Paper-Based Processes Led IRS to Potentially Erroneous Refunds

The Internal Revenue Service (IRS) issues close to $360 million in potentially erroneous tax refunds on an annual basis due to the lack of e-filing for amended returns, a process that would cost approximately $4.1 million to implement, according to a July 31 report from the Treasury Inspector General for Tax Administration (TIGTA).

The report focused on amended tax returns, which must be filed by paper and are not part of IRS’ e-file system. Without the e-filing, amended tax returns must be reviewed manually by tax examiners or customer service representatives, introducing the opportunity for human error. While a 2014 TIGTA report recommended adding e-filing, IRS officials cited the cost and labor of implementing e-file for amended tax returns. The IRS submitted budget requests for $4.1 million, but they were not granted due to competing priorities.

However, TIGTA found that 14 percent of amended returns in their sample were questionable, which could total nearly $360 million in potentially erroneous tax returns in 2017 and $1.8 billion over the next five years. Most of those potentially erroneous refunds resulted from employee error, and while the IRS has controls in place to prevent employee error, “these actions are still not adequate to address the erroneous refund losses associated with employee error and the lack of systemic verifications that are used for original tax returns,” TIGTA noted.

The remaining erroneous returns in the sample were off due to redacted reasons, but TIGTA estimated that the IRS issued $80 million in potentially erroneous refunds due to errors that “would have been identified and the return rejected if processed electronically.”

TIGTA noted that even without the potential savings from erroneous tax returns, implementing e-filing would create cost savings by eliminating the manual review process. E-filing is estimated to cost $4.1 million, while the additional processing costs for the next five years are projected to total $79.4 million.

While the IRS disagreed with the recommendation in 2014, the agency agreed to the recommendation this time, noting that the current budget request to Congress has $5.6 million to enhance the e-file system.

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