The Internal Revenue Service allowed over $27.2 million in potentially wrong tax refunds or tax credits to 1,938 taxpayers who made so-called “frivolous tax arguments,” according to a new report.
J. Russell George
Frivolous tax arguments are claims based on incorrect interpretations of the Tax Code to avoid paying taxes or get money from the IRS. For example, some taxpayers refuse to pay income taxes on religious or moral grounds by invoking the First Amendment, or claim that the only employees who are subject to federal income taxes are federal government employees or only income from foreign sources is taxable. The IRS has identified 50 such arguments.
A new report from the Treasury Inspector General for Tax Administration found that during fiscal years 2012 through 2014, the IRS discovered 36,648 frivolous tax returns in which a taxpayer used one or more of those 50 frivolous arguments. However, the processes and procedures used by the IRS do not ensure all tax returns claiming a potentially frivolous tax argument are caught. As a result, the IRS paid over $27.2 million in potentially erroneous refunds or tax credits to 1,938 taxpayers who claimed one or more of the 50 frivolous tax arguments in tax year 2014. The IRS is able to charge a $5,000 frivolous penalty for each of the 1,938 returns found by TIGTA.
The IRS told TIGTA it has modified its Frivolous Return Program filters to ensure returns with the same characteristics as those 1,938 frivolous returns will be identified and referred for additional frivolous filer review under the program.
TIGTA also found that IRS employees are not trained well enough to identify the tax returns that claim frivolous tax arguments. For example, 40 of the 50 frivolous arguments are identified as a result of an IRS employee’s manual review of paper-filed tax returns or correspondence. The IRS told TIGTA that before 2013 it provided annual training to employees who are responsible for reviewing tax returns and correspondence and has developed two online training courses in spotting frivolous returns. However, employees who work in the units that are most likely to identify frivolous returns and correspondence are not required to take those training courses.
On top of that, a number of employees in the FRP Correspondence Unit incorrectly identified for destruction some correspondence containing potentially frivolous arguments. TIGTA’s review of the 155 pieces of correspondence found that 11 pieces of correspondence (that is, 7 percent) should have been worked on as frivolous correspondence but were incorrectly identified for destruction.
TIGTA recommended the IRS ensure its annual evaluation of the FRP filter criteria allows for identification and assessment of all original and amended tax returns, regardless of the dollar amount, that meet the filter criteria and ensure the right actions are taken to address the 1,938 tax returns the IRS confirmed as being frivolous. In addition, TIGTA suggested the IRS should fix any computer programming errors to ensure all employees receive annual training on the processes for identifying potentially frivolous tax returns.
IRS management agreed with all of TIGTA’s recommendations. “It is important that every American obligated to pay taxes does so,” said TIGTA Inspector General J. Russell George in a statement. “I am pleased that the IRS agreed to the changes we recommended.”
Debra Holland, commissioner of the IRS’s Wage and Investment Division, pointed out that the report acknowledged that the IRS still managed to catch more than 78,000 returns with frivolous characteristics and prevented the payment of more than $3.6 billion in fraudulent refund claims outside the Frivolous Return Program. “From Fiscal Year 2012 through FY 2014, we identified over 36,000 tax returns using at least one of the frivolous arguments, and assessed almost 47,000 penalties for over $233 million,” Holland wrote.
The electronic filters used by the IRS FRP program scored and screened over 221,000 tax returns in processing year 2014, and the 1,938 additional returns that filed one or more frivolous arguments accounted for less than 1 percent of the total screened, she pointed out, and all 1,938 returns identified by TIGTA were business returns.