The Internal Revenue Service didn’t properly implement some provisions of the PATH Act aimed at reducing improper payments for refundable tax credits, instead allowing an estimated $152 million in credits, according to a new report.
The report, from the Treasury Inspector General for Tax Administration, pointed to provisions in the PATH Act that tried to reduce improper payments of the Earned Income Tax Credit, the Child Tax Credit, the Additional Child Tax Credit and the American Opportunity Tax Credit. Starting this past tax season, taxpayers are no longer permitted to file an original or amended tax return for prior years (known as a retroactive claim) to claim certain refundable credits if the Taxpayer Identification Number they used to claim the credit was issued after the due date of the tax return. However, TIGTA found the IRS lacked the information it needed to put the processes in place to catch those claims in time, so it mistakenly paid refundable credit claims totaling more than $34.8 million to 15,755 taxpayers.
On top of that, the PATH Act also moved the date for employers and their partners to file Forms W-2, Wage and Earnings Statement, and some Forms 1099-MISC, Miscellaneous Income, to January 31. That way, the forms would be available for IRS employees to verify the refundable credit claims while the tax returns were still being processed. The IRS has developed some processes to automatically verify tax returns against W-2 forms, but it still doesn’t have the processes in place to effectively use 1099-MISC forms that report nonemployee compensation to prevent unsupported refundable credit claims.
“An estimated $24.3 billion in refundable tax credit payments were issued improperly during Fiscal Year 2016,” said TIGTA Inspector General J. Russell George in a statement. “As such, it is imperative that the IRS effectively implement the PATH Act provisions that are intended to reduce such payments.”
TIGTA made four recommendations to the IRS in the report, and the IRS agreed with all four recommendations. TIGTA recommended the IRS review the 15,744 tax returns filed this past tax season with an untimely Taxpayer Identification Number and take the necessary steps to recover the tax credits that were paid in error. The IRS should also continue to evaluate opportunities to use Forms 1099-MISC to systemically verify income reported on EITC and ACTC claims, TIGTA suggested, and the IRS should conduct a study to quantify the EITC and ACTC claims the IRS identifies with income discrepancies and determine the IRS’s authority to address them. TIGTA also recommended the IRS evaluate the use of non-work-related Social Security Number data the IRS already has available to identify potentially mistaken EITC claims.
“The passage of the Protecting Americans from Tax Hikes (PATH) Act on December 18, 2015 introduced some very significant legislative changes that are helping the IRS reduce improper payments of refundable credits, whether through unintentional error or by intentionally fraudulent claims for refund,” wrote Kenneth C. Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “The provisions of the PATH Act have also been very helpful in improving our ability to identify and stop suspected refund fraud related to identity theft. Provisions of the legislation denying retroactively claimed refundable credits for tax years prior to the year taxpayers or their dependents received valid Taxpayer Identification Numbers presented implementation challenges. As noted, there was not sufficient time to reprogram our systems for the 2016 filing season, which started on January 19, 2016, one month after passage of the PATH Act; however, opportunity exists to address any erroneously allowed retroactive claims by our Compliance function.”