1
American Rescue Plan Act: Review of the Reconciliation
of the Child Tax Credit
June 14, 2023
Report Number: 2023-47-035
TIGTACommunicat[email protected] | www.treasury.gov/tigta
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
HIGHLIGHTS: American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
Final Audit Report issued on June 14, 2023 Report Number 2023-47-035
Why TIGTA Did This Audit
The
American Rescue Plan Act
of 2021
provided taxpayers the
ability to receive up to one half of
the estimated Tax Year 2021 Child
Tax Credit in advance payments
between July and December 2021.
The IRS issued 216.9 million
advance payments totaling
$93.5 billion. The IRS estimated
the advance payments based on
prior year tax return information
and information reported through
its nonfiler tools.
This audit was initiated to assess
processes and procedures to
ensure that taxpayers properly
reconciled the advance Child Tax
Credit payments on their Tax
Year 2021 tax return.
Impact on Tax Administration
TIGTA previously reported that the
IRS erroneously issued 3.3 million
advance payments to 1.5 million
taxpayers who were not eligible to
receive an advance payment. The
IRS’s reconciliation process
addressed both potentially
ineligible taxpayers and eligible
taxpayers who had not received
advance payments when they filed
their Tax Year 2021 tax return.
However, our review showed that
as of October 12, 2022,
approximately 4.1 million taxpayers
who were issued about $9 billion
in advance payments had not yet
filed a tax return.
What TIGTA Found
The IRS created an automated process to recalculate the Child Tax
Credit, including the amount of advance payments posted to a
taxpayers’ tax account. This process identified 3.8 million tax returns
that contained a discrepancy between the IRS calculated Child Tax
Credit amount and the amount claimed by the taxpayer that required
resolution. TIGTA’s review of the reconciliation process of tax returns
processed through May 5, 2022, identified:
• 6,833 taxpayers who potentially received $10.5 million in
excess Child Tax Credit because tax examiners incorrectly
resolved error conditions that allowed more Child Tax Credit
than what the taxpayer was eligible to claim on their tax
return.
• 105 taxpayers who did not receive all of their eligible Child Tax
Credit, resulting in the taxpayers not receiving an estimated
$139,000 in Child Tax Credit.
Further, in response to TIGTA’s concerns, the IRS developed a process
to identify undeliverable advance payments that occurred after
taxpayers filed their Tax Year 2021 tax return. As of October 12, 2022,
the IRS reissued payments to 7,877 taxpayers totaling $5.4 million.
What TIGTA Recommended
TIGTA made seven recommendations to the IRS including: identifying
and reviewing the instances where taxpayers received more or less
Child Tax Credit than they were eligible to receive, sending letters to
taxpayers with advance Child Tax Credit payments who have yet to file
a Tax Year 2021 tax return, and creating a process to recover
potentially erroneous advance payments.
The IRS agreed with four of the seven recommendations and partially
agreed with another. The IRS did not agree to identify additional
taxpayers with excess Child Tax Credits or to develop a process to
recover erroneous advance payments on nonfilers. TIGTA continues to
believe that taxpayers received excess Child Tax Credit after the IRS
implemented a programing change and that processes are needed to
recover erroneous advance payments totaling $1 billion.
U.S. DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20024
TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
June 14, 2023
MEMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE
FROM: Heather M. Hill
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – American Rescue Plan Act: Review of the
Reconciliation of the Child Tax Credit (Audit # 202240712)
This report presents the results of our review to assess processes and procedures to ensure that
taxpayers properly reconciled the advance Child Tax Credit payments on their Tax Year 2021 tax
return. This review is part of our Fiscal Year 2023 Annual Audit Plan and addresses the major
management and performance challenges of
Administering Tax Law Changes
and
Reducing Tax
Fraud and Improper Payments
.
Management’s complete response to the draft audit report is included as Appendix III. If you
have any questions, please contact me or Diana M. Tengesdal, Acting Assistant Inspector
General for Audit (Returns Processing and Account Services).
American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
Table of Contents
Background .....................................................................................................................................Page 1
Results of Review .......................................................................................................................Page 4
Programming Correctly Reconciled the Child Tax Credit
During Tax Return Processing; However, Some Taxpayers
Received Incorrect Child Tax Credits ............................................................................Page 4
Recommendations 1 through 3: ..............................................Page 5
Recommendations 4 and 5: .....................................................Page 6
Some Potentially Erroneous Advance Payments Were
Recovered Through the Reconciliation Process .......................................................Page 7
Recommendations 6 and 7: .....................................................Page 8
Appendices
Appendix I – Detailed Objective, Scope, and Methodology ................................Page 10
Appendix II – Outcome Measures .................................................................................Page 12
Appendix III – Management’s Response to the Draft Report .............................Page 14
Appendix IV – Glossary of Terms ...................................................................................Page 20
Appendix V – Abbreviations.............................................................................................Page 22
Page 1
American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
Background
The American Rescue Plan Act of 2021 (ARPA), enacted on March 11, 2021, increased the
amount of the Child Tax Credit from $2,000 to $3,000 per child under the age of 18 ($3,600 for
children under the age of 6) for Tax Year (TY)
1
2021 only and makes the Child Tax Credit fully
refundable to eligible taxpayers; thus, eliminating the Additional Child Tax Credit for these
taxpayers.
2
Figure 1 summarizes the changes made to the Child Tax Credit for TY 2021.
Figure 1: Child Tax Credit Changes by the ARPA for TY 2021
Source: Treasury Inspector General for Tax Administration (TIGTA) summary of ARPA legislation.
Advance payment of the Child Tax Credit
To determine eligibility and the amount of these advance payments during Calendar Year 2021,
the Internal Revenue Service (IRS) was authorized to use information from:
Taxpayers’ TY 2020 tax returns. However, if the taxpayers had not yet filed a TY 2020 tax
return (including instances where the TY 2020 tax return had not yet been processed
due to the IRS backlog), the IRS could then use taxpayers’ TY 2019 tax return.
1
See Appendix IV for glossary of terms.
2
Pub. L. No. 117-2, 135 Stat. 4 (codified in scattered sections of 7, 12, 15, 19, 20, 26, 29, 42, and 45 U.S.C.).
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American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
The
Non-Filers: Enter Payment Info Here Tool
(also used by taxpayers to receive
stimulus payments) or the
Child Tax Credit Non-Filer Sign-up Tool.
3
The
Child Tax
Credit Non-Filer Sign-up Tool
allowed taxpayers to file a simplified TY 2020 tax return
that contained the information the IRS needed to determine the taxpayer’s eligibility
and issue the advance payments.
In addition, the ARPA required the IRS to provide taxpayers with the ability to unenroll from
receiving advance payments and update information that could modify the amount of advance
payments taxpayers were eligible to receive,
e.g.,
taxpayers could update the number of their
qualifying children or their marital status
.
To meet this requirement, the IRS developed an
online portal, known as the
Child Tax Credit Update Portal
, and developed non-electronic
processes to enable taxpayers to perform many of the same updates that they provided through
the
Child Tax Credit Update Portal
.
Reconciliation of the Child Tax Credit on Tax Year 2021 tax returns
The IRS began issuing advance payments of the Child Tax Credit on July 15, 2021, only
four months after legislation was enacted, and continued issuing these payments each month
through December 2021. As of December 2021, the IRS issued 216.9 million advance payments
totaling $93.5 billion.
4
In compliance with the ARPA, the IRS provided taxpayers with a written notice of advance
payments by January 31, 2022, to assist taxpayers in reconciling advance payments received with
the TY 2021 Child Tax Credit allowed. The IRS developed Letter 6419,
2021 Total Advance Child
Tax Credit (AdvCTC) Payments
, which includes the total amount of advance payments issued for
TY 2021 and the number of qualifying children used to calculate the advance payments.
Taxpayers who received one or more advance Child Tax Credit payments should file
Schedule 8812,
Credits for Qualifying Children and Other Dependents,
with their TY 2021 tax
return to report advance Child Tax Credit payments received, claim the remaining eligible Child
Tax Credit amount, and reconcile the Child Tax Credit allowed with advance payments received.
In most instances, this results in the taxpayer receiving the remaining portion of the Child Tax
Credit; however, some taxpayers may owe additional tax if they received advance payments for
which they were not eligible. These taxpayers will need to report the receipt of their advance
payment(s) and potentially repay the amount they were not eligible to receive. Taxpayers who
meet the repayment protection conditions summarized in Figure 2 are allowed to keep the
excess payments, up to $2,000 per qualifying child.
3
In Calendar Year 2020, this tool assisted taxpayers who were eligible to receive an economic impact payment but do
not have a Federal tax return filing requirement and had not filed a TY 2018 or TY 2019 tax return. In Calendar
Year 2021, this tool assisted taxpayers who were eligible to receive advance Child Tax Credit payments but did not
have a Federal tax return filing requirement and had not filed a TY 2019 or TY 2020 tax return.
4
TIGTA, Report No. 2022-47-070,
American Rescue Plan Act: Accuracy of Advance Child Tax Credit Periodic Payments
(Sept. 2022).
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American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
Figure 2: Summary of Conditions for Repayment Protection
5
Source: TIGTA summary of ARPA legislation.
As of October 26, 2022, the IRS reported that approximately 1.3 million taxpayers with payments
totaling $1.9 billion were eligible for partial or full repayment protection. If the taxpayer does
not qualify for the repayment protection, the repayment amount is reported on the taxpayer’s
tax return and either reduces the refund amount or increases the balance due.
Prior audit recommended outreach efforts for potentially misrouted advance payments
In our prior review, we reported that taxpayers had their direct deposit information updated by
the IRS’s Return Integrity and Compliance Services function with information provided by the
Bureau of the Fiscal Service between August 23, 2021, and October 5, 2021. These updates were
intended to not only reduce the amount of paper checks being issued, but to also ensure that
advance payments were timely delivered to taxpayers.
6
As a result of this process,
1,519 taxpayers had their advance payments direct deposited into an account used for other
government payments (
e.g.
, payroll allotment accounts, such as a health savings account).
7
Many of these taxpayers did not have immediate access to the advance payments and may not
have thought to look for payments in these accounts.
As of September 2022, the Bureau of the Fiscal Service mailed 1,357 letters to impacted
taxpayers to officially inform them of the potential location of their advance payments.
Additionally, the Bureau of the Fiscal Service established a dedicated telephone line for the
impacted taxpayers and included the telephone number on the letter sent to the affected
taxpayers. The remaining 162 taxpayers had their payments returned to the IRS, and they are
eligible to receive the misdirected payment(s) through the filing of their tax return or the
issuance of subsequent payments.
5
Taxpayers with an income above these amounts but below $80,000 for single filers, $100,000 for head of household
filers, and $120,000 for married joint filers will gradually have the exempted amount reduced to $0 per qualifying
child.
6
TIGTA, Report No. 2022-47-070,
American Rescue Plan Act: Accuracy of Advance Child Tax Credit Periodic Payments
(Sept. 2022).
7
We were originally provided with 1,610 taxpayers, which was reported in TIGTA, Report No. 2022-47-070,
American
Rescue Plan Act: Accuracy of Advance Child Tax Credit Periodic Payments
(Sept. 2022); however, the IRS subsequently
provided additional information revising the number to 1,519 taxpayers.
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American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
Results of Review
Programming Correctly Reconciled the Child Tax Credit During Tax Return
Processing; However, Some Taxpayers Received Incorrect Child Tax Credits
The IRS created an automated process to recalculate the Child Tax Credit, including the amount
of advance payments posted to a taxpayer’s tax account, regardless of the advance amount
reported on a taxpayer’s tax return. The programming calculates the total Child Tax Credit
taxpayers are eligible to receive based upon their tax return information and reduces that
amount by any advance payments received. This automated process creates an error code on
the taxpayer’s tax account, and for most electronically filed tax returns the process systemically
corrected the error code. For those tax returns that do not meet the criteria to be systemically
resolved, including paper-filed tax returns, the IRS works the error condition through the manual
resolution process.
As of October 12, 2022, 39.8 million taxpayers filed tax returns claiming the Child Tax Credit,
totaling approximately $195 billion. Of which, $83.8 billion in Child Tax Credit was advance
payments that went through the recalculation process to ensure the accuracy of the Child Tax
Credit amount. Additionally, as of this same time period, our review showed that approximately
4.1 million taxpayers who were issued about $9 billion in advance payments had not yet filed a
tax return, or their tax return had not yet been processed due to the IRS backlog. Finally, our
review showed that approximately 1.1 million taxpayers had over $900 million in advance
payments that have been reversed.
During the processing of tax returns with advance payments, the IRS identified 3.8 million tax
returns that contained a discrepancy between the IRS calculated Child Tax Credit amount and
the amount claimed by the taxpayer that required resolution.
Tax examiner error resulted in taxpayers receiving additional Child Tax Credit
Our analysis of TY 2021 tax returns processed through May 5, 2022, identified 6,833 taxpayers
who received potentially $10.5 million in excess Child Tax Credit. This occurred during the
manual resolution process because tax examiners in the Error Resolution function incorrectly
resolved error conditions and allowed more Child Tax Credit than the taxpayer was eligible to
claim on their tax return. In response to our concerns, IRS management estimated, based on a
judgmental sample, that about 95 percent (6,491) of the taxpayers we identified had an error
code that was closed in error, and that they will consider them for treatment (
i.e.
, recover the
excess Child Tax Credit) based upon resource availability. We continue to believe that the IRS
should review and correct all tax returns that we identified.
These errors go undetected because updates made to tax returns through the Error Resolution
function do not have systemic controls to verify the corrections made. In December 2020, we
reported a similar concern over the lack of verification/validation of entries by tax examiners.
8
IRS management agreed with our recommendation to add controls to verify fields to prevent
8
TIGTA, Report No. 2021-40-008,
Expansion of Self-Correction for Electronic Filers and Other Improvements Could
Reduce Taxpayer Burden and Costs Associated With Tax Return Error Resolution
(Dec. 2020).
Page 5
American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
erroneous credits; however, at that time, programming was subject to availability of information
technology resources and other competing priorities. As a result, the corrective action was
placed on hold and erroneous credits continued to be issued to taxpayers.
The Commissioner, Wage and Investment Division, should:
Recommendation 1: Review all of the 6,833 taxpayers with excess Child Tax Credit identified
during our review and take appropriate actions to ensure that the taxpayers receive the correct
amount of the Child Tax Credit.
Management’s Response: IRS management agreed with the recommendation and will
review the taxpayers identified and take action as appropriate.
Recommendation 2: Identify additional taxpayers after May 5, 2022, who received excess Child
Tax Credit as a result of tax examiner error and take appropriate actions to ensure that these
taxpayers receive the correct amount of the Child Tax Credit.
Management’s Response: IRS management disagreed with this recommendation due
to programming being corrected on March 7, 2022.
Office of Audit Comment: We continue to believe that an assessment of
taxpayers receiving the Child Tax Credit after May 5, 2022, is needed as these
errors continued to occur after the IRS implemented the programing change. For
example, 906 of the 6,833 taxpayers we identified relative to Recommendation 1
were filed after the IRS implemented the programming change and the taxpayers
received excess Child Tax Credit.
Taxpayers did not always receive all of their eligible Child Tax Credit
Our analysis of TY 2021 tax returns processed through May 5, 2022, identified 105 taxpayers
who potentially did not receive all of their eligible Child Tax Credit (
i.e.
, they received less).
These taxpayers should have received an estimated $139,000 in additional Child Tax Credit.
On October 12, 2022, the IRS informed us of a programming error that occurred during the IRS’s
Controlled Launch for the 2022 Filing Season. In these instances, the IRS captured the incorrect
number of qualifying children and selected the tax returns for Error Resolution. During the error
correction process, the taxpayers received less Child Tax Credit than they were eligible to
receive. The IRS plans to consider these cases for treatment (
i.e.
, ensure the appropriate amount
of Child Tax Credit is given) subject to resource availability. However, we believe that the IRS
should ensure that all 105 tax accounts are corrected to ensure that these individuals receive all
their eligible Child Tax Credit.
The Commissioner, Wage and Investment Division, should:
Recommendation 3: Review the 105 taxpayers who potentially did not receive all of their
eligible Child Tax Credit identified during our review and take appropriate actions to ensure that
they receive the correct amount of the Child Tax Credit.
Management’s Response: IRS management agreed with the recommendation and will
review the taxpayers identified and take action as appropriate.
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American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
Recommendation 4: Evaluate the priority of programming to ensure that processes and
procedures are developed to identify and correct tax examiner entries input during the error
correction process that exceed statutory limits, including a process to systemically reprocess
corrected returns through Error Resolution programming before being released for processing.
Management’s Response: IRS management partially agreed with this recommendation
and implemented programming for electronically filed tax returns at the beginning of
the 2023 Filing Season to negate erroneous employee entries as the tax returns are
processed systemically.
Office of Audit Comment: While we agree with the actions taken by the IRS to
reduce erroneous employee entries, this does not address tax returns that are not
subject to this programming (
e.g.
, certain error conditions on electronically filed
tax returns and paper-filed tax returns). As a result, erroneous entries by tax
examiners on the paper-filed tax returns and electronically filed tax returns not
processed through the implemented programming will continue to occur.
Implementation of a new process to reconcile undelivered advance payments
Our analysis determined that the IRS sent the majority of the 57.1 million Letters 6419 to the
correct taxpayers and for the correct amount of advance Child Tax Credit payments issued to
the taxpayers.
9
However, we identified differences involving the reversals of advance payments
(
i.e.
, undelivered checks) that were not reflected on Letter 6419. These differences occurred due
to the timing of the IRS’s cutoff date to send the letters and the posting of the reversal to the
taxpayer’s tax account. To address this issue, the IRS used the amount of advance payments
recorded on taxpayers’ tax accounts at the time the IRS processed taxpayers’ tax returns rather
than the amount on Letter 6419.
Recommendation 5 (E-Mail Alert): On February 17, 2022, we notified IRS management of our
concerns with undeliverable payments that post after the processing of the tax return. In these
instances, the IRS processed the tax return as if the payment was received by the taxpayer. As a
result, the taxpayer would receive less Child Tax Credit than they are eligible to receive. We
recommended that the IRS develop a process to identify undeliverable payments after
processing of the TY 2021 tax return.
Management’s Response to E-Mail Alert: The IRS implemented a programming
change effective March 3, 2022, to identify undeliverable advance payments that
occurred after the tax return processed.
As of October 12, 2022, we identified 7,877 taxpayers with reversals of advance payments
totaling $5.4 million that were addressed by the programming change. As a result, the IRS was
able to identify these taxpayers and work to reissue the reversed advance payment(s) due to the
taxpayer.
9
TIGTA, Report No. 2022-47-070,
American Rescue Plan Act: Accuracy of Advance Child Tax Credit Periodic Payments
(Sept. 2022).
Page 7
American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
Some Potentially Erroneous Advance Payments Were Recovered Through the
Reconciliation Process
Our prior review determined that, between July and November 2021, the IRS erroneously sent
3.3 million payments to 1.5 million taxpayers who were not eligible to receive an advance
payment. These payments totaled nearly $1.1 billion and included instances in which
dependents did not meet the age requirements, were deceased, or were claimed on another tax
return. Our analysis was based on information from TY 2020 or, when necessary, TY 2019 tax
returns; the same approach the IRS used to make the advance payments.
10
We conducted additional analysis of the 1.5 million taxpayers and found that as of
October 12, 2022, 845,000 taxpayers with advance payments totaling $1 billion had not filed a
TY 2021 tax return. Further analysis of the remaining 618,000 taxpayers showed that they had
filed a TY 2021 tax return, including 242,000 taxpayers (39 percent) who received $119.4 million
in erroneous advance payments during Calendar Year 2021.
11
Our analysis showed that of the
618,000 taxpayers:
• 376,000 taxpayers received the correct amount of Child Tax Credit and $543 million in
advance payments based upon the information provided on the TY 2021 tax return.
• 173,000 taxpayers were not eligible for some or all of the advance payments but
qualified for repayment protection totaling $97.8 million.
• 69,000 taxpayers were not eligible for some or all of the advance payments and did not
qualify for repayment protection. These taxpayers were required to repay the excess
advance payments totaling $21.6 million.
The IRS stated that there is no compliance strategy to identify potentially erroneous advance
payments as the filing of the tax return would reconcile any discrepancies. Management further
stated that taxpayers who do not have a filing requirement are not required to file a tax return
even if they received advance payments. The reconciliation process only affects taxpayers who
file a tax return and does not address potentially erroneous claims on the 845,000 taxpayers
with advance payments who have yet to file a tax return. For these taxpayers, the IRS does not
know if the taxpayers would claim qualifying children for the Child Tax Credit or have to repay
the potentially erroneous advance payments. To assist taxpayers who have yet to file a tax
return, the IRS kept the Free File program available through the IRS’s webpage at www.IRS.gov
until November 17, 2022, to encourage taxpayers to file their tax return to claim the remaining
Child Tax Credit. Additionally, the IRS provided taxpayers an additional week to electronically
file their tax returns and kept electronic filing open through November 26, 2022.
Some taxpayers did not receive notice of their potential eligibility for the Child Tax Credit
In October 2022, the Department of the Treasury, with assistance from the IRS, identified more
than 9 million individuals who appear to qualify for the Child Tax Credit, Recovery Rebate Credit,
or Earned Income Tax Credit. The Department of the Treasury identified dependents who were
not claimed on a TY 2021 tax return and worked with the IRS to send letters to the taxpayers
10
TIGTA, Report No. 2022-47-070,
American Rescue Plan Act: Accuracy of Advance Child Tax Credit Periodic
Payments
(Sept. 2022).
11
The number of taxpayers does not total to 1.5 million due to rounding.
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American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
responsible for the unclaimed dependent rather than, for example, taxpayers who had received
advance payments that have not yet filed. The letter, issued in English and Spanish, informs the
taxpayer that they may be eligible to claim credits and a refund by filing their TY 2021 tax return.
Our analysis determined that only 1.1 million of the 4.1 million taxpayers with advance payments
who have not filed a tax return were issued a letter. As a result, there are some taxpayers who
may be unaware of the need to file their tax return to claim their remaining eligible Child Tax
Credit.
The Commissioner, Wage and Investment Division, should:
Recommendation 6: Identify taxpayers with advance payments who have yet to file a TY 2021
tax return and send a reminder notice, similar to the Department of the Treasury, using the
advance payments as part of the criteria.
Management’s Response: IRS management agreed with the recommendation and will
identify and notify taxpayers who have yet to file a tax return, reminding them to file
their TY 2021 tax return to claim any remaining credit to which they may be entitled.
Recommendation 7: Work with the Commissioner, Small Business/Self-Employed Division, to
create a process to recover potentially erroneous advance payments from taxpayers who have
not filed a TY 2021 tax return.
Management’s Response: IRS management disagreed with the recommendation. The
IRS indicated that by using current criteria for nonfiler case identification and Automated
Substitute for Return processes, some erroneous advance payments will be recovered.
However, these processes do not have the ability to identify and recover potential
erroneous payments by selecting specific credits.
Office of Audit Comment: We agree that the current processes may identify a
portion of the taxpayers who have yet to file a tax return; however, other
alternatives should be considered for the recovery of the $1 billion in erroneous
advance payments. With continued discussions by Congress on expanding the
advance Child Tax Credit, such a process will be needed as part of any efforts to
reintroduce advance Child Tax Credit payments.
Eligible taxpayers who were not sent advance
payments received the Child Tax Credit during
tax return processing
Our prior audit of advance Child Tax Credit
payments also identified 4.1 million taxpayers who
were eligible to receive almost $3.7 billion in
advance payments, but the IRS failed to send the
taxpayers one or more monthly payments between
July and November 2021. To resolve some of the
missed payments, the IRS issued
1.3 million recovery payments to impacted
taxpayers totaling more than $503.7 million in
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American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
August 2021. The IRS also sent 633,000 recovery payments to affected taxpayers totaling about
$224.1 million in September 2021.
12
During this review, we conducted additional analysis of the 4.1 million taxpayers and identified
606,000 taxpayers who did not receive any advance payments or recovery payments for TY 2021.
Specifically, as of October 12, 2022, we identified:
• 423,000 taxpayers claimed the Child Tax Credit when they filed their tax return
confirming that they should have received an estimated $2.3 billion in advance
payments.
• 48,000 taxpayers who filed a tax return but did not claim the Child Tax Credit. In most
cases, the taxpayers were no longer eligible to claim the Child Tax Credit as the taxpayer
did not report any qualifying children on their TY 2021 tax return. As an example, this
can occur when separated/divorced taxpayers alternate claiming a qualifying child based
on their custody agreement.
• 135,000 taxpayers did not file a tax return. As stated previously, the IRS encourages
taxpayers to file their TY 2021 tax return to receive the remaining Child Tax Credit, if any.
12
We did not report on recovery payments for October, November, and December 2021.
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American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to assess processes and procedures to ensure that
taxpayers properly reconciled the advance Child Tax Credit payments on their TY 2021 tax
return. To accomplish our objective, we:
• Assessed the processing of tax returns with the Child Tax Credit to ensure that the IRS
properly calculated the Child Tax Credit and appropriately applied the repayment
protection rules, when applicable.
• Assessed the IRS’s processes and procedures to address taxpayer accounts with advance
Child Tax Credit payment reversals after the issuance of the Letter 6419 and ensured that
the IRS provided the taxpayer with their eligible Child Tax Credit.
• Evaluated the steps taken by the IRS to identify and assist taxpayers where the Return
Integrity and Compliance Services function updated their direct deposit account used to
receive advance payments without the taxpayer’s knowledge.
• Reviewed the criteria used to issue 9 million letters to families who were potentially
eligible and did not claim stimulus payments, Earned Income Tax Credit, Child Tax Credit,
and other benefits.
• Assessed the Error Resolution Codes to ensure that the error codes associated with the
Child Tax Credit worked as intended and to ensure that tax examiners worked the error
code to ensure accurate claims for the Child Tax Credit.
Performance of This Review
This review was performed with information obtained from the Wage and Investment Division
and Return Integrity and Compliance Services function located in Atlanta, Georgia, and the
Submission Processing function located in Covington, Kentucky, during the period
February 2022 through February 2023. 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 Diana M. Tengesdal, Acting Assistant Inspector General
for Audit (Returns Processing and Account Services); Darryl J. Roth, Director; Jonathan W. Lloyd,
Audit Manager; Kenneth L. Carlson, Senior Auditor; Aranxa J. Delgado, Auditor; Sandy Ramos,
Auditor.
Validity and Reliability of Data From Computer-Based Systems
During this review, we obtained taxpayer account information from the IRS’s Individual Master
File,
TY 2021 tax return information from the Individual Returns Transaction File, information
about taxpayers from the National Account Profile table,
and payment data from the IRS’s
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American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
Refund File for Processing Years 2021 and 2022 that were available on TIGTA’s Data Center
Warehouse. We ensured that each file contained the specific data elements relevant to our
review. We selected judgmental samples from each extract and verified that the data in the
extracts were the same as the data captured in the Integrated Data Retrieval System.
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: processes and procedures
found in the Internal Revenue Manual and programming guides to ensure that taxpayers are
properly reconciling the advance Child Tax Credit payments reported on their TY 2021 tax
return. We tested these controls by reviewing and analyzing relevant documents and data and
holding discussions with IRS management.
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American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
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:
• Cost Savings (Funds Put to Better Use) – Potential; $9,957,194 in excess Child Tax Credit
for 6,491 taxpayers due to incorrect resolution of the error condition (see
Recommendation 1).
Methodology Used to Measure the Reported Benefit:
We identified 6,833 taxpayers who potentially received $10.5 million in excess Child Tax Credit.
This occurred during the manual resolution process because tax examiners in the Error
Resolution function incorrectly resolved the error condition and allowed more Child Tax Credit
than the taxpayer claimed on their tax return. These taxpayers for which the tax return was
identified by an Error Resolution Code as of May 5, 2022, had a different number of qualifying
children reported on the electronically filed tax returns when compared to the number allowed
by tax examiners. These taxpayers reported more qualifying children than they were eligible to
claim. When the tax examiner resolved the error condition, they allowed the incorrect number
of qualifying children, resulting in excess Child Tax Credit claimed.
We shared our results with IRS management, and they stated that they reviewed a judgmental
sample to determine that 95 percent were closed in error. Therefore, we multiplied
6,833 taxpayers by 95 percent to get an estimated 6,491 taxpayers with excess Child Tax Credit.
We multiplied these taxpayers by the average amount of excess Child Tax Credit of $1,534
($10,482,866 / 6,833), resulting in $9,957,194 (6,491 * $1,534) in excess Child Tax Credit due to
tax examiners incorrectly working the error condition.
Type and Value of Outcome Measure:
• Taxpayer Rights and Entitlements – Potential; $130,046 for 98 taxpayers who received
less Child Tax Credit than they were eligible to receive due to incorrect resolution of the
error condition (see Recommendation 3).
Methodology Used to Measure the Reported Benefit:
We identified 105 taxpayers who potentially did not receive all of their eligible Child Tax Credit.
Taxpayers received $139,347 less in Child Tax Credit as a result of tax examiners incorrectly
working error conditions. These taxpayers for which the tax return was identified by an Error
Resolution Code as of May 5, 2022, had a different number of qualifying children allowed by tax
examiners compared to the number of qualifying children on the electronically filed tax return.
These taxpayers for which tax examiners did not correctly calculate the amount of Child Tax
Credit, received less Child Tax Credit than what should have been allowed.
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We shared our results with IRS management and they stated that they reviewed a judgmental
sample of 15 taxpayers to determine that 14 taxpayers (93 percent) we identified had their error
code closed in error. Therefore, we multiplied 105 taxpayers by 93 percent to get an estimated
98 taxpayers who did not receive all of their eligible Child Tax Credit. We multiplied these
taxpayers by the average amount of Child Tax Credit they potentially did not receive of $1,327
($139,347 / 105), resulting in an estimated $130,046 (98 * $1,327) in Child Tax Credit that is due
to the taxpayers because of tax examiners incorrectly working the error conditions.
Type and Value of Outcome Measure:
• Taxpayer Rights and Entitlements – Actual; 7,877 taxpayers with $5.4 million in
undeliverable advance Child Tax Credit payments that posted to their accounts after the
filing of their TY 2021 tax returns (see Recommendation 5).
Methodology Used to Measure the Reported Benefit:
We determined Letter 6419 did not always reflect the correct amount of advance Child Tax
Credit the taxpayer received. These differences occurred due to the timing of the IRS’s cutoff
date to send the letters and the posting of reversals (
i.e.
, undeliverable payments) to the
taxpayer’s tax account. To address this issue, the IRS used the amount of advance payments
recorded on taxpayer’s tax accounts at the time the IRS processed taxpayers’ tax returns rather
than the amount on Letter 6419.
We notified IRS management about our concerns and that it would sometimes cause taxpayers
to receive less Child Tax Credit than they were eligible to receive. To address our concerns, the
IRS implemented a programming change effective March 3, 2022, to identify undeliverable
advance payments that occurred after the tax return processed. As of October 12, 2022, we
identified 7,877 taxpayers with reversals of advance payments totaling $5,365,783. The IRS
worked to reissue the reversed advance Child Tax Credit payments to these taxpayers.
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Appendix IV
Glossary of Terms
Term Definition
Data Center
Warehouse
A collection of IRS databases containing various types of
taxpayer accounts and IRS and TIGTA employee information that
is maintained by TIGTA for purposes of analyzing data for
ongoing audits.
Filing Season
The period from January 1 through mid-April when most
individual income tax returns are filed.
Individual Master File
The IRS database that maintains transactions or records of
individual tax accounts.
Individual Return
Transaction File
A database maintained by the IRS that contains information on
the individual tax returns it receives.
Integrated Data
Retrieval System
IRS computer system capable of retrieving or updating stored
information. It works in conjunction with a taxpayer’s account
records.
Internal Revenue
Manual
Primary source of instructions to employees relating to the
administration and operation of the IRS. The Manual contains
the directions employees need to carry out their operational
responsibilities.
Judgmental sample
A judgmental sample is a nonprobability sample, the results of
which cannot be used to project to the population.
Modified adjusted
gross income
Modified adjusted gross income is adjusted gross income, plus
any foreign earned income excluded from gross income, and
any amount excluded from gross income because it was
received from sources in Puerto Rico or American Samoa. For
most individuals, modified adjusted gross income is the same as
adjusted gross income.
National Account
Profile
A compilation of selected entity data from various IRS Master
Files and the Social Security Administration.
Recovery payment
A recovery payment is issued by the IRS to provide advance
Child Tax Credit payment to taxpayers who were eligible, but did
not receive, an advance payment in a prior month.
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Refund File
This file captures all refunds that are sent by the IRS to the
Bureau of the Fiscal Service for processing. The Bureau of the
Fiscal Service is responsible for generating the actual refunds
based upon the information provided by the IRS. The refunds
are sent by the Bureau of the Fiscal Service to the taxpayers in
the form of bank account direct deposits or mailed paper
checks. The file captures the name, address, and account
information for the individuals receiving the refunds and are
useful for identifying tax refund fraud.
Tax Year
A 12-month accounting period for keeping records on income
and expenses used as the basis for calculating the annual taxes
due. For most individual taxpayers, the tax year is synonymous
with the calendar year.
To report fraud, waste, or abuse,
contact our hotline on the web at www.tigta.gov
or via e-mail at
oi.govrep[email protected].
To make suggestions to improve IRS policies, processes, or systems
affecting taxpayers, contact us at www.tigta.gov/form/suggestions
.
Information you provide is confidential, and you may remain anonymous.
