Er­ro­neous IRS tax cred­its build up to bil­lions

The Washington Times Weekly - - National - BY PHILLIP SWARTS

Good news if you want to make im­prove­ments to your home or busi­ness: The gov­ern­ment can help you pay for it, even if you don’t qual­ify.

In fact, fed­eral investigators found that In­ter­nal Rev­enue Ser­vice over­sight is so bad that the agency handed out more than $1 bil­lion in tax breaks dur­ing 2011 to peo­ple who shouldn’t have been el­i­gi­ble.

The prob­lem lies with the Gen­eral Busi­ness Credit, a tax break for com­pa­nies that make im­prove­ments deemed to be in the pub­lic in­ter­est, such as in­stalling wheel­chair ramps, mak­ing en­ergy-ef­fi­cient im­prove­ments or open­ing a child care center for em­ploy­ees.

But in­di­vid­u­als mis­tak­enly have been ap­ply­ing for the credit as well, investigators said, and have re­ceived hun­dreds of mil­lions of dol­lars in tax breaks meant for busi­nesses.

“As with other tax cred­its, the Gen­eral Busi­ness Credit serves a use­ful pur­pose and the IRS must pre­vent its abuse,” said J. Rus­sell Ge­orge, head of the IRS in­ter­nal watch­dog, the Trea­sury in­spec­tor gen­eral for tax ad­min­is­tra­tion. “In th­ese dif­fi­cult fis­cal times, it is im­per­a­tive the IRS de­velop pro­cesses to iden­tify un­sup­ported and po­ten­tially er­ro­neous claims.”

For al­low­ing in­di­vid­ual tax­pay­ers to claim a tax break made for busi­nesses, the IRS wins the Golden Ham­mer, a weekly dis­tinc­tion awarded by The Wash­ing­ton Times to ex­am­ples of fis­cal abuse and mis­man­age­ment.

Of­fi­cials at the IRS said they agreed with the in­spec­tor gen­eral’s as­sess­ment and would be­gin look­ing at ways to im­prove over­sight.

“An eval­u­a­tion of our com­pli­ance strat­egy will be com­pleted to iden­tify sys­temic and op­er­a­tional changes to im­prove de­tec­tion pro­cesses,” a re­sponse from the agency said. “We will re­view those claims, as well as any sim­i­lar first-time claims made on 2012 re­turns by tax­pay­ers not in­cluded in the 2011 anal­y­sis.”

The vast ma­jor­ity of the waste investigators found lies in in­cen­tives for en­ergy ef­fi­ciency projects. It turns out that or­di­nary home­own­ers have been ap­ply­ing for the Gen­eral Busi­ness Credit de­signed to spur en­ergy-ef­fi­cient home­build­ing by con­struc­tion com­pa­nies and con­trac­tors.

Tax­pay­ers can get a sep­a­rate spe­cial credit for mak­ing en­ergy-sav­ing im­prove­ments to their own homes, capped at $500. But in­stead, many have been ap­ply­ing for the Gen­eral Busi­ness Credit, which doesn’t have a limit. It’s sup­posed to be based on how many en­ergy-ef­fi­cient houses the com­pa­nies build or sell.

That means in­di­vid­ual tax­pay­ers have been get­ting breaks in the tens of thou­sands of dol­lars — lev­els meant for com­pa­nies, not a sin­gle house­hold. The IRS even re­ceived 22 tax re­turns from in­di­vid­u­als re­quest­ing more than $10 mil­lion in tax cred­its each — which were granted.

Al­to­gether, the in­spec­tor gen­eral thinks, the IRS handed out $1.2 bil­lion in er­ro­neous tax breaks, though it wasn’t all claimed in 2011. Tax­pay­ers can carry the cred­its for­ward and po­ten­tially get sav­ings for up to 20 years.

It looks, how­ever, like tax­pay­ers aren’t tak­ing ad­van­tage of that, which has helped keep down po­ten­tial waste. As of June, 2013, only 65 peo­ple had car­ried over cred­its worth $195 mil­lion.

Ap­ply­ing for the wrong tax credit and not car­ry­ing it over from year to year shows that the whole sit­u­a­tion is likely the re­sult of er­rors on the part of peo­ple fill­ing out per­sonal tax forms, investigators said.

“The cal­cu­la­tions to de­ter­mine the credit amount for many of the tax re­turns are ex­ces­sively over­stated, which may be a re­sult of tax­payer con­fu­sion in cal­cu­lat­ing the credit,” the in­spec­tor gen­eral said. How­ever, the watch­dog redacted what ex­act mis­takes it be­lieves tax­pay­ers made, say­ing the in­for­ma­tion could be used by peo­ple try­ing to avoid pay­ing taxes.

De­spite “tax­payer con­fu­sion,” the in­spec­tor gen­eral said, the IRS should have caught the mis­takes be­fore for­feit­ing a po­ten­tial bil­lion dol­lars in rev­enue.

The Gen­eral Busi­ness Credit also gives breaks to com­pa­nies that in­stall hand­i­ca­pac­ces­si­ble ad­di­tions such as ramps. Over­sight for that part of the pro­gram was good, investigators said, and very lit­tle money was given to in­el­i­gi­ble en­ti­ties.

“How­ever, de­spite the suc­cess of this cri­te­rion for iden­ti­fy­ing po­ten­tially er­ro­neous claims, the IRS does not use this cri­te­rion to iden­tify other ques­tion­able Gen­eral Busi­ness Credit claims,” investigators said.

Once again, be­cause of con­cerns that peo­ple could take ad­van­tage of the over­sights, the in­spec­tor gen­eral did not say what ac­tion or pro­gram was so suc­cess­ful in stop­ping dis­abil­ity im­prove­ment pay­ments but not in en­ergy ef­fi­ciency pay­ments, and of­fi­cials de­clined to give fur­ther in­for­ma­tion to The Wash­ing­ton Times.

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