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The IRS Helping Prisoners, Dead People, and Kids

The Tax Prof Blog reported yesterday that the IRS allowed “millions in erroneous car deductions to prisoners, dead people, kid,” citing a report by the Treasury Inspector General for Tax Administration. He provides the following background information, which comes from the TIGTA report:

“The American Recovery and Reinvestment Act (Recovery Act) provides individuals with a Qualified Motor Vehicle (QMV) deduction, which is an additional deduction for State sales tax and excise tax on the purchase of certain motor vehicles. For Tax Year 2009 only, individuals could deduct State sales tax and excise tax for qualified motor vehicle purchases after February 16, 2009, and before January 1, 2010. The expiration date for the QMV deduction was December 31, 2009.”

According to a story by Kristina Peterson of Dow Jones Newswires” posted at NASDAQ.com:

“The Internal Revenue Service stumbled in handling a tax incentive designed to promote automobile sales, handing out more than $151 million in erroneous deductions, as well as 473 credits given to people who were imprisoned, dead or underage, a Treasury Department report said Wednesday.”

Here’s how TIGTA described the the problem in the report’s highlights:

"IMPACT UPON TAXPAYERS

“The American Recovery and Reinvestment Act of 2009 (Recovery Act) provides individuals with a Qualified Motor Vehicle (QMV) deduction, which is an additional deduction for State sales tax and excise tax on the purchase of certain motor vehicles.  The Internal Revenue Service (IRS) cannot verify whether individuals claiming a QMV deduction are entitled to the deduction at the time their tax returns are processed.  Inadequate verification of the QMV deduction increases the risk that taxpayers will be allowed to claim excessive QMV deductions.”

"WHAT TIGTA FOUND

“The IRS cannot verify whether individuals claiming a QMV deduction are entitled to the deduction at the time their tax returns are processed.  The reason is that individuals do not have to provide any third-party documentation to support that they actually purchased a qualified motor vehicle and, if a qualified vehicle was purchased, the amount paid in sales and excise taxes.

“Based on our review of a statistically valid sample of 150 individuals allowed a QMV deduction of less than the amount the IRS considers excessive, it appears that some individuals may have erroneously been allowed QMV deductions for vehicles that were not purchased.

“In addition, the process to identify potentially erroneous QMV deductions is not effective.  The IRS failed to identify 4,257 individuals claiming what the IRS defines as an excessive QMV deduction during tax return processing so it could hold and prevent the possible issuance of erroneous tax refunds.  These individuals claimed a total of more than $151.1 million in QMV deductions.  TIGTA also identified 473 cases for which information that the IRS maintains identifies the individuals as ineligible to claim about $1.02 million in QMV deductions they were allowed.  These individuals were in prison, deceased, or underage.

“Finally, the processes the IRS established to verify the 3,026 QMV deductions the IRS identified as having an excessive claim are also resulting in the erroneous release of tax refunds.  Our testing identified that the IRS does not ensure Tax Examiners are taking the necessary steps to verify the QMV deductions.”

Gee, do you think the members of Congress who voted for the “stimulus” bill in February 2009 knew that “the IRS doesn't require individuals to supply independent documents proving that they bought a car that qualified for the tax deduction, leading them to permit the tax break in error at times,” as Kristina Powers described the problem in her story for Dow Jones Newswires. Would they have even cared? Or is it just another reason why the "stimulus" bill stimulated so little economic activity?

Tax Prof provides several other sources for the news story, including Accounting Today, Associated Press, The Hill, Reuters, and USA Today, which you can find at his blog.

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