TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Highlights

ACTIONS CAN BE TAKEN TO BETTER IDENTIFY POTENTIALLY ERRONEOUS DOMESTIC
PRODUCTION ACTIVITIES DEDUCTIONS

Final Report issued on September 28, 2016

Highlights of Reference Number:  2016-40-091 to the Internal Revenue Service Deputy Commissioner for Services and Enforcement.

IMPACT ON TAXPAYERS

Congress enacted the American Jobs Creation Act of 2004 to enhance the ability of domestic businesses and manufacturing firms to compete in the global marketplace and to enable small businesses to maintain their position as the primary source of new jobs in this country.  Section 102 of this Act allows taxpayers to claim a Domestic Production Activities Deduction (DPAD) on their tax return.  The DPAD gives businesses an incentive to participate in qualifying activities in the United States.

WHY TIGTA DID THE AUDIT

During Processing Years 2013 through 2015, taxpayers claimed more than $131 billion in DPADs; nearly $44 billion was claimed in Processing Year 2015 alone.  TIGTA performed this review to determine whether the IRS has sufficient controls in place to ensure that the DPAD is properly claimed.

WHAT TIGTA FOUND

Processes have not been established to ensure that claims for the DPAD are ***************************2*********************************************TIGTA’s match of ************************2**************** **********2********* to the amount of DPAD claimed identified 2,829 taxpayers that filed returns for Tax Year 2013 that potentially overclaimed the DPAD by more than $27 million.

IRS management explained that systemically identifying businesses and corporations overclaiming the deduction based on the **********2****************** presents a challenge because many corporations file returns as part of a consolidated group, receive the DPAD from a pass-through entity, or use a Professional Employer Organization.  TIGTA agrees there are challenges to the IRS systemically determining if a business has overclaimed the DPAD *************2***************.  However, actions can be taken by the IRS to address these challenges.

The IRS also has not established processes to ensure that businesses, i.e., individual taxpayers, are eligible to claim the DPAD.  For example, individual taxpayers should only claim the DPAD if they have an *************************************************************2*************************************************************************************************************************2*****************************************.  TIGTA identified 177 electronically filed Tax Year 2013 Forms 1040, U.S. Individual Income Tax Return, that claimed $850,329 in the DPADs but did not have a ***********************2*************************.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS revise Form 8903, Domestic Production Activities Deduction, to include a line for providing the *************************2**************************************************** associated with a DPAD claim; develop processes to identify those taxpayers ***********************************************************2*********************************************; develop processes and procedures to identify individuals claiming a DPAD *******************************2***************************************************************************** and use its math error authority to disallow the deduction; and verify whether the 177 electronically filed returns that TIGTA identified as erroneously claiming the DPAD are entitled to the claim.

The IRS agreed with two of the four recommendations.  The IRS disagreed that it should revise Form 8903 *********************************2***************** and verify the 177 returns that TIGTA identified as erroneously claiming the DPAD.  TIGTA believes that requiring **2** would ensure more accurate reporting and will provide the IRS the ability to systematically verify DPAD claims.  TIGTA also believes the 177 returns potentially claimed a deduction to which they were not entitled.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

http://www.treasury.gov/tigta/auditreports/2016reports/201640091fr.pdf.

 

Redaction Legend:

2 = Risk Circumvention of Agency Regulation or Statute

 

 

Phone Number   /  202-622-6500

E-mail Address  /  TIGTACommunications@tigta.treas.gov

Website             /  https://www.treasury.gov/tigta