Corporations could be erroneously claiming over $2 billion in carryforward general business credits, according to a new government report.
The report, from the Treasury Inspector General for Tax Administration, found that the current processes at the Internal Revenue Service, do not ensure that corporations accurately claim carryforward general business credits.
The general business credit includes several separate business-related credits, TIGTA noted, and 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. The carryforward represents 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. That same year, corporate tax filers claimed general business credits totaling more than $93 billion. During its review, TIGTA identified 3,285 electronically filed Forms 1120, U.S. Corporation Income Tax Return, that filed that year 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 corporate tax returns for that year for which taxpayers did not receive more than $170 million in Empowerment Zone Employment Credits they claimed.
In addition, 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 TIGTA Inspector General J. Russell George in a statement.
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 report suggested that 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 that TIGTA identified as having an incorrect eligible small business designation.
In response to the report, 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 said, however, that it 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.
Karen Schiller, the commissioner of the IRS’s Small Business/Self-Employed Division, pointed out that the IRS is facing constraints after a series of deep budget cuts. “Given these constrained resources, the IRS has to make strategic and risk-based decisions in devising our examination plan,” she wrote in response to the report. “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. The IRS continues to work on improving the detection of returns with the highest risk of error. We cannot simply prioritize the discrete universe of corporate returns you identified as potentially questionable in your report because we have to consider the risk of placing these returns in the audit stream, and thereby potentially bypassing other returns with higher audit potential.”
The IRS emailed Accounting Today a further comment on TIGTA’s report. “As TIGTA acknowledged in this report, the administration of carryforward general business credits presents unique challenges for the IRS,” said the IRS statement. “While we agree that some taxpayers may have potentially claimed erroneous amounts of general business credit carryforward, we disagree with TIGTA’s overstated estimates. It is unrealistic to conclude that the tax effect is equal to the gross carryforward amount. The General Business Credit Carryforward is not a reimbursable credit but rather it is used to offset a tax liability. TIGTA’s projections assume that the taxpayer will always have enough tax liability to absorb the remaining business credits.
“These challenges are further compounded by the deep cuts to the IRS’s budget that hurt our examination and tax collection efforts in this and other areas,” the IRS statement continued. “Given resource constraints, the IRS examination program aims to ensure that our limited resources are allocated to focus on areas with the highest levels of noncompliance. We continue to work on improving the detection of returns with the highest risk of error. It is important to note that since 2010, the IRS budget has been reduced by nearly $1.2 billion. We also expect to have 16,000 fewer employees by the end of Fiscal Year 2015.”
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