IRS to Tighten Program Offsetting Tax Refunds against Tax Debts

IRS to Tighten Program Offsetting Tax Refunds against Tax Debts

The Internal Revenue Service plans to make changes in its procedures and computer systems to better identify a taxpayer’s outstanding tax debts and subtract them from the tax refunds they receive, particularly for owners of small businesses.

A new report from the Treasury Inspector General for Tax Administration found that the IRS needs to revise its computer programming and correct its procedures to ensure it identifies all available tax refunds to offset a taxpayer’s federal tax liabilities. The Tax Code requires a taxpayer’s refund to be offset first to pay outstanding federal tax debt before it may be offset to nontax debts or applied as a credit to a future tax period. After the tax overpayments have been offset to existing individual tax debts, any amount remaining can then be offset to business tax account liabilities.

If the taxpayer has no outstanding federal tax debt, then the Treasury’s Bureau of the Fiscal Service performs verifications to determine if the taxpayer has other types of government debt. The overall objective of TIGTA’s audit was to determine whether the IRS’s processes and controls ensure that overpayments are properly and accurately applied to offset federal tax liabilities.

TIGTA found that, in tax year 2013, the IRS offset more than $6.8 billion in individual tax refunds to pay outstanding individual and business tax debts. However, TIGTA discovered that the IRS’s current process does not effectively identify sole proprietors with business tax debt. As a result, TIGTA identified 53,672 individual taxpayers who received approximately $74.5 million in tax refunds in tax year 2013 that could have been offset against outstanding tax debts on the taxpayers’ associated business tax accounts.

In addition, TIGTA said the IRS needs to consistently apply tax account freezes to ensure that refunds are offset to pay associated tax liability on the IRS’s Non-Master File system, a system used by the IRS to process tax accounts that it cannot process on the Master File. TIGTA identified 487 individual and 29 business taxpayers who received more than $2.9 million in tax refunds for tax year 2013 that should have been offset to pay an outstanding Non-Master File tax debt. TIGTA also identified a significant potential for future improper refunds for an additional 616 individual taxpayers and 697 business taxpayers. These accounts have outstanding tax debts totaling more than $1.4 billion but do not currently have the required freezes on their associated Master File tax account. Read more on Accounting Today.