TIGTA: Program Gave $12 Billion in Deductions, but IRS Has No System to Prevent Overclaiming

Chris Gaetano
Published Date:
Nov 14, 2016

The Treasury Inspector General for Tax Administration (TIGTA) released a report faulting the IRS for having no mechanism in place to make sure that people who take advantage of the Domestic Production Activities Deduction (DPAD) don't claim more than what they're owed. The DAPD came about in 2004 as a result of the American Jobs Creation Act of 2004, which was meant to help business and manufacturing firms in the U.S. compete with global competitors, and create new small business jobs. 

TIGTA said that businesses have already claimed billions of dollars worth of these deductions, noting that between 2013 through 2015, taxpayers claimed more than $131 billion in DPADs, with nearly $44 billion coming from 2015 filings alone. In order to qualify for these credits, a taxpayer must participate in certain qualified activities such as goods manufacturing, farming, construction, film production or engineering.

However, TIGTA said that its review of the 2013 tax year found that 2,829 taxpayers had claimed more than $27 million in deductions that they were not qualified to receive. When TIGTA asked the IRS for information on how many taxpayers have been audited on DPAD claims, though, the service told them that it does not have a specific examination program focused on identifying and selecting returns with potentially questionable claims. DPAD claims, according to TIGTA, are instead only reviewed if the IRS happens to have selected the return for other examination issues. IRS management explained that systemically identifying businesses and corporations overclaiming the deduction presents a challenge, because many corporations file returns as part of a consolidated group, receive the DPAD from a pass-through entity, or use a Professional Employer Organization, according to TIGTA. 

"We believe the dollars at risk associated with these potential overclaims for the DPAD warrant the IRS's attention to better identify noncompliant taxpayers," said the report. 

It recommended that the IRS revise the the Form 8903 (which lets someone claim the deduction) to allow further disclosures about the DPAD credit to better detect erroneous claims, through the IRS felt that such changes would be premature and that the benefits would not outweigh the resources required to change the form. It also disagreed with re-examining forms erroneously claiming the deduction, saying it would not be prudent as it would just divert resources from higher risk cases with potentially higher adjustments. It did, however, agree with the recommendation to implement proper processes and procedures to identify individuals claiming the deduction and to stop those claiming it inappropriately. 

Click here to see more of the latest news from the NYSSCPA.