The Internal Revenue Service is being urged to modernize the process of filing amended tax returns in a new government report that estimates the IRS could be losing billions of dollars from erroneous tax refunds claimed on amended tax returns.
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Taxpayers currently file Form 1040X to amend previously filed income tax returns. Claims filed on an amended tax return can relate to any item of income, loss, exclusion, deduction, or credit and may result in a tax refund, TIGTA noted. The IRS received over 4 million amended tax returns in fiscal year 2012.
Previous TIGTA audits have identified problems with IRS processes for verifying claims on amended tax returns. The objective of the latest review was to determine whether the IRS has controls in place to ensure that claims for refunds on amended tax returns are appropriate.
TIGTA found that the IRS could reduce erroneous tax refunds, processing costs and taxpayer burden by revising the Form 1040 to allow for corrections to original tax return filings and expand e-filing to include amended tax returns.
TIGTA’s review of a statistical sample of 259 amended tax returns claiming tax refunds of $500 or more in FY 2012 identified 44 tax returns, that is, 17 percent, for which the IRS issued potentially erroneous tax refunds totaling $103,270.
Based on the sample results, TIGTA estimates the IRS may have issued more than $439 million in potentially erroneous tax refunds claimed on 187,421 amended tax returns during FY 2012. Thus, the IRS could issue an estimated $2.1 billion or more in potentially erroneous tax refunds claimed on amended tax returns over the next five years.
In addition, TIGTA estimates that allowing taxpayers to amend their tax return by e-filing a modified Form 1040 could have potentially saved more than $17 million in processing costs during fiscal year 2012.
“The IRS’s current process for filing and processing amended income tax returns creates unnecessary burden on taxpayers and increases the potential for erroneous tax refund payments,” said TIGTA Inspector General J. Russell George in a statement.
TIGTA recommended that the commissioner of the IRS’s Wage and Investment Division should revise Form 1040 to enable taxpayers to amend their original tax return using this form, expand e-filing to include amended tax returns, and conduct a review of the 44 amended tax returns that TIGTA identified for which potentially erroneous refunds were issued to determine the proper tax liability.
The IRS agreed with two of TIGTA’s recommendations, but disagreed with one recommendation. While the IRS disagreed with revising Form 1040, the IRS plans to consider changing the format and appearance of Form 1040X.
The IRS also said it plans to consider e-filing of amended tax returns based on its available funding and resources. The IRS reviewed the 44 potentially erroneous refund returns and generally agreed that procedures were not correctly followed for those identified as having processing errors.
“We agree that automation of the amended return process, to the greatest extent possible, will result in improved efficiencies in taxpayer service and tax administration,” wrote Debra Holland, commissioner of the IRS’s Wage and Investment Division, in response to the report.
She noted that in April 2013, the IRS initiated a process to define a “business vision” for an electronic amended return process, assembling subject matter experts from different business functions to develop the system’s goals, objectives and business requirements. At the end of the 2014 filing season, the IRS submitted the requirements to its Information Technology Division for an engineering study and cost estimate, but Holland pointed out that the IRS’s budget constraints limit the agency’s ability to work on such projects.
“In these challenging budgetary times, automation of the amended return filing process will compete for limited resources with other priority needs and will be dependent on the availability of adequate funding,” she wrote.
Holland also disagreed with TIGTA’s outcome measures of $2.1 billion in potentially erroneous refunds from amended tax returns over the next five years, noting that questionable claims do not automatically equate to erroneous claims, as well as TIGTA’s estimate of $17 million from electronically processing amended tax returns, pointing out that many such returns would probably still need to be manually reviewed.
