Treasury finds holes in stimulus tax breaks

WASHINGTON Tue Dec 22, 2009 4:38pm EST

WASHINGTON (Reuters) - Billions of dollars worth of tax breaks in the U.S. economic stimulus plan may present a big problem during the tax filing season ramps up as the Internal Revenue Service cannot verify who is eligible for them.

In a report on Tuesday, the Treasury Department's Inspector General for Tax Administration said the IRS cannot check the accuracy of those filing their taxes for 13 individual provisions and 26 business provisions authorized by the American Recovery and Reinvestment Act passed in February.

"The IRS relies on taxpayers to comply with tax laws and provide correct information on their tax returns, including accurately reporting income and claiming only those tax benefits and credits to which they are entitled," the report said.

Most individual federal taxes must be filed with the IRS by April 15.

The agency is not allowed to require taxpayers to fill out burdensome forms and its electronic filing program limits the type of information individuals can provide, according to the report.

Altogether, those holes could allow taxpayers to claim benefits they should not receive or to miss breaks they are entitled to from the $326 billion in tax measures included in the $787 billion stimulus bill.

The inspector general did not recommend how the IRS could prevent fraud or improve tracking the stimulus tax benefits, but said it planned ongoing audits of specific measures.

For individual taxpayers, those breaks come in the form of refundable tax credits, a sales tax deduction on car purchases and relief from the Alternative Minimum Tax. The stimulus also reduced taxes on unemployment benefits and sent extra money to Social Security recipients.

Businesses have $74 billion in tax cuts that include incentives to buy municipal bonds, invest in renewable energy and hire veterans.

In another wrinkle, those who make mistakes filing for the tax breaks could have to endure an audit of their returns.

It is easier for the IRS to correct errors before a tax return is validated and money is sent to tax payers, the Inspector General said. After funds have been released, the IRS must conduct a more detailed audit that could include field examinations, it said.

(Reporting by Lisa Lambert; Editing by Andrew Hay)