IRS Not Properly Verifying QBI Deductions, TIGTA Says

Millions of Dollars in Potentially Erroneous Qualified Business Income Deductions Are Not Being Verified

January 13, 2021

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

HIGHLIGHTS

Final Audit Report issued on January 13, 2021

What TIGTA Found

Processes do not ensure that filers * * * 2 * * * a QBI Deduction claimed. Our analysis of Processing Year 2020 tax returns as of April 16, 2020, identified 12,980 TY 2019 tax returns claiming about

$57 million in QBI Deductions for which the filer * * * 2 * * * of the qualified business income. In response to a recommendation in our prior report, the IRS established a process to identify tax returns with QBI Deductions for which the claimant did not * * * 2 * * * andd did not * * * 2 * * *.

Although the IRS identifies these types of claims, once identified, the IRS is * * * 2 * * * and meets the requirements for the deduction.

Further analysis of the 12,980 TY 2019 tax returns determined that the taxpayers reported * * 2 * * , which increases the likelihood that their * * * 2 * * * may be * * * 2 * * * as * * * 2 * * * for the deduction.

Finally, TIGTA identified that employees in the Submission Processing Code and Edit function did not correctly process paper-filed tax returns claiming millions of dollars in QBI Deductions. Our review of more than 2.8 million paper-filed tax returns identified 31,196 that included a QBI Deduction. Further analysis of the 31,196 identified 5,193 paper-filed tax returns with QBI Deductions totaling $45.3 million that were incorrectly processed.

What TIGTA Recommended

TIGTA made five recommendations to the IRS to improve its ability to verify QBI Deductions. These recommendations included updating internal guidelines to require that tax examiners review * * * 2 * * * on tax returns identified * * * 2 * * *, and for those claims that involve the * * * 2 * * *; and revising Forms 8995 and 8995-A to include a cautionary statement reminding taxpayers of the * * * 2 * * * to claim the QBI Deduction.

The IRS agreed or partially agreed with two recommendations and disagreed with the other three recommendations. The IRS plans to update Forms 8995 and 8995-A as recommended, and plans to evaluate TY 2020 returns that claimed a QBI Deduction * * * 2 * * * to determine if there is an increasing compliance risk that warrants additional compliance actions.

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January 13, 2021

MEMORANDUM FOR:
COMMISSIONER OF INTERNAL REVENUE

FROM:
Michael E. McKenney
Deputy Inspector General for Audit

SUBJECT:
Final Audit Report — Millions of Dollars in Potentially Erroneous Qualified Business Income Deductions Are Not Being Verified (Audit # 202040008)

This report presents the results of our review to determine whether the Internal Revenue Service is ensuring that taxpayers claim the correct Qualified Business Income Deduction. This review was part of our Fiscal Year 2020 Annual Audit Plan and addresses the major management and performance challenge of Implementing Tax Law Changes.

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

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).

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Table of Contents

Background

Results of Review

Appendices

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Background

Section (§) 11011 of the Tax Cuts and Jobs Act¹ created Internal Revenue Code § 199A, which provides individuals with a new tax deduction for business income called the Qualified Business Income (QBI) Deduction. The deduction is generally for owners of domestic businesses operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. In addition to individual taxpayers, some estates and trusts can also take the § 199A deduction. A QBI Deduction is generally claimed on Form 1040, U.S. Individual Income Tax Return, and reduces the taxpayer's taxable income. The IRS developed two forms for taxpayers to use when computing their QBI Deduction: Form 8995, Qualified Business Income Deduction Simplified Computation, and Form 8995-A, Qualified Business Income Deduction.

In general, the deduction is for taxable years beginning after December 31, 2017, of up to 20 percent of an individual's domestic qualified business income plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income from taxable income. Qualified business income is the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Depending on the taxpayer's taxable income, the QBI Deduction may be subject to limitations based on the type of trade or business, the amount of Form W-2, Wage and Tax Statement, wages paid with respect to the qualified trade or business, and the unadjusted basis immediately after acquisition of qualified property held by the trade or business. For purposes of the deduction, there are two business categories:

• Specified service trade or business: Any domestic trade or business, other than a C corporation, involving, for example, the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any business whereby the principal asset is the reputation of its employees or owners.

• Qualified trade or business: Any domestic trade or business, other than a C corporation, that is not a specified service trade or business and does not perform services as an employee.²

A QBI Deduction is not available for wage income³ or for business income earned by a C corporation.

Results of Review

The Internal Revenue Service (IRS) developed and implemented an additional 17 new business rules⁴ for use in Processing Year⁵ 2020 to identify potentially erroneous QBI Deductions. The 17 new rules are in addition to the two rules⁶ previously developed and used in Processing Year 2019. Our review of these newly developed rules found that 16 of the 17 rules were working correctly by identifying and rejecting tax returns with the specific error condition as set forth in the programming for the rules. For the remaining rule, the IRS disabled the rule from February 23 through March 22, 2020, because it was erroneously rejecting tax returns that did not have the specified error condition. The IRS corrected programming for this business rule on March 22, 2020, and we confirmed that the revised programming was working as intended.

In addition, in response to a prior finding, the IRS has been consistently conducting outreach across various platforms to inform and educate taxpayers, tax professionals, etc. on the benefits of and requirements for a QBI Deduction. However, our review identified that the IRS's processes do not ensure that filers who * * * 2 * * * qualify for the QBI Deduction and that employees in the Submission Processing Code and Edit function correctly process paper-filed tax returns with QBI Deductions.

Processes Do Not Ensure That Filers Who Claim a Qualified Business Income Deduction * * * 2 * * *

Our analysis of Processing Year 2020 tax returns as of April 16, 2020, identified 12,980 Tax Year (TY) 2019 tax returns claiming about $57 million in QBI Deductions for which the filer * * * 2 * * * of the qualified business income. In response to a recommendation in our prior report, the IRS established a process to identify tax returns with QBI Deductions for which the claimant did not * * * 2 * * *, and did not * * * 2 * * *.⁷

However, although the IRS identifies these types of claims, once identified, the IRS is taking no action at the time tax returns are processed to * * * 2 * * * reported. Such action is needed to ensure that these filers are in fact * * * 2 * * * the QBI Deduction. Tax examiners in the IRS's Error Resolution function reviewing these returns are * * * 2 * * *. For example, an input error could be that the taxpayer inadvertently entered his or her standard deduction amount on the line for the QBI Deduction.⁸

The IRS does flag the above-mentioned returns to be potentially selected for a post-processing examination with a focus on * * * 2 * * * to support the QBI Deduction. For example, of the 12,980 TY 2019 tax returns we identified, 12,480 with QBI Deductions totaling nearly $37 million met IRS dollar tolerances and were “flagged.” However, our review found that the dollar tolerances the IRS has established to ultimately select one of these types of returns for an examination results in the majority of these returns not being examined. Our analysis determined that 11,897 (95.3 percent) of the 12,480 tax returns did not meet the IRS's dollar tolerance to be selected for post-processing compliance treatment. As such, the claim is allowed and not reviewed to ensure that it is valid. These 11,897 tax returns had * * * 2 * * * and claimed $28.2 million in QBI Deductions.

The IRS not selecting the majority of the returns we identified for post-processing compliance treatment is despite the IRS denying QBI Deductions for 58 (85.3 percent) of 68 TY 2018 tax returns that were examined, as of May 2020, totaling more than $4.3 million. According to the IRS's examination results, the taxpayers agreed with the change to the QBI Deduction, i.e., that they did not qualify, in 57 (98.3 percent) of the 58 cases.

Returns that the Treasury Inspector General for Tax Administration (TIGTA) identified report * * * 2 * * * which increases the likelihood the * * * 2 * * * for the QBI Deduction

In addition to the high examination adjustment rate, all of the 12,980 TY 2019 tax returns we identified were taxpayers who were * * * 2 * * *, which increases the likelihood that their * * * 2 * * * for the QBI Deduction * * * 2 * * *. For example:

• 4,170 tax returns for which the taxpayer reported * * * 2 * * *. Taxpayers must * * * 2 * * * to be eligible for a QBI Deduction. Our review of these returns did not identify * * * 2 * * * for these taxpayers.

• 8,810 tax returns for which the taxpayer reported * * * 2 * * *. Payments made to * * * 2 * * *, as defined by Internal Revenue Code * * * 2 * * * and are considered * * * 2 * * * for the purpose for the QBI Deduction.⁹ However, for each of these returns, our review of the * * * 2 * * * found that the * * * 2 * * *, that these were * * * 2 * * *.¹⁰ * * * 2 * * *

Figure 1: * * * 2 * * *

Source: Excerpt of * * * 2 * * .

Another indicator that the income reported on these returns does not qualify for the QBI Deduction is that these taxpayers did not report the * * * 2 * * *. According to the Form 1040 instructions, * * * 2 * * *.¹¹ None of these returns * * * 2 * * *. According to IRS management, many taxpayers appear to be reporting their * * * 2 * * *. As such, we believe that these taxpayers are incorrectly * * * 2 * * *.

Although tax examiners could identify that * * * 2 * * * for these 12,980 returns may not qualify for the QBI Deduction, internal guidelines * * * 2 * * *, and as a result, no actions were taken on the part of the IRS during processing to address these potentially erroneous claims.

Sending soft notices and adding a cautionary statement could prevent potentially erroneous QBI Deduction claims made by taxpayers

When we discussed our results with IRS management, they indicated they do not have the authority to adjust these types of returns. We agree. However, apart from examining a small number of tax returns, the IRS has taken no other actions in an attempt to reduce the erroneous QBI Deduction claims we identified. The IRS uses soft notices to address noncompliance in other areas of the tax system. These notices commonly provide individuals with information specific to the eligibility or reporting requirements related to the potential error and suggest the filing of a Form 1040X, Amended U.S. Individual Income Tax Return, if an error has occurred. The use of soft notices could significantly expand the IRS's ability to address instances when taxpayers claim the QBI Deduction and tax examiner review of these returns identifies that * * * 2 * * * likely does not qualify for the qualified business income deduction.

Furthermore, we recognize the complexities regarding the requirements for claiming the QBI Deduction. As such, it would prove beneficial if the IRS added a cautionary statement, similar to what it is included on Schedule EIC, Earned Income Credit, attached to the Form 1040, reminding taxpayers of the eligibility requirements (see Figure 2).

A statement similar to Figure 3 could be added to the Forms 8995 and 8995-A as another way to inform filers of the * * * 2 * * * for the QBI Deduction.

Requiring filers to include * * * 2 * * * would allow the IRS to correct erroneous claims at the time tax returns are processed

In response to our raising this same concern in our prior review, IRS management provided its Office of Chief Counsel with different hypothetical scenarios to review to determine if the IRS could use its math error authority to address the type of QBI claim¹² included in its scenarios. One scenario involved a taxpayer who submitted a tax return claiming a QBI Deduction that * * * 2 * * *. In their response, Counsel noted that because a taxpayer who * * * 2 * * *.

IRS management further noted that * * * 2 * * *, is not a proper indication of a taxpayer's eligibility for the QBI Deduction. Further, * * * 2 * * * will not provide the information needed to consistently determine eligibility of the QBI Deduction or assist with addressing potentially erroneous QBI Deductions. We disagree, as these are not * * * 2 * * *, these are * * * 2 * * * that are often used to * * * *2 * * * which is the * * * 2 * * * for claiming the QBI Deduction. Despite the fact that * * * 2 * * * are often used to * * * 2 * * * IRS management indicated that * * * 2 * * *.

Employees in Code and Edit Did Not Correctly Process Paper-Filed Tax Returns Claiming Millions of Dollars in Qualified Business Income Deductions

Our review of more than 2.8 million tax returns filed via paper and processed by the IRS as of March 2020 identified 31,196 TY 2019 tax returns that included a QBI Deduction. Further analysis of these 31,196 returns identified 5,193 tax returns with QBI Deductions totaling $45.3 million whereby the taxpayer did not include Forms 8995 or 8995-A and that were incorrectly processed because tax examiners did not correspond with the taxpayer in an attempt to obtain the form or move misplaced entries to the correct line of the tax return, as required.

When we brought our concerns to IRS management's attention, management agreed that the tax examiners were not always corresponding with taxpayers to request the missing forms as required. IRS management reviewed 959 (18.5 percent) of the 5,193 tax returns we identified and found that:

• Tax examiners did not correctly edit the tax return in 710 (74 percent) of the returns reviewed by the IRS when the taxpayer misplaced entries such as the standard deduction amount or taxable income amounts that were incorrectly reported as a QBI Deduction. Internal guidelines require tax examiners to edit obviously misplaced entries and move them to the correct lines prior to data transcription. Some of these incorrect entries could have been due to data entry errors. According to the IRS, these 710 processing errors were corrected in Error Resolution where the QBI Deduction was removed.

• Tax examiners erroneously denied the QBI Deduction before corresponding with the taxpayer in 47 (5 percent) of the cases reviewed. Internal guidelines require tax examiners to correspond with taxpayers when a Form 8995 or Form 8995-A is not included with their paper-filed tax return to request the missing forms. According to the IRS, math error notices were issued explaining that the QBI Deduction was not allowed because the Form 8995 or Form 8995-A was not attached.

On June 11, 2020, IRS management issued an e-mail to its campus managers requesting that they provide training to tax examiners.

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Appendix I

Detailed Objective, Scope, and Methodology

The overall objective of this review was to determine whether the IRS is ensuring that taxpayers claim the correct QBI Deduction. To accomplish our objective, we:

• Evaluated the accuracy of the Modernized e-File business rules and programming and error resolution codes and programming to ensure that they are working as intended.

• Evaluated the actions taken by the IRS in response to our prior recommendation to * * * 2 * * *.

• Assessed the IRS's outreach efforts to notify potentially eligible taxpayers about the QBI Deduction.

• Evaluated the IRS's post-processing controls to identify individuals who do not meet eligibility requirements and erroneously claim the QBI Deduction.

Performance of This Review

This review was performed with information obtained from the Small Business/Self-Employed Division Examination Operations, Office of Legislative Implementation function in Washington, D.C., and the Wage and Investment Division Submission Processing function in Ogden, Utah, during the period February through June 2020. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.

Major contributors to the report were Russell P. Martin, Assistant Inspector General for Audit (Returns Processing and Account Services); Diana M. Tengesdal, Director; Linna K. Hung, Audit Manager; Kenneth Carlson, Lead Auditor; and Lorenzo Moss, Auditor.

Validity and Reliability of Data From Computer-Based Systems

We evaluated the data by 1) performing electronic testing of required data elements, 2) reviewing existing information about the data and the system that produced them, and 3) interviewing agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for purposes of this report. We reviewed and analyzed computerized information obtained from IRS systems to include the Modernized Tax Return Database, Individual Return Transaction File, Individual Master File, and Information Returns Master File.

Internal Controls Methodology

Internal controls relate to management's plans, methods, and procedures used to meet their mission, goals, and objectives. 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: the accuracy and programming of the Modernized e-File business rules, the accuracy and programming of the Error Resolution error codes, the post-processing compliance activities and plans to identify individuals erroneously claiming the deduction, and the accuracy of procedures and rules for paper return processing. We reviewed, analyzed, and evaluated procedures and data related to these controls to assess their reliability.

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Appendix II

Outcome Measures

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to Congress.

Type and Value of Outcome Measure:

• Revenue Protection — Potential; $48.7 million in erroneous QBI Deductions from tax returns that * * * 2 * * * (see Recommendations 1 and 2).

Methodology Used to Measure the Reported Benefit:

Using the Individual Return Transaction File, we identified 9,434,925 TY 2019 tax returns claiming a QBI Deduction. We reviewed the 9,434,925 tax returns to determine if the taxpayer * * * 2 * * *. Specifically, we determined whether the taxpayer * * * 2 * * *:

• * * * 2 * * *.

• * * * 2 * * *.

• * * * 2 * * *.

• * * * 2 * * *.

• * * * 2 * * *.

• * * * 2 * * *.

We identified 12,980 tax returns with $57,094,724 in QBI Deductions from the 9,434,925 TY 2019 tax returns * * * 2 * * *. To further refine the potential amount of revenue protected for TY 2019, we used the IRS's examination results because the key characteristics of the cases selected for examination, i.e., * * * 2 * * * and in which the taxpayer agreed that the QBI Deduction should be disallowed, were the same characteristics as the cases we identified. As such, we multiplied the percentage of disallowed claims from the IRS's TY 2018 examination results (85.3 percent) to the amount of QBI Deductions claimed for TY 2019 that * * * 2 * * * ($57,094,724) to determine that the IRS could protect $48,701,800 in disallowed QBI Deductions for TY 2019 ($57,094,724 x 85.3 percent = $48,701,800).

Type and Value of Outcome Measure:

• Inefficient Use of Resources — Potential; 583 tax returns that would require a post-processing compliance examination (see Recommendation 1).

Methodology Used to Measure the Reported Benefit:

Using the Individual Return Transaction File, we identified 9,434,925 TY 2019 tax returns claiming a QBI Deduction. We reviewed the 9,434,925 tax returns to determine if the taxpayer * * * 2 * * *. Specifically, we determined whether the * * * 2 * * *:

• * * * 2 * * *.

• * * * 2 * * *.

• * * * 2 * * *.

• * * * 2 * * *.

• * * * 2 * * *.

• * * * 2 * * *.

We determined that 12,980 of the 9,434,925 tax returns * * * 2 * * *. Of those 12,980 tax returns, 12,480 were flagged to be potentially addressed via a post-processing examination. Further analysis identified that 583 had QBI Deductions of * * * 2 * * * met the threshold for a post-processing compliance examination.

Type and Value of Outcome Measure:

• Taxpayer Rights and Entitlements — Potential; 212 taxpayers claiming QBI Deductions that were incorrectly denied (see Recommendations 4 and 5).

Methodology Used to Measure the Reported Benefit:

Our analysis of the Individual Return Transaction File identified 5,377 taxpayers who filed a paper tax return claiming a QBI Deduction greater than * * * 2 * * * without including a Form 8995. We matched the 5,377 tax returns to the Individual Master File for TY 2019 to determine whether the IRS sent a Letter 12C, Individual Return Incomplete for Processing: Forms 1040, 1040-SR, 1040-A & 1040EZ, to the taxpayer to request the Form 8995 from the taxpayer. We determined that tax examiners did not send Letters 12C to 5,193 (96.5 percent) of the 5,377 taxpayers. The IRS reviewed 959 out of the 5,193 taxpayers' accounts and found that 47 (5 percent) of the 959 taxpayers had their QBI Deduction denied prior to the tax examiner corresponding with the taxpayer to obtain the additional supporting documentation (either Form 8995 or Form 8995-A). We determined that for the remaining 4,234 taxpayers (5,193 less 959), approximately 212 (5 percent) could have had their QBI Deduction incorrectly denied.

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Appendix III

Tax Year 2019 Modernized E-File Business Rules for the Qualified Business Income Deduction

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Appendix IV

Management's Response to the Draft Report

November 30, 2020

MEMORANDUM FOR
MICHAEL E. MCKENNEY
DEPUTY INSPECTOR GENERAL FOR AUDIT

FROM:
Eric C. Hylton
Commissioner, Small Business/Self-Employed Division

SUBJECT:
Draft Audit Report — Millions of Dollars in Potentially Erroneous Qualified Business Income Deductions Are Not Being Verified (Audit #202040008)

Thank you for the opportunity to review and comment on the subject draft audit report. The Tax Cuts and Jobs Act (TCJA) added §199A to the Internal Revenue Code (IRC), which provides individuals with a tax deduction for business income called the Qualified Business Income (QBI) deduction. This new code section is complex and presents challenges for both taxpayers and the Internal Revenue Service.

Your report focused on our processes to identify and prevent erroneous qualified business income deduction claims. As acknowledged in your report, we have taken several significant actions since the enactment of IRC §199A, including educating taxpayers and the tax professional community, as well as implementing processing and post processing business rules. The 12,980 returns you identified in the report account for less than 0.14% of the population claiming a QBI deduction (9,434,925 returns). Additionally, more than 95% of those returns were properly screened out due to our post processing compliance thresholds leaving only 1,083 returns (0.01%) available for compliance actions.

Your report includes three outcome measures and we agree that 212 taxpayers claiming QBI deductions may have been denied their deduction without having received a request for missing information first. However, we disagree that $48.7 million of increased revenue potential would be derived from potential erroneous QBI deductions. This measure assumes the results of a small sample of 68 examined returns can be extrapolated to the population of returns identified by TIGTA as being similar, an assumption that is not statistically supported. Additionally, the IRS has determined that taking the actions suggested during processing activities could harm taxpayers and increase risks. Conversely, to pursue post-processing compliance activities would create an opportunity cost that would reduce overall revenue potential by diverting resources from other productive workstreams.

Similarly, we disagree that post-processing compliance efforts used resources inefficiently to examine the qualified business income deduction reported on 583 tax returns. The information needed to address the concerns identified with these returns required post-processing compliance efforts. Given that these returns could not have been appropriately addressed during processing, the work was an efficient use of post-processing compliance efforts.

Attached is a detailed response outlining our corrective actions to address your recommendations. If you have any questions, please contact me, or a member of your staff may contact Scott Irick, Director Examination Operations, Small Business/Self-Employed Division.

Attachment

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Attachment

RECOMMENDATION 1:

The Deputy Commissioner for Services and Enforcement should update internal guidelines to require tax examiners to review * * * 2 * * * tax returns identified * * * 2 * * *, and for those claims that involve * * * 2 * * *, develop and send a soft notice to these taxpayers.

CORRECTIVE ACTION:

Determining the correct qualified business income deduction can be extraordinarily complex. Because a taxpayer who * * * 2 * * * . Many of the taxpayers that TIGTA identified with its criteria could be eligible for the deduction claimed. The IRS already has post-processing procedures in place to review returns that claim a QBI deduction where * * * 2 * * *. Pursuing soft notices for this issue would not be a good use of resources due to the complexity of the issue and would likely create unnecessary confusion and taxpayer burden.

IMPLEMENTATION DATE: N/A

RESPONSIBLE OFFICIAL:

N/A

CORRECTIVE ACTION MONITORING PLAN:

N/A

RECOMMENDATION 2:

The Deputy Commissioner for Services and Enforcement should revise Forms 8995 and 8995-A to include a cautionary statement reminding taxpayers of the * * * 2 * * * to claim the QBI Deduction.

CORRECTIVE ACTION:

The IRS will update the Forms 8995 and 8995-A to include a statement which provides the * * * 2 * * * to claim the QBI Deduction.

IMPLEMENTATION DATE: October 15, 2021

RESPONSIBLE OFFICIAL:

Director, Office of Legislative Program Coordination, Small Business/Self-Employed Division.

CORRECTIVE ACTION MONITORING PLAN:

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

RECOMMENDATION 3:

The Deputy Commissioner for Services and Enforcement should identify the * * * 2 * * * that * * * 2 * * * and revise the Form 1040 filing instructions to * * * 2 * * * in support of qualified business income deduction claims.

CORRECTIVE ACTION:

A taxpayer can claim the QBI deduction and * * * 2 * * *. Taxpayers are * * * 2 * * * required to support any qualified business income deduction claims on existing Forms 8995 and 8995-A by identifying * * * 2 * * *. However, we will evaluate tax year 2020 returns that claimed a QBID * * * 2 * * * to determine if there is an increasing compliance risk that warrants additional compliance actions.

IMPLEMENTATION DATE: February 15, 2022

RESPONSIBLE OFFICIAL:

Director, Legislative Program Coordination

CORRECTIVE ACTION MONITORING PLAN:

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

RECOMMENDATION 4:

The Deputy Commissioner for Services and Enforcement should develop processes to ensure tax examiners are sending correspondence to taxpayers prior to disallowing the QBI Deduction and moving misplaced entries to correct lines, as required.

CORRECTIVE ACTION:

Procedures to correspond with taxpayers for missing documentation prior to disallowing the QBI deduction are already in place. We provided training for tax examiners responsible for resolving errors involving returns claiming the QBI deduction as part of the annual 2020 Error Resolution System training. In June 2020, we notified campus managers to remind employees to follow the established procedures for corresponding for missing documentation.

The IRS should not correspond for supporting documentation when correcting an obvious taxpayer error and moving an amount from Form 1040, line 10, Qualified business income deduction, to line 9, Standard deduction or itemized deductions.

IMPLEMENTATION DATE: N/A

RESPONSIBLE OFFICIAL:

N/A

CORRECTIVE ACTION MONITORING PLAN:
N/A

RECOMMENDATION 5:
The Deputy Commissioner for Services and Enforcement should ensure the remaining 4,234 tax returns identified for which the QBI Deduction may have been erroneously disallowed are reviewed, and when applicable, correspond with taxpayers to request Form 8995 or 8995-A to support their deduction.

CORRECTIVE ACTION:
The majority of these returns were corrections to misplaced QBI deductions during return perfection activities. For the remaining returns, a math error notice was issued to notify taxpayers of changes made to their return. Math error notices advise taxpayers of their appeal rights and provide the toll-free number or address in which to respond with additional information.

The recommended manual review and correspondence is too costly and duplicative.

IMPLEMENTATION DATE: N/A

RESPONSIBLE OFFICIAL:

N/A

CORRECTIVE ACTION MONITORING PLAN:

N/A

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Appendix V
Abbreviations

IRS	Internal Revenue Service
QBI	Qualified Business Income
TIGTA	Treasury Inspector General for Tax Administration
TY	Tax Year