Washington, D.C. - Billions of dollars in tax credits are being provided to Individual Taxpayer Identification Number filers without adequate verification of eligibility, according to a report from the Treasury Inspector General for Tax Administration.
The Internal Revenue Service provides ITINs to individuals who are not eligible for a Social Security number to help them comply with the tax laws. Although ITINs are specifically not to be used in employment for wages, a recent TIGTA audit revealed that 292,992 employers filed 790,701 W-2s with ITINs reporting wages totaling more than $9.5 billion in 2006.
TIGTA said that incomplete or inaccurate information is being input into IRS systems when a tax return is filed with an ITIN and the attached Form W-2 contains an SSN that does not belong to the individual filing the tax return. For electronically filed returns, this is due to some tax software auto-populating the ITIN in place of the SSN.
Verification of eligibility is critical because claims for credits are substantial, TIGTA stated. In tax year 2007, more than 1.2 million, or 66 percent, of ITIN filers received Additional Child Tax Credits of almost $1.8 billion. This is a refundable credit available to individuals with no tax liability.
The agency recommended that the commissioner of the IRS's Wage and Investment Division develop processes to identify individuals who are improperly using ITINs for work purposes and develop outreach efforts with the Social Security Administration to address their improper use; limit the automatic-population feature for ITIN tax returns; ensure that accurate tax information is input into IRS systems from both paper and electronically filed ITIN tax returns; and ensure that the requirements for the Child Tax Credit and the ACTC are met on ITIN returns claiming the credits.
TIGTA also made a legislative recommendation to clarify whether or not refundable tax credits such as the ACTC may be paid to filers without a valid SSN and, if these credits may not be paid, to provide the IRS with math error authority to disallow the associated claims for the credits. Disallowance of the credit to filers without a valid SSN would reduce outlays by $8.9 billion over five years.
IRS officials agreed to continue to work with software companies to limit the auto-populate feature. They also agreed to work with the Treasury Office of Tax Policy to consider legislation to limit claims for the ACTC to taxpayers with an SSN.
The IRS disagreed with the other recommendations. TIGTA said that it does not believe that management provided adequate justification for disagreeing with the recommendations.
Separately, TIGTA urged the IRS to ensure better compliance by tax-exempt organizations that don't file their tax returns.
A recent TIGTA report recommended that the IRS needs a comprehensive, documented strategy to focus on improving compliance by non-filing charities. Even though they are technically tax-exempt, such organizations are generally required to file an annual information return with the IRS. TIGTA said in its audit report that it believes steps could be taken by the IRS to more fully identify and address tax-exempt non-filers.
"The filing of required tax-exempt organization returns in a timely manner is critical to increasing the ability of taxpayers to accurately view the operations of tax-exempt organizations and make contribution decisions," it said.
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