TD P 15-71
Management Advisory Report:
Significantly More Individual Taxpayers Inappropriately Received
Disabled Access Credits for Tax Year 2000 Than for 1999
January 2002
Reference Number:
2002-30-048
January
29, 2002
MEMORANDUM FOR
COMMISSIONER ROSSOTTI
FROM: Pamela J. Gardiner
/s/ Pamela J. Gardiner
Deputy
Inspector General for Audit
SUBJECT: Final Management Advisory
Report – Significantly More Individual Taxpayers Inappropriately Received
Disabled Access Credits for Tax Year 2000 Than for 1999 (Audit # 200230008)
This
report presents the results of a computer analysis the Internal Revenue Service
(IRS) requested of Tax Year (TY) 2000 U.S. Individual Income Tax Returns (Form
1040) that inappropriately included Disabled Access Credits.1
Our overall objective was to identify
taxpayers who claimed and received the Disabled Access Credit on their TY 2000
Forms 1040 despite indications they had no business ownership or participation.2 We also determined whether the IRS was
providing taxpayer education, which it had agreed to do, related to this tax
credit.
In
September 2001, we reported3 that
taxpayers were inappropriately receiving the Disabled Access Credit on their TY
1999 Forms 1040. Although the number of
taxpayers involved was not great, the issue was significant for two reasons:
·
Many of the taxpayers involved were elderly Americans who
were possibly victims of promoters recommending unwise investments in pay
telephones and automated teller machines and promising bogus tax credits.
·
Based on the media coverage the issue had received,4 we believed
the problem was most likely increasing.
One
of the recommendations in our prior report was for the IRS to analyze the
results of our computer analyses for TY 1999, perform similar analyses of TY
2000 returns, and develop a compliance approach to address this issue. To facilitate the IRS’ corrective action, we
agreed to perform a computer analysis of TY 2000 tax returns.
For
TY 2000, the number of tax returns for which the Disabled Access Credit was
inappropriately allowed increased 28 percent, as compared to TY 1999. The amount of credit allowed on these returns
totaled over $1.25 million. We also
determined that 64 taxpayers
inappropriately received the credit for both TYs 1999 and 2000.
As
of the date of our review, the IRS was on schedule to add information to its
Small Business/Self-Employed Community Website to alert taxpayers about
investments in pay telephones and automated teller machines fraudulently
promoted as qualifying for the Disabled Access Credit. We discussed another enhancement to the IRS’
website with the Project Manager for the IRS’ website and the Director,
Stakeholder Partnership, Education and Communications. They agreed to work together to provide links
from other sections of the IRS’ website to the text in the Small
Business/Self-Employed section.
The
Treasury Inspector General for Tax Administration (TIGTA) has designated this
report as Limited Official Use (LOU) pursuant to Treasury Directive TD P-71-10,
Chapter III, Section 2, “Limited Official Use Information and Other Legends” of
the Department of Treasury Security Manual.
Because this document has been designated LOU, it may only be made
available to those officials who have a need to know the information contained
within this report in the performance of their official duties. This report must be safeguarded and protected
from unauthorized disclosure; therefore, all requests for disclosure of this
report must be referred to the Disclosure Unit within the TIGTA’s Office of
Chief Counsel.
We are making no formal recommendations in this report; therefore, no response is required. Please contact me at (202) 622-6510 if you have questions or your staff may call Gordon C. Milbourn III, Assistant Inspector General for Audit (Small Business and Corporate Programs), at (202) 622-3837.
TD P 15-71
Taxpayer Education Will be Provided Regarding Inappropriately Claiming the Disabled Access Credit
Appendix I – Detailed Objectives, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
In September 2001, the Treasury Inspector General for Tax Administration (TIGTA) issued a report1 to the Internal Revenue Service (IRS) discussing taxpayers that inappropriately received the Disabled Access Credit2 on their Tax Year (TY) 1999 U.S. Individual Income Tax Returns (Form 1040). Although the number of taxpayers involved was not great, the issue was significant for two reasons:
· Many of the taxpayers involved were elderly Americans who were possibly victims of promoters recommending unwise investments and promising bogus tax credits.
· Based on the media coverage the issue had received,3 we believed the problem was most likely increasing.
One of our recommendations in that report was for the IRS to analyze the results of our computer analyses for TY 1999, perform similar analyses of TY 2000 returns, and develop a compliance approach to address this issue.
To facilitate the IRS’ corrective actions, we agreed to perform a computer analysis of the IRS’ Individual Returns Transaction File4 to identify taxpayers inappropriately receiving the Disabled Access Credit for their TY 2000 Forms 1040.
This report presents the results of our analysis and our
assessment of IRS management’s progress in completing corrective actions
planned in response to our prior report.
Our work was conducted at the
The Number of Taxpayers Inappropriately Receiving the Disabled Access Credit Significantly Increased for Tax Year 2000
In order to qualify for the
Disabled Access Credit, taxpayers must incur expenses to bring their businesses
into compliance with the
We also determined that 64
taxpayers inappropriately received the credit for both TYs 1999 and 2000. For the combined years, these 64 taxpayers
received credits totaling over $370,000 (an average of $5,800 per taxpayer).
As agreed with the IRS, we will
provide the data from our computer analysis to appropriate officials in the
IRS’ Criminal Investigation function and the Office of Strategy, Research and
Performance Management, Small Business/ Self-Employed Division.
Taxpayer Education Will be Provided Regarding Inappropriately Claiming the Disabled Access Credit
As of the date of our review, the
IRS was on schedule to add information to its Small Business/Self-Employed
Community Website to alert taxpayers about investments in pay telephones and
automated teller machines fraudulently promoted as qualifying for the Disabled
Access Credit.
However, because the taxpayers involved, by definition, have no business ownership or participation, in our view they are not likely to be researching this particular IRS website. Therefore, we believe these taxpayers would benefit more from education aimed at individual taxpayers rather than taxpayers who own small businesses or are self-employed. We discussed this issue with the Project Manager for the IRS’ website and the Director, Stakeholder Partnership, Education and Communications. They agreed to work together to provide a link from the Wage and Investment and the Tax Professional sections of the IRS’ website to the text in the Small Business/Self-Employed section.
TD P 15-71
Appendix I
Detailed Objectives,
Scope, and Methodology
Our overall objective was to identify taxpayers who claimed and received the Disabled Access Credit on their Tax Year (TY) 2000 U.S. Individual Income Tax Return (Form 1040) despite indications they had no business ownership or participation. We also determined whether the Internal Revenue Service (IRS) was providing taxpayer education, which it agreed to do in response to our prior report,[1] related to this tax credit.
To accomplish our objectives, we performed the following audit tests:
I. To identify taxpayers who inappropriately claimed and received the Disabled Access Credit on their TY 2000 Forms 1040, and to determine the impact, we:
A.
Performed a computer
analysis of data on the IRS’ Individual Returns Transaction File2 to identify TY 2000 returns that claimed the Disabled
Access Credit but did not include one of the following schedules:
·
Profit or Loss From
Business (Schedule C).
·
Profit or Loss From
Farming (Schedule F).
·
Supplemental Income
and Loss (Schedule E).
The data was accumulated in two separate files. One file included all IRS processing cycles
except for cycle 22 (the week starting May 27, 2001). The other file included only cycle 22 data.
B. Performed validity tests of the data accumulated to ensure that the computer runs accurately identified appropriate returns. We performed a query on the data to identify any duplicate records. Also, we verified the data by selecting a judgmental sample of 13 records using an Excel spreadsheet feature called “data analysis” and matching the records identified to the original IRS files. We ensured that the computer program worked as intended and that the data was accurate.
C.
Analyzed the IRS
records to identify the number of taxpayers that received the credit but did
not have bona fide business reasons for taking the credit. We determined the total amounts of credits
received. We also determined the number
of taxpayers that received refunds or elected to apply overpayments to
subsequent years’ taxes and the total amount of the refunds/overpayments
applied. In addition, we compared the
Social Security Numbers of taxpayers who received the credit for TY 2000 with
those receiving the credit for TY 1999 to determine if any taxpayers claimed
the credit for both years.
The original data files created by the computer runs
included 557 taxpayer records. Each
record identified a taxpayer that claimed the Disabled Access Credit but did
not include a Schedule C, E, or F with his or her return. We reduced the total number of records by
excluding taxpayers that, even though they had claimed the credit, did not actually
receive it. We also eliminated records
if taxpayers did not receive at least $50 of Disabled Access Credit. As a result, 499 records were included in the
analysis.
II. To compare the recommendations made in the
prior audit report with the actions taken or planned by IRS management, we:
A.
Reviewed the prior
final audit report and, for each recommendation, identified management’s
response.
B.
Interviewed IRS Small
Business/Self-Employed (SB/SE) Division management and, for each recommendation
made in the report, determined the actions already taken or planned. This included determining their efforts to
educate and/or warn taxpayers about the illegality of taking the credit and
about promoters that encourage taxpayers to make fraudulent investments.
C.
Contacted the Project
Manager for the IRS’ website and the Director, Stakeholder Partnership,
Education and Communications, SB/SE Division, to discuss the need to make
education materials available on website sections most likely to be accessed by
individual taxpayers.
TD P 15-71
Appendix II
Major Contributors to This
Report
Gordon C. Milbourn III, Assistant Inspector General for Audit (Small Business and Corporate Programs)
Richard J. Dagliolo, Director
Kyle R. Andersen, Audit Manager
L. Jeff Anderson, Senior Auditor
Bill R. Russell, Senior Auditor
Layne D. Powell, Computer
Specialist
TD P 15-71
Appendix III
Deputy Commissioner
N:DC
Chief, Criminal Investigation CI
Commissioner, Small Business/Self-Employed Division S
Commissioner, Wage and Investment Division W
Director, Compliance, Small Business/Self-Employed
Division S:C
Director, Compliance, Wage and Investment Division W:CP
Director, Refund Crimes
CI:RC
Director, Strategy and Finance, Wage and Investment
Division W:S
Director, Strategy, Research and Performance Management,
Small Business/Self-Employed Division
S:SR
Director, Stakeholder Partnership, Education and
Communications W:CAR:SPEC
Deputy Chief Financial Officer, Department of the Treasury
TD P 15-71
1 A business
incentive tax credit enacted to help eligible small businesses comply with the
applicable requirements of the Americans with Disabilities Act (ADA) 42 U.S.C. §§ 12101-12212 (1994 &
Supp. IV 1998). The
2 For purposes of our analysis, taxpayers were deemed to have no business ownership or participation if they did not file one of the following schedules with their tax return: Profit or Loss From Business (Schedule C), Profit or Loss From Farming (Schedule F), or Supplemental Income and Loss (Schedule E).
3 Some Individual Taxpayers Are Inappropriately Receiving Tax Credits Intended for Businesses That Provide Access for Disabled Americans (Reference Number 2001-30-158, dated September 2001).
4 Noelle Knox
and Greg Farrell, “Seniors Lose Big in Risky Deals Through Insurance Agents,”
1 Some Individual Taxpayers Are Inappropriately Receiving Tax Credits Intended for Businesses That Provide Access for Disabled Americans (Reference Number 2001-30-158, dated September 2001).
2 A business
incentive tax credit enacted to help eligible small businesses comply with the
applicable requirements of the Americans with Disabilities Act (ADA), 42 U.S.C.
§§ 12101-12213 (1994 & Supp. IV 1998).
The
3 Noelle Knox
and Greg Farrell, “Seniors Lose Big in Risky Deals Through Insurance Agents,”
4 The IRS’ Individual Returns Transaction File contains information from tax returns filed for the current and two previous years.
5 For purposes of our analysis, taxpayers were deemed to have no business ownership or participation if they did not file one of the following schedules with their tax return: Profit or Loss From Business (Schedule C), Profit or Loss From Farming (Schedule F), or Supplemental Income and Loss (Schedule E).
[1] Some Individual Taxpayers Are Inappropriately Receiving Tax Credits Intended for Businesses That Provide Access for Disabled Americans (Reference Number 2001-30-158, dated September 2001).
2 The IRS’ Individual Returns Transaction File contains information from tax returns filed for the current and two previous years.