IRS Transfers Taxpayer Payments to the Wrong File

The Internal Revenue Service improperly transferred hundreds of millions of dollars in taxpayer payments to its Excess Collection File, often without the right documentation, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, examined two statistically valid samples (small dollar transfers and transfers over $1 million) of taxpayer payments transferred to the XSF and determined that the documentation was insufficient to support the transfer in most of the sampled cases. As a result, TIGTA estimates that more than $604 million was improperly transferred into the XSF. TIGTA also found that managerial approval was not always obtained in the sample of transfers over $1 million, and estimates that IRS employees transferred more than $145 million to the XSF without managerial approval.

The XSF is a control file containing nonrevenue receipts (such as receipts received for items other than taxes) and tax payments that cannot be applied to a taxpayer account. Once the payment is moved to the XSF, it is no longer associated with the taxpayer’s account. As of January 2010, there was approximately $4.7 billion in the XSF, and more than $1.4 billion (30 percent) of this amount came from transfers of $50,000 or more.

Payments that eventually go to the XSF are generally caused by one of a limited number of conditions, such as when a taxpayer submits a tax payment but does not file a tax return; a taxpayer files a tax return past the time period to receive a refund; a taxpayer submits a tax payment in anticipation of a tax adjustment, but the adjustment does not occur; and the IRS is unable to determine which taxpayer’s account to apply a payment.

Taxpayers who submit a tax payment when the IRS is barred from making an assessment must be refunded their payment if they make a timely claim for a refund. Some of these types of payments were transferred to the XSF, and TIGTA estimates that 224 taxpayers were not adequately notified of their rights to have their payments refunded, involving more than $116 million transferred to the XSF.

“The IRS must improve all procedures associated with the Excess Collection program to ensure more consistent processing, approval, and communication with taxpayers,” said TIGTA Inspector General J. Russell George in a statement. “Until the IRS takes corrective action, there is an increased risk that taxpayers will not recover their payments.”

TIGTA made five recommendations in the report. The IRS agreed with all of those recommendations and plans to take corrective actions. The IRS plans to revise the guidance pertaining to transfers to the XSF for clarification and consistency and revise Form 8758 to include a line for managerial approval. Also, management plans to request a program change to systemically issue a letter for payments received after the assessment statute expiration date or with an amended return. Finally, the IRS plans to revise the letter to clarify how to claim a refund.