Processes Were Not Established to Verify Eligibility for Work Opportunity Tax Credits

Treasury Inspector General for Tax Administration

Office of Audit

PROCESSES WERE NOT ESTABLISHED TO VERIFY ELIGIBILITY FOR WORK OPPORTUNITY TAX CREDITS

Issued on July 1, 2014

Highlights

Highlights of Report Number: 2014-40-041 to the Internal Revenue Service Deputy Commissioner for Services and Enforcement.

IMPACT ON TAXPAYERS

The Work Opportunity Tax Credit (WOTC) is a Federal tax credit designed to encourage employers to hire individuals from certain targeted groups who have consistently faced significant barriers to employment.  For Tax Year 2013, the maximum credit per individual that could be claimed was $9,600.  The credit has been in existence since 1978 but expired on December 31, 2013.  On January 28, 2014, members of Congress introduced legislation to renew this tax credit.

WHY TIGTA DID THE AUDIT

This audit was initiated to determine whether controls were adequate to identify questionable employer claims for the WOTC.  Between January 1 and December 30, 2012, more than $721 million in the WOTC was claimed on 21,278 electronically filed tax returns.  The number and amount claimed on paper returns is not available.

WHAT TIGTA FOUND

The IRS did not establish processes to verify the eligibility for the WOTC.  TIGTA identified 759 WOTC claims totaling approximately $13 million on 687 tax returns processed in Processing Year 2012 for which the IRS had information at the time the tax returns were processed that could have been used to identify these claims as questionable.

The IRS reviewed 77 of the 759 WOTC claims to determine whether the WOTC was in fact potentially erroneous.  The IRS confirmed that 24 of the 77 were erroneous WOTC claims.  The remaining 53 WOTC claims involved mistakes on the part of the filer or the pass-through entity.

WHAT TIGTA RECOMMENDED

TIGTA recommended that if legislation to extend the WOTC is enacted, the IRS should revise Form 5884 to request specific information, and revise associated instructions to advise employers of where to submit certification requests and of certification requirements to claim the WOTC.  The IRS should also include the characteristics of the tax returns confirmed as questionable in its overall compliance strategy being developed for General Business Credits and conduct a review of the 24 WOTC claims identified as erroneous to determine the proper tax liability for the tax returns.

In their response to the report, IRS officials agreed with TIGTA’s findings and recommendations.  The IRS stated that, where feasible, it plans to make suggested revisions to the forms and instructions, and plans to include a compliance strategy to address questionable WOTC claims in the overall compliance strategy being developed for General Business Credits.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

http://www.treas.gov/tigta/auditreports/2014reports/201440041fr.html.

E-mail Address: TIGTACommunications@tigta.treas.gov

Phone Number: 202-622-6500

Website: http://www.treasury.gov/tigta