IRS mistakenly designates thousands of e-file providers as not-for-profits
Inspector general reports that by not verifying the status of groups, the Internal Revenue Service increased the risk for losses from unscrupulous businesses.
The Internal Revenue Service failed to check as required by agency rules the nonprofit status of groups participating in a volunteer program that provides free tax advice and electronic filing of returns to low-income and elderly taxpayers, according to an internal report released on Monday.
As of August 2009, 13,797 active e-file providers claimed to be not-for-profit organizations, which are exempt from all e-file program requirements and specific checks that for-profit organizations are required to complete. The majority of these organizations participated in the IRS' Stakeholder Partnerships, Education and Communication volunteer program, which provides free federal tax return preparation and electronic filing to underserved populations, including low- to moderate-income families and the elderly and disabled.
By not verifying the status of some e-file providers, the IRS increased "the risk to both the taxpaying public and the federal government for potential losses associated with unscrupulous e-file providers," the Treasury Inspector General for Tax Administration reported.
From a sample of 97 e-file providers taken from a list of designated not-for-profit organizations, the inspector general found 18, or 19 percent, were erroneously assigned a nonprofit designation. Of the 18, 10 were designated as not-for-profit organizations, but were not listed in the program's database of participants or were marked as inactive. The other eight groups appeared to be for-profit organizations, according to the report.
Based on the sample, "There is a potential that 2,560 of these e-file providers were improperly designated as not-for-profit organizations," the report stated.
Richard Byrd, commissioner of the wage and investment division at the IRS, noted in a letter responding to the report that in 2008 and 2009, the agency established formal procedures for validating e-file providers as not-for-profit, and plans to ensure future compliance through regular reports and reviews.
The inspector general reported in 2007 and in 2003 that the IRS must improve screening and monitoring of e-file providers.
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