«Testimony of The Honorable J. Russell George Treasury Inspector General for Tax Administration March 3, 2015 Washington, D.C. TESTIMONY OF THE HONORABLE ...»
In addition, TIGTA recently reported that the IRS hired some former employees with prior substantiated conduct or performance issues.32 The practice of rehiring former employees with known conduct and performance issues presents increased risk to the IRS and taxpayers. For example, TIGTA found that nearly 20 percent of the rehired former employees TIGTA sampled who had prior substantiated or unresolved conduct or performance issues also had new conduct or performance issues after being rehired. This is significant because the time spent by IRS managers addressing performance and conduct issues is time taken away from serving taxpayers and enforcing the law.
The IRS is also dedicating significant resources toward addressing what it believes to be the most significant risks to compliance, such as the challenge presented by taxpayers’ increasing use of flow-through entities, such as partnerships.33 In the IRS’s 2014–2017 Strategic Plan,34 one of its stated goals is to ensure compliance with tax responsibilities and to combat fraud, and one of its stated measures of success is an increase in voluntary compliance by three percent from 83 percent to 86 percent by 2017.
TIGTA continues to audit the efficiency and effectiveness of the IRS’s efforts to reduce the Tax Gap35 and improve voluntary tax compliance. In the area of partnership compliance, for example, the IRS initiated its Partnership Strategy in July 2012 to The general business credit is offered as an incentive for a business to engage in certain kinds of activities considered beneficial to the economy or the public at large and is used to reduce a corporation’s regular tax liability. A carryforward is the amount of the general business credit that is unused because of the tax liability limit for claiming the credit.
TIGTA, Ref. No. 2015-10-006, Additional Consideration of Prior Conduct and Performance Issues Is Needed When Hiring Former Employees (Dec. 2014).
Between 2008 and 2012, the number of business partnership filings increased by 21 percent.
IRS Strategic Plan FY 2014-2017.
The Tax Gap is the difference between what all taxpayers owe and what they pay. The IRS estimated the net tax gap (after factoring in forced collections) to be approximately $385 billion annually.
improve the partnership audit process in light of the significant increase in partnership filings and complexities associated with auditing partnership returns. TIGTA recently completed a review of the partnership audit program and found that the IRS has no effective way to assess the productivity of its partnership audits since many complex partnerships have multiple layers of flow-through entities.36 In order to track partnership audits, the IRS uses a decade’s old system that is unable to provide information on the total amount of taxes that are ultimately assessed to the taxable partners as a result of adjustments made to the partnership returns. Therefore, the IRS is unable to assess the full impact of its partnership compliance activities.
The IRS agrees that this is a significant problem but asserts that a new information technology system is the only means to obtain the necessary information on the productivity of its partnership compliance program. Until such time as the IRS upgrades its systems, TIGTA believes the IRS could make better use of the significant research capacity within the IRS to address this formidable tax compliance challenge.
Although the IRS has requested over $16 million as part of its FY 2016 budget request to increase the number of agents with specialized experience in auditing large partnerships, it has not taken the steps to improve the tracking of the results of its partnership audits so that it can make the best use of its resources devoted to this area.
More Timely Third-Party Reporting and Correctable Error Authority
Each year, the IRS receives information returns filed by third parties such as employers and educational institutions. These returns provide the IRS the information needed to verify taxpayers’ claims for benefits such as the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit (AOTC). However, information returns are generally not filed with the IRS until after most taxpayers file their annual tax returns. As a result, the IRS cannot use the information contained on these information returns to verify tax returns until after those tax returns are processed and refunds are issued.
For example, the IRS estimates that in FY 2013, 30 percent of (or $4.35 billion) in improper EITC payments resulted from verification errors associated with the IRS’s inability to identify taxpayers who misreport their income to erroneously claim the EITC.
TIGTA’s review of TY 2012 tax returns identified more than $1.7 billion in potentially erroneous EITC claims on tax returns for which no third-party Forms W-2, Wage and Tax Statement, supporting the wages reported had been received by the IRS.
TIGTA, Audit No. 201430027, Additional Improvements Are Needed to Measure the Success and Productivity of the Partnership Audit Process, report planned for March 2015.
However, the IRS does not have the Forms W-2 information at the time most of these tax returns are processed. Employers who file paper Forms W-2 are not required to file these forms until February of each year. Employers who e-file Forms W-2 have until the end of March each year to file.
TIGTA also estimates that the IRS issued more than $3.2 billion in potentially erroneous education credits in TY 2012 for students for whom the IRS did not receive a Form 1098-T, Tuition Statement, from a postsecondary educational institution.37 Educational institutions are required to provide a Form 1098-T to students who attend their institution and file a copy of Form 1098-T with the IRS. The Form 1098-T provides the name and Employer Identification Number of the institution, the name and Taxpayer Identification Number of the student who attended, and information on whether the student attended half-time or was a graduate student. However, these forms are not available at the time the tax returns are filed. Consequently, the IRS is not able to use this information to identify potentially erroneous claims when tax returns are processed. As with the Form W-2, Forms 1098-T generally do not have to be filed with the IRS until the end of March each year.
Requiring third parties such as employers and educational institutions to file information returns earlier will provide the IRS with the opportunity to use the information contained on these forms to verify tax returns at the time they are processed rather than after refunds are issued. This could significantly improve the IRS’s ability to prevent the issuance of billions of dollars in erroneous tax benefits, including the EITC and education credits.
However, even if the third-party information returns are received more timely, the IRS still needs certain authorities to more efficiently and effectively use these data to address taxpayer noncompliance. Generally, the IRS must audit any tax return it identifies with a questionable claim before the claim can be adjusted or denied, even if the IRS has reliable data that indicate the claim is erroneous. However, the number of tax returns the IRS can audit is limited to available resources and the need to provide a balanced enforcement program among all taxpayer segments.
The IRS does have math error authority38 to systemically address erroneous claims that contain mathematical or clerical errors or EITC claims with an invalid qualifying child’s Social Security Number. The IRS estimates that it costs $1.50 to TIGTA, Audit Number 201440015, Billions of Dollars in Potentially Erroneous Education Credits Continue to be Claimed for Ineligible Students and Institutions, report planned for March 2015.
Under current law, the IRS can adjust tax returns on which the taxpayer has made a math error utilizing summary assessment procedures.
resolve an EITC claim using math error authority, compared to $278 to conduct a pre-refund audit.
However, the majority of erroneous claims that the IRS identifies do not contain the types of errors for which it has math error authority. For example, in TY 2011, the IRS identified approximately 6.6 million potentially erroneous EITC claims totaling approximately $21.6 billion that it could not address using existing math error authority.
In addition, the number of potentially erroneous EITC claims that the IRS can audit is further reduced by its need to allocate its limited resources among the various areas of taxpayer noncompliance to provide a balanced tax enforcement program. As a result, billions of dollars in potentially erroneous EITC claims go unaddressed each year.
The Department of the Treasury has included a legislative proposal to obtain correctable error authority as part of the IRS’s budget requests each year since FY 2013, which would permit the IRS to disallow tax benefit claims when Government data sources do not support information on the tax return, or when taxpayers have failed to include required documentation with their tax return or exceeded the lifetime limit for claiming a deduction or credit. This authority would enable the IRS to systemically deny all tax claims for which the IRS has reliable data showing the claim is erroneous. The data available for IRS use in verifying tax returns go beyond that which is provided to the IRS on information returns such as the Form W-2.
For example, the Affordable Care Act requires Health Care Exchanges to provide data to the IRS on a monthly basis for each individual enrolled in the Exchange who purchased a qualified health insurance plan, including the amount of advance Premium Tax Credits (PTC) received. The Department of Health and Human Services estimates more than six million individuals purchased insurance through an Exchange in Calendar Year 2014. The Exchange data are available at the time tax returns are processed and can be used to ensure taxpayers have purchased insurance through an Exchange as required and have properly reconciled advance PTC payments on their tax returns before refunds are paid. However, the IRS was not given the authority to use the Exchange data to systemically disallow a PTC claim for which the data show the claim is erroneous. As a result, the IRS must audit these tax returns.
The IRS has authority to use the Department of Health and Human Services National Directory of New Hires (NDNH) which contains wage information to verify EITC claims. However, the IRS does not have the authority to systemically disallow an EITC claim that is not supported by NDNH data. Therefore, the IRS must audit the EITC claims it identifies for which NDNH data indicate the income reported is potentially erroneous. TIGTA estimates the use of correctable error authority along with expanded use of the NDNH could have potentially prevented the issuance of the more than $1.7 billion in questionable EITC claims in TY 2012 for which the IRS had no Form W-2 from an employer. TIGTA forecasted that these processes could prevent the issuance of more than $8.5 billion in potentially erroneous EITC claims over the next five years.
A similar issue also exists with education credits. To qualify for an education credit, students must attend a postsecondary educational institution that is certified by the Department of Education to receive Federal student aid funding. The Department of Education Postsecondary Education Participants System (PEPS) database includes all educational institutions certified to receive Federal student aid funding. TIGTA’s comparison of TY 2012 tax returns with the Department of Education PEPS database identified more than 1.6 million taxpayers who received education credits totaling approximately $2.5 billion for students who attended institutions that are not certified to receive Federal student aid funding. As with the EITC, the IRS must audit these tax returns before the erroneous claim can be denied. 39 Despite the IRS’s numerous efforts, it is unlikely that it will achieve any significant reduction in erroneous payments without more timely access to third-party information and the ability to systemically deny erroneous claims at the time a tax return is processed. Given the scope of the improper payments that the IRS reports each year, in addition to the improper payments that remain unreported, changes in existing compliance methods could have a significant financial impact by enabling the IRS to more efficiently and effectively address this problem.
TIGTA BUDGET REQUEST FOR FY 2016 As requested by the Subcommittee, I will now provide information on our budget request for FY 2016.
TIGTA’s FY 2016 proposed budget requests appropriated resources of $167,275,000, an increase of 5.7 percent from the FY 2015 enacted budget. TIGTA will continue to focus on its mission of ensuring an effective and efficient tax administration.
The FY 2016 budget resources include funding to support TIGTA’s critical audit, investigative, and inspection and evaluation priorities, while still maintaining a culture that continually seeks to identify opportunities to achieve efficiencies and cost savings.
TIGTA, Audit Number 201440015, Billions of Dollars in Potentially Erroneous Education Credits Continue to be Claimed for Ineligible Students and Institutions, report planned for March 2015.
During FY 2014, TIGTA’s combined audit and investigative efforts have recovered, protected, and identified monetary benefits totaling $16.6 billion,40 including cost savings, increased revenue, revenue protection,41and court-ordered settlements in criminal investigations, and have affected approximately 3.6 million taxpayer accounts.
Based on TIGTA’s FY 2014 budget of $156.4 million, this represents a return on investment of $106-to-$1.
TIGTA’s Audit Priorities
TIGTA’s audit priorities include mitigating risks associated with tax refund fraud and identity theft, monitoring the IRS’s implementation of the Affordable Care Act and other tax law changes, and assessing the IRS’s efforts to improve tax compliance involving foreign financial assets and offshore accounts.
Recent audit work has shown that the IRS could develop or improve processes that will increase its ability to detect and prevent the issuance of fraudulent tax refunds resulting from identity theft. In addition, TIGTA has concerns about the security of tax data provided to the Exchanges and is also concerned that the potential for refund fraud and related schemes could increase as a result of processing ACA Premium Tax Credits.
Several key ACA provisions became effective in FY 2015, and the IRS must ensure that the tax administration system is able to fully implement these provisions.
Consequently, TIGTA has implemented a multi-year audit strategy to assess the IRS’s implementation of the ACA. This strategy includes coordination with other agencies, including the Department of Health and Human Services Office of Inspector General.
TIGTA is conducting or planning to initiate 10 ACA-related audits during FY 2015.
The tax compliance of business and individual taxpayers involved in international transactions remains a significant concern for the IRS. Complex transfer pricing issues and identifying U.S. taxpayers with hidden foreign assets and accounts continue to demand additional IRS resources. TIGTA will continue to perform audit work to assess This figure includes dollars potentially compromised by bribery; dollar amount of tax liability for taxpayers who threaten and/or assault IRS employees; dollar value of resources protected against malicious loss; dollar amount of embezzlement or taxpayer remittance theft; dollar value of Government property recovered; dollar value of court ordered criminal and civil penalties, fines, and restitution; and dollar value of seizures, forfeitures, and recoveries from contract fraud.
Recommendations made by TIGTA to ensure the accuracy of the total tax, penalties, and interest paid to the Federal Government.
the IRS’s compliance with provisions of the Foreign Account Tax Compliance Act42 and its efforts to improve tax compliance involving foreign financial assets and offshore accounts.
TIGTA’s Investigative Priorities