The Internal Revenue Service faced challenges last tax season verifying taxpayers’ eligibility for some of the newer stimulus-related tax credits, allowing 125,762 individuals to receive nearly $111.4 million in erroneous Recovery Act-related tax benefits, according to a new government report.

One of the challenges the IRS confronts each year in processing tax returns is the implementation of new tax law changes, said a report from the Treasury Inspector General for Tax Administration. The passage of two significant tax laws also had an impact on the 2010 filing season and presented additional challenges for the IRS. As of May 28, 2010, the IRS received more than 131.7 million individual income tax returns and issued approximately 101 million refunds totaling $291.7 billion.

The IRS processed individual tax returns on a timely basis during the 2010 filing season. However, implementing some new tax provisions presented challenges for the IRS. These challenges resulted in increased error inventories from individuals incorrectly calculating the Making Work Pay Credit and individuals not providing required documentation when claiming the First-Time Homebuyer Credit. There were nearly 23.7 million errors on tax returns through May 28, 2010, an increase of 7.1 percent in error receipts compared to the same time last year.

TIGTA identified inadequate controls and incomplete and inaccurate programming resulting in 125,762 individuals receiving nearly $111.4 million in erroneous Recovery Act-related tax benefits.

Those included 10,581 individuals claiming $65.6 million in erroneous Homebuyer Credits. IRS compliance efforts did not allow 2,363 of the 10,581 individuals to receive $11.3 million they claimed for the Homebuyer Credit. In addition, TIGTA identified 109,665 individuals erroneously receiving $29.7 million in Making Work Pay and Government Retiree credits, and 5,345 individuals erroneously claiming $15.6 million in plug-in vehicle credits. TIGTA also found 171 individuals claiming $453,220 in erroneous Nonbusiness Energy Property credits.

In addition, TIGTA identified 2,933 individuals with more than $95.8 million in Qualified Motor Vehicle Tax deductions on individual income tax returns (Form 1040, Schedule A) that exceeded the dollar amount the IRS uses to identify a potentially erroneous claim. The IRS has not developed a process to identify these potentially erroneous claims on Schedule A.

“During the 2010 Filing Season, the IRS timely processed individual income tax returns and issued refunds on schedule,” said TIGTA Inspector General J. Russell George in a statement. “However, while the IRS did a good job overall, improvements are needed to prevent erroneous claims for credits and deductions.”

TIGTA made five recommendations to the IRS in its report. TIGTA recommended that the commissioner of the IRS’s Wage and Investment Division should develop processes to track and account for Recovery Act credits claimed on plug-in vehicle credit tax forms and verify whether 8,218 individuals identified as erroneously claiming the First-Time Homebuyer Credit are entitled to claim the credit.

The report also recommended that the IRS should ensure its computer systems are programmed to identify individuals exceeding the maximum allowable Nonbusiness Energy credits. The IRS should also ensure that programming is implemented to identify and freeze the refunds of individuals claiming more than a specific dollar amount in Qualified Motor Vehicle Tax deductions on Schedule A, if the deduction is extended.

The IRS agreed with each of the report’s recommendations and plans to take corrective actions.

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