IRS to Change How It Reviews Amended Tax Returns and Refund Claims

WASHINGTON, D.C. (JUNE 15, 2016)

The Internal Revenue Service plans to change some of its procedures for reviewing amended tax returns after a government report estimated it may have inappropriately allowed approximately $32.4 million in tax refunds and abatements.

The report, from the Treasury Inspector General for Tax Administration, examined whether the IRS’s controls over auditing amended individual tax returns ensure the claims are properly evaluated and processed to prevent inappropriate tax refunds and tax abatements.

For the report, TIGTA reviewed a statistical sample of 84 closed surveys and audits of amended individual returns with claims for tax refunds or abatements for the fiscal year 2013 and found that 31 claims were not appropriately substantiated or had large, unusual or questionable items that were not adequately considered and investigated. A combination of factors apparently caused these problems. The report identified several actions the IRS can take to better ensure claims are substantiated with the appropriate supporting documentation and that issues on the amended returns are recognized, considered and investigated.

When the sample results are projected to a larger population of tax returns, TIGTA estimates a total of approximately $34.4 million in tax refunds and abatements may have been inappropriately allowed.

TIGTA recommended the IRS change specific controls, tools and procedures in its Examination function to improve surveying, auditing and documenting reviews of claims for refunds and abatements of taxes.
IRS management agreed with five of the report’s six recommendations and plans to take corrective actions.  However, the IRS disagreed with one of the recommendations to require that claims coordinators document the justification for surveying a claim and to evaluate the benefits of requiring claims coordinators to identify and document whether any large, unusual or questionable items existed on the return.

TIGTA, for its part, said it believes that it would be beneficial for claims coordinators to use their expertise and research any such items for all returns since they are more knowledgeable of audit issues and perhaps more equipped to identify issues.

Karen Schiller, the commissioner of the IRS’s Small Business/Self-Employed Division, pointed out that managers already have the ability to evaluate a claims coordinator’s decision to survey a claim at the time of closure and discuss any concerns that they may have.

“We fail to see sufficient potential benefits to warrant expanding our limited resources on creating documentation to support the reason for surveys in PSP,” she wrote, referring to the IRS’s Planning and Special Programs unit.

Schiller also disagreed with TIGTA’s outcome measure, the $34.4 million in potentially inappropriate tax refunds and abatements estimated in the report. “While there were unusual fact patterns in a number of TIGTA’s exception cases, we believe the employees, using all available information, reached the appropriate conclusion in most instances,” she wrote. “Thus, we believe the ‘exception rates’ throughout the body of the report and the outcome measures are overstated.”

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