The Internal Revenue Service is still unable to verify claims for refundable tax credits such as the Earned Income Tax Credit before sending out tax refunds, despite legislation in 2015 giving it more time to double-check such claims, according to a new government report.
The report, from the Treasury Inspector General for Tax Administration, pointed out that the Protecting Americans from Tax Hikes Act of 2015, also known as the PATH Act, includes provisions aimed at reducing improper claims for the Earned Income Tax Credit, the Child Tax Credit, the Additional Child Tax Credit and the American Opportunity Tax Credit. Those provisions were supposed to save an estimated $7 billion over 10 years by reducing fraud, abuse and improper payments in refundable tax credit programs. Because of those PATH Act provisions, the IRS couldn’t begin providing refunds to taxpayers who claimed the refundable tax credits until after Feb. 15, so it would have extra time to verify the tax credit claims and safeguard against identity theft and tax fraud. The IRS began doing that last tax season. This tax season, the delay was even longer and the IRS announced on Feb. 27 that it was beginning to send out the refunds (see IRS starts giving tax refunds to taxpayers claiming EITC and ACTC).
However, last year, the delay didn’t necessarily mean the IRS was able to verify the tax credit claims. In the report, TIGTA identified 1.4 million tax returns with a discrepancy in wages reported on the tax return and wages reported on third-party Forms W-2, Wage and Tax Statement, that were not reviewed by the IRS before the refunds were released on Feb. 15, 2017. These taxpayers received approximately $8.2 billion in refunds, including $4.3 billion from EITC claims and $1.7 billion from ACTC claims.
The IRS didn’t receive any third-party W-2 forms before releasing the refunds for 660,141 of the more than 1.4 million tax returns. Those returns had tax refunds totaling nearly $3.7 billion. Late and missing W-2’s reduce the IRS’s ability to verify EITC and ACTC claims before it pays out tax refunds, TIGTA pointed out, so the effectiveness of the IRS’s efforts to verify the wages reported directly depends on employers filing W-2 forms on a timely basis.
On top of that, TIGTA found that for 4,509 tax returns associated with a retroactive refundable credit claim, the IRS allowed nearly $9.8 million in refundable tax credits. The IRS incorrectly rejected credits totaling $489,423 on 289 returns for which a taxpayer’s Individual Taxpayer Identification Number was issued before the return’s due date, entitling the taxpayer to the refundable credit that was being claimed.
Last tax season, the IRS didn’t program its Modernized e-File system to systemically verify the ITIN issuance date for electronically filed refundable credit claims for the prior year. Instead, all prior-year e-filed tax returns were sent to the IRS’s Error Resolution System function, where employees needed to manually revalidate the ITIN, for a total cost estimated at $400,570. But even then the methodology for correcting the ITIN issuance date continued to result in errors.
TIGTA made five recommendations in the report. It recommended the IRS review the tax returns for which the IRS incorrectly allowed and denied the CTC, the ACTC, the EITC and the AOTC. It also suggested the IRS should program the Modernized e-File system to verify the TIN issuance date on prior-year tax returns and reject retroactive claims. TIGTA also recommended the IRS correct the programming errors that led to the incorrect calculation of ITIN issuance dates, and ensure that its computer systems are updated with the correct TIN issuance dates.
The IRS agreed with four of TIGTA’s recommendations and partially agreed with the remaining one. For that one, IRS management pointed out that limitations associated with the Modernized e-File system’s ability to identify extensions of time to file could result in rejecting possible allowable claims. TIGTA acknowledged that without the ability to systemically identify an extension that changes the due date of the return, the IRS could in fact reject allowable claims. TIGTA therefore agreed with the IRS’s alternative process of identifying claims and sending them for additional review to determine whether they are erroneous retroactive refundable credit claims.
“It is also necessary to recognize, as reflected in the report, that the legal authority does not exist for the IRS to increase a taxpayer’s liability when income documents do not reconcile with the return,” wrote Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Whether the discrepancy results in an additional tax assessment or the reduction of allowable credits, deficiency procedures must be followed and they are the costliest treatment processes available for addressing questionable returns in terms of both human resource needs and processing costs.”
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