The Internal Revenue Service needs to improve the way it deals with erroneous claims for refundable tax credits such as the Earned Income Tax Credit, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, noted that the IRS estimates that 24 percent, or $16.8 billion, in EITC payments were issued improperly in fiscal year 2016. TIGTA undertook a review to assess the IRS’s strategy and processes for identifying and addressing return preparers’ filing returns with erroneous refundable credits such as the EITC. The IRS has various compliance treatments to deal with the 24,312 return preparers who have been identified as filing high rates of tax returns that show the characteristics of an erroneous claim. Those include issuing a letter to the preparer or visiting the preparer’s office in person.

However, TIGTA found that the scoring and selection model used by the IRS to develop its FY 2016 Return Preparer Compliance Workplan weren’t documented sufficiently. TIGTA’s analysis found 3,547 return preparers, with 30 percent or more of their returns having one or more characteristics of a potentially erroneous EITC claim. Those tax preparers submitted 337,317 returns with EITC claims totaling more than $1.1 billion. But the IRS didn’t perform a compliance treatment for many of these preparers, and the agency’s documentation didn’t explain why the IRS excluded these preparers from treatment.

IRS headquarters in Washington, D.C.
Andrew Harrer/Bloomberg

On top of that, TIGTA found that coordination and referrals among IRS functions could increase the IRS’s ability to address return preparers with persistent noncompliance. TIGTA analyzed the 1,297 return preparers in the IRS Fiscal Year 2016 Return Preparer Compliance Workplan who received an office visit and found that 510 of them (or 39 percent) didn’t improve their compliance with EITC requirements the following year.

The IRS actually excluded 1,686 noncompliant return preparers from the IRS scoring and selection process after including the return preparers in a control group that was used to measure the effectiveness of compliance treatments.

TIGTA recommended the IRS do a better job of documenting the methodology and criteria used in the Refundable Credits Policy and Program Management function’s risk-based return preparer scoring and selection model. The IRS should also develop procedures for its Refundable Credits Policy and Program Management function for identifying egregious preparers and referring them to other functions when they continue to be noncompliant after an office visit.

The IRS agreed with one of TIGTA’s recommendations and partly agreed with the other recommendation, acknowledging that more actions are needed when preparers continue to be noncompliant.

“We agree that the documentation outlining the return preparer scoring and selection model can be improved; however, we disagree with the finding that the Treasury Inspector General for Tax Administration identified that there were 3,547 untreated return preparers,” wrote Kenneth C. Corbin, commissioner of the IRS’s Wage and Investment Division. “Preparers are identified using a dynamic data driven set of criteria that had been updated over the course of the 17 months between the time our selections were made and the time the TIGTA analysis identifying the 3,547 preparers was done. The data had changed and would not be expected to provide the same results.”

TIGTA is still concerned, however, that the Refundable Credits Policy and Program Management function doesn’t have written procedures to proactively refer egregious return preparers to other IRS functions.

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Michael Cohn

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.