TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Highlights

IMPROVEMENTS ARE NEEDED TO ENSURE THAT MEMBERS OF THE MILITARY RECEIVE TAX BENEFITS TO WHICH THEY ARE ENTITLED

Final Report issued on May 26, 2020

Highlights of Reference Number:2020-40-029 to the Commissioner of Internal Revenue.

IMPACT ON TAXPAYERS

Currently more than 2.8 million individuals serve in some capacity for the U.S. military, including more than 2.1 million service members and more than 700,000 civilians.In recognition of the dangers that members of the military face and the sacrifices they make on behalf of the United States, special Federal income tax benefits have been extended to members of the military since the inception of modern taxation.

WHY TIGTA DID THE AUDIT

This audit was initiated to evaluate the IRSís assistance to current and former members of
the military who are serving currently or have served in a combat zone and/or received a combat-related disability severance payment.

WHAT TIGTA FOUND

The IRS has taken a number of actions to address prior recommendations to improve the identification of individuals serving in a combat zone.However, the IRS still does not have processes and procedures to resolve unpostable records received from the Department of Defense (DOD).

Our analysis of DOD data with an unpostable condition as of October 3, 2019, determined that 3,047 individuals never had a Combat Zone Indicator placed on their tax account.Although the IRS established processes to maintain the unpostable records in a database, it cannot confirm that manual review processes were implemented.

In addition, due to programming and tax examiner errors, some tax accounts with aged Combat Zone Indicators were not accurately updated.Our analysis identified 358 individuals with a Combat Zone Indicator with an entry date that was more than two years old and with a balance due to the IRS totaling more than $2.5 million for which collection activity was suspended.

Further, additional steps can be taken to notify some veterans of their right to claim a disability severance payment refund.Actions should be taken to assist veterans whose letters were returned as undeliverable or the IRS did not have a current address.In addition, the IRS did not protect the right to file a refund claim for 419 veterans who did not receive a letter because the IRS did not have a valid address.

Finally, the Combat-Injured Veterans Tax Fairness Act of 2016, in providing for the retroactive refund of these improperly withheld taxes, did not include veterans from the Coast Guard.The National Taxpayer Advocate 2020 Purple Book includes a legislative recommendation to modify the Act to include Coast Guard veterans who had Federal income tax improperly withheld from their disability severance payments.

WHAT TIGTA RECOMMENDED

TIGTA made eight recommendations to improve the IRSís assistance to current and former members of the military.TIGTA recommended that the IRS develop processes to resolve unpostable records and ensure that all Combat Zone Indicators more than two years old are identified and reviewed.In addition, the IRS should ensure that eligible veterans for whom it has an address are notified of their right to file a refund claim and the right to file a claim is protected for the 419 veterans for which the IRS does not have a valid address.

The IRS agreed or partially agreed with six recommendations.The IRS disagreed with TIGTAís recommendations to update its systemic program to prioritize the assignment of aged Combat Zone Indicators or to place an indicator on the 419 tax accounts of the veterans the DOD identified but did not receive a letter from the IRS.

READ THE FULL REPORT

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

https://www.treasury.gov/tigta/auditreports/2020reports/202040029fr.pdf.

 

Phone Number /202-622-6500

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

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