The Internal Revenue Service did not pursue up to $53 million in potentially improper claims for the Qualified Retirement Savings Contributions Credit, according to a new government report.
The report, from the Treasury Inspector General for Tax Administration, noted that since tax year 2012, the federal government has provided the tax credit, often referred to as the Saver’s Credit, to reduce the income taxes of certain low- to moderate-income workers who contribute to a qualified retirement plan. For tax year 2011, taxpayers received approximately $1.1 billion in Saver’s Credits. But if adequate controls are not in place to ensure compliance with all the requirements of the law, the IRS may not be able to detect potentially improper Saver’s Credits.
The report acknowledged that the IRS has developed and implemented controls for submission processing that generally prevented taxpayers from receiving the Saver’s Credit if they were under 18 years of age, had an income level that exceeded the eligibility limits or were claiming a credit greater than the statutory limits.
However, for tax year 2011, TIGTA determined that taxpayers potentially made approximately $53 million in improper claims for contributions to a qualifying retirement account. Based on a comparison with third-party data, the claims appear to be potentially either false or overstated, according to TIGTA. In the future, if the IRS identifies and addresses taxpayers who are potentially ineligible to receive the Saver’s Credit, it could recover approximately $264 million over five years.
TIGTA recommended that the IRS develop a cost-effective strategy for improving compliance with the requirements for claiming the Saver’s Credit. In response to the report, IRS officials agreed that improvements could be made to increase compliance but did not agree with TIGTA’s recommendation because they do not believe there are cost-effective alternatives.
“We appreciate the recognition that controls used during tax return processing were successful in preventing substantially all improper Retirement Savings Contribution Credit (Saver’s Credit) claims when corroborating data was available to determine ineligibility,” wrote Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division, in response to the report. “As noted in the report, the ability to address improper claims becomes more challenging when data is not available during initial processing of the return. Despite the challenges presented by having to identify certain improper claims using post-processing analysis, we believe the controls in place do provide a reasonable assurance of detecting improper claims, when considered in the context of the materiality of the credit amount, the cost of addressing potentially improper claims, and the opportunity costs of displacing other work that yields higher productivity.”
The report noted that 280,543, or 4.4 percent, of the 6.4 million taxpayers claiming the Saver’s Credit appeared to improperly claim or overstate it, and of those, 20,081 were addressed by the IRS’s compliance functions, Bogadi pointed out. Of the remaining credit claims that were not addressed, only 3,592 (or 0.06 percent) had a credit claim of more than $850.
“With a maximum allowable credit of $1,000 ($2,000 for joint filers), the incremental benefit to be derived from expanded controls is not substantial,” Bogadi wrote.
However, TIGTA argued that given the significant number of taxpayers who had been identified as claiming potentially improper Saver’s Credits, as well as the potential for continued noncompliance in the future, it continues to believe that the IRS should follow through with the recommendation.