Thousands of Multimillion-Dollar Tax Refunds Not Being Reviewed

IRS rules and inconsistent procedures are preventing the review of thousands of tax returns with multimillion-dollar refund claims, possibly costing the government hundreds of millions in revenue, a government watchdog said.

Generally the IRS must allow the Joint Committee on Taxation to review refunds of income, estate, gift, and certain excise taxes in excess of $2 million—$5 million for C corporations—before it issues the money. But thousands of refunds bypass this check, which is required under tax code Section 6405, the Treasury Inspector General for Tax Administration said in a report released Monday.

IRS regulations and practices limit the number of returns subject to JCT review; the agency’s criteria for selecting cases for examination is inconsistent; and procedures for identifying and forwarding cases aren’t always followed, TIGTA said.

The watchdog identified 5,416 tax modules of returns required to be sent to the JCT and containing at least one refund posted to the module during fiscal years 2016, 2017, or 2018 that meets the high-dollar criteria. Each tax module may include numerous returns, including the originally filed return and any amended or associated returns filed by the taxpayer. Of that amount, 4,443, or about 82%, weren’t sent to the committee.

More than 1,600 of the modules weren’t referred because of regulations limiting the returns that have to be examined, the watchdog found. Reviewing those could have resulted in approximately $210 million in additional tax being assessed, it estimated.

The IRS agreed to three of the watchdog’s four recommendations, saying it plans to coordinate more with JCT to ensure returns that are legally required to be reviewed are reviewed and to strengthen its processes for identifying and submitting returns to the committee.