Red flags are not the final word in an IRS tax controversy

Is the process by which the Internal Revenue Service verifies its tax refunds in need of an overhaul? A recent story raises concerns.

Specifically, a report authored by the Treasury Inspector General for Tax Administration identified a programming error that resulted in the IRS issuing over $46 million in erroneous refunds. The error was identified after an audit of the Return Integrity and Compliance Services organization, which is the IRS department responsible for preventing such errors.

The IRS’s standard procedures impose a two-week processing delay on any returns that have been identified as possibly fraudulent. That window may allow IRS officials to verify the authenticity of such return items as income and withholding. According to the report, unfortunately, the programming bug overrode that built-in failsafe. Consequently, erroneous refunds were mailed out in response to over 13,000 tax returns, totaling about $27 million.

Yet that’s only part of the problem. The audit also identified returns that had been selected for verification, yet no further IRS action was ever taken. That lack of verification resulted in about another $19 million in refunds being issued.   

Taxpayers certainly do not like to hear reports about their tax dollars being misused. Nevertheless, the story serves as a reminder that the IRS’s programming is not the final word in a tax controversy. Tax returns that have been flagged for review might pass verification without the taxpayer ever being notified. Even if a tax return is selected for audit, the issue might be resolved with additional documents to satisfy any verification issues. As a law firm that focuses on IRS problems and other tax controversies, we are comfortable with such negotiations.

Source: Accounting Today, “Programming Error, Poor Oversight Cost $46 mn in Bad Refunds,” Daniel Hood, Dec. 22, 2015

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