oversight

Assessment of Processes to Verify Tentative Carryback Refund Eligibility

Published by the Office of the Treasury Inspector General for Tax Administration on 2021-06-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

  TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION




                              Assessment of Processes to Verify
                            Tentative Carryback Refund Eligibility


                                                      June 2, 2021

                                         Report Number: 2021-46-035




This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined
                             to be restricted from public release has been redacted from this document.
                                                                                                                      1
                                  TIGTACommunications@tigta.treas.gov | www.treasury.gov/tigta
          HIGHLIGHTS: Assessment of Processes to Verify Tentative Carryback Refund Eligibility

Final Audit Report issued on June 2, 2021                                         Report Number 2021-46-035

 Why TIGTA Did This Audit               What TIGTA Found
 This audit was initiated to assess     TIGTA’s review of 25,403 tentative refund applications, received by
 the IRS’s efforts to ensure the        the IRS from March 27, 2020, through September 30, 2020, identified
 validity and accuracy of tentative     a total of 1,061 late-filed applications belonging to 1,026 taxpayers.
 refund applications reporting a        Further analysis of these applications found that the IRS may have
 carryback loss.                        erroneously processed 150 of these applications resulting in the
                                        issuance of more than $186 million in tentative refunds. This
 This is a part of a series of audits
                                        occurred because the customer service representatives were not
 to evaluate the IRS’s
                                        always properly adhering to filing deadline procedures and the
 implementation of specific
                                        Accounts Management function was not providing adequate
 business provisions incorporated
                                        oversight to ensure that the customer service representatives did not
 into the pandemic relief
                                        process these late-filed applications.
 legislation. TIGTA is conducting
 separate reviews of the IRS’s          Further, TIGTA’s review of the 25,403 tentative refund applications
 processing of employer tax             identified 132 applications whereby the taxpayers’ tax accounts had
 credits, including the repayment       either a confirmed or unresolved identity theft indicator. These
 of deferred payroll taxes.             applications had approximately $186 million in tentative refunds paid
                                        without appropriate reviews to ensure the validity of the application,
 Impact on Taxpayers
                                        as required. This occurred because IRS employees did not always
 Provisions 2303 and 2304 of the        follow their internal guidance to refer cases to a specialized identity
 Coronavirus Aid, Relief, and           theft liaison.
 Economic Security (CARES) Act,
                                        Finally, TIGTA identified 1,404 taxpayers (296 individuals and
 signed into law on
                                        1,108 businesses) that had ********************2***********************
 March 27, 2020, made several
                                        on their accounts prior to submitting a tentative refund. *****1*****
 modifications that temporarily
                                        *************************1**********************************. Business
 repeal certain restrictions
                                        taxpayers making employment tax payments should have been
 imposed by the Tax Cuts and Jobs
                                        separately sent notification that there was a change to their address
 Act affecting net operating losses.
                                        on their IRS tax account. The Consolidated Appropriations Act of
 Additionally, the CARES Act
                                        2014, enacted January 17, 2014, requires the IRS to issue a notice as
 requires a taxpayer with a net
                                        confirmation of *********2*********** relating to an employer making
 operating loss arising in a taxable
                                        employment tax payments.
 year beginning in 2018, 2019, or
 2020 to carry that loss back to        What TIGTA Recommended
 each of the five preceding years       TIGTA made five recommendations to the Commissioner, Wage and
 unless the taxpayer elects to          Investment Division, that included determining if the late-filed
 waive or reduce the carryback.         applications were processed in error and taking appropriate
                                        corrective action, and ensuring that tentative refund applications
                                        associated with taxpayers whose tax accounts have an identity theft
                                        indicator or ******************2******************** are sent for
                                        required review.
                                        IRS management agreed with all five recommendations.
                                                 U.S. DEPARTMENT OF THE TREASURY
                                                       WASHINGTON, D.C. 20220



TREASURY INSPECTOR GENERAL
  FOR TAX ADMINISTRATION



                                                    June 2, 2021


MEMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE



FROM:                           Michael E. McKenney
                                Deputy Inspector General for Audit

SUBJECT:                        Final Audit Report – Assessment of Processes to Verify Tentative
                                Carryback Refund Eligibility (Audit # 202040636)

This report presents the results of our review to assess the Internal Revenue Service’s (IRS)
efforts to ensure the validity and accuracy of tentative refund applications reporting a carryback
loss. This review is part of our ongoing expedited Coronavirus Aid, Relief, and Economic
Security Act1 audits and addresses the major management and performance challenge of
Implementing Tax Law Changes.
Management’s complete response to the draft report is included as Appendix III.
Copies of this report are also being sent to the IRS managers affected by the report
recommendations. If you have any questions, please contact me or Russell P. Martin, Assistant
Inspector General for Audit (Returns Processing and Account Services).




1
    Pub. L. No. 116-136, 134 Stat. 281 (2020).
                                 Assessment of Processes to Verify Tentative Carryback Refund Eligibility




Table of Contents
Background .....................................................................................................................................Page   1


Results of Review .......................................................................................................................Page          3

            Some Tentative Refund Applications Were Erroneously
            Processed After the Filing Deadline .............................................................................Page 4
                         Recommendations 1 and 2: .....................................................Page 6

            Some Tentative Refund Applications Associated With Identity
            Theft Tax Accounts Were Not Sent for Required Fraud Review.........................Page 6
                         Recommendation 3: ...................................................................Page 7

            Some Tentative Refund Applications **************2***************
            *******2******* Were Not Referred for Required Fraud Review .........................Page 7
                         Recommendations 4 and 5: .....................................................Page 8


Appendices
            Appendix I – Detailed Objective, Scope, and Methodology ................................Page 9
            Appendix II – Outcome Measures .................................................................................Page 11
            Appendix III – Management’s Response to the Draft Report .............................Page 14
            Appendix IV – Abbreviations ...........................................................................................Page.19
                          Assessment of Processes to Verify Tentative Carryback Refund Eligibility




Background
Sections 2303 and 2304 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, 1
signed into law on March 27, 2020, made several modifications that temporarily repeal certain
restrictions imposed by the Tax Cuts and Jobs Act 2 affecting net operating losses (NOL). 3 In
particular, the CARES Act temporarily repeals:
        The 80 percent taxable income limitation of NOLs arising in tax years beginning after
         December 31, 2017. 4
        The disallowance of NOL carrybacks for taxpayers whose NOLs are not farming losses
         and taxpayers that are not non-life insurance companies.
        The requirement for non-corporate taxpayers not to deduct excess business losses and
         to carry them as NOLs (excess business losses are reportable on Form 461, Limitation on
           Business Losses.
        The two-year carryback requirements for business losses incurred in the trade or
         business of farming 5 and losses incurred by non-life insurance companies.
These temporary repeals provide taxpayers with the opportunity to carryback losses.
Additionally, the CARES Act requires a taxpayer with a NOL arising in a taxable year beginning in
2018, 2019, or 2020 to carry that loss back to each of the five preceding years unless the
taxpayer elects to waive or reduce the carryback.

Process to carryback losses
Taxpayers with a NOL have a choice of two methods to carryback their loss, each of which has
separate rules. 6 A taxpayer may:
        File an application for tentative refund . The Form 1045, Application for Tentative
         Refund, (individuals) or Form 1139, Corporation Application for Tentative Refund,
         generally must be filed within one year after the end of the tax year with the NOL. A
         taxpayer can file one form to carryback their loss to all applicable preceding gain years.
         The primary advantage of filing a tentative refund application using Form 1045 or

1
    Pub. L. No. 116-136, 134 Stat. 281 (2020).
2
    Pub. L. No. 115–97, 131 Stat. 2054 (2017).
3
  A NOL is created when certain deductions exceed income from all sources. These deductions must relate to a trade
or business, work as an employee, or casualty or theft losses. A NOL deduction can be applied or “carried” to offset
taxable income in either preceding or later taxable years. A NOL may allow a refund for taxes already paid when
carried back to an earlier year.
4
  Under the Tax Cuts and Jobs Act, for NOLs arising in taxable years beginning after December 31, 2017, the NOL
deduction generally is limited to 80 percent of taxable income determined without regard to the NOL deduction (the
“80-percent taxable income limitation”). Excess losses generally may be carried forward indefinitely, but not back, and
carryovers of such NOLs to other taxable years are adjusted to take account of the 80-percent taxable income
limitation.
5
  Under the COVID-Related Tax Relief Act of 2020, Pub. L. No. 116-260, the modifications to carryback provisions of
the CARES Act do not apply to qualifying taxpayers with a farming loss that make an applicable election.
6
  Individuals, Estates, Trusts, Corporations, and Charitable and Exempt Organizations are eligible to carryback their
losses.
                                                                                                                Page 1
                       Assessment of Processes to Verify Tentative Carryback Refund Eligibility


        Form 1139 is that the return that generated the NOL does not have to be completely
        processed by the Internal Revenue Service (IRS) before the refund can be approved, thus
        making the refund “tentative.” This means the refund can be issued prior to verification
        of the posted tax return. Additionally, a tentative refund is processed prior to referral for
        examination.
     File an amended return . Unlike the tentative refund, an amended return has to be filed
      for each carryback year and must generally be filed within the statutory period of three
      years from the due date of the loss year return, including extensions. A carryback filed
      on an amended return is subject to examination criteria on the loss/gain years before
      allowing the claim.
While the IRS is required to process tentative refund applications within 90 days, interest must
be paid on refunds if they are not issued within 45 days. The same rules apply for processing
amended returns and computing and paying interest for refunds not processed within 45 days;
however, the IRS is not statutorily required to process amended return carryback claims within
90 days.
When a taxpayer files an application for tentative refund, customer service representatives (CSR)
working in the Wage and Investment Division’s Accounts Management function begin by
conducting research to verify all necessary information (e.g., authorized signature,
documentation) is completed and attached. If necessary information is missing, the CSR will
attempt to contact the taxpayer by telephone to obtain the necessary missing information.
Once all of the necessary information is confirmed or provided in response to a CSR contacting
the taxpayer, the CSR will then review the taxpayer’s tax account on the IRS’s data systems to
ensure that it matches the information provided on the application, determine if there have
been *******************2********************* and determine if there are any identity theft
indicators on the taxpayer’s account. If the CSRs are unable to resolve any of these issues, or an
application should otherwise be rejected, the CSRs will issue Letter 216C, Tentative Carryback
Application Adjustment Request, to reject a tentative carryback application and if applicable
request additional information. Figure 1 summarizes the differences between the methods for
claiming a carryback.
              Figure 1: Differences Between Tentative Refund and Amended Return Refunds

     Form             When to File            Forms Required           Interest Payment Rules        Type of Refund
                                               for Each Year
                                                                                                  Refunds are
                Generally, within one
                                                                                                  considered “tentative”
                year following the end                               No interest is paid by the
                                          One form can be used                                    and the IRS can
  Form 1045     of the loss tax year
                                          to carryback to multiple
                                                                     IRS if the refund is
                                                                                                  assess and collect tax
   or 1139      (e.g., Dec. 31, 2021,                                processed within
                                          other tax years.                                        immediately if the
                for a 2020 Calendar                                  45 days of receipt.
                                                                                                  refund is found to be
                Year taxpayer).
                                                                                                  in error.
                                                                                                  The claim is
                                                                                                  considered “correct”
                Generally within          A separate amended         No interest is paid by the   when the refund is
   Amended      three years after the     return must be filed for   IRS if the refund is         issued and
    Returns     due date of the loss      each year the loss is      processed within             erroneous refund
                year tax return.          carried back.              45 days of receipt.          procedures would
                                                                                                  be needed to
                                                                                                  recover any tax.
Source: Internal Revenue Manual 21.5.9.
                                                                                                                Page 2
                          Assessment of Processes to Verify Tentative Carryback Refund Eligibility


This is a part of a series of audits to evaluate the IRS’s implementation of specific business
provisions incorporated into the pandemic relief legislation. The Treasury Inspector General for
Tax Administration is conducting separate reviews of the IRS’s processing of employer tax
credits. 7



Results of Review
This report presents the continued results of our assessment of the IRS’s response to the
COVID-19 pandemic. The information is provided as of the date in which our audit testing was
completed. If we were able to get more updated information prior to the issuance of our report,
we noted this and added the most up-to-date information.
Our review found that subsequent to enactment of the CARES Act, the IRS immediately took
steps in an effort to readily provide assistance to taxpayers in obtaining refunds associated with
CARES Act tentative refund applications. The IRS established temporary procedures to accept
eligible carryback refunds through dedicated e-fax lines on April 17, 2020. Only carryback
refunds on Forms 1045 and Forms 1139 could be submitted via this dedicated fax line. This
process was put in place to enable the CSRs to review and process these applications while
working remotely during the pandemic. In addition, the IRS also updated its carryback internal
processing procedures and issued these updates to the CSRs in an effort to properly implement
the new legislative changes. Finally, in order to meet taxpayer demand, the IRS increased the
number of CSRs assigned to work these CARES Act-related tentative refund applications from 67
to 131 employees.
As of September 30, 2020, 21,832 taxpayers submitted 25,403 tentative refund applications. 8
During Fiscal Year 2020, 9 the IRS’s average processing time for tentative refund applications was
approximately 17 days, which is well below the 90-day processing requirement. The IRS
approved tentative refunds for 11,031 of these taxpayers totaling nearly $13.3 billion. The
remaining 10,801 taxpayers had applications that were still in processing (5,692 taxpayers) or
whose applications were closed without having a refund approved (5,109 taxpayers). Figure 2
summarizes the number of taxpayers that submitted a tentative refund application and those
that had their refunds approved.




7
  Audit No. 202040633, Assessment of Actions Taken to Provide Relief to Businesses as a Result of the Coronavirus
(COVID-19), and Audit No. 202140623, Continued Review of COVID-19 Related Business Tax Relief Provisions.
8
    Appendix I provides details pertaining to the scope of our review.
9
 A fiscal year is defined as a 12-consecutive-month period ending on the last day of any month, except December.
The Federal Government’s Fiscal Year 2020 began on October 1, 2019, and ended on September 30, 2020.
                                                                                                            Page 3
                        Assessment of Processes to Verify Tentative Carryback Refund Eligibility


              Figure 2: Breakdown of Submitted Tentative Refund Applications by Form Type




          Source: Treasury Inspector General for Tax Administration Analysis of Tentative Refund Applications
          received from March 27, 2020, through September 30, 2020, based on IRS Correspondence Imaging
          System (CIS) 10 data and Master File 11 information.

According to the IRS, as of February 12, 2021, it received 44,567 tentative refund applications for
processing.


Some Tentative Refund Applications Were Erroneously Processed After the
Filing Deadline
Our review of 25,403 tentative refund applications received by the IRS as of September 30, 2020,
identified that 1,061 Tax Year (TY) 2018 applications (4 percent) were submitted after the filing
deadline of July 15, 2020. Further analysis of these applications found that the IRS may have
erroneously processed 150 of these applications, resulting in the issuance of more than
$186 million in tentative refunds. This occurred because the CSRs were not always properly
adhering to filing deadline procedures and Accounts Management was not providing adequate
oversight to ensure that the CSRs did not process these late-filed applications. The IRS issued
Notice 2020-23 providing payment and filing relief to taxpayers until July 15, 2020. This also
extended the deadline for submitting tentative refund applications to carryback a NOL that
arose in any taxable year that began during Calendar Year 2018 and that ended on or before
June 30, 2019.
When we brought this to management’s attention, management agreed that tentative refund
applications received after their filing deadline should not be processed. They explained that
the taxpayer has a legal right of claim when an amended return is filed to carryback a loss;
however, the taxpayer does not have the same right when a tentative refund application is

10
  The CIS is a system used by Accounts Management that delivers an electronic workflow to the CSRs who can work
cases in a paperless environment.
11
  The Master File is a record containing all information regarding the taxpayer’s filing of returns and related
documents.
                                                                                                                  Page 4
                        Assessment of Processes to Verify Tentative Carryback Refund Eligibility


submitted. In other words, when filing an amended return, the taxpayer is legally adjusting their
tax filing and records. Moreover, the manner in which a taxpayer chooses to file for a NOL
refund affects the statute of limitations on tax assessments that the IRS can impose on a
taxpayer, which may allow for the IRS to examine returns that were otherwise closed.
            Figure 3: Example of Filing a Tentative Refund Application Versus an Amended Return
                 In 2020, Taxpayer Z files Form1139 to carryback an NOL from TY 2018 to TY 2013, claiming a
                 refund of $100,000. Taxpayer Z receives the refund claimed on Form 1139. Upon
      Filing a   examination, the IRS identifies $40,000 of adjustments for the TY 2013 return that is
     Tentative   unrelated to the TY 2018 return. The general three-year assessment statute is closed for the
      Refund     carryback year. If the IRS allows the Form 1139 claim in full, under Internal Revenue Code
                 Section 6501(k), it can assess the tax deficiency for the $40,000 of adjustments unrelated to
                 the NOL that were identified by the IRS on the TY 2013 return.


                 If Taxpayer Z had filed an amended return to carryback the TY 2018 NOL, the IRS would be
     Filing an
                 barred from assessing the tax for TY 2013 because they were not related to the 2018 NOL
     Amended
                 carryback. If the IRS had not paid the refund prior to examining the claim, it could have
      Return
                 instead offset the $40,000 against the amount of the refund claim.


Source: Hypothetical example was not drawn from any actual taxpayer case and was based on information presented
in Tax Adviser article “NOL Carryback Claims Can Unlock Closed Statute of Limitation Years” (2010).

In response to our discussions, management independently identified 315 late-filed tentative
refund applications that were due by July 15, 2020. However, their review did not include
574 applications out of the 1,061 12 that we identified; therefore, the IRS still needs to take
corrective action on these accounts to determine if the IRS should reverse the refund or reject
the application. For the 315 tentative refund applications identified by the IRS, the IRS
immediately took the following actions:
       Identified and reviewed closed late-filed applications. The IRS identified 258 closed
        late-filed tentative refund applications with approximately $117 million tentative refunds
        approved. On October 19, 2020, Accounts Management instructed all processing sites to
        review each of these applications to determine if the tentative refund should be reversed.
        If the tentative refund was determined to be processed in error, the IRS instructed the
        CSRs to notify the taxpayer that an adjustment to their tentative refund was being made
        and instruct the taxpayer to file an amended return. Based on their review, as of
        November 12, 2020, the IRS incorrectly processed 12 of the 258 closed late-filed
        tentative refund applications. For the 12 taxpayers, we found that eight taxpayers were
        contacted and two of those taxpayers had their refunds reversed. The IRS indicated that
        the remaining 246 were correctly rejected or processed according to the case
        specifications (e.g., the taxpayer submitted multiple applications and one was timely
        submitted for processing).
       Identified open applications and proactively instructed employees. The IRS also
        identified 57 tentative refund applications still in process and instructed all processing
        sites on October 15, 2020, that these applications should be rejected from processing


12
  At the time of our review, we identified 446 out 1,061 applications that were still in process that the IRS did not
identify. We also identified 128 out of the 1,061 applications that were closed at the time of our review that the IRS
did not identify.
                                                                                                                Page 5
                   Assessment of Processes to Verify Tentative Carryback Refund Eligibility


       and Letter 216C should be sent to the taxpayer. Accounts Management also proactively
       noted in its instructions that any newly assigned Calendar Year 2018 tentative carryback
       applications received after July 15, 2020, that were not previously provided, should be
       rejected.

The Commissioner, Wage and Investment Division, should:

Recommendation 1: Review the additional 574 late-filed tentative refund applications we
identified and determine if the applications were processed in error. If so, take appropriate
action to either reverse the erroneously approved refund or reject the application from
processing.
       Management’s Response: The IRS agreed with this recommendation. IRS management
       plans to review the additional 574 tentative refund applications and will take appropriate
       action to reverse the erroneously approved refund or reject the application for those
       determined to be filed late.

Recommendation 2: Establish processes and procedures to identify late-filed tentative refund
applications and ensure that these applications are rejected from processing.
       Management’s Response: The IRS agreed with this recommendation and advised that
       its internal guidelines contain procedures to identify late-filed CARES Act tentative
       applications for refund. However, IRS management plans to emphasize the importance
       of the timeliness procedures in recurring monthly communications and ensure that the
       applications are referred as required.


Some Tentative Refund Applications Associated With Identity Theft Tax
Accounts Were Not Sent for Required Fraud Review
Our review of 25,403 tentative refund applications received as of September 30, 2020, identified
132 applications with tentative refunds issued totaling more than $186 million whereby the
taxpayer’s tax account had either a confirmed identity theft or pending/unresolved identity theft
indicator. Reviews of these applications were not performed to ensure the validity of the
application, as required. This occurred because the CSRs did not always follow their internal
guidance to refer applications associated with tax accounts with identity theft indicators to an
identity theft liaison. These 132 applications include:
    17 business taxpayers with tentative refunds totaling approximately $133.6 million.
     Internal guidelines state that if either the loss or gain year includes a tax period with a
     business identity theft indicator, the CSRs should refer the case to the IRS’s Return
     Integrity and Compliance Services (RICS) function for review and a determination on how
     to proceed. We provided these cases to the IRS for review by the RICS function, which
     confirmed that 13 of the cases were not identity theft and four were still pending a
     response from the taxpayer. For the four cases that were still pending at the time of our
     review, the IRS issued tentative refunds in the amount of $1,785,620.
    32 individual taxpayer accounts with tentative refunds totaling approximately
     $26.4 million. These accounts had unresolved identity theft markers (i.e., the IRS was still
     reviewing the account to make a determination of identity theft) and were not referred
                                                                                              Page 6
                           Assessment of Processes to Verify Tentative Carryback Refund Eligibility


           for review. Internal guidelines state that the CSRs review the taxpayer’s account for
           identity theft indicators and refer the case to an Accounts Management identity theft
           liaison prior to processing. We provided these cases to the IRS for review. Management
           noted that they did not find any evidence of identity theft.
        83 taxpayers with tentative refund applications totaling approximately $26.2 million for
         which the taxpayer was a confirmed victim of identity theft. The IRS reviewed the
         83 accounts and found there was no evidence of identity theft, despite the procedural
         error of not sending these cases to the identity theft liaison as required.

Recommendation 3: The Commissioner, Wage and Investment Division, should ensure that
tentative refund applications associated with taxpayers whose tax accounts have an identity
theft indicator are sent to an identity theft liaison for review as required.
           Management’s Response: The IRS agreed with this recommendation and advised that
           its internal guidelines contain procedures for forwarding tentative applications for
           refund, where identity theft indicators are present on the account, to the identity theft
           team for additional review. However, IRS management plans to place heighted emphasis
           on this requirement in recurring monthly communications to ensure that affected
           applications are referred as required.


Some Tentative Refund Applications ************2*****************
***2*** Were Not Referred for Required Fraud Review
Our review identified 1,404 (296 individuals 13 and 1,108 businesses) taxpayers that submitted
tentative refund applications that had tax accounts showing there was ************2*************
******2****** 14 prior to the submission of the tentative refund application. Only one of these
applications was sent to an identity theft liaison for the required review to ensure the validity of
the claim. These taxpayers received approximately $2.4 billion in tentative refunds.
The presence of ****************************************2******************************************
for a tentative refund, can be an indication of potential fraud or identity theft. Recognizing this
risk, the IRS updated its internal guidelines instructing the CSRs to refer a tentative refund
application to an identity theft liaison for review if there *******************1********************
*********************1***********************. Once received, research must be performed to
ensure the validity of the submission.
Although ********************************1 and 2********************************** business
taxpayers making employment tax payments should have been separately sent notification of
the fact that there was ************2************* on their IRS tax account. The Consolidated
Appropriations Act of 2014, 15 enacted January 17, 2014, requires the IRS to issue a notice as
*****************2****************** relating to an employer making employment tax payments.
The IRS is required to send a notice to *******************2*********************. The notice

13
     The 296 individual taxpayers received a total of $30.5 million in tentative refunds, as noted in Appendix II.
14
   The IRS defines a ********************************************2*********************************************************
*****************************************************************2*********************************************************
*****************************************************************2**********************.
15
     Pub. L. No. 113-76, 128 Stat. 190 (2014).
                                                                                                                     Page 7
                    Assessment of Processes to Verify Tentative Carryback Refund Eligibility


instructs business taxpayers to contact the IRS if there should not be *********2********* on their
account when they disagree with **********2*********** and/or question the legitimacy of the
source of the ********2*********.

The Commissioner, Wage and Investment Division, should:

Recommendation 4: Review the 296 individual taxpayers we identified with ********2*********
********2********* to ensure the validity of the tentative refund application.
       Management’s Response: The IRS agreed with this recommendation. IRS management
       plans to review the 296 individual taxpayers identified and will take appropriate actions
       to reject or reverse the adjustments taken on invalid tentative refund applications.

Recommendation 5: Ensure that tentative refund applications associated with taxpayers whose
tax accounts showed that there was *****************2****************** are identified and
sent to an identity theft liaison for review as required.
       Management’s Response: The IRS agreed with this recommendation and advised that
       its internal guidelines contain procedures for forwarding tentative applications for
       refund, where identity theft indicators are present on the account, to the identity theft
       team for additional review. However, IRS management plans to place heightened
       emphasis on this requirement in recurring monthly communications to ensure that
       affected applications are referred as required.




                                                                                               Page 8
                          Assessment of Processes to Verify Tentative Carryback Refund Eligibility


                                                                                                  Appendix I
                       Detailed Objective, Scope, and Methodology
Our overall objective was to assess the IRS’s efforts to ensure the validity and accuracy of
tentative refund applications reporting a carryback loss. To accomplish our objective, we:
       •   Determined the controls in place governing the processing of carrybacks and associated
           refunds.
       •   Reviewed tentative refund applications received from the enactment of the
           CARES Act from March 27, 2020, through September 30, 2020. We identified that
           25,403 applications were received during this time period and these applications were
           associated with 21,832 taxpayers. The variance between the number of applications and
           number of taxpayers in our scope of review is due to the fact that a taxpayer can submit
           multiple tentative refund applications. The number of tentative refund applications and
           associated taxpayers was pulled from the CIS on October 28, 2020. To calculate the
           amount of refunds approved, we used Individual and Business Master File data current
           through October 21, 2020. We associated the net Transaction Code (TC) 1 295 amounts
           for taxpayers included only in the population of 21,832 taxpayers. 2 The association of
           TCs 295 as tentative refunds approved is based on combining all TCs 295 on taxpayers’
           accounts that were posted on or after March 27, 2020, into one amount for all gain years
           (e.g., TCs 295 for a taxpayer in 2013, 2014, and 2015). The total is net of any TCs 294 on
           taxpayers’ accounts. 3
       •   Assessed whether the IRS accurately processed CARES Act-related tentative refund
           applications according to existing controls.
       •   Assessed whether the IRS ensured the validity of CARES Act-related tentative refund
           applications.

Performance of This Review
This review was performed with information provided by the Wage and Investment Division’s
Accounts Management and RICS functions during the period May 2020 through February 2021.
We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objective. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objective.
Major contributors to the report were Russell P. Martin, Assistant Inspector General for Audit
(Returns Processing and Account Services); Diana M. Tengesdal, Director; Nina A. Hill, Audit



1
 A transaction code is a three-digit code used to identify transactions being processed and to maintain a history of
actions posted to a taxpayer’s account.
2
    TC 295 indicates that a tentative refund has been approved on a taxpayer’s account.
3
    TC 294 is used to adjust a previously posted tentative refund allowance.
                                                                                                              Page 9
                   Assessment of Processes to Verify Tentative Carryback Refund Eligibility


Manager; Taylor C. McDonald, Lead Auditor; Gwendolyn S. Gilboy, Senior Auditor;
Aranxa J. Delgado, Auditor; and Sandy Ramos, Auditor.

Validity and Reliability of Data From Computer-Based Systems
We performed tests to assess the reliability of data from the Business and Individual Master Files
and the CIS. We evaluated the data by (1) performing electronic testing of required data
elements, (2) reviewing existing information about the data and the system that produced them,
and (3) coordinating with agency officials knowledgeable about the data. We determined that
the data were sufficiently reliable for purposes of this report.

Internal Controls Methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance. We determined that the
following internal controls were relevant to our audit objective: the processes in place for
reviewing and approving tentative refund applications. We evaluated these controls by
reviewing IRS procedures, conducting virtual walkthroughs of processing tentative refund
applications, conducting various meetings with the IRS, and evaluating applications received in
the CIS.




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                                                                                        Appendix II
                                    Outcome Measures
This appendix presents detailed information on the measurable impact that our recommended
corrective actions will have on tax administration. These benefits will be incorporated into our
Semiannual Report to Congress.

Type and Value of Outcome Measure:
   •   Revenue Protection – Potential; $186.5 million in erroneously approved tentative refunds
       to 150 taxpayers that filed their applications late (see Recommendations 1 and 2).

Methodology Used to Measure the Reported Benefit:
During the COVID-19 pandemic, the IRS issued Notice 2020-23 providing payment and filing
relief to taxpayers until July 15, 2020. This also extended the deadline for submitting tentative
refund applications to carryback a NOL that arose in any taxable year that began during
Calendar Year 2018 and that ended on or before June 30, 2019. We reviewed 25,403 tentative
refund applications submitted by taxpayers from March 27, 2020, through September 30, 2020,
and identified all those that filed a TY 2018 tentative refund application, excluding applications
claiming only a carryback of a minimum tax credit, after the July 15, 2020, extension. We
identified a total of 1,061 late-filed TY 2018 tentative refund applications under this criterion
belonging to 1,026 taxpayers.
We determined that the IRS may have incorrectly processed $186,462,114 in tentative refunds
for 150 taxpayers that late-filed a tentative refund application for TY 2018. For calculating the
amount of tentative refunds, we identified any TCs 295 posted on the 1,026 taxpayers’ accounts
from March 27, 2020, through October 21, 2020. To conservatively calculate the refund dollars,
we limited the refund population to taxpayers that did not also have a TY 2019 tentative
application listed in the CIS.

       Management’s Response: The IRS disagreed with the outcome measure stating that
       the impact of the error identified was procedural. IRS management believes that had the
       150 tentative refund applications been rejected, those taxpayers would still be entitled to
       claim the $186 million in associated refunds by filing amended tax returns for the
       carryback years.

               Office of Audit Comment: We agree that the taxpayers can file an amended
               return to claim the tentative refunds associated with the 150 claims that the IRS
               may have processed in error. However, as explained in our report, tentative
               refunds claims are evaluated differently by the IRS than an amended return
               claims. Amended return claims are subject to examination criteria when
               processing, and if selected, the taxpayer’s return could result in additional
               assessments or adjustments to their account. As such, there is no absolute as to
               whether these taxpayers would in fact be entitled to the full amount of associated
               refunds that was erroneously processed.

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                   Assessment of Processes to Verify Tentative Carryback Refund Eligibility


Type and Value of Outcome Measure:
   •   Cost Savings – Funds Put to Better Use - Potential; $1.8 million in potentially fraudulent
       tentative refunds approved for four taxpayers with identity theft indicators on their
       accounts (see Recommendation 3).

Methodology Used to Measure the Reported Benefit:

From a population of 25,403 tentative refund applications filed between March 27, 2020, and
September 30, 2020, we identified 17 business taxpayers with tentative refunds totaling
$133.6 million for which the taxpayers had an unreversed identity theft indicator on one of the
tax account years affected by the tentative carryback. According to the IRS’s internal guidance,
if either the loss or gain year includes a tax period with a business identity theft indicator, the
CSRs should refer the case to the IRS’s RICS function for review and a determination on how to
proceed. These applications were not referred as required. We provided these cases to the IRS
for review by the RICS function, which confirmed that 13 of the cases were not identity theft and
four were still pending a response from the taxpayer. For the four cases that were still pending
at the time of our review, the IRS issued tentative refunds in the amount of $1,785,620.

       Management’s Response: The IRS disagreed with the outcome measure stating that
       two of the four taxpayers have responded confirming their identities. IRS management
       is still awaiting responses from the remaining two taxpayers, comprising of $59,576 of
       the original $1.8 million identified. Additionally, management has emphasized and
       communicated to employees their expectations that applications meeting potential fraud
       and identity theft criteria be appropriately routed for further review prior to being
       processed.

               Office of Audit Comment: The outcome measure reflects the potential amount
               that the IRS may have erroneously paid prior to confirming the identities of these
               four taxpayers as required. We are pleased that as part of the IRS’s corrective
               actions that steps have been taken subsequent to the completion of our testing
               to confirm these identities.

Type and Value of Outcome Measure:
   •   Cost Savings – Funds Put to Better Use - Potential; $30.5 million in potentially fraudulent
       tentative refunds approved for 296 individual taxpayers ***************2******************
       ************2************ (see Recommendations 4 and 5).

Methodology Used to Measure the Reported Benefit:
In response to the passage of the CARES Act, the IRS updated its internal guidance, instructing
the CSRs to refer a tentative refund application to an identity theft liaison if there has been a
********************2********************** on the taxpayer’s account. From a population of
25,403 tentative refund applications filed between March 27, 2020, and September 30, 2020, we
identified 296 individual taxpayers who filed a tentative refund application *********2*********
********************2*************************** prior to issuing a refund. These taxpayers
received a total of $30,510,142 in tentative refunds.


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           Assessment of Processes to Verify Tentative Carryback Refund Eligibility


Management’s Response: The IRS disagreed with the outcome measure stating that
management’s review of the accounts comprising the $30.5 million in refunds is resulting
in findings that identity theft had not occurred. Additionally, management has
emphasized and communicated to employees their expectations that applications
meeting potential fraud and identity theft criteria be appropriately routed for further
review prior to being processed.

       Office of Audit Comment: The outcome measure reflects the potential amount
       that the IRS may have erroneously paid prior to authenticating these filers as
       required. We are pleased that as part of the IRS’s corrective actions that steps
       have been taken subsequent to the completion of our testing to authenticate
       these filers.




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 Assessment of Processes to Verify Tentative Carryback Refund Eligibility


                                                                     Appendix III
Management’s Response to the Draft Report




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         Assessment of Processes to Verify Tentative Carryback Refund Eligibility




                                              2


identified in the report, the average processing time for a tentative refund application
was 17 days, and the Service continues to strive to meet this requirement.

Using e-Fax to receive Forms 1045 and 1139 from taxpayers yielded significant benefits
by facilitating our ability to route them to teleworking Customer Service Representatives
for expedited handling while the Submission Processing centers were closed; however,
reviewing the applications and adjusting accounts remained a substantially manual
process that was subject, at times, to human error. Up to 150 of the 25,403 applications
received may have been erroneously processed after the July 15, 2020 deadline;
however, it should be noted that had the tentative refund applications been rejected,
those taxpayers would still be entitled to claim the $186 million in associated refunds by
filing amended tax returns for the carryback years. The impact is procedural, and we
therefore disagree with the $186 million claimed outcome measure for revenue
protection.

We also are not in agreement with the outcome measures for cost savings of $1.8
million and $30.5 million associated with employee errors in not following identity theft
procedures and potential identity theft associated with **********2**********, respectively.
We have received responses from two of the four taxpayers whose tentative
applications for refund were approved while there were active identity theft indicators on
their accounts. Both taxpayers confirmed their identities. We are waiting for responses
on the remaining two, comprising $59,576 of the original $1.8 million identified. Our
review of accounts comprising $30.5 million in refunds associated with entities having
**********2********** are also resulting in findings that identity theft had not occurred. We
have emphasized and communicated to employees our expectations that applications
meeting potential fraud and identity theft criteria be appropriately routed for further
review prior to being processed.

Our responses to your specific recommendations are enclosed. If you have any
questions, please contact me, or a member of your staff may contact Dietra Grant,
Director, Customer Account Services, Wage and Investment Division, at 470-639-3504.

Attachment




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                                                                           Page 16
         Assessment of Processes to Verify Tentative Carryback Refund Eligibility




                                              2


CORRECTIVE ACTION MONITORING PLAN
We will monitor this corrective action as part of our internal management system of
controls.

RECOMMENDATION 3
The Commissioner, Wage and Investment Division, should ensure that tentative refund
applications associated with taxpayers whose tax accounts have an identity theft
indicator are sent to an identity theft liaison for review as required.

CORRECTIVE ACTION
The IRM contains procedures for forwarding tentative applications for refund, where
identity theft (IDT) indicators are present on the account, to the IDT team for additional
review. We will place a heightened emphasis on this requirement in recurring monthly
communications to ensure affected applications are referred as required.

IMPLEMENTATION DATE
April 15, 2022

RESPONSIBLE OFFICIAL(S)
Director, Accounts Management, Customer Account Services, Wage and Investment
Division

CORRECTIVE ACTION MONITORING PLAN
We will monitor this corrective action as part of our internal management system of
controls.

RECOMMENDATION 4

The Commissioner, Wage and Investment Division, should:

Review the 296 individual taxpayers we identified ********************2********************
****2**** to ensure the validity of the tentative refund application.

CORRECTIVE ACTION
We will review the 296 individual taxpayers identified and ensure validity of the tentative
refund application. Tentative refund applications identified as invalid will be either
rejected or, if previously processed, actions to reverse the adjustments will be taken.

IMPLEMENTATION DATE
September 15, 2021

RESPONSIBLE OFFICIAL(S)
Director, Accounts Management, Customer Account Services, Wage and Investment
Division




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        Assessment of Processes to Verify Tentative Carryback Refund Eligibility


                                                                             Appendix IV
                              Abbreviations

CARES      Coronavirus Aid, Relief, and Economic Security
CIS        Correspondence Imaging System
CSR        Customer Service Representative
IRS        Internal Revenue Service
NOL        Net Operating Loss
RICS       Return Integrity and Compliance Services
TC         Transaction Code
TY         Tax Year




                                                                                   Page 19
             To report fraud, waste, or abuse,
                call our toll-free hotline at:
                         (800) 366-4484


                              By Web:
                      www.treasury.gov/tigta/


                             Or Write:
         Treasury Inspector General for Tax Administration
                            P.O. Box 589
                        Ben Franklin Station
                   Washington, D.C. 20044-0589




Information you provide is confidential, and you may remain anonymous.