The Internal Revenue Service needs to do more to prevent improper claims for refunds of excess Social Security tax withholding, according to a recent government report.

The report from the Treasury Inspector General for Tax Administration found that 72 percent of the 322 returns it examined had potentially erroneous claims totaling $177,854.

In Tax Year 2011, more than 1.3 million returns made claims for excess Social Security Tax refunds, for more than $1.6 billion.

TIGTA’s review of the IRS’s effectiveness in ensuring that taxpayers are accurately claiming these credits looked at 322 returns out of 87,319 for which the amount of Social Security tax withholding reported by employers did not support the credit amount claimed, and found that 231 were potentially erroneous.

Of those 231, 40 could have been identified as questionable when the returns were processed; the remaining 191 involved discrepancies between the credit claimed by the taxpayer and the amount reported by employers.

"While the IRS has established processes to identify these discrepancies, it only reviews a small portion of the questionable claims it identifies," said Inspector General J. Russell George in a statement. "The IRS should develop a strategy that adequately addresses these discrepancies, including determining the benefit of using soft notices as an alternative compliance approach."

TIGTA recommended that the IRS ensure that employees follow established procedures when verifying claims and develop a strategy that adequately addresses tax returns identified with a discrepancy between the Social Security tax withholding reported by taxpayers and reported by employers.

The IRS agreed with most of the recommendations, stating that it has updated processing procedures and plans to ensure the proper training of employees, and that it plans to redesign filters used to identify erroneous credits. However, the service does not plan to revise its strategy to address Social Security tax withholding discrepancies to include the use of soft notices.

"The IRS takes seriously its responsibility to ensure that taxpayers are accurately claiming excess Social Security tax withholding credits," the IRS said in a statement. "While we agree that this is an area of concern, we believe the report paints a misleading picture of some of the challenges in this area. Our additional review of the 67 tax returns TIGTA cited found that the amount of unreconciled wages, in almost all instances, resulted in a corresponding amount of income tax that exceeded the amount of excess FICA tax credit claimed."

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