IRS mostly correct on recovery rebate credits, TIGTA says

By Paul Bonner

The IRS correctly calculated taxpayers' eligibility for a recovery rebate credit in the 2021 filing season 99.3% of the time, the Treasury Inspector General for Tax Administration (TIGTA) reported Monday.

However, even the corresponding 0.7% error rate involved hundreds of millions of dollars in improper allowances of the credit, and TIGTA found other instances where individuals should have received a recovery rebate credit or a greater amount of one but didn't.

The report, Processing of Recovery Rebate Credit Claims During the 2021 Filing Season (No. 2022-46-032), dated May 19, analyzed reasons for the errors, which were both systemic and manual, and made 22 recommendations, 12 of which the IRS disagreed with. Some recommendations the Service agreed to were issued as alerts to the Service during TIGTA's study, some of which resulted in processing changes during the filing season.

Achieving a 99.3% accuracy rate was "no small feat," Kenneth Corbin, IRS commissioner, Wage and Investment Division said in the memo providing IRS management's response to the draft report. As TIGTA also noted, 26.3 million tax returns claimed recovery rebate credits for 2020 totaling $39.2 billion, as of May 27, 2021.

The recovery rebate credit, a provision of the Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136, provided the refundable credit of up to $1,200 per eligible adult and $500 per qualifying child, applied to the 2020 tax year. It was extended and modified by the Consolidated Appropriations Act, 2021, P.L. 116-260, including an additional recovery rebate credit for 2020 of up to $600 per eligible adult and $600 per eligible child.

Both portions of the recovery rebate credit were paid in advance to qualifying taxpayers as economic impact payments (EIPs) so that the recovery rebate credit was generally available only to taxpayers who did not receive either or both EIPs or their full eligible amounts but who had been eligible for them. The first round of EIPs was issued to nearly 162 million individuals and the second to 146.5 million individuals, for a combined total dollar amount of nearly $413 billion as of Feb. 4, 2021.

Although the recovery rebate credit error rate was low, TIGTA found that more than 355,000 individuals had received recovery rebate credits totaling $603 million for which they may have been ineligible either because they were listed as a dependent on another tax return or the amount was based erroneously on a dependent who had been claimed on another return or for whom an EIP had been paid. Some other ineligible claimants were nonresident aliens or residents of U.S. territories.

TIGTA determined that, on 181,743 returns, the IRS miscalculated the recovery rebate credit amount, including 117,314 returns for which the calculated recovery rebate credits were $218.7 million more than the taxpayers were entitled to, and another 64,429 returns where the recovery rebate credit was a total of $80 million less than the taxpayers should have received. The majority of these errors, 167,130, were made by tax examiners attempting to correct a discrepancy in the claimed versus eligible amount of the recovery rebate credit. Another 11,797 returns reflected an IRS programming error in calculating a recovery rebate credit for taxpayers claiming under the married filing separately status.

More than 11.2 million returns required resolution of an EIP/recovery rebate credit discrepancy, 5.6 million of them manually, TIGTA reported. Besides risking additional errors, manual corrections created lengthy delays, TIGTA said. More than 500,000 such returns were still being processed as of Sept. 2, 2021.

Fraud filters generally worked as intended, TIGTA reported, although a programming error prevented 7,478 returns with potentially erroneous recovery rebate credits totaling $29.4 million from being flagged for additional review before the recovery rebate credits were paid.

Where the IRS disagreed with TIGTA's recommendations, the Service generally cited the relatively few numbers of taxpayers involved and other priorities competing for its limited resources. Although TIGTA recommended that the IRS review returns that claimed both an EIP and a recovery rebate credit for the same qualifying child or a recovery rebate credit for an individual claimed as a dependent on another return, the IRS replied that returns are subject to selection for examination.

With respect to approximately 10 million taxpayers who appeared to have been eligible to claim a recovery rebate credit but did not do so, the IRS declined to take the initiative to issue them one unilaterally, noting that "taxpayers are not required to claim the [recovery rebate credit]" and that the IRS had "widely communicated the need to file the Tax Year 2020 tax return to claim the credit based on current household circumstances."

TIGTA faulted this response for being inconsistent with the IRS's automatic adjustments with respect to the exclusion from gross income of up to $10,200 in unemployment benefits under the American Rescue Plan Act, P.L. 117-2, adding that "it is unrealistic for IRS management to assume that prior IRS communications are sufficient to ensure that all individuals, including those who do not normally file a tax return, understand whether they are eligible for the [recovery rebate credit] and how to claim it."

— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.

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