IRS overlooks $74M in bogus claims for Social Security tax credit

The Internal Revenue Service isn’t doing enough to flag over $74 million in potentially erroneous claims for the Excess Social Security Tax Credit, according to a new report.

The IRS headquarters in Washington
The IRS headquarters in Washington.

The report, from the Treasury Inspector General for Tax Administration, found the IRS paid more than $74 million in potentially erroneous Excess Social Security Tax Credits as a result of incomplete Social Security tax credit selection criteria, insufficient procedures and tax examiner processing errors.

Taxpayers who have more than one employer and whose combined Social Security tax withholding from all their employers is bigger than the maximum annual withholding amount for FICA taxes are able to claim the excess amount of Social Security tax that’s been withheld as a refundable tax credit. As of Dec. 28, 2017, the IRS received more than 1.5 million tax returns for 2016 claiming the Excess Social Security Tax Credit and gave out tax credits totaling more than $3.1 billion.

TIGTA saw some improvement in how the IRS is handling claims for the tax credit since the last time it did an audit. It analyzed more than 2.5 million tax returns that were electronically filed in 2017 and 2018 with an Excess Social Security Tax Credit claim and found that the processes implemented in response to its previous audit have improved the IRS’s identification of questionable claims for excess FICA taxes.

Nevertheless, the IRS paid more than $74 million in potentially erroneous tax credits on the claims. In addition, incorrect return selection criteria led to the IRS unnecessarily spending around $1.1 million to manually review 737,735 valid Social Security Tax Credit claims filed in 2017 and 2018. The majority of potentially erroneous claims for the tax credit identified by the IRS’s post-processing income matching program are still not being addressed.

TIGTA made eight recommendations in the report to improve the IRS’s efforts to detect and prevent erroneous Excess Social Security Tax Credit claims. It suggested the IRS update its internal procedures to make sure IRS employees follow the right procedures to accurately determine the correct amount of Excess Social Security Tax Credit. On top of that, TIGTA recommended the IRS develop processes to make sure the Social Security tax maximum withholding amounts are updated annually in its programs that select claims for review. The IRS should also set up a process to send and measure the success associated with soft notices that let individuals know about potential errors related to Excess Social Security Tax Credit claims, TIGTA suggested.

The IRS agreed with all eight of the report’s recommendations and plans to take action to correct the problems. That includes implementing a review process for the 2019 filing season to make sure IRS tax examiners correctly address the potential errors. The review results will then be evaluated to see what’s causing the problems. The IRS will also make sure the maximum withholding amounts are updated annually. The agency has also agreed to determine the feasibility of sending and measuring the success of sending “soft notices” to taxpayers related to the Excess Social Security Tax Credit.

However, an IRS official disagreed with some of the findings related to the soft notices. “We disagree that sending soft notices to taxpayers with excess social security tax discrepancies could generate a potential revenue of $28,327,843,” wrote Kenneth C. Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “We do not agree with the methodology used to project this potential revenue. Our resources would not afford us the ability to send notices to all the taxpayers you identified with excess social security tax credit claimed. Additionally if this work is pursued versus another type of work there will be an opportunity cost for that business decision.”

For reprint and licensing requests for this article, click here.