The report by the Treasury Inspector General for Tax Administration (TIGTA) praised the Internal Revenue Service's handling of this year's tax filing season while implementing two unexpected changes in tax law, namely the economic stimulus legislation, signed by President Bush in February, and the additional alternative minimum tax 'patch,' which limited the number of taxpayers subject to the tax. According to the Treasury Department, as of the end of September the IRS had distributed just under 116 million stimulus payments to taxpayers.

However, while the IRS was able to meet the challenges created by the new legislation and accurately process most returns in a timely manner, TIGTA concluded that the agency should improve the processing of certain tax returns which have allowed some taxpayers to improperly claim deductions, such as the Qualified Mortgage Insurance Premiums deduction, the Individual Retirement Account deduction, and a “dual benefit” for both the tuition and fees deduction and the education credit. It also found that many taxpayers did not claim the sales tax deduction when they were entitled to do so.

TIGTA recommended that the IRS ensure its computer systems are programmed to identify taxpayer returns claiming the Qualified Mortgage Insurance Premiums deduction with adjusted gross income that exceeds the maximum phase-out limitations, as well as taxpayer returns claiming Individual Retirement Account deductions for taxpayers age 70½ or older. The report also urged the IRS to continue to inform taxpayers that they are eligible for a sales tax deduction if they itemize and do not claim a state income tax deduction.

The IRS agreed with some of TIGTA's recommendations, and plans to update its programs to identify taxpayer returns which improperly claim the Qualified Mortgage Insurance Premium deduction. The agency also agreed to continue to inform taxpayers of eligibility for the sales tax deduction and plans to add a cautionary statement to a tax form, similar to one added in 2006. However, the IRS did not agree to calculate the sales tax deduction for the taxpayer or to send a notice as recommended by TIGTA. It also does not plan to update its systems to identify taxpayer returns claiming Individual Retirement Account deductions for taxpayers aged 70½ and older, although it will study alternative methods of rooting out these claims.