WASHINGTON - Adequate controls are not in place to ensure that businesses and corporations properly claim the Domestic Production Activities Deduction (DPAD) on their tax returns, according to an audit report that the Treasury Inspector General for Tax Administration (TIGTA) released today.
Congress enacted the American Jobs Creation Act of 2004 to enhance the ability of domestic businesses and manufacturing firms to compete in the global marketplace and to enable small businesses to maintain their position as the primary source of new jobs in this country. Section 102 of this Act allows taxpayers to claim a DPAD, giving businesses an incentive to participate in qualifying activities in the United States. During Processing Years 2013 through 2015, taxpayers claimed more than $131 billion in DPADs; nearly $44 billion was claimed in Processing Year 2015 alone.
TIGTA performed this review to determine whether the Internal Revenue Service (IRS) has sufficient controls in place to ensure that the DPAD is properly claimed, and found that the IRS has not established processes to ensure that taxpayers did not overclaim the DPAD. In its review, TIGTA identified 2,829 taxpayers who filed returns for Tax Year 2013 that potentially overclaimed the DPAD by more than $27 million.
IRS management explained that systemically identifying businesses and corporations overclaiming the deduction presents a challenge, because many corporations file returns as part of a consolidated group, receive the DPAD from a pass-through entity, or use a Professional Employer Organization.
TIGTA also found that the IRS has not established processes to ensure that businesses, i.e., individual taxpayers, are eligible to claim the DPAD. TIGTA identified 177 electronically filed Tax Year 2013 Form 1040 returns that claimed $850,329 in the DPAD without proper support.
TIGTA made four recommendations for the IRS to improve its controls for identifying potentially erroneous DPAD claims. The IRS agreed with two of the four recommendations.