Office of Audit
ACTIONS ARE NEEDED TO BETTER IDENTIFY AND ADDRESS INDIVIDUALS WHO FILE TAX RETURNS USING FRIVOLOUS ARGUMENTS
Final Report issued on August 31, 2016
Highlights of Reference Number: 2016-40-069 to the Internal Revenue Service Commissioner for the Wage and Investment Division.
IMPACT ON TAXPAYERS
Individuals or businesses who oppose the Federal tax laws may use a frivolous tax argument to enrich themselves or evade paying tax. Generally, a frivolous tax argument is based on a frivolous or incorrect interpretation of the Federal tax laws. Individuals and businesses use these incorrect interpretations to support their claims that they are not subject to Federal tax laws.
WHY TIGTA DID THE AUDIT
To date the IRS has identified 50 frivolous tax arguments used by taxpayers. During Fiscal Years 2012 through 2014, the IRS identified 36,648 frivolous tax returns in which the taxpayer used one or more of the 50 identified frivolous arguments. TIGTA performed this audit to assess the IRS’s efforts to identify and prevent the avoidance of individual income tax based on frivolous tax arguments.
WHAT TIGTA FOUND
Potentially erroneous refunds were paid as a result of undetected or insufficiently addressed frivolous tax return claims. Specifically, IRS processes and procedures do not ensure that all tax returns claiming a potentially frivolous tax argument are identified. As a result, the IRS paid more than $27.2 million in potentially erroneous refunds or tax credits to 1,938 taxpayers who claimed one or more frivolous tax arguments in Tax Year 2014. The IRS can assess a $5,000 frivolous penalty for each of the 1,938 returns for which a valid return is not provided by the taxpayer. IRS management informed us that the Frivolous Return Program (FRP) filters have been modified to ensure that returns with the same characteristics as those 1,938 confirmed as frivolous will be identified and referred to the FRP for additional frivolous filer review.
In addition, TIGTA identified that employees are not adequately trained to identify tax returns claiming frivolous tax return arguments. For example, 40 of the 50 frivolous arguments are identified as a result of an IRS employee’s manual review of paper-filed tax returns or correspondence. The IRS informed us that prior to Calendar Year 2013 annual FRP training was provided to its employees responsible for reviewing tax returns and correspondence. The IRS has developed two online frivolous return training courses. However, employees working in those units most likely to identify frivolous returns and correspondence are not required to take the training courses.
Finally, the FRP Correspondence Unit employees incorrectly identified for destruction correspondence containing potentially frivolous arguments. Our review of the 155 pieces of correspondence found that 11 (7 percent) pieces of correspondence should have been worked as frivolous correspondence but were incorrectly identified for destruction.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the IRS ensure that the annual evaluation of the FRP filter criteria includes the identification and assessment of all original and amended tax returns, regardless of dollar tolerance, that meet the filter criteria and ensure that appropriate action is taken to address the 1,938 tax returns the IRS confirmed as being frivolous. In addition, the IRS should correct computer programming errors and ensure that all employees receive annual training on the processes for identifying potentially frivolous tax returns.
IRS management agreed with all of TIGTA’s recommendations.
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