Prisoners, dead people and children qualified for a 2009 tax break to spur car buying, according to a U.S. report Wednesday that criticized the Internal Revenue Service for misapplying the refund in some cases.
The IRS should have done more to verify that people who claimed the qualified motor vehicle (QMV) deduction were entitled to it, said the report from the Treasury Inspector General for Tax Administration, a government-run IRS watchdog.
The measure, which expired on Dec. 31, 2009, was part of the Obama administration's economic stimulus package.
Taxpayers who claimed the deduction were not required to provide independent proof that they bought a vehicle, or if they did, how much they paid in deductible sales and excise taxes, said the inspector general.
"While no amount of fraud is acceptable, more than 4.3 million taxpayers claimed more than $7.2 billion in qualified motor vehicle deductions and only a small percentage involved questionable claims," the IRS said in a statement.
"In instances where there are questionable deductions, the IRS will take steps to review the claims and conduct audits as warranted," the agency said.
The IRS failed to identify 4,257 people who made QMV claims above a level the IRS flagged as excessive, the report said. These people claimed more than $151.1 million in QMV deductions, based on the inspector general's 2010 review of 2009 returns.
"Identification of those individuals might have prevented the issuance of erroneous refunds," the report said.
Car dealers promoted the refund at the time. With the economy in recession for much of the year, the QMV deduction helped boost vehicle sales through 2009.
About $1 million in deductions went to 473 people in error "because the IRS did not have processes to identify the individuals were in prison, deceased or underage," it said.
Of that total, 439 were prisoners, who deducted $955,843 in sales tax for the purchase of vehicles in 2009 "even though they were in prison for a full year in 2009 when the vehicle was purportedly purchased," the report said.
Another $36,490 in claims were allowed for people who were dead before the before the deduction's short life, from mid-February 2009 to the end of that year, it said.
The watchdog also found that 18 people under the age of 15 got $31,139 in QMV deductions. In the United States, minors generally are not allowed to buy a motor vehicle.
The IRS said it has taken steps to strengthen controls.
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