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Processing of Recovery Rebate Credit Claims During the 2022 Filing Season
On March 14, 2022, we notified the Director, Submission Processing, Wage and Investment Division, of our concerns regarding the accuracy of COVID Tax Tip 2022-29 regarding Internal Revenue Code §§ 6428B(f) and 6428B(h). Specifically, the guidance states incorrectly that taxpayers can claim the RRC for a shared dependent even if the IRS has already made an advance payment for the dependent. We recommended that the IRS revise the Tax Tip and related Frequently Asked Questions, etc., to state that taxpayers who share qualifying dependents are required to reduce the amount of the RRC claimed by the advance payment issued to either parent on behalf of the dependent.
The Commissioner, Wage and Investment Division, should review the 274,865 individuals identified where the IRS issued an RRC to potentially ineligible dependents and nonresidents and take the actions needed to recover payments that are determined to be erroneous.
Continue to periodically issue information on the availability of the RRC and how to claim it through Frequently Asked Questions on IRS.gov, communications with tax return preparers, annual unclaimed refund announcements, etc. until the statutory period for taxpayers to file a Tax Year 2020 and 2021 tax return to claim the RRC has expired.
Send a letter to the nearly 3 million individuals we identified where the tax return data show the individual is potentially eligible for the RRC encouraging the individuals to amend their Tax Year 2021 return and claim the credit if eligible. The letter should clearly state the eligibility requirements for claiming the RRC in simple terms and direct the individuals to additional resources if needed to assist them in determining whether they are eligible.
Delays Continue to Result in Businesses Not Receiving Pandemic Relief Benefits
On November 22, 2021, we notified the Director, Customer Account Services, Wage and Investment Division, that IRS employees were erroneously suspending Forms 941-X when the amended employment tax return did not include an adjustment to the amount of deferred Social Security tax. We recommended that the Accounts Management function immediately review the Forms 941-X that are identified in the suspense inventory as an adjustment to the amount of deferred Social Security tax to ensure that they are categorized properly.
The Commissioner, Wage and Investment Division, should evaluate the current inventory of backlogged claims related to pandemic relief and develop specific plans to prioritize claims and develop timelines to process backlogged claims.
The Commissioner, Wage and Investment Division, should review the 928 business entities identified that do not appear to qualify as an RSB and take actions needed to recover the ERCs that are determined to be erroneous.
The Commissioner, Small Business/Self-Employed Division, should identify all fourth quarter Tax Year 2021 paper-filed Forms 941 processed prior to when the programming was implemented and identify amended employment tax returns receiving the ERC for which there was no indication that the business was an RSB and take actions needed to recover the ERCs that are determined to be erroneous.
On May 13, 2021, we notified the Director, Examination, Small Business/Self-Employed Division, about the inconsistent referral criteria and recommended that the IRS update referral criteria to include Forms 941-X with refundable credits.
On November 23, 2021, we alerted the Director, Customer Account Services, Wage and Investment Division, that Forms 941-X were not being referred to Examination as required and recommended that the Accounts Management function provide additional guidance to its employees to reinforce established CAT-A referral criteria.
The Commissioner, Wage and Investment Division, should review the 41 Form 941-X claims identified with a nonrefundable COVID-19 related employer credit that meet CAT-A referral criteria and take actions needed to recover credits that are determined to be erroneous.
Provide additional training to employees as it relates to referring Forms 941-X to Examination for review.
Submit a request for the development of a systemic process to identify Form 941-X claims that meet referral criteria and alert the Accounts Management employee when processing these claims of the need to refer the return to Examination.
Delays in Management Actions Contribute to the Continued Tax Processing Center Backlogs
On September 16, 2021, we notified the Director, Submission Processing, Wage and Investment Division, that the IRS needed to identify when to stop coding and editing9 prior year tax returns to prevent having to rework these returns (a situation that occurred during the 2020 Filing Season). For example, the IRS needed to send 822,994 business tax returns back to the Code and Edit function at the beginning of Processing Year 2021 to be re-edited to allow for processing. This occurred because these tax returns, although edited, had not been entered into the IRS’s tax processing system by the end of Processing Year 2020. This resulted in an inefficient use of the IRS’s resources because IRS employees needed to re-edit the tax returns. We recommended that the IRS develop a plan to not only limit the number of returns that would require rework, but also any potential downtime in the Code and Edit function so that resources can be maximized for processing tax returns.
On September 29, 2021, we notified the Director, Submission Processing, Wage and Investment Division, of our observation that paper-filed information returns were being sorted and batched. According to both Tax Processing Centers, a decision had not yet been made regarding if the information return documents will be processed or destroyed. As we reported in September 2021,10 the IRS faced similar decisions during Processing Year 2020 and destroyed approximately 30 million paper-filed information return documents around March 19, 2021, because the documents could no longer be processed through its systems. We recommended that the IRS determine if/when Processing Year 2021 paper-filed information return documents would be processed. As an alternative to destroying these documents, we recommended that management evaluate and consider scanning the information return documents using the Service Center Recognition Image Processing System while forgoing the data validation process.
On September 17, 2021, we notified the Director, Submission Processing, Wage and Investment Division, of our concerns with the processing of a backlog of taxpayer address changes using a first-in/first-out method. As of August 27, 2021, the Ogden Entity function had more than 173,000 address change requests in its ending inventory. In our discussions with Ogden Entity function management, they estimated that due to the backlog of inventory, more than 50 percent of the address change requests the staff were working had already been made by other means, e.g., the filing of a tax return that automatically updates the taxpayer’s address. As such, Entity function employees were needlessly expending resources working address change requests for which the address was already updated. We recommended that the IRS evaluate changing the order in which address changes are worked to a last-in/first-out method.
On October 21, 2021, we notified the Director, Submission Processing, Wage and Investment Division, of our concerns related to the accuracy of information communicated to taxpayers regarding transcript request methods. For example, our review of information posted on IRS.gov found that non-paper-based methods for requesting tax transcripts were not communicated clearly. Whereas, the Form 4506-T, Request for Transcript of Tax Return, and Form 4506, Request for Copy of Tax Return, provide information for automated self-help service tools. We also found that the instructions on the Forms 4506 and 4506-T do not align with the website wording and could cause confusion for taxpayers. We recommended that IRS management update IRS.gov to provide clear communications on available resources. This includes updating the Forms 4506 and 4506-T tip sections to match IRS.gov language and conducting outreach to encourage individual taxpayers to obtain tax transcripts using the various automated methods.
On September 16, 2021, we notified the Director, Submission Processing, Wage and Investment Division, of our concerns about the printing capacity of the new electronic fax (e-fax) equipment in the Error Resolution System functional area, noting that this new equipment can only print about 20,000 to 30,000 pages/month (approximately 240,000/year) whereas, the prior equipment printed roughly 2 million documents per year. In addition, in the three months since Ogden received this new equipment, it has burned out and needed new parts. Although Ogden ordered new multifunctional print devices, those were not to be delivered until January 2022. As a workaround, Ogden used two printers that had a capacity of about 15,000 pages per month. We recommended that the Submission Processing function collaborate with Managed Print Services and the Information Technology organization to identify and expeditiously resolve all instances of printer capacity, break/fix, etc. issues that are causing work stoppages in the Tax Processing Centers.
On December 17, 2021, we notified the Commissioner, Wage and Investment Division, of our concern that the resources assigned to the RAIVS unit were not commensurate between the Kansas City and Ogden Tax Processing Centers. In our discussions, IRS management advised that taxpayer tax transcript requests had been previously transshipped from the Kansas City Tax Processing Center to the Austin Tax Processing Center with the last transshipment of work occurring in October 2021. On January 11, 2022, we notified the Director, Submission Processing, Wage and Investment Division, of the same concern noting that during our December 2021 walkthroughs, Kansas City management stated they have 70 full-time employees in the RAIVS/Income Verification Express Service’s unit. Whereas, Ogden management stated they have 183 full-time employees. As of December 10, 2021, the Kansas City RAIVS unit had over 751,000 unprocessed requests compared to a little more than 145,000 unprocessed requests in the Ogden RAIVS unit. We recommended that the IRS evaluate alternatives to address the volume of RAIVS inventory at the Kansas City Tax Processing Center. This should include an evaluation of the capacity to reallocate staffing at the Kansas City Tax Processing Center to assist the RAIVS unit, and/or realignment of work among the various Tax Processing Centers, i.e., transship inventory from Kansas City to Ogden.
The Commissioner, Wage and Investment Division, should immediately take steps to address the imbalance of Tax Processing Center staffing and inventory to address the continued backlog of transcript requests.
The Commissioner, Wage and Investment Division, should develop a detailed strategy to show how current and future staffing resources, including available surge team members, will be used to address the significant backlog of amended returns in the Submission Processing function’s inventory.
The Commissioner, Wage and Investment, should ensure that the various products and IRS.gov landing pages are updated to reflect acceptable methods for faxing information to the IRS.
The Child Tax Credit Update Portal Was Successfully Deployed, but Security and Process Improvements Are Needed
Ensure that the ELC coaches comply with existing agency requirements related to the independent verification and validation of all ELC artifacts.
Ensure that the ELC coaches comply with existing agency requirements related to the independent verification and validation of all ELC artifacts.
Ensure that the ELC coaches comply with existing agency requirements related to the independent verification and validation of all ELC artifacts.
Prioritize remediation efforts on the two noncompliant SADI system servers that have weighted noncompliance scores of less than 90 percent.
Prioritize remediation efforts on the two noncompliant SADI system servers that have weighted noncompliance scores of less than 90 percent.
Prioritize remediation efforts on the two noncompliant SADI system servers that have weighted noncompliance scores of less than 90 percent.
Ensure that only authorized approving authorities provide status updates and grant final approval of ELC artifacts during required milestone reviews.
Ensure that only authorized approving authorities provide status updates and grant final approval of ELC artifacts during required milestone reviews.
Ensure that only authorized approving authorities provide status updates and grant final approval of ELC artifacts during required milestone reviews.
Establish a formal process, which includes routine updates, to identify primary and proxy approvers for all ELC artifacts.
Establish a formal process, which includes routine updates, to identify primary and proxy approvers for all ELC artifacts.
Establish a formal process, which includes routine updates, to identify primary and proxy approvers for all ELC artifacts.
The Chief Information Officer should ensure that systems supported by the CSPs have an approved IRS ATO prior to a system’s deployment.
The Chief Information Officer should ensure that systems supported by the CSPs have an approved IRS ATO prior to a system’s deployment.
The Chief Information Officer should ensure that systems supported by the CSPs have an approved IRS ATO prior to a system’s deployment.
The Chief Privacy Officer should establish a process that complies with Office of Management and Budget requirements regarding the selection, implementation, assessment, and continuous monitoring of privacy controls.
The Chief Privacy Officer should ensure that formal documentation is created that shows that all the privacy controls applicable to the SADI system are properly selected, implemented, and assessed.
The Chief Privacy Officer should ensure that formal documentation is created that shows that all the privacy controls applicable to the SADI system are properly selected, implemented, and assessed.
The Chief Privacy Officer should ensure that formal documentation is created that shows that all the privacy controls applicable to the SADI system are properly selected, implemented, and assessed.
The Chief Information Officer should ensure that the Cybersecurity function validates that all required NIST physical and environmental protection and media protection controls are implemented.
The Chief Information Officer should ensure that the Cybersecurity function validates that all required NIST physical and environmental protection and media protection controls are implemented.
The Chief Information Officer should ensure that the Cybersecurity function validates that all required NIST physical and environmental protection and media protection controls are implemented.
The Chief Information Officer should ensure that the IRS prioritizes completing the processes that will validate newly built servers being placed into the production environment meet minimum compliance requirements and initiate vulnerability scanning and remediation during the server build process.
The Chief Information Officer should ensure that the IRS prioritizes completing the processes that will validate newly built servers being placed into the production environment meet minimum compliance requirements and initiate vulnerability scanning and remediation during the server build process.
The Chief Information Officer should ensure that the IRS prioritizes completing the processes that will validate newly built servers being placed into the production environment meet minimum compliance requirements and initiate vulnerability scanning and remediation during the server build process.
Ensure that all CTC Update Portal and SADI system associated POA&Ms (listed in Appendix II) are completed timely based on IRS-defined timelines and processes.
American Rescue Plan Act: Assessment of the Child Tax Credit Update Portal’s Capabilities and Related Processes
On January 25, 2022, we notified the Director, Return Integrity and Compliance Services, of potential inaccuracies and other areas of concern based on our review of information on www.ChildTaxCredit.gov. For example, the website references Publication 972, Child Tax Credit and Credit for Other Dependents, which the IRS made obsolete for Tax Year 2021, and did not reference thresholds for single or married filing separately taxpayers. We recommended that the IRS review our concerns and share them with the Department of the Treasury to address.
On January 28, 2022, we notified the Director, Return Integrity and Compliance Services, of our concerns with the reconciliation process when there are undelivered checks. This concern arises when the taxpayer files their Tax Year 2021 tax return but has a check for an advance Child Tax Credit payment that was returned undelivered after the taxpayer filed their tax return. In these situations, the taxpayer will not receive the payment from the undelivered check and will need to work with the IRS, after filing their tax return, to recover their payment. We recommended that the IRS develop a process to continue to proactively identify and correct accounts with undelivered advance Child Tax Credit that post to accounts after the IRS processes the Tax Year 2021 tax return.
Recurring Identification Is Needed to Ensure That Employers Full Pay the Deferred Social Security Tax
The Commissioner, Small Business/Self-Employed Division, should ensure that the 3,231 tax accounts are updated to reflect the correct balance due.
The Commissioner, Small Business/Self-Employed Division, should continue to identify new tax accounts with a Social Security tax deferral at least through Calendar Year 2024 to ensure that all unpaid deferrals are identified for collection as appropriate.
Management Took Actions to Address Erroneous Employee Retention Credit Claims; However, Some Questionable Claims Still Need to Be Addressed
On February 28, 2024, we alerted the ERC Team Lead of our concern and recommended that the IRS review the 997 tax returns we identified and consider them for post-refund compliance review to recover potentially erroneous ERC paid.
On February 28, 2024, we alerted the ERC Team Lead of our concern and recommended that the IRS review the 139,993 and 44,930 Tax Years 2020 and 2021 returns and consider them for post-refund compliance to recover any potentially erroneous ERC paid.
The Commissioner, Small Business/Self-Employed Division, should ensure that the 923 entities we identified receive a disallowance letter to prevent erroneous ERC claims from being paid.
The Commissioner, Small Business/Self-Employed Division, should ensure that any subsequent analysis to identify businesses for recapture letters uses accurate wage data and takes into consideration lessons learned from the Tax Year 2020 recapture letters.
Additional Actions Are Needed to Reduce Accounts Management Function Inventories to Below Pre‑Pandemic Levels
Ensure that all sites understand and begin immediately stamping the ICT received date after correspondence screening is completed, and that individual and business documents are screened with equal importance.
Coordinate with the Information Technology organization to explore adding Taxpayer Relations inventories into the CII, so that all Accounts Management inventory is located in the same inventory management system.
The Commissioner, Wage and Investment Division, should establish time frames for and a process to measure correspondence screening timeliness at each site.
The Commissioner, Wage and Investment Division, should rescind the requirement that only the TEs and the CSRs perform correspondencescreening and encourage all sites to use mail clerks, after providing them with adequate training.
The Commissioner, Wage and Investment Division, should ensure prompt completion of the ICT review to determine if additional scanners will be purchased.
Discontinue correspondence screening via telework and ensure at all sites that screening must be conducted in the same IRS facility where documents are being scanned by the ICT.
Identify and address the cause of Accounts Management function employees incorrectly routing cases to other IRS functions and work with other IRS functions to update their Internal Revenue Manuals to make it clear that incorrectly routed documents should be returned to the originating employee.
We recommended that management take steps to hire as many mail clerks as possible.
The Commissioner, Wage and Investment Division, should establish goals for each of the Accounts Management function’s inventory types and develop a plan for addressing those goals to ensure a timely return to pre-pandemic inventory levels.
The Commissioner, Wage and Investment, should prioritize funding and implementation of automated processing of Forms 1040-X to increase efficiencies and reduce taxpayer burden.
The Commissioner, Wage and Investment Division, should implement temporary solutions for the processing of Forms 1040-X to reduce the backlogs, reduce taxpayer burden, and save IRS resources until an automated solution is implemented.
Coordinate with the Information Technology organization to prevent generating transcripts for manual refunds less than $100 and adjust the frequency that some transcripts are generated to help management get through the inventory more efficiently.
Temporarily relieve employees in the Accounts Management function from having to complete paperwork for barred statutes, so they can focus on eliminating the backlogged inventory and prevent future barred statutes.
American Rescue Plan Act: Accuracy of Advance Child Tax Credit Periodic Payments
As detailed previously, we provided the Director, Return Integrity and Compliance Services, Wage and Investment Division, with notifications and files detailing erroneous payments we identified and recommended that the IRS evaluate the discrepancies to identify why the payments were made to prevent additional periodic payments to ineligible taxpayers. In addition, we recommended that the IRS add a stop payment transaction code to taxpayer accounts to prevent them from receiving additional improper advance Child Tax Credit payments.
On August 9, 2021, we notified the Director, Return Integrity and Compliance Services, Wage and Investment Division, of our concerns related to eligible taxpayers who did not receive their advance Child Tax Credit payments. We recommended that the IRS evaluate the discrepancies to identify why periodic payments were not made to eligible taxpayers.
On June 29, 2021, we notified the Director, Return Integrity and Compliance Services, Wage and Investment Division, that the messaging provided on the IRS’s eligibility assistant tool and the presentation of information related to the advance Child Tax Credit payments on IRS.gov may be confusing to taxpayers. For example, the link to “Get Answers on the Advance Child Tax Credit” that is located on the IRS.gov main page takes taxpayers to the Advance Child Tax Credit Payments in 2021 web page; however, the links to get the questions and answers is at the bottom of the screen. We recommended that the IRS consider revising the messaging and presentation of information on its platforms to make it clear for taxpayers.
On January 28, 2022, we notified the Director, Return Integrity and Compliance Services, Wage and Investment Division, that we identified 2.2 million taxpayers who had their direct deposit information updated by the IRS between August 23 and October 5, 2021. We recommended that the IRS conduct an outreach effort to inform taxpayers of the possibility that their advance payments may have been sent to payroll allotment accounts. This outreach effort could include sending a separate letter to the impacted taxpayers.
The Director, Return Integrity and Compliance Services, Wage and Investment Division, should develop and implement processes and procedures to include data validation on incoming files from third-party sources prior to their use.
Processing of Recovery Rebate Credit Claims During the 2021 Filing Season
On June 15, 2021, we alerted IRS management of our concerns with the systemic calculation of the allowable RRC amount. We recommended that IRS management review the returns we identified and provide us with any corrective actions they intended to take.
Conduct analysis of Tax Year 2020 tax returns processed after May 27, 2021, to identify additional individuals who received an RRC for a qualifying child for which the IRS has already paid an EIP or an RRC to someone else and take the actions needed to recover RRC payments that are determined to be erroneous.
Review the 7,022 individuals identified in which the IRS issued multiple RRCs for a qualifying child who was claimed on more than one tax return and take the actions needed to recover payments that are determined to be erroneous.
Conduct analysis of Tax Year 2020 tax returns processed after May 27, 2021, to identify additional individuals who received an RRC for a qualifying child who was claimed on more than one tax return and take the actions needed to recover payments that are determined to be erroneous.
Review the 75,594 tax returns identified in which the individual is potentially a nonresident alien and take the actions needed to recover the RRC payments that are determined to be erroneous.
Perform analysis of Tax Year 2020 tax returns filed after May 27, 2021, to identify additional tax returns with the same characteristics as those the IRS determined were filed by a nonresident alien and take the actions needed to recover erroneous RRC payments.
The Commissioner, Wage and Investment Division, should coordinate with the Territories to confirm and recover erroneous RRCs.
Review the nearly 6.9 million potentially eligible individuals we provided to the IRS who had not filed a Tax Year 2020 tax return as of May 27, 2021, and send a letter to those individuals who still have not filed a Tax Year 2020 return to encourage them to file a return and claim the RRC if eligible.
Review the 3.1 million eligible individuals we identified who filed a Tax Year 2020 return and proactively issue these taxpayers their credit.
Conduct additional analysis to identify tax returns filed after May 27, 2021, in which an individual is eligible for the RRC based on their Tax Year 2020 tax return and did not claim the credit, and proactively issue the taxpayer their credit.
If IRS management does not proactively issue the RRC to individuals who filed a return and did not claim the credit, the IRS should notify these individuals that they are eligible to claim the RRC and should file an amended tax return to claim the credit.
On March 19, 2021, we alerted IRS management of our concerns that an incorrect amount of advance payments was being used to calculate the RRC for some taxpayers. We recommended that IRS management review the returns we identified and provide us with any corrective actions they intended to take.
Work with the BFS to ensure that individuals who were denied the RRC and have still not activated their EIP1 or EIP2 debit card as of December 31, 2021, have EIPs reversed in their tax account and are issued their RRC. These processes should include notifying Metabank that the debit cards in question are to be cancelled.
Work with the BFS to obtain recurring data during Processing Year 2022 to identify individuals who have not activated their advance ARPA RRC debit card at the time a return is filed and implement processes to reverse the advance payment so these individuals can receive the RRC on their Tax Year 2021 tax return.
We alerted the Commissioner, Wage and Investment Division, of our concerns that the IRS was unnecessarily burdening taxpayers whose RRC claims were identified for manual ERS review. We recommended the IRS develop processes to systemically adjust RRC claims using the computer-generated RRC calculation.
On April 6, 2021, we alerted IRS management of our concerns regarding ERS tax examiners incorrectly computing the RRC (see management’s action in response to Recommendation 1). We recommended the IRS review the returns we identified and take the actions necessary to ensure that these taxpayers receive the amount of the RRC they are entitled to receive.
On March 12, 2021, we alerted IRS management of our concerns that some tax returns were not being identified by fraud filters. We recommended IRS management review the returns we identified and associated fraud filters to identify why these returns were not selected and make programming changes as necessary to ensure proper identification of returns with potentially questionable claims.
Conduct analysis to identify Tax Year 2020 RRC claims processed after May 27, 2021, to identify other returns in which ERS tax examiners incorrectly calculated the number of allowable dependents and returns that were not reprocessed per IRS guidance after programming was corrected, and ensure that these taxpayers receive the correct amount of the RRC.
Review the 14,508 individuals identified in which the IRS issued an RRC to an individual who was claimed as a dependent on someone else’s tax return but did not check the dependent box and take the actions needed to recover payments that are determined to be erroneous.
Conduct analysis of Tax Year 2020 tax returns processed after May 27, 2021, to identify additional individuals who received an RRC and were also claimed as a dependent on someone else’s tax return but did not check the dependent box, and take the actions needed to recover the RRC payments that are determined to be erroneous.
Review the 238,680 individuals under the age of 25 identified as potential dependents and take the actions needed to recover payments that are determined to be erroneous.
Review the 15,741 individuals identified in which the individual incorrectly received an RRC and an EIP for the same qualifying child and take the actions needed to recover RRC payments that are determined to be erroneous.