Treasury Inspector General for Tax Administration
October 22, 2012
TIGTA - TIGTA - 2012-58
Contact: David Barnes
WASHINGTON – Millions of dollars in refundable credits that were determined to be erroneous after taxpayers received them may never be recovered by the Internal Revenue Service (IRS), according to a new report released publicly today by the Treasury Inspector General for Tax Administration (TIGTA).
Refundable tax credits, which not only have the potential to reduce a taxpayer’s liability to zero but can provide cash payments to taxpayers, are highly vulnerable to fraud. TIGTA initiated its audit to determine the effectiveness of efforts by the IRS to recover refundable credits disallowed during post-refund examinations and to consider options the IRS could implement to decrease the issuance of erroneous refundable credits. Examples of refundable credits include the Earned Income Tax Credit (EITC), Additional Child Tax Credit (ACTC), First-Time Homebuyer Credit, and American Opportunity Tax Credit.
“Because of the susceptibility of these credits to fraud, and the low success rates in recovering erroneous credits once refunds have been issued, the IRS should take every reasonable step possible to identify potentially questionable credits and validate those credits before associated refunds are issued,” said J. Russell George, Treasury Inspector General for Tax Administration.
To collect erroneous refundable credits issued to the taxpayer, the IRS frequently has to rely on a process of refund offsets, which withhold future tax refunds to repay any amounts owed by the taxpayer. If the taxpayer does not timely repay the erroneous credit, the IRS must wait for the annual tax season to collect any money, and a collection would be made only if the taxpayer is eligible for a refund.
TIGTA found that due to post-refund examinations of tax returns, taxpayers were required to repay more than some $2.3 billion in erroneous refundable tax credits during tax years 2006 through 2009. By the end of December 2011, the IRS had recovered an estimated $1.3 billion, of which more than 70 percent was collected through refund offsets.
TIGTA recommended that the IRS implement additional controls to identify and stop erroneous claims for refundable credits before refunds are issued, including: 1) implementing an account indicator to identify taxpayers who claim erroneous refundable credits to prevent them from erroneously receiving those claims for a specific period in the future; 2) freezing and verifying claims for the ACTC on all returns for which the EITC is frozen; and 3) coordinating with the Department of the Treasury’s Office of Tax Policy to seek legislation to expand the EITC due diligence requirements to include the ACTC.
IRS management agreed with TIGTA’s findings and plans to take appropriate corrective actions.
Read the report.
Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.
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