The Internal Revenue Service did not establish processes to verify eligibility for the Work Opportunity Tax Credit, according to a new government report.
In the report, from the Treaasury Inspector General for Tax Administration, TIGTA identified 759 WOTC claims totaling approximately $13 million on 687 tax returns processed in 2012 for which the IRS had information at the time the tax returns were processed that could have been used to identify these claims as questionable. The IRS reviewed 77 of the 759 WOTC claims to determine whether the WOTC was in fact potentially erroneous, and the IRS confirmed that 24 of the 77 were erroneous WOTC claims. The remaining 53 WOTC claims involved mistakes on the part of the filer or the pass-through entity.
The Work Opportunity Tax Credit is a federal tax credit designed to encourage employers to hire individuals from certain targeted groups who have consistently faced significant barriers to employment. For tax year 2013, the maximum credit per individual that could be claimed was $9,600.
Between Jan. 1 and Dec. 30, 2012, more than $721 million in the WOTC was claimed on 21,278 electronically filed tax returns. The number and amount claimed on paper returns is not available.
The credit has been in existence since 1978 but expired on Dec. 31, 2013. On Jan. 28, 2014, members of Congress introduced legislation to renew this tax credit, but the legislation has not yet passed.
TIGTA recommended that if legislation to extend the WOTC is enacted, the IRS should revise Form 5884 to request specific information, and revise the associated instructions to advise employers of where to submit certification requests and of certification requirements to claim the WOTC. The IRS should also include the characteristics of the tax returns confirmed as questionable in its overall compliance strategy being developed for General Business Credits and conduct a review of the 24 WOTC claims identified as erroneous to determine the proper tax liability for the tax returns, TIGTA recommended.
In response to the report, IRS officials agreed with TIGTA’s findings and recommendations. The IRS stated that, where feasible, it plans to make suggested revisions to the forms and instructions. The IRS also plans to include a compliance strategy to address questionable WOTC claims in the overall compliance strategy being developed for General Business Credits.
However, an IRS official noted that the agency is dealing with budget constraints. “Our examination program is based on our comprehensive analysis of compliance and filing data,” wrote Mary Beth Murphy, deputy commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “However, it is important to note that from fiscal year 2010 to fiscal year 2014, the IRS has seen the number of key enforcement personnel drop by 3,000 positions. Our examination program aims to ensure that our limited resources are allocated to focus on areas with the highest levels of noncompliance. This allows us to maximize audit coverage in the most egregious tax filing issues while achieving balanced overall coverage. This approach has enabled us to achieve program balance while addressing challenges resulting from declining staffing levels.”