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IRS Tax Refund Offset Program Needs Improvement

A recent report from the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS’s computer programming and current processes are not able to effectively identify taxpayers’ outstanding tax debts and apply refunds to outstanding debts.

The IRS requires that a taxpayer’s refund be offset first to pay outstanding federal tax debt before it can be applied to offset nontax debts or applied as a credit to a future tax period. However, the IRS’s existing computer programming is not capable of identifying sole proprietors with business tax debt.

For the 2013 tax year, TIGTA identified approximately 53,000 individual taxpayers who received $74.5 million in tax refunds that should have been offset against outstanding debts on the taxpayers’ associated business tax accounts. TIGTA also reported the 502 individual tax refunds totalling approximately $780,000 were incorrectly applied to outstanding tax debts on LLC business tax accounts.

Several recommendations were made to the IRS for improving the tax refund offset program, including revising its tax debt identification programming and correcting procedural errors.

While the IRS agreed with TIGTA’s recommendations and began implementing some changes, the IRS stated that implementation of the requisite programming changes is subject to budgetary constraints, limited resources, and competing priorities. Due to those constraints, the IRS could not provide an implementation date for all of TIGTA’s recommendations.

By Janet Berry-Johnson, CPA