Treasury Inspector General for Tax Administration
March 31, 2015
TIGTA - 2015-05
Contact: David Barnes
WASHINGTON – Existing processes at the Internal Revenue Service (IRS) do not ensure that corporations accurately claim carryforward general business credits, according to a new report from the Treasury Inspector General for Tax Administration (TIGTA).
The general business credit (made up of several separate business-related credits) is offered as an incentive for a business to engage in certain kinds of activities considered beneficial to the economy or public at large, such as improving disability access for customers or providing child care for employees’ children. A carryforward is the amount of the general business credit that is unused because of the tax liability limit for claiming the credit. During Processing Year 2013, the IRS received 87,674 corporate tax returns with general business credits that offset taxes owed by more than $21 billion.
During Processing Year 2013, corporate filers claimed general business credits totaling more than $93 billion. The objective of this review was to determine whether the IRS’s controls are adequate to identify questionable general business credits claimed on business tax returns.
TIGTA identified 3,285 electronically filed Forms 1120, U.S. Corporation Income Tax Return, filed in Processing Year 2013 on which corporations claimed potentially erroneous carryforward credits totaling more than $2.7 billion.
TIGTA also found that a programming error caused some corporations to not receive general business credits they claimed. TIGTA identified 717 Processing Year 2013 corporate tax returns for which taxpayers did not receive more than $170 million in Empowerment Zone Employment Credits they claimed.
Finally, TIGTA identified 1,411 corporate tax returns filed in Processing Years 2012 and 2013 that erroneously claimed a current year general business credit as an Eligible Small Business subsequent to the expiration of the relevant tax provision. These businesses claimed almost $35 million in general business credits as Eligible Small Businesses.
"Given the amount of potential tax revenue at risk, it is imperative that the IRS improve its processes to ensure that corporations accurately claim carryforward general business credits," said J. Russell George, Treasury Inspector General for Tax Administration.
TIGTA recommended that the IRS verify whether the 3,285 corporate filers TIGTA identified as having a questionable carryforward amount are entitled to claim the carryforward amount. The IRS should also determine whether the programming error affects paper-filed business returns and verify whether taxes were affected for the 1,411 corporate filers TIGTA identified as having an incorrect Eligible Small Business designation.
In their response, IRS management agreed with three of TIGTA's recommendations and disagreed with two. The IRS plans to review two samples of cases for audit potential and determine whether any further action is required. In addition, the IRS has requested corrections to general business credit programming for the 2016 Filing Season. TIGTA is concerned about the lack of sufficient corrective action in response to the other two recommendations, and believes that implementing these recommendations would significantly improve the IRS’s ability to ensure compliance in this area.
Read the report.
Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.
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