Amended tax returns still prone to fraudulent refunds
The Internal Revenue Service hasn’t done enough to improve its procedures for reviewing amended tax returns to reduce erroneous and fraudulent tax refunds, according to a new report.
The report, from the Treasury Inspector General for Tax Administration, followed up on earlier reports by TIGTA that found risks of fraudulent and erroneous tax refunds from amended returns. In the new report, TIGTA reviewed a valid sample of 235 of more than 1.1 million amended tax returns processed in 2017 and identified 33 (that is, 14 percent) questionable amended returns with refunds totaling $74,974. Based on the results of the sample, TIGTA estimated the IRS issued nearly $359.9 million in potentially erroneous tax refunds claimed on 158,397 amended tax returns in 2017. It forecast that the IRS could issue nearly $1.8 billion over the next five years.
Of the 33 returns identified as questionable, 23 resulted from employee processing errors totaling $58,204 in potentially erroneous tax refunds. Based on the results of the sample, TIGTA estimates the IRS issued nearly $279.4 million in potentially erroneous tax refunds claimed on 110,398 amended tax returns in 2017. It also forecast that the IRS could issue nearly $1.4 billion in potentially erroneous tax refunds claimed on amended tax returns over the next five years.
In previous reports, TIGTA has recommended that the IRS revise Form 1040 to allow taxpayers to amend their original tax return using that same form. In addition, TIGTA had also recommended that the IRS expand electronic filing to include amended tax returns. It estimated the IRS could potentially save more than $17 million in processing costs during fiscal year 2012 if it had allowed taxpayers to e-file their amended tax return. The IRS disagreed with this recommendation at the time, but said it would consider the format and appearance of the Form 1040X to include more specific information related to changes to income in conjunction with the implementation of e-filing of amended returns.
In the new report, TIGTA recommended that the IRS review the questionable amended tax returns it identified and implement adequate processes to identify and correct employee errors to reduce erroneous refunds. It also suggested the IRS should request funding to expand electronic filing for the 2020 filing season. TIGTA recommended the IRS update its internal processes to identify and review amended tax returns with claims for refundable credits that were denied during the original tax return processing, as well as modify the Form 1040X to allow individuals to use the Identity Protection Personal Identification Number when filing an amended tax return.
IRS management agreed with five of TIGTA’s seven recommendations, but disagreed with one suggestion on the need to hold amended tax returns for processing until a taxpayer confirms their identity when they are a victim of identity theft. The IRS believes its current verification processes provide enough account protections. The IRS partly agreed with TIGTA’s recommendation that it evaluate amended tax returns for potential identity theft. The IRS plans to conduct a study to assess the feasibility of using an Identity Protection Personal Identification Number on amended returns and develop processes for them.
“As the IRS has incrementally modernized its tax return processing systems over the past decade, we have maintained the goal of introducing amended returns into the electronic processing environment,” wrote Kenneth C. Corbin, commissioner of the IRS’s Wage and Investment Division. “... In its current state, amended return processing is reliant on manual processes; however, we developed automated tools for our employees to use that replicate, to the greatest extent possible, the systemic checks and validations to which original returns are subjected.”