TIGTA - Large Dollar Refunds Are Not Always Examined and Sent to the Joint Committee on Taxation

TIGTA found that Large Dollar Refunds Are Not Always Examined and Sent to the Joint Committee on Taxation. The Highlights of Reference Number:  2020-30-023 to the Commissioner of Internal Revenue provide that:

IMPACT ON TAXPAYERS

Pursuant to Internal Revenue Code (I.R.C.) Section (§) 6405, before the IRS can issue refunds of income, estate, and gift taxes, and certain excise taxes in excess of a statutorily prescribed amount ($2 million, or $5 million for C corporations), the IRS must provide a report to the JCT.  Taxpayers legally entitled to their refunds may be subject to audit and delays in receiving their refunds, while erroneous high dollar refund claims present a risk to tax compliance.

WHY TIGTA DID THE AUDIT

This audit was initiated to assess the effectiveness of the IRS’s efforts to examine returns with refunds in excess of $2 million ($5 million for C corporations) and report to the Joint Committee on Taxation (JCT) on such refunds.

WHAT TIGTA FOUND

TIGTA identified 1,664 tax modules that exceed the refund dollar criteria, but were not referred to or selected for examination because Treasury Regulation § 301.6402-4 and IRS procedures limit the tax returns that are subject to JCT review.  The IRS does not examine all of these returns even though they exceed the statutory dollar criteria of $2 million and $5 million.

Additionally, the IRS is not always in compliance with I.R.C. § 6405.  The existing procedures for identifying potential JCT cases and forwarding such cases to the Examination functions are not always being followed.  TIGTA identified 74 tax modules with amended and net operating loss carryback returns that were not properly referred to the Examination functions; therefore, they were not examined or sent to the JCT as legally required.

Even when a return is appropriately sent to the Examination functions as a potential JCT case, not all cases are sent to the JCT when required.  Some of the various situations TIGTA identified included:

·   11 instances in which the case was properly referred to the Examination functions, but the classifier accepted the return as filed; therefore, it was not examined or sent to the JCT.

·   28 tax modules meeting JCT review criteria that were not examined; therefore, they were not sent to the JCT for review even though they were properly referred to the Examination functions and properly selected for examination by the classifiers.

·   47 tax modules meeting JCT review criteria that were examined, but the revenue agent failed to refer the case to the IRS’s Joint Committee Review team at the conclusion of the examination; therefore, the case was not sent to the JCT for review.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS:  assess the compliance risk of the large-dollar original return refund claims that exceed I.R.C. § 6405 dollar criteria that are not required to be examined and are not subject to the JCT review process due to Treasury Regulation § 301.6402-4(a), relative to other tax returns, and allocate examination resources accordingly; take corrective actions to ensure that the refunds that were not sent to the JCT for review as required are subject to the JCT review process; and assign oversight responsibilities to a specific group or function for the overall JCT process to ensure that cases are sent to the JCT, when required, and procedures are being followed.

The IRS agreed to three of our four recommendations, and plans to take corrective actions such as coordinating with the JCT to determine the appropriate approach for the returns that were not sent to the JCT as legally required, and strengthening the controls over the process for identifying and submitting returns to the JCT.

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