Washington, D.C. - The Internal Revenue Service is unable to determine if it is issuing erroneous or fraudulent manual refunds to taxpayers, according to a new report. The Treasury Inspector General for Tax Administration found that the IRS could not easily identify potentially fraudulent or erroneous manual refunds. They amount to a great deal of money: In 2007, the IRS issued approximately 184,000 manual refunds totaling over $1.5 billion to individual taxpayers, and approximately 70,000 totaling almost $32 billion to business taxpayers.

The IRS has begun taking steps to reduce the risk of issuing erroneous manual refunds, including requiring that the employees who input manual refund requests into the IRS's computers are different from those who authorize payment, but TIGTA determined that although employees are required to seek written approval from a manager, there were over 58,000 manual refund transactions for which the IRS's electronic data files did not accurately identify the IRS employees requesting them.



Bridgeport, Conn. - A federal court judge ruled in favor of General Electric in a tax case involving $62 million in tax benefits from a partnership arrangement that the IRS had claimed was a sham.

The case, which could have implications for other cases involving tax shelters and listed transactions, involved an entity that GE set up in 1993 with two Dutch banks. Under the arrangement, GE was able to shift approximately $310 million in income from old aircraft leases to the two banks by re-depreciating a fleet of airplanes that had already been depreciated, saving about $62 million in taxes.

After the IRS protested the arrangement, claiming that the only purpose was to reduce GE's tax expenses, GE paid the $62 million, but took the IRS to court. In 2004, a U.S. District Judge here ruled in favor of GE, but his ruling was overturned in 2006 by an appeals court. It said that he needed to consider an alternative argument and decide if the banks were equity partners or lenders.



Washington, D.C. - The IRS's ability to detect identity-theft-related refund and employment fraud is limited, but by the end of 2008, the IRS had cataloged over 50,000 incidents, according to a report by the Government Accountability Office.Approximately 90 percent of fraudulently claimed refunds were stopped in 2008 with about $15 million issued before the IRS became aware of the fraud.

In 2008, the IRS began implementing four new initiatives in an effort to better detect and resolve identity theft cases, including an identity theft indicator that the IRS places on victims' accounts so that IRS personnel can more easily recognize and assist the legitimate taxpayer in case of account problems. The indicator further enables the IRS to screen returns to prevent fraudulent refunds from being issued to identity thieves. The IRS also decided to resolve legitimate taxpayers' ID theft problems using a decentralized process; the activity that discovers a problem has the responsibility to resolve it.

For the 2010 season, the IRS is considering whether to expand its screening; however, the agency does not know how well its current strategy is working.



Washington, D.C. - A new report from the Treasury Inspector General for Tax Administration found problems in the Internal Revenue Service's handling of taxpayer payments that are subsequently dishonored by the banks in which they are deposited. Between Jan. 1, 2008, and July 17, 2008, the IRS generated refunds as a result of dishonored check overpayments totaling approximately $53 million. TIGTA estimates that the IRS was unable to stop more than $20 million in refunds from being erroneously issued to nearly 14,000 individuals.

Further complicating matters was the issuance of economic stimulus payments in 2008. Some taxpayers who were entitled to receive an economic stimulus payment stopped payment on their checks, anticipating that the stimulus would satisfy their tax liability. However, in some instances, the stimulus payment was refunded to the taxpayer before the IRS processed the dishonored check. As a result, taxpayers received stimulus payments that should instead have been used to offset their tax liabilities.

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