TIGTA Says Casualty and Theft Loss Deductions Erroneously Processed Without Valid Claim Number
IRS management did not agree to establish a process to consider deduction claims for post compliance review when the FEMA number on the tax return and the number in the taxpayer’s tax account do not match. IRS management stated that they already have...
Jul. 22, 2021
As a result of TIGTA’s prior report, the IRS agreed to evaluate addressing tax returns that do not contain the required FEMA number in the Error Resolution function. However, because of the increased workload due to the Coronavirus Disease 2019, this has not yet been accomplished. As such, potentially erroneous casualty and theft loss deductions are still not being addressed during processing.
TIGTA’s review of Tax Year 2019 tax returns processed as of September 3, 2020, identified 34,699 tax returns that claimed a casualty and theft loss deduction. TIGTA found that 12,075 (35 percent) of the 34,699 either had a FEMA number that did not match the FEMA number on the taxpayer’s tax account, had an invalid FEMA number, or were missing the FEMA number. The deductions claimed on these returns totaled more than $309 million. TIGTA estimates these individuals underpaid approximately $41.3 million in income tax.
In addition, IRS management’s analysis of the 7,761 tax returns TIGTA identified in its previous review determined that 33 tax returns were addressed through the unallowable treatment stream, and only 183 tax returns would meet their Campus Exam filter selections and dollar tolerance. The fact that only 2.4 percent of the identified cases will potentially be examined further supports TIGTA’s prior recommendation that these tax returns should be identified for review during processing rather than being examined after processing.
TIGTA made three recommendations to improve the processing of casualty and theft loss deduction claims. The IRS should develop processes and procedures to identify tax returns at the time returns are filed for which the FEMA number is not provided or is not valid and establish processes to identify returns for post compliance review when the FEMA number on the tax return does not match the number on the taxpayer’s tax account. The IRS should also review the 12,075 tax returns TIGTA identified
. IRS management agreed or partially agreed with two recommendations. IRS management revised the Form 4684, Casualties and Thefts, so the request to prompt taxpayers for the declarations labeled “DR” or “EM”, and will evaluate the effectiveness of the change after the 2021 Filing Season. IRS management also agreed to review the 12,075 returns TIGTA identified.
IRS management did not agree to establish a process to consider deduction claims for post compliance review when the FEMA number on the tax return and the number in the taxpayer’s tax account do not match. IRS management stated that they already have a process in place to identify anyone who is not in a Federally declared disaster area regardless of whether the return has a different FEMA number, has an invalid FEMA number, or is missing a FEMA number.