TIGTA Seal graphic

Treasury Inspector General for Tax Administration

Press Release

April 28, 2016
TIGTA - 2016-11
Contact: Karen Kraushaar, Director of Communications
(202) 622-6500

Revising Tax Debt Identification Programming and Correcting Procedural Errors Could Improve the Tax Refund Offset Program

WASHINGTON — The Internal Revenue Service (IRS) needs to revise computer programming and correct its procedures to ensure it identifies all available tax refunds to offset Federal tax liabilities.

That is a finding of an audit report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

The Internal Revenue Code requires a taxpayer’s refund to be offset first to pay outstanding Federal tax debt before it may be offset to nontax debts or applied as a credit to a future tax period. After the tax overpayments have been offset to existing individual tax debts, any amount remaining can then be offset to business tax account liabilities. If the taxpayer has no outstanding Federal tax debt, then Treasury’s Bureau of the Fiscal Service performs verifications to determine if the taxpayer has other types of government debt. The overall objective of TIGTA’s audit was to determine whether the IRS’s processes and controls ensure that overpayments are properly and accurately applied to offset Federal tax liabilities.

TIGTA found that, in Tax Year 2013, the Internal Revenue Service (IRS) offset more than $6.8 billion in individual tax refunds to pay outstanding individual and business tax debts. However, TIGTA identified that the IRS’s current process does not effectively identify sole proprietors with business tax debt. As a result, TIGTA identified 53,672 individual taxpayers who received approximately $74.5 million in tax refunds in Tax Year 2013 that could have been offset against outstanding tax debts on the taxpayers’ associated business tax accounts.

In addition, the IRS needs to consistently apply tax account freezes to ensure that refunds are offset to pay associated tax liability on the IRS’s Non-Master File system (a system used by the IRS to process tax accounts that it cannot process on the Master File). TIGTA identified 487 individual and 29 business taxpayers who received more than $2.9 million in tax refunds for Tax Year 2013 that should have been offset to pay an outstanding Non-Master File tax debt. Moreover, TIGTA identified a significant potential for future improper refunds for an additional 616 individual taxpayers and 697 business taxpayers. These accounts have outstanding tax debts totaling more than $1.4 billion; however, they do not currently have the required freezes on their associated Master File tax account.

Finally, the IRS incorrectly offset individual tax refunds to tax debt of Limited Liability Companies. TIGTA identified 502 Tax Year 2013 individual tax refunds totaling approximately $780,474 that were incorrectly applied to outstanding tax debts on their Limited Liability Company business tax accounts. The IRS stated that its current computer programming did not incorporate criteria to identify these cases.

“The IRS needs to revise its processes and controls to ensure that refunds for tax overpayments are properly offset to pay for individual or business tax liabilities,” said J. Russell George, the Treasury Inspector General for Tax Administration. “At present, the IRS’s existing computer programming cannot provide this assurance,” he added.

TIGTA made seven recommendations in its report, with which the IRS agreed and plans to take corrective action. For three of TIGTA’s seven recommendations, the IRS stated that implementation of the requisite programming changes to accomplish the objectives are subject to budgetary constraints, limited resources, and competing priorities.

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.