Treasury Inspector General for Tax Administration
Office of Audit
Combat Zone Indicators on Taxpayer Accounts Are Frequently Inaccurate
Issued on September 23, 2009
Highlights of Report Number: 2009-40-138 to the Internal Revenue Service Commissioner for the Wage and Investment Division.
IMPACT ON TAXPAYERS
In recognition of the dangers
that members of the military face and the sacrifices they make on behalf of the
WHY TIGTA DID THE AUDIT
This audit was part of our audit coverage in the TIGTA Fiscal Year 2009 Annual Audit Plan. The overall objective of this audit was to assess the IRS actions to ensure the accuracy of Combat Zone indicators.
WHAT TIGTA FOUND
TIGTA found that Combat Zone indicators are frequently inaccurate because the IRS is incorrectly updating Combat Zone indicators to active status when a military member self-identifies on their tax return that they served in a combat zone. In addition, Combat Zone indicators used by the IRS do not distinguish between military and civilian taxpayers. As a result, civilians can receive Combat Zone tax relief benefits to which they are not entitled. The IRS also cannot identify for married individuals filing a joint tax return which individual(s) is/are in the military.
Further, unpostable conditions are not accurately resolved when there is a problem posting the entry/exit dates provided by the Department of Defense. As a result, Combat Zone indicators are not being placed on individuals’ accounts when they enter a combat zone and/or are not being reversed when they exit a combat zone. Finally, the IRS requires no documentary evidence to support an individual’s self-identification that they are serving in a combat zone.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the Commissioner, Wage and Investment Division, develop processes to distinguish military taxpayers from civilian taxpayers, properly identify individuals who are in the military that file a joint tax return, and ensure indicators are properly reversed. The IRS should also discontinue providing the option to self-identify by annotating a tax return. Further, the IRS should review the accounts of nonfilers with inaccurate indicators to determine if notification or compliance actions are needed, identify and resolve unpostable records from the Department of Defense, validate Combat Zone service at the time an individual self-identifies, and develop a secure fillable form with the required data fields to improve electronic self-identification.
In their response to the report, IRS officials agreed with or agreed to take action on 9 of our 10 recommendations. The IRS disagreed with our recommendation to develop a process to distinguish military taxpayers from civilian taxpayers. IRS management indicated that they have the ability to distinguish between military and civilian taxpayers. TIGTA acknowledges that the IRS can identify military individuals via the information received monthly from the Department of Defense. However, as our report states, the IRS uses the same indicator for both military and civilian taxpayers. Once this indicator is set on the accounts of civilian taxpayers, it could allow civilian taxpayers to inappropriately exclude income without action by the IRS because the IRS will not review accounts with unreported income if a Combat Zone indicator is present.
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to:
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