IRS computer glitches allow erroneous credits

Flaws in the Internal Revenue Service's software programs have allowed filers to improperly claim tax credits for first-time home purchases and energy-efficient improvements to houses, according to a preliminary audit of the 2011 filing season.

As of March 4, computer glitches had allowed 54 people to receive $331,557 in credits for buying first homes that were purchased after the qualifying deadline, stated a March 31 Treasury Inspector General for Tax Administration report publicly released on Monday.

"Incorrect programming is resulting in the issuance of erroneous first-time homebuyer credits and nonbusiness energy property credits," wrote Michael Phillips, TIGTA's deputy inspector general for audit. "Taxpayers are continuing to erroneously receive first-time homebuyer credit claims with ineligible purchase dates."

In response to these early findings, IRS officials told the IG that the tax service will resolve the homebuyer credit problem by July through verifying eligibility using separate property records.

In addition, the audit, which reviewed the IRS' performance dealing with a range of recent tax law changes, revealed that filers were claiming duplicate or excessive credits for the cost of making certain energy-saving enhancements to residential properties, costing the government more than $34 million. As of March 4, more than 50,000 people had claimed the nonbusiness energy property credit twice -- in tax years 2009 and 2010. The credit is capped at a total of $1,500 spread out over 2009 and 2010.

The inspector general recommended the tax service establish procedures to prevent filers from receiving credits over the legal limit. IRS officials had not responded to the IG's office regarding this matter at the time of the report.

A separate defect in software that checks reimbursements to the government by past recipients of the homebuyer credit was automatically sending many returns to an error resolution system, delaying processing and refunds.

The IRS installed the system to flag people who are not paying off the homebuyer credit, which is essentially a long-term loan. An IRS database contains fields that list the dollar amount each credit recipient is expected to pay this tax year. The system matches the reimbursement reported by each filer with the expected amount owed. If the numbers don't correspond, the system sends the return to an error resolution system. The inspector general found the database fields were missing expected amounts for most taxpayers who are required to start repaying the credit -- about 80 percent of them.

"As a result, a large number of tax returns are being sent to error resolution [by mistake]," Phillips wrote. As of March 17, IRS computers had forwarded 313,950 returns due to the flaw.

The IRS was still fixing the program as of March 23, according to its website: "A small percentage of tax returns, primarily related to 2008 home purchases, are being impacted by processing issues involving the repayment of the first-time homebuyer credit. While most of these returns are processing normally, the IRS recognizes the hardship caused by delayed refunds, and it has assigned additional staff and resources to address the issues promptly."

On Tuesday, IRS officials said they have since fixed the bug. Currently, less than two percent of returns from taxpayers with payments due this tax year remain outstanding. Officials expect many of those filings to be processed and refunds issued by the end of the month.

"The IRS has seen a successful filing season for millions of taxpayers despite significant challenges, including late law changes that delayed return processing," the agency said in a statement. "The IRS is extremely successful at detecting and stopping incorrect refunds and prevents the vast majority of fraudulent refunds from being issued."

Officials added the tax service has processed nearly 96 million returns, and issued almost 81 million refunds totaling $234 billion.