IRS Kept $4.75 Billion in Overpayments That Taxpayers Can No Longer Claim Back

Unapplied taxpayer credits are vulnerable to fraud and abuse

February 9, 2016

The IRS has kept $4.75 billion in overpayments from taxpayers who can no longer legally claim them back, according to an audit from the Treasury Inspector General for Tax Administration.

When a taxpayer sends a payment to the IRS, and the IRS is unable to determine which taxpayer’s account the payment is for, the money is applied to the unidentified remittance file. This usually happens when a taxpayer submits a payment to the IRS but does not file a tax return.

A rule within the IRS, known as the refund statute, puts a deadline on how long taxpayers can claim a refund on their overpayment of taxes. If the taxpayer doesn’t turn in a tax return to the IRS within that deadline, the payment is moved to the excess collection file.

Currently, the excess collection file holds $5.81 billion, a figure that has increased by 23 percent since January 2010. Eighty-two percent of that money, or $4.75 billion, consists of overpayments that can no longer be claimed by the taxpayer, because of deadline restrictions. The rest could be returned to taxpayers.

Because the excess collection file has grown in the past years, the audit was initiated to see whether the unapplied taxpayer credits were exposed to fraud and abuse and whether or not improper transactions had been efficiently prevented. The audit evaluated cases where taxpayer credits exceeding $15,000 were taken out of the excess collection file.

The audit found that IRS employees could inappropriately generate funds from the file due to insufficient controls within the system. In 24 cases of the 28 that were reviewed, there was no proof of taxpayer correspondence prior to a payment being made. The money reviewed in these 24 cases totaled $4 million.

"Without proper documentation, management does not have evidence to determine if the actions taken on the cases were appropriate," states the audit. "These control weaknesses increase the risk that fraudulent or improper [excess collection file] transfers will not be prevented or detected."

According to IRS policy, money within the excess collection file must remain there for up to seven years but should be purged from the system after that to reduce the likelihood of potential fraud. Yet, the audit found that overpayments were held in the excess collection file for longer than seven years, with some still there from the 1980s, 1970s, and even the 1960s. When asked by the auditors, the IRS could not explain why the credits were maintained for so long.

"Weaknesses in the administration of the [excess collection file] can create an environment in which unapplied taxpayer credits are vulnerable to loss and can either overstate or understate potential Government obligations," states the report. "These control weaknesses increase the risk of undetected fraud."

The IRS did not respond to requests for comment by press time.

Published under: IRS