The Internal Revenue Service did not resolve over 159,000 injured spouse cases in a timely way, resulting in the unnecessary payment of millions of dollars in interest, according to a new government report.
An injured spouse is a taxpayer who files a joint tax return for which all or part of his or her share of the tax refund was, or is expected to be, applied against the other spouse’s past-due debt. The IRS closed a total of 730,956 injured spouse cases in calendar years 2014 and 2015, according to the report.
The report, by the Treasury Inspector General for Tax Administration, pointed out that the IRS is required by law to apply a taxpayer’s tax refund to any past-due federal tax debt, child or spousal support debt, federal agency nontax debt (such as a student loan), or state income tax obligation before issuing the refund. If a taxpayer files a joint tax return resulting in a refund, that refund may be used to pay a past due amount of either spouse’s debts. However, the IRS can refund all or a portion of the refund if the taxpayer qualifies as an injured spouse.
TIGTA’s review of a statistically valid sample of 100 injured spouse cases from the universe of 530,581 resolved between Jan. 1, 2014, and May 28, 2015, found that 91 percent of the cases were processed accurately. But 30 percent of the cases were not resolved within the required 45 days, resulting in the unnecessary payment of interest. The IRS took an average of 102 days from receipt to resolution of the cases, and as a result of not working on the cases in a timely manner, paid interest of $506.
Based on these results, TIGTA estimates the IRS may have paid interest totaling $2.7 million for 159,174 of the 530,581 injured spouse cases as a result of not timely resolving the cases.
TIGTA also found the IRS did not update Form 8379, Injured Spouse Allocation, and its instructions to address a prior TIGTA recommendation for the IRS to ensure that guidance provided to taxpayers is current, complete, and accurate. For example, instructions still do not inform taxpayers that a claim can be filed for prior years or that there is a six-year statute of limitations on filing a claim for nontax debt and a three-year statute of limitations for tax debt.
The IRS did address a prior recommendation from TIGTA to identify and revise all IRS documents containing injured spouse information to refer taxpayers to Form 8379 and its instructions for guidance.
In recent years, the IRS has streamlined the procedures for obtaining innocent spouse relief and eliminated a two-year statute of limitations on requests for innocent spouse relief (see IRS Streamlines Innocent Spouse Relief).
TIGTA recommended the IRS ensure that injured spouse cases are assigned to customer service representatives who have sufficient training, knowledge, and experience to resolve the cases. In addition, TIGTA recommended that the IRS ensure that taxpayers are informed of the current statute of limitations the IRS applies when processing injured spouse cases and prioritize the work needed to update Form 8379 and its instructions.
The IRS agreed with all three of TIGTA’s recommendations. The IRS said it plans to ensure that all customer service representatives processing injured spouse allocations have sufficient training to resolve the cases. In addition, the IRS plans to update its internal guidance and instructions provided to the taxpayers to reflect the current statute of limitations the IRS applies when processing injured spouse cases and take immediate action to update the Form 8379 and instructions upon receipt of clarifying guidance from its Office of Chief Counsel.
The IRS also pointed out that it is working under budget constraints. “The report identifies lack of usage of the Automated Account Listing (AAL) as a primary reason for the increased overage inventory, which leads to taxpayer burden and unnecessary interest payments,” wrote Debra Holland, commissioner of the IRS’s Wage and Investment Division, in response to the report. “While we agree that AAL review/monitoring can improve, we must emphasize that there are other factors that impact our ability to timely process injured spouse cases. As of Fiscal Year 2015, the IRS budget had been cut by more than $1.2 billion, and the IRS had approximately 15,000 fewer employees than in 2010.”
She noted that the Accounts Management function at the IRS has lost over 2,000 full-time equivalent staff positions since 2012, a reduction of 12.5 percent.
On Thursday, the House Appropriations Committee approved further budget cuts of $236 million for the IRS in fiscal year 2017, which is lower than the agency’s 2008 level of funding and $1.3 billion below the Obama administration’s budget request.