The Internal Revenue Service generally did a good job last season creating processes to handle some of the new provisions affecting tax season, according to a government report, but there were a few areas where it could be improved.
The report, from the Treasury Inspector General for Tax Administration, looked at the results of the 2017 tax filing season. Last season, there were a few important changes, such as holding tax refunds longer for returns claiming the Earned Income Tax Credit or the Additional Child Tax Credit, as mandated by the PATH Act of 2015. The law also required employers to file their W-2 forms earlier.
The IRS is expected to have a tougher time next tax season, when it will be dealing with the vast changes in the tax code from last December’s Tax Cuts and Jobs Act. The IRS will likely be fielding calls about the new tax law this tax season as well, even though most of the provisions won’t affect last year’s taxes that taxpayers will be filing their returns for this year.
TIGTA reported that as of May 5, 2017, the IRS received 138.9 million tax returns, 88.7 percent of which were filed electronically. The IRS issued more than 101.6 million refunds totaling almost $282 billion as of that date.
The IRS began accepting and processing individual tax returns on Jan. 23, 2017, as scheduled, and processed 5.1 million tax returns that reported nearly $23.9 billion in Premium Tax Credits for health insurance coverage under the Affordable Care Act that were either received in advance or claimed at the time of filing. Under the ACA, many taxpayers receive the tax credits in advance to help them buy health coverage. Taxpayers received $5.8 billion in Advance Premium Tax Credits to which they were not entitled, but of that total $3.5 billion was not required to be repaid. As of May 4, 2017, more than 2.5 million taxpayers filed a return that was silent with respect to their health care coverage.
As required under the PATH Act, the IRS held all refunds that included the Earned Income Tax Credit and Additional Child Tax Credit until Feb. 15, 2017 to give them extra scrutiny in an effort to safeguard against identity theft and tax fraud. Most tax preparers complied with the expanded due-diligence requirements for the Child Tax Credit, the ACTC, and the American Opportunity Tax Credit, which are also intended to prevent identity theft and tax fraud. As of May 4, 2017, 441,071 of the 471,518 tax return preparers who filed at least one claim for these credits (that is, 93.5 percent of them) included Form 8867, Paid Preparer’s Due-Diligence Checklist, as required. However, TIGTA found that IRS processes don’t ensure that all noncompliant tax preparers are notified.
Despite these safeguards, the IRS is continuing to pay the AOTC for ineligible students, the report found. TIGTA estimates the IRS erroneously paid $2.8 billion in AOTCs on more than 1.7 million returns for tax year 2016, on which no educational institution Employer Identification Number was provided as required, or the student received the AOTC for more than the four-year limit.
On the other hand, the IRS managed to inappropriately deny approximately $1 million in Residential Energy Efficient Property Credits to 494 taxpayers as of May 4, 2017, according to the report. On top of that, TIGTA found IRS processes don’t effectively determine whether taxpayers who file as Married Filing Separately and claim the Child and Dependent Care Credit are actually eligible for the credit under an exception in the law before the IRS denies them the credit. TIGTA found that Married Filing Separately taxpayers filed 12,057 claims for the Child and Dependent Care Credit totaling $7.4 million, all of which were denied by the IRS.
TIGTA made seven recommendations in the report, including revising its procedures to notify all tax preparers filing a Child Tax Credit claim who don’t comply with the due diligence requirements. TIGTA also suggested the IRS develop math error procedures to deny AOTC claims when the educational institution Employer Identification Number is not provided. The IRS should also modify Form 2441, Child and Dependent Care Expenses, to allow Married Filing Separately taxpayers to attest that they meet the exception for eligibility, the report suggested. TIGTA also recommended the IRS review the potentially erroneous returns it identified to ensure taxpayers receive the benefits to which they’re entitled and recover any benefits paid in error.
The IRS agreed with all seven of TIGTA’s recommendations. Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, pointed to how the earlier availability of the W-2 forms as required under the PATH Act helped the IRS catch more dubious tax returns. “Having Form W-2 data available earlier in the processing year substantially improved our ability to detect questionable returns that required additional review,” he wrote in response to the report. “It also allowed us to authenticate returns that had otherwise been flagged as questionable by our identity theft detection processes, permitting those returns to complete processing without taxpayer contact.”
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