Don't Mess With Taxes

If people dressed as Lady Gaga, Kim Kardashian, The Situation and various Twilight characters aren't scary enough for you this Halloween (and those get-ups are why adults should not be allowed to don costumes!), you can read the IRS watchdog report that reveals the agency let almost $111.4 million in stimulus-related tax payments go out to unqualified filers.

"The passage of two significant tax laws impacted the 2010 Filing Season and presented additional challenges for the IRS," notes Michael Phillips, Deputy Inspector General for Audit for the Treasury Inspector General for Tax Administration, or TIGTA, in the Sept. 30 report.

The IRS received more than 131.7 million tax returns as of this past May 28, and generally, those returns were handled in a timely manner, says TIGTA in Verifying Eligibility for Certain New Tax Benefits Was a Challenge for the 2010 Filing Season.

But, and it's a big and costly but, there were some major problems with the processing of this spring's filings.

New tax laws, new tax filing errors: Implementing some new tax provisions presented challenges for the IRS, notes Phillips in the TIGTA report.

The major filing issues were by taxpayers who miscalculated their Making Work Pay credit amounts and by individuals who did not provide required documentation when claiming the First-Time Homebuyer credit. 

Overall, there were nearly 23.7 million errors on tax returns through May 28, an error rate increase of 7.1 percent compared to the same time last year.

$111.4 million in wrong stimulus payouts: Even more disturbing, TIGTA found that the IRS' "inadequate controls and incomplete and inaccurate programming" resulted in 125,762 individuals receiving nearly $111.4 million in erroneous American Recovery and Reinvestment Act-related tax benefits.

Specifically, the breakdown was:

• 10,581 individuals claiming $65.6 million in erroneous homebuyer credits.
  
• 109,665 individuals erroneously receiving $29.7 million in Making Work Pay and Government Retiree credits. 
  
• 5,345 individuals erroneously claiming $15.6 million in plug-in vehicle credits.
  
• 171 individuals claiming $453,220 in erroneous nonbusiness energy property credits.

In addition, TIGTA identified 2,933 individuals with more than $95.8 million in vehicle sales tax deductions, but the IRS had not developed a process to identify these potentially erroneous claims on Schedule A.

There was one bit of positive news, though, in connection with the homebuyer credit. The IRS was successful in stopping 2,363 idividuals who incorrectly claimed the homebuyer credit, keeping $11.3 million in the Treasury.

Fixing the system: TIGTA suggested several remedies to the IRS, including:

• Development of processes to track and account for Recovery Act credits claimed on plug-in vehicle credit tax forms.   
  
• Verification of whether 8,218 individuals identified as erroneously claiming the first-time homebuyer credit are entitled to claim the credit.  
  
• Ensuring that computer systems are programmed to identify individuals exceeding the maximum allowable nonbusiness energy credits. 
  
• Implementing computer programming to identify and freeze refunds of individuals claiming more than a specific dollar amount of vehicle tax deduction on Schedule A, if the deduction is extended.

It's no surprise that the IRS agreed with each of TIGTA's recommendations and says it will take corrective actions.

Now about that $111.4 million …

Related posts:

• IRS compliance issues cost U.S. millions
• IRS not cashing checks fast enough
• Wrong IDs cost IRS billions
• Making Work Pay tax problems ... again
• Homebuyer tax credit payback chaos?

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