TIGTA Report on IRS Response to OID/Redemption Schemes

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TIGTA Report on IRS Response to OID/Redemption Schemes

Post by jcolvin2 » Thu Jun 22, 2017 7:25 pm

http://www.treasury.gov/tigta/auditrepo ... 040fr.pdf.

Office of Audit
Actions Can Be Taken To Increase Detection of Frivolous Redemption Claims
Final Report Issued on June 20, 2017

Highlights of Reference Number: 2017-40-040 to the Internal Revenue Service Commissioner for the Wage and Investment Division.


Individuals or businesses that oppose the Federal tax laws sometimes use frivolous tax arguments to enrich themselves or evade paying tax. One such argument is a frivolous redemption claim. A frivolous redemption claim involves the filing of a return reporting false income and claiming excessive false income tax withholding. Tax returns with a frivolous redemption claim report income and the taxpayer does not calculate any tax due or claims a refund of the excessive withholding.


This audit was initiated to evaluate the IRS’s decision to discontinue the use of the Electronic Fraud Detection System predictive modeling filters to identify individual tax returns claiming potentially frivolous Original Issue Discount (redemption claim) arguments.


The IRS’s identification processes and procedures are contributing to the reduction in confirmed frivolous redemption claims it identifies. TIGTA’s analysis of 337,273 tax returns in which the taxpayer reported excessive withholding identified 58,248 returns that were not evaluated for referral to the Frivolous Return Program because the refund fell below the IRS’s processing dollar tolerance.

In addition, the IRS expanded its procedures for identifying potentially frivolous amended returns as a result of an identified frivolous amended return scheme. This scheme resulted in the issuance of $43.4 million in refunds on 207 frivolous amended returns. However, the expanded procedures still rely on IRS employees to identify potentially frivolous claims, increasing the risk that a frivolous claim will be processed. When shown an example of an IRS confirmed frivolous amended return resulting from the identified scheme, two IRS employees responsible for processing amended returns indicated they would have processed the taxpayer’s claim.


TIGTA recommended that the Commissioner, Wage and Investment Division, ensure that the annual evaluation of the error identification processes criteria includes the identification and assessment of all original and amended tax returns, regardless of dollar tolerance, that have excessive withholding. The IRS should also continue to explore opportunities to develop systemic processes to identify potentially frivolous amended returns for additional review before refunds are paid.

IRS management agreed with both recommendations. The IRS plans to modify business rules relating to potentially frivolous issues to address those returns that would otherwise avoid selection and make them available for consideration in the annual filter performance review process. The IRS also plans to continue exploring opportunities to develop systemic processes to identify for pre refund review amended returns that claim excessive withholding.