credit (Homebuyer Credit).
1. Electronically identified 792,554 TY 2010 tax returns reporting installment payments of $367 million on First-Time Homebuyer Credit and Repayment of the Credit (Form 5405) and reviewed a sample of 30 tax returns to determine whether the installment payment was properly posted to the Individual Master File account. We performed computer analysis on the 792,554 TY 2010 tax returns to determine if tax returns were processed correctly.
2. Electronically identified 32,091 TY 2010 tax returns for taxpayer who received the Homebuyer Credit for homes purchased in 2008 but did not report an installment payment on Form 5405. We reviewed a random sample of 30 tax returns to determine whether additional tax was assessed for the unreported installment payment. We performed computer analysis on the 32,091 TY 2010 tax returns to determine whether they were processed correctly.
3. Electronically identified 271,390 TY 2010 tax returns claiming nearly $1.9 billion in Homebuyer Credits on Form 5405.
B. Expansion of the Adoption Credit.
1. Identified 72,330 taxpayers claiming $895,031,504 in Adoption Credits on Qualified Adoption Expenses (Form 8839) and U.S. Individual Income Tax Returns (Form 1040), Line 71b. We performed computer analysis to evaluate these individual tax returns to determine whether they were properly processed.
2. Determined whether individual tax returns were processed correctly and taxpayers were not allowed to claim over the TY 2010 $13,170 Adoption Credit limit, the Adoption Credit was properly reduced when modified adjusted gross income was within the phase-out range, and the Adoption Credit was not allowed when modified adjusted gross income was above the phase-out range.
3. Determined whether refunds were correctly frozen and taxpayer notices were properly issued. We identified 42,309 tax returns meeting criteria to have the Adoption Credit portion of the refund frozen and the tax return sent to the Examination function for further processing. We reviewed Individual Master File account information for the 42,309 taxpayers to determine whether refunds were frozen and tax returns were sent to the Examination function.
C. Electronically identified all TY 2009 tax returns that reported unused Adoption Credit amounts carried forward. We matched all TY 2010 tax returns claiming an amount carried forward to the related TY 2009 return and identified TY 2010 returns claiming unused Adoption Credits for which no unused Adoption Credit was reported in TY 2009. Also, we identified TY 2010 returns claiming unused Adoption Credit amounts that were overstated from TY 2009.
D. Nonbusiness Energy Property Credit.
1.
Identified and evaluated 5,293,296 tax returns claiming
the Nonbusiness Energy Property Credit and determined whether the individual
previously claimed the Nonbusiness Energy Property Credit in TY 2009.
2.
Matched all TY 2010 tax returns claiming Nonbusiness
Energy Property Credits to tax returns claiming the credit in TY 2009 to
identify taxpayers who claimed Nonbusiness Energy Property Credits over the
statutory limit for TY 2009 and TY 2010.
E. Qualified Plug-in Electric Drive Motor Vehicle Credit.
1.
Identified and evaluated 866 tax returns filing a
Qualified Plug-in Electric Drive Motor Vehicle Credit (Form 8936) to
determine whether the credit was claimed for:
vehicles with nonqualifying years, placed-in‑service dates, or makes
and models; an excessive number of vehicles; or a vehicle for which other (multiple)
claims were made.
IV. Determined if the corrective actions implemented by the IRS in response to prior TIGTA reports[27] accurately resolved problems that were identified and followed up on findings identified in those reports.
A. Homebuyer Credit.
1. Determined whether IRS management initiated corrective actions for tax returns claiming the Homebuyer Credit as a long-time resident for purchase dates prior to November 7, 2009.
a) Electronically identified 2,812 TY 2009 tax returns processed between May 28 and December 31, 2010, that were allowed to erroneously claim the Credit as a long-time resident for purchase dates prior to November 7, 2009.
b) Determined whether processes were established to identify errors on tax returns for this condition and if the description in the notice sent to the taxpayer accurately described the condition identified.
2. Determined whether IRS management initiated corrective actions for tax returns claiming the Homebuyer Credit for a future home purchase.
a) Electronically identified 1,605 TY 2009 tax returns processed between May 28 and December 31, 2010, that were allowed to erroneously claim the Credit for a future purchase date.
b) Determined whether processes were established to identify errors on tax returns for this condition and if the Taxpayer Notice Code description accurately described the condition identified.
B. Plug-in Electric Vehicle Credits and Alternative Motor Vehicle Credit.
1.
Determined whether IRS management initiated corrective
actions to ensure that the computer systems and tax return processing
procedures were updated to identify and disallow vehicles with nonqualifying
years, placed-in‑service dates, or makes and models; excessive multiple
vehicle claims; and multiple claims for the same vehicle, including programming
to reject e-filed returns with these
conditions.
2.
Determined whether IRS management initiated corrective
actions to track and account for vehicle credits claimed on Qualified Plug-in
Electric and Electric Vehicle Credit (Form 8834), Alternative Motor Vehicle
Credit (Form 8910), and Form 8936 for paper‑filed tax returns.
3.
Identified and evaluated 2,001 tax returns with a Form
8834 to determine whether the credit was claimed for: vehicles with nonqualifying years, placed-in‑service
dates, or makes and models; an excessive number of vehicles; or a vehicle for
which other (multiple) claims were made.
C.
Identified and evaluated 41,085 tax returns with a Form
8910 to determine whether the credit was claimed for: vehicles with nonqualifying years, placed‑in‑service
dates, or makes and models; an excessive number of vehicles; or a vehicle for
which other (multiple) claims were made.
D. Nonbusiness Energy Property Credit.
1. Determined whether IRS management initiated corrective actions to ensure that the computer systems and tax return processing procedures were updated to identify individual claims exceeding the maximum allowable Nonbusiness Energy Property Credit amount, including programming to reject e-filed tax returns with this condition.
2. Electronically analyzed tax returns claiming the Nonbusiness Energy Property Credit to verify that the processes had been implemented to prevent claims exceeding the maximum amount allowed.
E. Qualified Motor Vehicle Tax Deduction.
1. Determined whether IRS management effectively identified erroneous Qualified Motor Vehicle Tax deductions claimed on Itemized Deductions (Schedule A) (Form 1040) and Standard Deduction for Certain Filers (Schedule L) (Form 1040 or Form 1040-A[28]).
2. Electronically identified 427,332 taxpayers claiming $606,823,690 in Qualified Motor Vehicle Tax deductions on Schedules A or Schedules L for TY 2010.
V. Identified the interim results for the Wage and Investment Division’s Accounts Management function fraudulent tax return statistics.
A. Obtained the Questionable Refund Program Workload Comparison Summary Report as of April 30, 2011, to identify the interim IRS fraudulent tax return statistics for the 2011 Filing Season.
B. Obtained the Questionable Refund Program Workload Comparison Summary Report for Processing Year 2010 and reviewed a prior TIGTA report[29] to obtain IRS fraudulent tax return statistics and determined the number of erroneous refunds identified and stopped for Processing Years 2008 through 2010.
VI. Determined whether taxpayers were using the savings bond option for direct purchase of savings bonds from their refunds and whether taxpayers significantly increased their use of the split refund option by electronically identifying and counting the tax returns filed with Allocation of Refund (Including Savings Bond Purchases) (Form 8888).
Internal controls methodology
Internal controls relate to management’s
plans, methods, and procedures used to meet their mission, goals, and
objectives. Internal controls include
the processes and procedures for planning, organizing, directing, and
controlling program operations. They
include the systems for measuring, reporting, and monitoring program
performance. We determined the following
internal controls were relevant to our audit objective: controls over information processing – we
reviewed the Work Requests and Error Resolution Internal Revenue Manuals for
controls over the tax law changes under review.
Accurate and timely recording of transactions and events – we monitored
the timeliness of returns processing using the IRS’s Report of Individual
Income Tax Returns Received and Processed and the Miscellaneous Monitoring
Report. Appropriate documentation of
transactions and internal controls – when appropriate, we used the IRS’s Individual
Return Transaction File and the Integrated Data Retrieval System to review
return transaction records and posted transactions. We also evaluated the controls that are
incorporated directly into computer applications to help ensure the validity,
completeness, and accuracy of transactions and data during application
processing of tax returns for the 2011 Filing Season.
Appendix II
Major Contributors to This Report
Michael E. McKenney, Assistant Inspector General for Audit (Returns
Processing and Account Services)
Russell Martin, Director
Tina Parmer, Audit Manager
Kathleen Hughes, Senior Auditor
Sharla Robinson, Senior Auditor
Van Warmke, Senior Auditor
Evan Close, Auditor
Crystal Hamling, Auditor
Kim McMenamin, Auditor
Arlene Feskanich, Senior Information Technology Specialist
Brian Hattery, Senior Information Technology Specialist
Martha Stewart, Senior Information Technology Specialist
Michele Cove, Information Technology Specialist
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Deputy Commissioner, Wage and Investment Division SE:W
Director, Business Modernization Office, Wage and Investment Division SE:W:BMO
Director, Customer Account Services, Wage and Investment Division SE:W:CAS
Director, Customer Assistance, Relationships, and
Education, Wage and Investment Division SE:W:CAR
Director, Electronic Tax Administration and
Refundable Credits, Wage and Investment Division SE:W:ETARC
Director, Strategy and Finance, Wage and Investment Division SE:W:S
Director,
Accounts Management, Wage and Investment Division SE:W:CAS:AM
Director, Field Assistance, Wage and Investment Division SE:W:CAR:FA
Director,
Director, Stakeholder Partnership, Education,
and Communications, Wage and Investment Division SE:W:CAR:SPEC
Director, Submission Processing, Wage and
Investment Division
SE:W:CAS:SP
Chief Counsel CC
National Taxpayer Advocate TA
Chief, Program Evaluation and Improvement, Wage and Investment Division SE:W:S:PEI
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaison: Chief, Program Evaluation and Improvement, Wage and Investment Division SE:W:S:PEI
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to Congress.
For most of the outcomes listed in this appendix, we conducted computer analyses of TY 2010 individual income tax returns that were processed by the IRS Submission Processing sites[30] between January 1 and April 30, 2011, and were posted to the Individual Master File. We have also included two outcomes that were follow-up issues from prior reviews. For these outcomes, we conducted computer analysis of TY 2009 individual income tax returns that were processed by the IRS Submission Processing sites between May 30 and December 25, 2010, and were posted to the Individual Master File.
Type and Value of Outcome Measure:
· Cost Savings (Funds Put to Better Use) – Potential; $16.4 million from 2,812 taxpayers who received erroneous First-Time Homebuyer Credits (Homebuyer Credits) (see page 9).
Methodology Used to Measure the Reported Benefit:
We used computer analysis to identify 2,812 taxpayers who were allowed $16.4 million in Homebuyer Credits when their tax returns were processed during the period May 30 through December 25, 2010. These taxpayers filed a tax return claiming the Homebuyer Credit as a long-time resident with a purchase date prior to November 7, 2009.
Type and Value of Outcome Measure:
· Cost Savings (Funds Put to Better Use) – Potential; $11.4 million from 1,605 taxpayers who received erroneous Homebuyer Credits (see page 9).
Methodology Used to Measure the Reported Benefit:
We used computer analysis to identify 1,605 taxpayers who were
allowed $11.4 million in Homebuyer Credits when their tax returns were
processed during the period May
30 through December 25, 2010. These taxpayers
filed a tax return claiming a Homebuyer Credit for a home which had not yet
been purchased, but
reportedly would be in the future.
Type and Value of Outcome Measure:
· Cost Savings (Funds Put to Better Use) – Potential; $839,130 from 1,901 taxpayers who received erroneous refunds of their Homebuyer Credit repayments (see page 9).
Methodology Used to Measure the Reported Benefit:
We used computer analysis to identify 1,901 taxpayers who reported either the required repayment amount
or more than the required repayment amount of their Homebuyer Credit on
their tax returns processed during the
period January 1 through April 30, 2011, and had $839,130 in Homebuyer Credit repayments erroneously refunded.
Type and Value of Outcome Measure:
· Increased Revenue – Potential; $3.6 million from 15,956 taxpayers not assessed Homebuyer Credit repayment amounts that were not paid (see page 9).
Methodology Used to Measure the Reported Benefit:
We used computer analysis to identify 15,956 taxpayers who reported Homebuyer Credit repayment amounts
less than the required repayment amount on their tax returns processed during
the period January 1 through April 30, 2011.
These taxpayers were not assessed nearly $3.6 million in additional
taxes for the amount of Homebuyer Credit repayments that was underpaid.
Type and Value of Outcome Measure:
· Revenue Protection – Potential; $1.4 million from 6,027 taxpayers erroneously credited more in Homebuyer Credit repayments than they actually paid (see page 9).
Methodology Used to Measure the Reported Benefit:
We used computer analysis to identify 6,027 taxpayers who received erroneous credit for $1.4 million
more in Homebuyer Credit repayments than they actually paid on their tax
returns processed during the period January 1 through April 30, 2011, because
the repayment amounts were erroneously increased by 50 percent without
assessing additional tax for the increased repayment amount.
Type and Value of Outcome Measure:
· Taxpayer Rights and Entitlements – Potential; 2,765 taxpayers were erroneously assessed $675,063 more in Homebuyer Credit installment payments than they were required to pay (see page 9).
Methodology Used to Measure the Reported Benefit:
We used computer analysis to identify 2,765 taxpayers who were
erroneously assessed $675,063 more in additional tax than they were required to
repay in Homebuyer Credit installment payments on tax returns processed during the period January 1 through April 30,
2011, because the repayment amount was erroneously increased by 50 percent and they
were assessed the additional payment amount as additional tax.
Type and Value of Outcome Measure:
· Cost Savings (Funds Put to Better Use) – Potential; 736 taxpayers erroneously received more than $4 million in Adoption Credits (see page 15).
Methodology Used to Measure the Reported Benefit:
We used computer analysis to identify 736 taxpayers who erroneously received more than $4 million in Adoption Credits on tax returns processed during the period January 1 through April 30, 2011.
Type and Value of Outcome Measure:
· Taxpayer Burden – Potential; 41,591 taxpayers (see page 15).
Methodology Used to Measure the Reported Benefit:
We used computer analysis to identify 72,330 individual tax returns claiming more than $895 million in Adoption Credits processed during the period January 1 through April 30, 2011. Of the 72,330 Adoption Credit claims, 41,591 (58 percent) met IRS documentation criteria for sending the tax return to its Examination function because the IRS did not have math error authority to deny the Adoption Credit at the time the tax return was processed.
Type and Value of Outcome Measure:
· Revenue Protection – Potential; $76.4 million from 111,804 taxpayers claiming erroneous Nonbusiness Energy Property Credits (see page 19).
Methodology Used to Measure the Reported Benefit:
We used computer analysis to identify 111,710 taxpayers who erroneously claimed in excess of $76.3 million in Nonbusiness Energy Property Credits on tax returns processed during the period January 1 through April 30, 2011. These taxpayers claimed more than the maximum allowed $1,500 for the Nonbusiness Energy Property Credit for both TY 2009 and TY 2010. In addition, we identified 94 taxpayers filing as married who erroneously claimed in excess of $111,000 because they were allowed to claim more than the maximum allowed $3,000 for both TY 2009 and TY 2010.
Type and Value of Outcome Measure:
· Revenue Protection – Potential; $32 million from 23,639 taxpayers erroneously claiming plug-in electric and alternative motor vehicle credits on e-filed tax returns (see page 20).
Methodology Used to Measure the Reported Benefit:
We used computer analysis to identify taxpayers who e-filed a tax return claiming plug-in electric and alternative motor vehicle credits on Qualified Plug-in Electric and Electric Vehicle Credit (Form 8834), Alternative Motor Vehicle Credit (Form 8910), and Qualified Plug-in Electric Drive Motor Vehicle Credit (Form 8936) on tax returns processed during the period January 1 through April 30, 2011. We identified 23,639 taxpayers erroneously claiming $32 million in these credits with nonqualifying vehicle makes and models.
Type and Value of Outcome Measure:
· Revenue Protection – Potential; $3 million in tax has been assessed for 2,034 taxpayers previously identified in another review[31] with excessive QMV deductions (see page 21).
Methodology Used to Measure the Reported Benefit:
We previously
reported that the process to identify potentially erroneous QMV deductions was
not effective, and we identified 7,756 taxpayers with potentially erroneous QMV
deductions. We reported that we planned
to monitor IRS progress in verifying the 7,756 potentially erroneous QMV
deductions we had identified and report the amount of increased tax liability
for those QMV deductions disallowed during our 2011 Filing Season
review. Our analysis identified
assessments totaling more than $3 million in tax have been made for 2,034 taxpayers.
Appendix V
List of Tax Forms and Schedules Processed
Through the Modernized E-File System
|
Form 1040 |
U.S. Individual Income Tax Return |
|
Schedule A |
Itemized Deductions |
|
Schedule B |
Interest and Ordinary Dividends |
|
Schedule C |
Profit or Loss From Business |
|
Schedule D |
Capital Gains and Losses |
|
Schedule E |
Supplemental Income and Loss |
|
Schedule
EIC |
Earned Income Credit |
|
Schedule M |
Making Work Pay Credit |
|
Schedule R |
Credit for the Elderly or the Disabled |
|
Schedule
SE |
Self-Employment Tax |
|
Form
1099-R |
Distributions From Pensions, Annuities, Retirement
or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. |
|
Form 2106 |
Employee Business Expenses |
|
Form 2210 |
Underpayment of Estimated Tax by Individuals,
Estates, and Trusts |
|
Form 2441 |
Child and Dependent Care Expenses |
|
Form 4562 |
Depreciation and Amortization |
|
Form 4868 |
Application for Automatic Extension of Time to File
U.S. Individual Income Tax Return |
|
Form 8283 |
Noncash Charitable Contributions |
|
Form 8812 |
Additional Child Tax Credit |
|
Form 8829 |
Expenses for Business Use of Your Home |
|
Form 8863 |
Education Credits (American Opportunity and Lifetime
Learning Credits) |
|
Form 8880 |
Credit for Qualified Retirement Savings
Contributions |
|
Form 8888 |
Allocation of Refund (Including Savings Bond
Purchases) |
|
Form W-2 |
Wage and Tax Statement |
Appendix VI
|
Adjusted Gross Income |
Income minus certain expenses and
deductions. |
|
American Opportunity Tax Credit |
A partially refundable Federal tax
credit to help parents and college students offset the costs of college. |
|
Electronic Fraud Detection System |
An automated system
used to maximize fraud detection at the time tax returns are filed to eliminate the issuance of questionable refunds. |
|
Electronic Return Originator |
The Authorized IRS e‑file Provider that originates
the electronic submission of a tax return to the IRS. The Electronic Return Originator is usually
the first point of contact for most taxpayers filing a tax return using IRS e-file. |
|
Filing Season |
The period from January 1 through mid-April
when most individual income tax returns are filed. |
|
Fiscal Year |
A 12-consecutive-month period ending
on the last day of any month except December.
The Federal Government’s fiscal year begins on October 1 and ends on
September 30. |
|
Free File Program |
A free Federal tax preparation and e-filing program for eligible
taxpayers developed through a partnership between the IRS and the Free File
Alliance LLC. The Alliance is a group
of |
|
Individual Return Transaction File |
Contains data transcribed from initial
input of the original individual tax returns during return processing. |
|
Individual Master File |
IRS database that maintains
transactions and records of individual tax accounts. |
|
Integrated Data Retrieval System |
Computer application consisting of databases and operating
programs that support IRS employees working active tax cases within each
business function across the entire IRS. It manages data extracted from the Corporate
Account Data Stores, allowing IRS employees to take specific actions on
taxpayer account issues, track status, and post transaction updates back to
the Master File. |
|
Master File |
The IRS database that stores various
types of taxpayer account information.
This database includes individual, business, and employee plans and
exempt organizations data. |
|
Processing Year |
Calendar year in which the tax return
or document is processed by the IRS. |
|
Questionable Refund Program |
A nationwide, multi-functional program
designed to detect and stop fraudulent claims for refunds on income tax
returns. |
|
Submission Processing Site |
The data processing arm of the
IRS. The sites process paper and
electronic submissions, correct errors, and forward data to the Computing
Centers for analysis and posting to taxpayer accounts. |
|
Tax Year |
The 12-month period for which tax is
calculated. For most individual
taxpayers, the tax year is synonymous with the calendar year. |
Appendix VII
Management’s Response to the Draft Report
DEPARTMENT OF THE TREASURY
INTERNAL
REVENUE SERVICE
ATLANTA, GA 30308
COMMISSIONER
WAGE AND INVESTMENT DIVISION
September 16, 2011
MEMORANDUM
FOR MICHAEL R. PHILLIPS
DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Richard Byrd, Jr. /s/ Richard Byrd, Jr.
Commissioner, Wage and Investment Division:
Draft Audit
Report - Draft Audit Report - The
Passage of Late Legislation and Incorrect Computer Programming Delayed Refunds
for Some Taxpayers During the 2011 Filing Season
(Audit # 201140029)
We have
reviewed the subject draft report and appreciate your acknowledgement of our
delivery of another successful Filing Season. While the late passage of
legislation and its resulting challenges caused the delay of processing some
forms until mid-February, the 2011 Filing Season was one of the most successful
in recent history. As of August 12, 2011, over 137million tax returns were
processed, with more than 105 million refunds issued. Approximately 108 million of these returns
were e-filed, which is
a 13 percent increase over last year.
We are working
diligently to identify and stop all fraudulent returns and achieved an increase
of 171 percent over last year in the number of fraudulent returns identified.
This was accomplished, in part, by improved identification and screening of
prisoner tax returns. We anticipate that our expanded efforts in this area will
have a long-lasting and significant impact in preventing the payment of
erroneous or fraudulent refund claims. We will continue to improve our
processes and staffing as resources permit.
As of July 2,
2011, we have processed over 4.3 million returns with $30.4 billion in First-Time
Homebuyer's Credit (FTHBC)
claimed. Erroneous claims for refundable credits, such as the FTHBC and
Adoption Credit, are subject to stringent enforcement activity, including both
pre-refund and post-refund examination. In Fiscal Year (FY) 2011, through July
22, our Examination functions have completed audits of 180,000 FTHBC returns.
We continue to address those returns where the FTHBC claim is either
questionable, or not supported by third-party records. Also, for FY 2011,
through July 22, our Examination functions have proposed denial or disallowance
of $442.6 million in FTHBC claims.
The credit
for adoption expenses (Adoption Credit) can be the largest refundable credit
allowed to individuals by the Tax Code. The lessons we learned in implementing
the FTHBC helped us to develop and execute a strong Adoption Credit strategy
that balanced compliance and outreach activities. We made access to the credit
available to qualified individuals, while identifying and stopping the payment
of questionable or erroneous claims. The IRS compliance strategy included a
robust outreach and education strategy consisting of the issuance of formal
guidance in Revenue Procedures and Notices, posting information on IRS.gov, and
outreach to adoption agencies, advocacy groups, taxpayers, preparers, and
software developers. We also developed new Examination filters that addressed
known and anticipated compliance challenges. Based on the risk associated with
this large credit, the IRS required taxpayers to submit documentation of the
adoption with their returns when claiming the credit. Returns without
documentation, or with insufficient documentation, were examined.
With regard
to other deductions and credits addressed in the report, we continue to develop
and refine controls that can be used to identify questionable claims during
return processing and prevent payment of any erroneous or fraudulent refund
claim. As indicated above, erroneous or fraudulent returns identified increased
171% for the year. We have improved our processes to detect more fraudulent
claims when the returns are filed. We will use all resources available to
ensure fair administration of the tax system while appropriately meeting our
responsibility for fiscal stewardship, the need for coverage in all areas, and
service to the taxpaying public. As the Treasury Inspector General for Tax
Administration correctly observed, in appropriate cases, expanded math error
authority could enable us to respond more efficiently to erroneous refundable
credit claims. The IRS and the Office of Chief Counsel will discuss the merits
of obtaining math error authority and will discuss your recommendations with
the Department of Treasury, Office of Tax Policy for consideration as
appropriate.
Attached are
our comments to your recommendations. If you have any questions, please contact
me, or a member of your staff may contact Peter J. Stipek,
Director, Customer Account Services, Wage and Investment Division, at (404)
338-8910.
Attachment
Attachment
The
Commissioner, Wage and Investment Division, should:
RECOMMENDATION
1
Ensure the
4,417 taxpayers identified as claiming the Homebuyer Credit for ineligible past
purchase dates or future purchase dates are entitled to claim the credit.
CORRECTIVE
ACTION
We agree with
this recommendation and are taking steps to correct the accounts of 4,417
taxpayers not entitled to the credit. The IRS implemented processes to identify
other individuals who had also claimed the credit with a future purchase date,
or who had claimed the long time resident credit prior to the implementation
date, of the provision.
IMPLEMENTATION
DATE
June 15, 2012
RESPONSIBLE
OFFICIAL
Director,
Accounts Management, Wage and Investment Division
CORRECTIVE
ACTION MONITORING PLAN
The IRS will
monitor this corrective action as part of our internal management control
system.
RECOMMENDATION
2
Establish a
Homebuyer Credit Entity Section for each taxpayer who received the Homebuyer
Credit rather than grouping information by primary and secondary SSN.
CORRECTIVE
ACTION
We agree with
the intent of this recommendation. However, we have determined that
establishing a Homebuyer Credit Entity Section for each taxpayer who received
the Homebuyer Credit, rather than grouping information by primary and secondary
Social Security Number, is not needed to address the issues identified in the
audit report. The issues outlined in your report were not caused by the absence
of First-Time Homebuyer's Credit information in the Entity Section of taxpayer
accounts.
IMPLEMENTATION
DATE
Implemented
RESPONSIBLE
OFFICIAL
Director,
Earned Income Tax Credit, Wage and Investment Division
CORRECTIVE
ACTION MONITORING PLAN
N/A
RECOMMENDATION
3
Ensure that
the required Homebuyer Credit installment repayment field is accurately
populated with the amount that must be repaid by each taxpayer.
CORRECTIVE
ACTION
We agree with
this recommendation. Error Resolution System (ERS) programming is in place to
retrieve and retain the data to be displayed by the ERS, provided the data is
available in the National Account Profile (NAP) First-Time Homebuyer Credit
database for the taxpayer filing the return. A programming change to the NAP
data file, on April 16, 2011, corrected the problem.
IMPLEMENTATION
DATE
Implemented
RESPONSIBLE
OFFICIAL
Director,
Submission Processing, Wage and Investment Division
CORRECTIVE
ACTION MONITORING PLAN
N/A
RECOMMENDATION
4
Ensure that
the tax accounts are corrected for the 17,857 taxpayers who had their Homebuyer
Credit repayment erroneously refunded or who owed repayment amounts that were
not paid and were not properly assessed.
CORRECTIVE
ACTION
We agree with
this recommendation. The IRS has revised programming, and actions have been
taken to recover Homebuyer Credit repayments erroneously refunded and repayment
amounts that were not paid or not properly assessed.
IMPLEMENTATION
DATE
February 15,
2012
RESPONSIBLE
OFFICIAL
Director,
Accounts Management, Wage and Investment Division
CORRECTIVE
ACTION MONITORING PLAN
The IRS will
monitor this corrective action as part of our internal management control
system.
RECOMMENDATION
5
Ensure that
the tax accounts are corrected for the 8,792 taxpayers who received an amount
greater than they repaid or who were assessed an amount more than they were
required to repay.
CORRECTIVE
ACTION
We agree with
this recommendation and have already completed the necessary actions to correct
the accounts. Actions taken include adjusting the tax and issuing the
appropriate notification to the 2,765 taxpayers whose tax was impacted. The
accounts of the remaining 6,027 taxpayers were adjusted to reflect the
appropriate repayment amounts. Final adjustments to the accounts were completed
in late July 2011.
IMPLEMENTATION
DATE
Implemented
RESPONSIBLE
OFFICIAL
Director,
Accounts Management, Wage and Investment Division
CORRECTIVE
ACTION MONITORING PLAN
N/A
RECOMMENDATION
6
Ensure that
programming changes are made to prevent tax examiners from increasing the
installment repayment amount without increasing the associated tax liability.
CORRECTIVE
ACTION
We disagree
with this recommendation. Systemically preventing tax examiners from increasing
the repayment installment amount is undesirable because taxpayers may pay more
than the required amount. We have issued procedures instructing tax examiners
of the process to follow when joint filers each have to repay the First-Time
Homebuyer Credit. A Servicewide Electronic Research
Program alert (110446) was issued on June 15, 2011, to the tax examiners in
ERS, to reinforce the correct procedures.
IMPLEMENTATION
DATE
N/A
RESPONSIBLE
OFFICIAL
N/A
CORRECTIVE
ACTION MONITORING PLAN
N/A
The
Commissioner, Wage and Investment Division, should:
RECOMMENDATION 7
Verify the
claims on the 499 tax returns that claimed an incorrect amount of unused
Adoption Credit and were not sent to the Examination function to determine what
portion of the Adoption Credit was appropriate.
CORRECTIVE ACTION
We agree with
this recommendation and have included these cases in our Fiscal Year (FY) 2012
Examination plan. We will review these returns and conduct examinations when
warranted.
IMPLEMENTATION DATE
July 15, 2012
RESPONSIBLE OFFICIAL
Director,
Reporting Compliance, Wage and Investment Division
CORRECTIVE ACTION MONITORING PLAN
The IRS will
monitor this corrective action as part of our internal management control
system.
RECOMMENDATION 8
Verify the
claims on the 237 tax returns that claimed over the maximum limit over multiple
years but were not selected for audit by the Examination function to determine
what portion of the Adoption Credit was appropriate.
CORRECTIVE ACTION
We agree with
this recommendation and have included these cases in our FY 2012 Examination
plan. We will review these returns and conduct examinations when warranted.
IMPLEMENTATION DATE
July 15, 2012
RESPONSIBLE OFFICIAL
Director,
Reporting Compliance, Wage and Investment Division
CORRECTIVE ACTION MONITORING PLAN
The IRS will
monitor this corrective action as part of our internal management control
system.
Legislative
Recommendation
The
Commissioner, Wage and Investment Division, should:
RECOMMENDATION
9
Work with the
Department of the Treasury to seek math error authority from Congress for
Adoption Credit claims with insufficient documentation.
CORRECTIVE
ACTION
The IRS will
discuss the recommendation with the Department of the Treasury, Office of Tax
Policy.
IMPLEMENTATION
DATE
December 15,
2012
RESPONSIBLE
OFFICIAL
Director,
Earned Income Tax Credit, Wage and Investment Division
CORRECTIVE
ACTION MONITORING PLAN
We will
monitor this corrective action as part of our internal management control
system.
The
Commissioner, Wage and Investment Division, should:
RECOMMENDATION
10
Initiate a
recovery program for the review of the 111,804 taxpayers that we identified as
claiming more than the 2-year maximum limit of the Nonbusiness
Energy Property Credit to recover the $76.4 million in erroneous credits
refunded.
CORRECTIVE
ACTION
We agree with
this recommendation. As Treasury Inspector General for Tax Administration notes
in the report, the IRS does not have the legal authority to automatically
adjust these returns with math error authority. Recovery of the credits must be
accomplished by the use of deficiency procedures, which can be a resource
intensive process. We will build upon the findings of the subset of these
returns that have been identified for audit to develop a program that will
leverage available resources to maximize recoveries of the credits claimed in
excess of allowable limits.
IMPLEMENTATION
DATE
October 15, 2012
RESPONSIBLE OFFICIAL
Director,
Reporting Compliance, Wage and Investment Division
CORRECTIVE ACTION MONITORING PLAN
We will
monitor this corrective action as part of our internal management control
system.
Legislative
Recommendation
The
Commissioner, Wage and Investment Division, should:
RECOMMENDATION 11
Work with the
Department of the Treasury to seek math error authority from Congress to
prevent the overpayment of credits subject to lifetime limits spanning multiple
tax periods.
CORRECTIVE ACTION
The IRS will
discuss the recommendation with the Department of the Treasury, Office of Tax
Policy.
IMPLEMENTATION DATE
December 15,
2012
RESPONSIBLE OFFICIAL
Director,
Earned Income Tax Credit, Wage and Investment Division
CORRECTIVE ACTION MONITORING PLAN
We will
monitor this corrective action as part of our internal management control
system.
The
Commissioner, Wage and Investment Division, should:
RECOMMENDATION 12
Initiate
actions to recover the $32 million in plug-in electric and alternative motor
vehicle credits claimed by the 23,639 taxpayers the TIGTA identified as having
erroneously claimed these credits.
CORRECTIVE ACTION
We agree with
this recommendation and have taken action to address the potential
noncompliance in this taxpayer segment. The Director, Reporting Compliance,
Wage and Investment Division (W&I), and the Director, Campus Reporting
Compliance, Small Business/Self-Employed Division (SB/SE), have included a
sample of these cases in the FY 2012 Examination plan. We will evaluate the
results achieved through audits of the selected sample of returns and will
adjust the plan accordingly to maximize the effective use of examination
resources.
IMPLEMENTATION
DATE
March 15,
2012
RESPONSIBLE
OFFICIAL
Director,
Reporting Compliance, Wage and Investment Division
Director,
Campus Reporting Compliance, Small Business/Self-Employed Division
CORRECTIVE
ACTION MONITORING PLAN
We will
monitor this corrective action as part of our internal management control
system.
Legislative
Recommendation
The
Commissioner, Wage and Investment Division, should:
RECOMMENDATION
13
Work with the
Department of the Treasury to seek math error authority from Congress to deny
Qualified Plug-in Electric Drive Motor Vehicle Credits for nonqualifying
makes of motor vehicles.
CORRECTIVE
ACTION
The IRS will
discuss the recommendation with the Department of the Treasury, Office of Tax
Policy.
IMPLEMENTATION
DATE
December 15,
2012
RESPONSIBLE
OFFICIAL
Director,
Submission Processing, Wage and Investment Division
CORRECTIVE
ACTION MONITORING PLAN
We will
monitor this corrective action as part of our internal management control
system.
The
Commissioner, Wage and Investment Division, should:
RECOMMENDATION
14
Require
taxpayers who claimed a QMV deduction in TY 2010 to provide documentation for
proof of purchase of a qualified vehicle, including the date any State sales or
excise tax was paid.
CORRECTIVE
ACTION
We agree with
this recommendation. The Director, Reporting Compliance, W&I, will work
with the Director, Campus Reporting Compliance, SB/SE,
to include a sample in the FY 2012 Examination plan. Documentation will be
requested as part of the examination. The results of these examinations will be
used to determine if further examinations are warranted. We will evaluate the
results achieved through audits of the selected sample of returns and will
adjust the plan accordingly to maximize the effective use of examination
resources.
IMPLEMENTATION
DATE
July 15, 2012
RESPONSIBLE
OFFICIAL
Director,
Reporting Compliance, Wage and Investment Division
Director,
Campus Reporting Compliance, Small Business/Self-Employed Division
CORRECTIVE
ACTION MONITORING PLAN
We will
monitor this corrective action as part of our internal management control
system.
[1] See Appendix VI for a glossary of terms.
[2] See Appendix VI for a glossary of terms.
[3] Each year, the tax products must be updated to reflect current tax rates, exemption amounts, and cost of living adjustments as show in Revenue Procedures.
[4] Pub. L. No. 111-312 124 Stat. 3296 (2010).
[5] Pub. L. No. 110-289 122 Stat. 2654 (2008).
[6] Pub. L. No. 111-148 124 Stat. 119 (2010).
[7] A refundable tax credit is a tax credit that is treated as a payment and can be refunded to the taxpayer. Refundable credits can create a Federal tax refund that is larger than the amount a person actually paid in taxes during the year.
[8] Submission Processing sites in Fresno, California; Atlanta, Georgia; Kansas City, Missouri; and Austin, Texas.
[9] The IRS anticipated receiving fewer tax returns early in the filing season due to some tax returns being held for processing until February 14, 2011.
[10] Pub. L. No. 111-92 123 Stat. 2984 (2009). This law requires paid preparers who expect to file more than 10 individual tax returns to file electronically in Calendar Year 2011. The IRS is phasing this requirement in through Calendar Year 2012.
[11] The IRS could not prevent the issuance of all fraudulent tax refunds identified since some fraudulent tax returns were subsequently identified as part of a tax refund scheme after they had been processed and the refund had been released.
[12] Expanded Access to Wage and Withholding Information Can Improve Identification of Fraudulent Tax Returns (Reference Number 2010-40-129, dated September 30, 2010).
[13] Verifying Eligibility for Certain New Tax Benefits Was a Challenge for the 2010 Filing Season (Reference Number 2010-41-128, dated September 30, 2010).
[14] First-Time Homebuyer Credit Repayment Notices Were Incorrect, and the Method Used to Identify Dispositions Is Unreliable (Reference Number 2011-41-097, dated September 15, 2011).
[15] The IRS calculates this amount based on 1/15th of the First-Time Homebuyer Credit amount received by the taxpayer.
[16] Prior to TY 2010, the Adoption Credit was a nonrefundable credit that was limited to the amount of the tax liability on the tax return. Individuals were allowed to carry any unused amount forward for 5 years. An additional 600 of the 11,925 claims had inaccurate unused Adoption Credit claims but were excluded from being sent to the Examination function because they did not meet IRS examination criteria.
[17] We identified an additional 684 claims with no required documentation attached or with invalid or insufficient documentation that were not sent to the Examination function. *****************2(f)************************************************************************************************.
[18] This is an example of a hypothetical situation.
[19] This is an example of a hypothetical situation.
[20] Pub. L. 111-5, 123 Stat. 115 (2009).
[21] If a taxpayer and his or her spouse owned and lived apart in separate main homes, they may each qualify for $1,500.
[22] Individuals Received Millions of Dollars in Erroneous Plug-in Electric and Alternative Motor Vehicle Credits, (Reference Number 2011-41-011, dated January 21, 2011).
[23] All of the volumes reported on are e-filed tax returns.
[24] Individual tax returns were examined and closed without change to the amount of tax.
[25] See Appendix VI for a glossary of terms.
[26] To assess the reliability of computer-processed data, programmers in the TIGTA Office of Information Services validated the data that were extracted and we verified the data with appropriate documentation. Judgmental samples were reviewed to ensure that the amounts presented were supported by external sources. As appropriate, data were compared to the physical tax returns to verify that the amounts were supported.
[27] Verifying Eligibility for Certain New Tax
Benefits Was a Challenge for the 2010 Filing Season (Reference Number
2010-41-128, dated September 30, 2010), and Individuals
Received Millions of Dollars in Erroneous Plug-in Electric and Alternative
Motor Vehicle Credits (Reference Number 2011-41-011, dated January 21,
2011).
[28] Another version of the U.S. Individual Income Tax Return.
[29] Interim Results of the 2009 Filing Season (Reference Number 2009-40-058, dated March 30, 2009).
[30] See Appendix VI for a glossary of terms.
[31] Millions of Dollars in Questionable Qualified Motor Vehicle Deductions Are Being Allowed (Reference Number 2011-41-037, dated April 15, 2011).