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IRS may be overlooking billions of dollars worth of false claims for carryforwards

The Internal Revenue Service isn’t doing enough to address billions of dollars worth of potentially erroneous carryforward tax credits and deductions claimed by businesses, according to a new report.

With a carryforward credit or deduction, a taxpayer claims the unused portion of a tax credit or deduction on a future year’s tax return. The credit reduces the amount of a business’ tax liability, while a carryforward deduction reduces a company’s taxable income. Approximately 2.5 million tax returns for 2015 included claims for carryforward credits, for a total of $81.9 billion, according to the report from the Treasury Inspector General for Tax Administration. Another 6.5 million tax year 2015 returns claimed carryforward deductions of $55.9 billion.

TIGTA has previously found problems with carryforward claims in two earlier reviews, but said in its new report that the IRS still isn’t doing enough to ensure the accuracy of carryforward claims. A sample of 100 tax returns found that 63 taxpayers did not include the required statement with their tax year 2015 General Business Credit carryforward claims, and in other cases the claims didn’t match up with their prior-year returns.

IRS building sign
Sign in front of IRS building in Washington, D.C.

TIGTA made six recommendations in its latest report, suggesting the IRS add criteria to its risk tool to identify high-risk carryforward Research Credit claims, and also to identify and examine returns with discrepancies of General Business Credit carryforward claims. Based on the results of this work, the IRS should expand the criteria to identify other carryforward claims with discrepancies if warranted. TIGTA also recommended the IRS prepare and submit an information technology request to address the problem. The report also suggested the IRS should develop a strategy to evaluate possible revisions to tax forms to capture carryforward claim information. While that strategy is being developed, the IRS should implement an educational campaign about carryforward claims.

The IRS agreed with three of TIGTA’ s recommendations, partially agreed with one recommendation, but disagreed with other recommendations, as well as TIGTA’s estimated numbers for the outcome measure.

“While some taxpayers may claim erroneous carryforward amounts, it is unreasonable to conclude that the tax effect is equal to the gross carryforward amount,” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “Carryforwards are only allowable in accordance with certain tax code provisions. Thus, taxpayers may never be able to utilize the full amount of the carryforward. Finally, there are legitimate reasons that discrepancies can exist which means the carryforward amount claimed may be correct even when it doesn’t reconcile to a prior year’s return. We reviewed a sample of discrepancy cases you identified and did not find any invalid claims.”

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