IRS Must Establish Processes to Monitor DPAD Claims, TIGTA Says

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1 = Tax Return/Return Information

IMPACT ON TAXPAYERS

Congress enacted the American Jobs Creation Act of 2004 to enhance the ability of domestic businesses and manufacturing firms to compete in the global marketplace and to enable small businesses to maintain their position as the primary source of new jobs in this country. Section 102 of this Act allows taxpayers to claim a Domestic Production Activities Deduction (DPAD) on their tax return. The DPAD gives businesses an incentive to participate in qualifying activities in the United States.

WHY TIGTA DID THE AUDIT

During Processing Years 2013 through 2015, taxpayers claimed more than $131 billion in DPADs; nearly $44 billion was claimed in Processing Year 2015 alone. TIGTA performed this review to determine whether the IRS has sufficient controls in place to ensure that the DPAD is properly claimed.

WHAT TIGTA FOUND

Processes have not been established to ensure that claims for the DPAD are * * * 2 * * *. TIGTA's match of * * * 2 * * * to the amount of DPAD claimed identified 2,829 taxpayers that filed returns for Tax Year 2013 that potentially overclaimed the DPAD by more than $27 million.

IRS management explained that systemically identifying businesses and corporations overclaiming the deduction based on the * * * 2 * * * presents a challenge because many corporations file returns as part of a consolidated group, receive the DPAD from a pass-through entity, or use a Professional Employer Organization. TIGTA agrees there are challenges to the IRS systemically determining if a business has overclaimed the DPAD * * * 2 * * *. However, actions can be taken by the IRS to address these challenges.

The IRS also has not established processes to ensure that businesses, i.e., individual taxpayers, are eligible to claim the DPAD. For example, individual taxpayers should only claim the DPAD if they have an * * * 2 * * *. TIGTA identified 177 electronically filed Tax Year 2013 Forms 1040, U.S. Individual Income Tax Return, that claimed $850,329 in the DPADs but did not have a * * * 2 * * *.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS revise Form 8903, Domestic Production Activities Deduction, to include a line for providing the * * * 2 * * * associated with a DPAD claim; develop processes to identify those taxpayers * * * 2 * * *; develop processes and procedures to identify individuals claiming a DPAD * * * 2 * * * and use its math error authority to disallow the deduction; and verify whether the 177 electronically filed returns that TIGTA identified as erroneously claiming the DPAD are entitled to the claim.

The IRS agreed with two of the four recommendations. The IRS disagreed that it should revise Form 8903 * * * 2 * * * and verify the 177 returns that TIGTA identified as erroneously claiming the DPAD. TIGTA believes that requiring * * 2 * * would ensure more accurate reporting and will provide the IRS the ability to systematically verify DPAD claims. TIGTA also believes the 177 returns potentially claimed a deduction to which they were not entitled.

Management's complete response to the draft report is included as Appendix VI.

Copies of this report are also being sent to the Internal Revenue Service managers affected by the report recommendations. If you have any questions, please contact me or Russell P. Martin, Assistant Inspector General for Audit (Returns Processing and Account Services).

                           Table of Contents

                 Figure 1: The DPAD Claimed in Previous

The DPAD currently provides a deduction from taxable income (or, in the case of an individual, adjusted gross income) that is generally equal to 9 percent⁶ of its Qualified Production Activities Income (QPAI).⁷ This currently equates to approximately a 3 percent reduction in the tax rate for a high-income individual taxpayer or corporation with a 35 percent tax rate.⁸ The DPAD has two specific limitations, as follows:

• The applicable DPAD percentage is applied to the lesser of the taxpayer's QPAI or adjusted gross income (or taxable income for a corporation). For example, if a taxpayer has a QPAI of $5,000 and an adjusted gross income of $1,000, the DPAD would be calculated by multiplying $1,000 (the lesser of QPAI and adjusted gross income) by 9 percent.

• The deduction cannot exceed 50 percent of Form W-2, Wage and Tax Statement, wages paid by the taxpayer during the taxable year.

Taxpayers use Form 8903, Domestic Production Activities Deduction, to calculate and claim the allowable DPAD.⁹ To claim the DPAD, the taxpayer must have income attributable to the actual conduct of a trade or business. An activity qualifies as a trade or business if the taxpayer's primary purpose for engaging in the activity is for income or profit and is conducted continually and regularly. Individual taxpayers claim the DPAD as an adjustment to income on line 35 of Form 1040. Corporations claim the deduction on line 25 of Form 1120.

Partnerships and S Corporations that conduct a trade or business that is a qualified activity do not claim the DPAD on their returns. Instead, the DPAD is allocated to the shareholder or partner to claim on their individual or corporate return. Information needed to compute the DPAD is reported by pass-through entities to the individual via Schedule K-1.¹⁰

Potential regulation changes

On August 26, 2015, the Internal Revenue Service (IRS) issued proposed amendments, suggesting changes to the current regulations for the DPAD. Some of these proposed changes address:

• The allocation of Form W-2 wages in a short year¹¹ and in the acquisition or disposition of a trade or business.

• Guidance on the definition of oil-related QPAI.

• Definition of a qualified film.

• Treatment of activities in Puerto Rico.

Our review identified that the IRS has not established processes to ensure that taxpayers' claims for the DPAD are * * * 2 * * *. Our match of * * * 2 * * *¹² * * * 2 * * * to the amount of the DPAD claimed identified 2,829 taxpayers¹³ that filed returns for Tax Year (TY)¹⁴ 2013 that potentially overclaimed the DPAD by more than $27 million.¹⁵ Figure 2 provides a breakdown of the number of tax returns and potential amounts overclaimed by taxpayer type.

                  Figure 2: Potential Overclaimed DPAD

To be eligible to claim the DPAD on their tax return, taxpayers must have paid wages to employees during the tax year. As previously stated, the deduction they are allowed is * * * 2 * * * during the taxable year. Figure 3 provides a hypothetical example that shows the effect of this DPAD limitation.

          Figure 3: Example of DPAD Calculation * * * 2 * * *

We agree there are challenges to the IRS systemically determining if a business has overclaimed the DPAD * * * * 2 * * *. However, actions can be taken by the IRS to address these challenges. In March 2015, we reported that the IRS had not established processes to link employers with their PEOs.¹⁹ We also raised this same concern in prior reports.²⁰ We recommended that the IRS establish a program by which employers can inform the IRS of the PEOs they authorize to file and pay employment taxes and, once in place, ensure that tax account records are updated to reflect this information (establishing a link between the two entities). The IRS partially agreed with our recommendation and is currently implementing a voluntary PEO certification process in July 2016 to help address this concern.

We believe that the dollars at risk associated with these potential overclaims for the DPAD warrant the IRS's attention to better identify noncompliant taxpayers. While Form 8903 has a line item for entering wages for calculating the DPAD, it does not have a separate line item allowing for entry of the * * * 2 * * *. Creating a new line on the form to require the * * * 2 * * * would allow the IRS to ensure that businesses are not overclaiming the deduction * * * 2 * * *. Figure 4 shows a hypothetical example of how a line can be added next to lines 16 and 17 of Form 8903 to * * * 2 * * *.

 

Figure 4: Example of DPAD Calculation With * * * 2 * * *

 

 

 

Recommendations

The Commissioner, Small Business/Self-Employed Division, should:

Recommendation 1: Revise Form 8903 to include a line for providing * * * 2 * * * associated with the DPAD claim.

Our review identified that the IRS has not established processes to ensure that businesses, i.e., individual taxpayers, are eligible to claim the DPAD. For example, individual taxpayersshould only claim the DPAD if they have an * * * 2 * * *. We identified 177 electronically filed (e-filed) Forms 1040 for TY 2013 that claimed $850,329 in the DPAD * * * 2 * * * the operation of a business.²² We provided these returns to the IRS for review, and IRS management agreed that the taxpayers in these cases did not file the * * * 2 * * * to support the DPAD.²³

An activity qualifies as a trade or business if the taxpayer's primary purpose for engaging in the activity is for income or profit and is conducted continually and regularly. The IRS provides taxpayers with * * * 2 * * * in which an individual * * * 2 * * *.

 * * * 2 * * *               * * * 2 * * *

IRS management reviewed the methodology we used to identify the individuals that claimed a DPAD without an * * * 2 * * *. IRS management indicated that these cases could be addressed using its math error authority allowed under Internal Revenue Code Section 6213(b). As such, a claim for a DPAD for which the taxpayer does not include a * * * 2 * * *.

Recommendations

Recommendation 3: The Commissioner, Wage and Investment Division, should develop processes and procedures to identify individuals claiming a DPAD * * * 2 * * *, and use its math error authority to disallow the deduction.

² The calendar year in which the tax return or document is processed by the Internal Revenue Service.

³ Files that contain data from initial input of the original individual and business tax returns during return processing.

⁴ Taxpayers that are patrons of certain agricultural or horticultural cooperatives may be allocated a share of the cooperative's DPAD on Form 1099-PATR, Taxable Distributions Received From Cooperatives.

⁵ A provision of a regulation that specifies that certain conduct will be deemed not to violate a given rule.

⁶ Oil-related activities are limited to 6 percent.

⁷ Income from the taxpayer's domestic production gross receipts, reduced by the cost of goods sold and related expenses including the cost of production and portion of indirect expenses, is known as the QPAI.

⁸ Nine percent, i.e., DPAD percentage, multiplied by 35 percent tax rate equals 3.15 percent reduction in the tax rate.

⁹ See Appendix V for a copy of Form 8903.

¹⁰ This includes Form 1041 (Schedule K-1), Beneficiary's Share of Income, Deductions, Credits, etc.; Form 1065 (Schedule K-1), Partner's Share of Income, Deductions, Credits, etc.; Form 1065-B (Schedule K-1), Partner's Share of Income (Loss) From an Electing Large Partnership; and Form 1120-S (Schedule K-1), Shareholder's Share of Income, Deductions, Credits, etc.

¹¹ A short tax year is a tax year of less than 12 months.

¹² For this audit, the term business refers to an individual filing a * * * 2 * * *.

¹³ For this analysis, we removed those business records with a Schedule E attached to the return.

¹⁴ A 12-month accounting period for keeping records on income and expenses used as the basis for calculating the annual taxes due. For most individual taxpayers, the tax year is synonymous with the calendar year.

¹⁵ Taxpayers and dollar amounts limited to only those that potentially overclaimed the DPAD by $3,000 or more.

¹⁶ A pass-through entity is an entity that passes income, credits, deductions, etc., through to individuals or businesses that are partners, shareholders, or beneficiaries.

¹⁷ A PEO, sometimes referred to as an employee leasing organization, enters into an agreement with an employer to perform some or all of the employment tax withholding, reporting, and payment activities related to workers performing services for the employer.

¹⁸ A unique nine-digit number used to identify a taxpayer's business account.

¹⁹ TIGTA, Ref. No. 2015-40-023, Processes Are Needed to Link Third-Party Payers and Employers to Reduce Risks Related to Employment Tax Fraud (Mar. 2015).

²⁰ TIGTA, Ref. No. 2007-30-169, Improvements Have Been Made to Monitor Employers That Use Professional Employer Organizations, but More Can Be Done (Sept. 2007); and TIGTA, Ref. No. 2011-40-103, Affordable Care Act: Efforts to Implement the Small Business Health Care Tax Credit Were Mostly Successful, but Some Improvements Are Needed (Sept. 2011).

²¹ Math error authority refers to an automated process in which the IRS identifies math or other statistical irregularities and automatically prepares an adjusted return for a taxpayer filing on paper and generally rejects electronic returns.

²² Taxpayers and dollar amount limited to only those that claimed a DPAD of $500 or more.

²³ We also included paper-filed Forms 1040 in our analysis. However, the IRS's review of the tax returns we identified as claiming the DPAD * * * 2 * * * found that a high percentage of these potentially erroneous claims resulted from either IRS processing or taxpayer errors. Based on this, we removed paper-filed returns from our quantification of potentially erroneous DPAD claims.

²⁴ TIGTA, Ref. No. 2013-40-093, Unsupported and Potentially Erroneous Claims for General Business Credits Are Not Always Identified When Tax Returns Are Processed (Sept. 2013).

I. Determined if IRS procedures ensure that individual taxpayers are not allowed to take the DPAD on their individual tax return without * * * 2 * * *.

During this review, we relied on data from the IRS's Information Returns Master File⁴ database for TY 2013 that were provided by TIGTA's Office of Investigations' Strategic Data Services. We performed additional extracts from the Business Master File⁵ and Individual Master File⁶ located on TIGTA's Data Center Warehouse. Before relying on our data, we ensured that each file contained the specific data elements we requested. In addition, we selected random samples of each extract and verified that the data in the extracts were the same as the data captured in the IRS's Integrated Data Retrieval System.⁷ As a result of our testing, we determined that the data used in our review were reliable.

Internal controls methodology

Internal controls relate to management's plans, methods, and procedures used to meet their mission, goals, and objective. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. We determined that the following internal controls were relevant to our audit objective: IRS processes, procedures, and controls used to ensure that taxpayers are correctly claiming the DPAD. We evaluated the controls by reviewing the IRS's Internal Revenue Manual, interviewing IRS management, reviewing relevant legislation and Internal Revenue Code sections applicable to the DPAD, conducting data analysis, and reviewing past TIGTA audit work on related subjects.

² A 12-month accounting period for keeping records on income and expenses used as the basis for calculating the annual taxes due. For most individual taxpayers, the tax year is synonymous with the calendar year.

³ A unique nine-digit number used to identify a taxpayer's business account.

⁴ The IRS database of current tax year information returns. These include Forms 1099-PATR. Taxable Distributions Received From Cooperatives, and W-2.

⁵ The IRS database that consists of Federal tax-related transactions and accounts for businesses. These include employment taxes, income taxes on businesses, and excise taxes.

⁶ The IRS database that maintains transactions or records of individual tax accounts.

⁷ IRS computer system capable of retrieving or updating stored information. It works in conjunction with a taxpayer's account records.

Diana M. Tengesdal, Director

Larry Madsen, Audit Manager

Johnathan D. Elder, Lead Auditor

Ryan N. Hadlock, Auditor

Heidi C. Turbyfill, Auditor

Office of the Commissioner -- Attn: Chief of Staff

Commissioner, Large Business and International Division

Commissioner, Small Business/Self-Employed Division

Commissioner, Wage and Investment Division

Director, Examination, Large Business and International Division

Director, Examination, Small Business/Self-Employed Division

Director, Submission Processing, Wage and Investment Division

Director, Office of Audit Coordination

Type and Value of Outcome Measure:

• Increased Revenue -- Potential; $5,402,635 for 2,829 taxpayers overclaiming the DPADs. These taxpayers did not properly * * * 2 * * *(see page 4).

We conducted an analysis of TY 2013 tax returns with a DPAD claimed. We analyzed both individual and corporate tax returns. We found that 2,721 individual taxpayers potentially overclaimed the DPAD by $3,000 or more. This resulted in $23,230,484 of the DPADs potentially overclaimed by individual taxpayers. To find the tax effect of the potentially overclaimed deductions, we determined that the average marginal tax rate of those individuals who potentially overclaimed the DPADs in this report is 19.62 percent. We multiplied the $23,230,484 by the marginal tax rate of 19.62 percent and determined the tax effect for individuals to be $4,557,821. We also found that 108 corporations potentially overclaimed the DPADs by $3,000 or more. This resulted in $4,527,407 of the DPADs potentially overclaimed by corporate taxpayers. To find the tax effect of the potentially overclaimed deductions, we determined that the average marginal tax rate of those corporations that potentially overclaimed the DPADs is 18.66 percent. We then multiplied this amount by the average marginal tax rate of 18.66 percent and determined the tax effect for corporations to be $844,814. The IRS could potentially increase revenue by more than $5.4 million if TIGTA's recommendations are implemented.

Type and Value of Outcome Measure:

• Revenue Protection -- Potential; $166,835 for 177 taxpayers claiming the * * * 2 * * * (see page 8).

We conducted an analysis of PY 2014 individual tax returns with the DPADs claimed and found that there were 1,464 taxpayers who claimed $2,708,037 of the DPADs and * * * 2 * * *. Of these returns, we found that 714 were e-filed and 750 were paper-filed. The paper-filed returns require the IRS to transcribe information from the tax returns onto its computer systems. This is performed by employees manually typing the applicable information. Because of this manual process, errors are sometimes made when transcribing the information. The IRS reviewed a sample of the paper-filed returns and found a high rate of IRS processing and taxpayer errors. As a result, we are not including the 750 paper-filed returns claiming $1,774,784 of the DPADs in our outcome.

The remaining 714 e-filed returns claimed $933,253 of the DPADs without proper support, 177 of which had DPAD amounts of $500 or more with claims totaling $850,329. To determine the tax effect of these deductions, we determined the average marginal tax rate on those individuals who potentially overclaimed the deduction in this report to be 19.62 percent. We multiplied the $850,329 by the average marginal tax rate of 19.62 percent to obtain the tax effect of $166,835. The IRS could potentially protect more than $166,000 if TIGTA's Recommendation 3 is implemented.

 

* * * * *

 

 

Appendix V

 

 

Form 8903, Domestic

 

Production Activities Deduction

 

 

 

 

* * * * *

 

 

Appendix VI

 

 

Management's Response to the Draft Report

 

 

September 12, 2016

 

 

MEMORANDUM FOR MICHAEL E. MCKENNEY

 

DEPUTY INSPECTOR GENERAL FOR AUDIT

 

 

FROM:

 

Douglas W. O'Donnell

 

Commissioner Large Business & International

 

 

SUBJECT:

 

Draft Audit Report -- Actions Can Be Taken to Better Identify

 

Potentially Erroneous Domestic Production Activities Deductions

 

(Audit #2015-40-008)

 

In 2004, the American Jobs Creation Act of 2004 (AJCA) was enacted. Section 102 of the AJCA phased in a new tax deduction, for a broad range of domestic manufacturing and production businesses, as well as for many companies engaged in activities not traditionally viewed as manufacturing (e.g., film production, agriculture, electricity generation, and building construction), but which nevertheless create jobs in the United States. The deduction is available to corporations, partnerships, other pass-through entities, and individuals. The deduction, which was fully phased in beginning in 2010, effectively reduces the tax rate on corporate manufacturers that engage in "domestic production" from 35% to 32% To claim the deduction, a taxpayer submits a Form B903, Domestic Production Activities Deduction (DPAD).

DPAD is a complex issue and in most cases requires an audit to determine whether the activities qualify for the deduction and to calculate the domestic production gross receipts (DPGR) and expenses properly allocable to DPGR in addition to other issues. We appreciate your acknowledgement of the challenges for the IRS due to the scope, size, and complexity of the DPADs. These challenges are further compounded by cuts to the IRS's budget. Your report includes potential increased revenue and revenue protection of less than $6 million, which is a small fraction of the nearly $43 billion in DPAD claimed in Processing Year 2013. Given constraints on resources, we have to make strategic and risk-based decisions to ensure our limited resources are allocated to areas with the highest levels of potential noncompliance.

We do not agree with the report's premise that the IRS can ensure that DPAD is properly claimed through simple mathematical review of returns * * * 2 * * *. Therefore, we respectfully disagree with your recommendation to revise Form 8903 to include a line for providing the * * * 2 * * * associated with the DPAD claim. This requirement would be difficult to apply where * * * 2 * * * through multi-tiered partnerships and where wages comes from various entities. The burden on taxpayers and the IRS would exceed any potential enforcement benefit.

TIGTA concedes that cases identified using the * * * 2 * * * cannot be resolved using math error authority and must be resolved through examination. However, * * * 2 * * * currently do not identify productive examination work. Our SBSE Division previously initiated two compliance initiative projects (CIP) involving DPAD; one CIP specifically used a * * * 2 * * *. Both CIPs were terminated because the exam results did not justify additional time and resources. In particular, the results of the * * * 2 * * * CIP appear to support our contention that there are legitimate reasons why a return with a valid DPAD may appear to exceed the * * * 2 * * *. However, because we continually strive to improve the identification of returns with the highest risk of noncompliance, we will analyze these past CIPs as well as the filters used by TIGTA and available filing information to determine whether we can develop a new, more productive CIP.

We agree with the recommendation that the Commissioner, Wage and Investment Division, should develop processes and procedures to identify individuals claiming a DPAD without evidence of a * * * 2 * * * and use math error authority to correct the return. The IRS has procedures in place to detect income tax returns claiming DPADs without * * * 2 * * *; however, the process is manual and can be prone to human error. As a secondary control, we will request programming that will validate * * * 2 * * * is present on the return when a DPAD is claimed and flag the return for the appropriate corrective.

We respectfully disagree that we should verify whether the 177 e-filed tax returns identified by TIGTA are entitled to the DPAD. We cannot "verify" whether a taxpayer is "entitled" to a DPAD claim without an audit. We reviewed the available return information for these cases to determine whether there exists a compliance risk that warrants examination. Our review found that many cases show no indication of an improper claim. * * * 1 * * *. We do not believe it is prudent to deploy examination resources from cases with higher compliance risk and larger potential adjustments to these cases that reflect lower compliance risk and minimal potential adjustments.

We respectfully disagree with the measurable benefits. Since we do not agree with the premise that your * * * 2 * * * reliably identify invalid claims, we cannot agree with the basis of your computation. In addition, the outcome measures do not account for the opportunity costs associated with redeploying resources away from cases with higher compliance risks and larger potential adjustments to the cases with lower compliance risk and minimal potential adjustments. Specifically:

• Revenue Protection Potential of more than $5.4 million: As stated above, a mathematical * * * 2 * * * on the face of the return or * * * 2 * * * under that taxpayer's EIN does not necessarily mean that the taxpayer erroneously claimed a DPAD. TIGTA acknowledges that * * * 2 * * * by corporations that file returns as part of a consolidated group, from a flow-through entity or by Professional Employer Organizations (PEO) that would file employment tax return information under their own EIN. In other words, a taxpayer may actually * * * 2 * * * sufficient to support the DPAD claimed even if * * * 2 * * * on the taxpayer's return. The outcome measures do not account for these valid claims. Moreover, even assuming all of the claims are invalid, using the marginal tax rates assumed by TIGTA (19.62%), the average potential tax revenue per case is $1,908.

• Revenue Protection Potential of more than $166,000: As we explained above, of the identified 177 taxpayers, a review of the three returns with the highest reported DPAD show minimal or no potential adjustments. In fact, 121 of the 177 cases (more than 68%) claimed deductions of * * * 2 * * * or less (i.e. potential adjustment of less than * * * 2 * * *).

If you have any questions, please contact me or a member of your staff may contact Holly O. Paz, Director, Corporate Issues and Credits, at (202) 317-8559.

Attachment

RECOMMENDATION 1:

The Commissioner, Small Business/Self-Employed Division, should revise Form 8903 to include .a line for providing the * * * 2 * * * associated with the DPAD claim.

CORRECTIVE ACTION(S):

We believe implementing this recommendation would be premature. We do not agree that the * * * 2 * * * currently can be used to effectively identify appropriate DPAD examination cases. Unless these criteria can effectively be used for examination case selection, the minimal potential benefit that might be derived from the information obtained through a revision of Form 8903 does not outweigh the resources required to revise the form and to annually transcribe the data.

IMPLEMENTATION DATE:

N/A

RESPONSIBLE OFFICIAL(S):

N/A

CORRECTIVE ACTION(S) MONITORING PLAN:

N/A

RECOMMENDATION 2:

The Commissioner, Small Business/Self-Employed Division, should develop processes to identify those taxpayers not * * * 2 * * * that can be addressed during post-processing compliance activities.

CORRECTIVE ACTION(S):

We will review our prior DPAD Compliance Initiative Projects (CIP) as well as the filters used by TIGTA and available filing information to determine whether we can develop a new, more productive CIP.

IMPLEMENTATION DATE:

March 15, 2017

RESPONSIBLE OFFICIAL(S):

Director, Exam Case Selection, SB/SE Examination

CORRECTIVE ACTION(S) MONITORING PLAN:

IRS will monitor this corrective action as part of our internal management system of controls.

RECOMMENDATION 3:

The Commissioner, Wage and Investment Division, should develop processes and procedures to identify individuals claiming a DPAD * * * 2 * * * and use its math error authority to disallow the deduction

CORRECTIVE ACTION(S):

The IRS has procedures in place to detect income tax returns claiming DPADs without * * * 2 * * *; however, the process is manual and can be prone to human error. As a secondary control, we will determine if math error business rules can be developed using the information available during processing that will not result in unnecessary math error notices being issued when a DPAD is claimed. Due to the constraints of limited funding and resources, and the prioritization of competing information technology needs, we cannot provide an implementation date for this action.

IMPLEMENTATION DATE:

N/A

RESPONSIBLE OFFICIAL(S):

Director, Submission Processing, Customer Account Services, Wage and Investment Division

CORRECTIVE ACTION(S) MONITORING PLAN:

We will monitor this corrective action as part of our internal management control system.

RECOMMENDATION 4:

The Commissioner, Small Business/Self-Employed Division, should verify whether the 177 e-filed tax returns that we identified as erroneously claiming the DPAD are entitled to the claim.

CORRECTIVE ACTION(S):

After a return is filed (as is the case for the 177 exception cases identified), we cannot "verify" whether a taxpayer is "entitled" to a DPAD claim without an audit. We reviewed the available return information for the three exception cases with the largest deductions to determine whether information reflected a compliance risk that warranted examination. After review of these cases, we determined that these returns did not warrant further examination. * * * 1 * * *. Even if it is not valid, the potential adjustment is not cost-effective for examination. The remaining cases have even smaller potential adjustments. Given the limited compliance risk and small potential adjustments, especially in light of the short statute (less than 1 year), we do not believe it is prudent to deploy examination resources from cases with higher compliance risk and larger potential adjustments to these cases that reflect lower compliance risk and minimal potential adjustments.

IMPLEMENTATION DATE:

N/A

RESPONSIBLE OFFICIAL(S):

N/A

CORRECTIVE ACTION(S) MONITORING PLAN:

N/A