Office of Audit
AUTHORITIES PROVIDED BY THE INTERNAL REVENUE CODE ARE NOT EFFECTIVELY USED TO ADDRESS ERRONEOUS REFUNDABLE CREDIT AND WITHHOLDING CREDIT CLAIMS
Final Report issued on February 26, 2020
Highlights of Reference Number: 2020-40-008 to the Commissioner of Internal Revenue.
IMPACT ON TAXPAYERS
Congress provided the IRS with tools to address taxpayers identified as submitting fraudulent or reckless refundable credit claims. These tools include the authority to assess the erroneous refund penalty and require taxpayers to recertify that they meet refundable credit eligibility requirements for credits claimed on a return filed subsequent to disallowance of a credit, and the ability to apply two-year or 10-year bans on taxpayers who disregard credit eligibility rules.
WHY TIGTA DID THE AUDIT
A prior TIGTA review found that the IRS did not always recertify the eligibility of taxpayers who received Earned Income Tax Credit (EITC) before allowing the credit. This audit was initiated to evaluate the IRS’s use of available tools to deter taxpayers from repeatedly claiming erroneous or fraudulent refundable tax credits.
WHAT TIGTA FOUND
The IRS does not use the tools provided by Congress to the extent possible to address erroneous credit payments. This is despite the IRS’s estimate that 25 percent ($18.4 billion) of the EITCs for Fiscal Year 2018 are likely improper, as well as nearly 33 percent ($8.7 billion) of Additional Child Tax Credit payments in Tax Years 2009 through 2011, and more than 31 percent ($5.3 billion) of American Opportunity Tax Credit payments during Tax Year 2012.
While the IRS assessed the erroneous refund penalty on 3,190 returns, TIGTA identified 494,555 taxpayers with more than $2.6 billion in withholding and refundable credits that were disallowed for Tax Years 2015, 2016, and 2017 for which almost $534.7 million in potential penalties was not assessed.
TIGTA also identified 289,059 returns processed during Calendar Year 2018 for which the IRS did not verify the taxpayers’ eligibility before recertifying them to receive a refundable credit. These taxpayers received more than $532 million in refundable credits. In addition, recertification indicators were not placed on 6,259 Tax Year 2017 tax returns for which the IRS disallowed $6.2 million in refundable credits as part of its Automated Questionable Credit program.
IRS criteria also allows taxpayers to claim erroneous refundable credits for multiple years before a two-year ban is placed on their tax account. TIGTA identified 3,934 taxpayers who claimed more than $12.9 million in credits in Tax Year 2017 and had the same credit disallowed in multiple prior tax years. TIGTA estimates it costs the IRS nearly $1.1 million to re-audit taxpayers who have previously been denied a refundable credit.
WHAT TIGTA RECOMMENDED
TIGTA made eight recommendations to the IRS Commissioner, Wage and Investment Division. The IRS agreed or partially agreed with five recommendations. The IRS did not agree to examine all tax returns with a recertification indicator, modify systemic processes to apply the two-year ban after two audits result in the disallowance of a refundable credit, or develop a plan to obtain and use information from the Social Security Administration of individuals who admit to falsely reporting self-employment income to receive refundable credits.
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