The Treasury Inspector General for Tax Administration (TIGTA) reported last week that in 2011, the IRS paid out $3.6 billion in fraudulent refunds on tax returns filed by identity thieves. Even that amount was an improvement over the previous year when the total fraud was $5.2 billion. However, on Tuesday, TIGTA released a new report that found that though the IRS is making some progress against fraud, it is not using all available tools to prevent erroneous refunds and improper tax credits.
In 2007, the Small Business and Work Opportunity Tax Act amended the IRS code to increase the agency’s ability to penalize taxpayers who claim excessive tax credits or refunds. A recent audit, however, found that the IRS has not properly implemented the law, and is following up in only a fraction of the cases where action may be warranted [emphasis added]:
[I]n the year after the IRS revised its interpretation of the law (June 3, 2012, through May 25, 2013), there were 709,123 individual tax credits disallowed by Campus Operations for which the IRS could have potentially assessed erroneous refund penalties totaling more than $1.5 billion.
The inspector general found no legitimate reason for the IRS’s neglect of the law:
In response to the findings, IRS management “raised concerns about the costs and benefits of establishing processes and procedures… to assess erroneous refund penalties,” but did not support these concerns with documentation or analysis.
