Programming Errors, Deficiencies in Tax Examiner Screening Resulted in Some Health Coverage Tax Credit Claims Being Erroneously Processed

WASHINGTON, May 23 -- The U.S. Department of the Treasury's Inspector General for Tax Administration issued the following audit report highlights:

Highlights of Reference Number: 2018-40-035 to the Commissioner of Internal Revenue.

IMPACT ON TAXPAYERS

The Health Coverage Tax Credit (HCTC) is a refundable tax credit that covers 72.5 percent of the cost of qualified health insurance premiums for eligible individuals and qualified family members. Individuals can claim the HCTC in three ways: annually on their tax return, as advance monthly payments, or a combination of these two methods.

WHY TIGTA DID THE AUDIT

TIGTA initiated this audit because our prior report on the IRS's 2016 Filing Season identified errors in processing tax returns that claimed the HCTC. The overall objective of this review was to evaluate the IRS's implementation of the HCTC advance payment process and accuracy of processing tax returns claiming the credit.

WHAT TIGTA FOUND

Our review identified that the IRS implemented processes and procedures in response to legislation retroactively extending the HCTC through Calendar Year 2019. This includes implementing processes to set eligibility indicators on individual's tax accounts and establishing a systemic advance monthly payment process. However, programming and tax examiner errors continue to result in the erroneous processing of some HCTC claims. Our review identified that 3,839 (9.5 percent) of the 40,227 Tax Year 2016 tax returns with HCTC claims filed between January 21 and July 6, 2017, were erroneously processed. Because of these errors, taxpayers potentially did not receive HCTCs to which they were entitled or were erroneously allowed HCTCs to which they were not entitled. For example, 2,972 returns with HCTC claims totaling $4,362,924 were not referred by tax examiners to the Examination function for review despite meeting Examination function referral criteria. In addition, consistent screening processes are needed to identify erroneous HCTC claims. The Error Resolution Unit's screening process is not consistent with the process used by the Examination function to identify erroneous claims. As a result, HCTC claims totaling $951,648 on 343 tax returns were erroneously paid to ineligible taxpayers. Finally, TIGTA identified that the IRS paid HCTC claims totaling $128,807 on 45 returns filed by individuals who included Form W-2, Wage and Tax Statement, which indicates that they were employed.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS: 1) ensure that tax examiners follow procedures to refer potentially erroneous HCTC claims to the Examination function; 2) review 2,222 tax returns for which tax examiners erroneously disallowed the claim without first corresponding with the taxpayer; 3) confirm that programming changes are implemented to refer, to the Examination function, all returns filed by taxpayers who do not provide support for their HCTC; 4) review 664 returns for which tax examiners erroneously input the HCTC in computers; 5) develop procedures to identify tax examiner errors related to processing HCTC claims; 6) implement procedures to identify HCTC claims on returns filed by potentially ineligible individuals; 7) review the 343 returns for which an ineligible individual's HCTC claim was granted; and 8) refer the 45 returns that claimed the HCTC and had an attached Form W-2 to the Examination function. The IRS agreed with all of the recommendations and stated that it plans to review the identified returns, update its procedures as needed, implement programming changes, and refer returns found to have had erroneously issued HCTCs to its Examination function for consideration and appropriate recovery actions.

This report was prepared to provide information only. Therefore, no recommendations were made in the report.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

https://www.treasury.gov/tigta/auditreports/2018reports/201840035fr.pdf