IG: Combat-zone tax rules lead to errors - Military News | News From Afghanistan, Iraq And Around The World - Military Times

IG: Combat-zone tax rules lead to errors

Hundreds of thousands of troops and civilians who have served in combat zones may not have received all their earned tax benefits or have continued to receive benefits to which they are not entitled, a recent audit found.

According to the audit by the Treasury Inspector General for Tax Administration, “active combat zone indicators” remained on the 2007 tax records of some 339,027 taxpayers beyond the date of their departure from a combat zone. That was 40 percent of the total number of taxpayers with combat zone indicators on their records for that tax year

The IRS initially reversed the indicators for those taxpayers, based on the exit dates provided by the Pentagon in monthly reports to the IRS, but reactivated the indicators when those taxpayers annotated “combat zone” on their tax returns.

Service members and civilians can self-identify as serving in a combat zone by annotating their tax return or calling or e-mailing the IRS. The IRS, the IG said, has required no proof to support such claims.

In addition, the IRS records on combat zone tax indicators do not differentiate between military and civilian taxpayers — which can result in civilians being granted tax relief benefits to which they are not entitled, the IG said. The wages of civilians supporting the military in war zones are not excluded from federal tax, but such civilians are entitled to other benefits, such as extensions of time to file their tax returns.

The IRS also cannot tell which member of a married couple filing a joint return is in the military, or if both are serving, which also results in inaccurate returns, the IG said.

The IG’s review of tax year 2007 records also found that 1,720 of 185,685 combat zone transactions identified Social Security numbers that did not match an IRS tax account — possibly the result of first-time filers or data entry errors. As a result, those records were not flagged with a combat zone indicator.

“This is not the first time we have reported these findings,” said J. Russell George, the Treasury inspector general for tax administration. “The IRS must do its best to correct this problem, especially during wartime.”

A 2005 audit found that more than 58 percent of 580,000 taxpayer records with active combat zone indicators were incorrect, and that errors created during updates “were not resolved.” The errors ranged from missing information to mismatches between Social Security numbers and names, the IG said.

The IRS undertook a “one-time cleanup” following that audit by identifying and reversing the indicators on 203,485 accounts with an entry date more than three years old and no exit date.

IRS response

In its response to the new report, the IRS said it concurred with nine of the 10 recommendations made by the inspector general.

The IRS wants to eliminate self-identification on tax returns, but not until it is sure that other means of identification are adequate, the inspector general said. The IRS will consider the option of a secure form for self-identification by e-mail for civilians.

For service members, the monthly Pentagon notification should suffice, said Michael McKenney, assistant IG for audit.

The IRS also said it will work to identify which member of a married couple is serving in a combat zone, or if both are, especially if they file jointly. The agency also said it is working to ensure the accurate reversal of a combat zone indicator for joint filers when it receives Pentagon notification of an exit date.

The IRS disagreed with one recommendation, saying it already has a process for distinguishing between military and civilian taxpayers. The IG countered that although the IRS can identify service members through the records the Pentagon provides, it uses the same indicator for both. Once entered onto a civilian taxpayer’s record, that “could allow the civilian taxpayers to inappropriately exclude income without action by the IRS because the IRS will not review accounts with unreported income if a combat zone indicator is present.”

The IRS set up a task force to evaluate processing concerns for combat zone tax exclusions in November 2008 that has produced some positive results, the inspector general said.

Under federal tax law, enlisted personnel pay no federal tax on income earned in a combat zone, while officers pay taxes only on income that is above the highest monthly enlisted pay, a provision that affects only senior officers.

All troops in combat zones can postpone filing and paying taxes, enforcement activities and other tax actions.