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IRS Under Further Pressure Over Erroneous Tax Refunds

by Mike Godfrey, Tax-News.com, Washington

18 November 2013


Having recently noted that the United States Internal Revenue Service's (IRS) processes can be ineffective in identifying tax returns claiming improper tax credits and fraudulent tax refunds, a further report from the Treasury Inspector General for Tax Administration (TIGTA) has accused the agency of also limiting its ability to assess penalties.

TIGTA conducted an audit to determine whether the IRS is properly assessing the erroneous claims for refund or credit penalty on individual tax accounts, but decided that, by incorrectly interpreting federal law, the IRS has significantly limited the number of claims on which it can assess penalties.

It noted that the Small Business and Work Opportunity Tax Act of 2007 amended the Internal Revenue Code to enhance the IRS's ability to seek monetary penalties for the growing number of erroneous tax credit and refund claims. Under the law, taxpayers who claim excessive tax credits or refunds may be penalized up to 20 percent of the erroneous claim.

TIGTA found that, up to May 2012, the IRS had incorrectly interpreted the erroneous refund penalty law regarding when the IRS had the authority to assess a penalty, and had, consequently, assessed only 84 erroneous refund penalties totaling USD1.9m between May 2007 and that date. In response to concerns raised from various IRS functions, the IRS Office of Chief Counsel then revised its interpretation of the law and issued an updated memorandum.

However, it also found that, despite that revision, the IRS has not yet developed processes and procedures to enable its operations to disallow the majority of individual tax credits to assess the penalty. For example, in the year after the IRS revised its interpretation of the law (June 3, 2012, to May 25, 2013), there were more than 700,000 individual tax credits disallowed by the IRS for which it could have potentially assessed erroneous refund penalties totaling more than USD1.5bn.

"I am troubled that even though the IRS has revised its interpretation of this law, it has still failed to establish processes to assess penalties on the majority of disallowed tax credit claims," said J. Russell George, the TIGTA. "Taxpayers who seek refunds or credit claims that have no reasonable basis in law must be penalized, for they create unnecessary burden on both the IRS and the American people by straining resources and impeding tax administration."

TAGS: individuals | compliance | tax | tax compliance | law | tax credits | legislation | United States | tax breaks | penalties | individual income tax | Work | Tax

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