WASHINGTON – Internal Revenue Service (IRS) processes do not prevent the issuance of refundable tax credit claims to taxpayers whose income is not supported, according to an audit report that the Treasury Inspector General for Tax Administration (TIGTA) issued today.
In December 2015, Congress enacted the Protecting Americans from Tax Hikes (PATH) Act of 2015, which contains a number of integrity provisions intended to reduce improper Earned Income Tax Credit (EITC), Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), and American Opportunity Tax Credit (AOTC) claims. These provisions are projected to save approximately $7 billion over 10 years by reducing fraud, abuse, and improper payments in refundable tax credit programs.
TIGTA identified 1.4 million tax returns with a discrepancy in wages reported on the tax return and wages reported on third-party Forms W-2, Wage and Tax Statement, that were not reviewed by the IRS prior to refunds being released on February 15, 2017. These taxpayers received approximately $8.2 billion in refunds that included $4.3 billion in the EITC and $1.7 billion in the ACTC. The IRS received no third party Forms W-2 prior to the refunds being released for 660,141 of the more than 1.4 million tax returns. These returns had refunds totaling almost $3.7 billion. Late and missing Forms W-2 reduce the IRS's ability to verify EITC and ACTC claims before refunds are paid. The effectiveness of IRS efforts to verify wages reported on tax returns claiming the EITC and the ACTC is directly dependent on employers timely filing Forms W-2.
In addition, TIGTA found that for 4,509 tax returns associated with a retroactive refundable credit claim the IRS allowed almost $9.8 million in refundable tax credits. Furthermore, the IRS incorrectly rejected credits totaling $489,423 on 289 returns in which the taxpayer's Individual Taxpayer Identification Number (ITIN) was issued before the return due date and entitled the taxpayer to the refundable credit claimed.
Finally, for the 2017 Tax Filing Season, the IRS did not program the Modernized e-File system to systemically verify the ITIN issuance date for electronically filed prior year refundable credit claims. Instead, all previous year electronically filed tax returns are sent to the Error Resolution System function for employees to manually revalidate the ITIN at a total estimated cost of $400,570. In addition, the methodology for correcting the ITIN issuance date continued to result in errors.
TIGTA made five recommendations in the report. The IRS agreed with four recommendations and partially agreed with the remaining one.