REVISING TAX DEBT IDENTIFICATION PROGRAMMING
AND CORRECTING PROCEDURAL
ERRORS COULD IMPROVE THE TAX REFUND OFFSET PROGRAM
Final Report issued on March 31, 2016
Highlights of Reference Number: 2016-40-028 to the Internal Revenue Service Deputy Commissioner for Services and Enforcement and the Chief Technology Officer.
IMPACT ON TAXPAYERS
The IRS maintains a file that contains information about Federal debts owed by taxpayers. In Tax Year 2013, more than $6.8 billion in individual tax refunds were offset to pay outstanding individual and business tax debts.
WHY TIGTA DID THE AUDIT
The Internal Revenue Code requires a taxpayer’s refund to be offset to pay outstanding tax debt. Refunds must be offset to an outstanding Federal tax debt before it may be offset to nontax debts or applied as a credit to a future tax period. The overall objective was to determine whether the IRS’s processes and controls ensure that overpayments are properly and accurately applied to offset Federal tax liabilities.
WHAT TIGTA FOUND
TIGTA identified that data maintained by the IRS could be used to increase its identification of individuals with business tax debt. The IRS’s current process does not effectively identify sole proprietors with business tax debt. Using information the IRS captures and maintains from Form SS-4, Application for Employer Identification Number, TIGTA identified 53,672 individual taxpayers who received approximately $74.5 million in tax refunds in Tax Year 2013 in which the IRS could have offset the refunds to outstanding tax debt on the taxpayer’s associated business tax account.
In addition, the IRS needs to consistently apply tax account freezes to ensure that refunds are offset to pay associated tax liability on the IRS’s Non–Master File (NMF) system. TIGTA identified 487 individual and 29 business taxpayers that received more than $2.9 million in tax refunds for Tax Year 2013 that should have been offset to pay an outstanding NMF tax debt.
Finally, the IRS incorrectly offset individual tax refunds to tax debt of Limited Liability Companies (LLC). TIGTA identified 502 Tax Year 2013 individual tax refunds totaling approximately $780,474 that were incorrectly applied to outstanding tax debts on their LLC business tax accounts. The IRS stated that its current computer programming did not incorporate criteria to identify these cases.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the IRS revise its processes to identify individual tax returns to offset to business tax debt, develop a systemic process to ensure that freezes are not erroneously reversed, ensure that a manual freeze is input on a primary taxpayer’s account when the secondary taxpayer’s account has an outstanding tax debt, and develop a process to ensure that offset freezes are placed on all individual and business tax accounts when there is an outstanding debt on the NMF account. TIGTA also recommended that the IRS revise computer programming to ensure that credit elects are offset to any associated tax debt on the NMF, and to use the LLC indicator on the business tax account to ensure that individual tax refunds are not offset to the associated LLC’s business tax debt. Finally, TIGTA recommended that the IRS identify and transfer the incorrect offsets totaling $780,474 from the 502 LLC accounts back to the individual taxpayer accounts.
The IRS agreed with TIGTA’s recommendations. For three of TIGTA’s recommendations, the IRS stated that implementation of the requisite programming changes to accomplish the objectives are subject to budgetary constraints, limited resources, and competing priorities.
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to:
Phone Number / 202-622-6500
E-mail Address / TIGTACommunications@tigta.treas.gov
Website / https://www.treasury.gov/tigta