Treasury Inspector General for Tax Administration 2022-47-023 (American Rescue Plan Act: Assessment of Processes to Identify and Address Improper Child and Dependent Care Credit Claim)
Summary
Final Audit Report 2022-47-023 of the Treasury Inspector General for Tax Administration, issued March 14, 2022, assesses the IRS's implementation of the expanded Child and Dependent Care Credit eligibility requirements under the American Rescue Plan Act. The report states that a review of nearly 6.3 million Tax Year 2019 tax returns that received the credit identified weaknesses in the controls over the processing of claims, and that TIGTA issued 11 alerts to the IRS. According to the report, IRS management agreed to take actions on six of these alerts but is not taking actions to address all processing deficiencies. TIGTA made nine recommendations, including post-refund compliance processes and seeking legislative authority to disallow the credit in certain cases; the IRS agreed with seven of the nine.
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TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
American Rescue Plan Act: Assessment of
Processes to Identify and Address Improper
Child and Dependent Care Credit Claims
March 14, 2022
Report Number: 2022-47-023
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined
to be restricted from public release has been redacted from this document. 1
TIGTACommunications@tigta.treas.gov | www.treasury.gov/tigta
HIGHLIGHTS: American Rescue Plan Act: Assessment of Processes to
Identify and Address Improper Child and Dependent Care Credit Claims
Final Audit Report issued on March 14 2022 Report Number 2022-47-023
Why TIGTA Did This Audit What TIGTA Found
The Child and Dependent Care TIGTA’s review of nearly 6.3 million Tax Year 2019 tax returns that
Credit (CDCC) provides a tax credit received the CDCC identified a number of weaknesses in the controls
for paid expenses for the care of a over the processing of CDCC claims. TIGTA issued 11 alerts to the
qualifying individual to enable the IRS so it could address the processing deficiencies before taxpayers
taxpayer, and their spouse if filing begin filing claims for the refundable CDCC during Processing
a joint return, to work or actively Year 2022. IRS management agreed to take actions to address
look for work. Provision 9631 of processing weaknesses associated with six of these alerts: 1) the care
the American Rescue Plan Act provider is a relative; 2) the care provider Taxpayer Identification
temporarily expands the CDCC by Number is obviously invalid; 3) qualifying persons’ names and
making the credit fully refundable Taxpayer Identification Numbers are missing; 4) qualifying persons
and increasing the amount of the claimed are born after the tax year; 5) taxpayers circumvent limits for
credit for Tax Year 2021 for prior year expenses; and 6) both spouses on a joint tax return do not
taxpayers who live in the United have earned income.
States for more than half of the
However, the IRS is not taking actions to address all processing
year. To claim the CDCC, the
deficiencies TIGTA alerted them to during this audit. This includes
taxpayer must file a Form 2441,
not taking the steps needed to ensure that requirements to claim the
Child and Dependent Care
CDCC are met at the time tax returns are processed. In addition, the
Expenses. Our objective was to
IRS is not taking actions to update its filing instructions and
assess the IRS’s implementation of
publications to provide additional guidance to taxpayers or revising
the expanded CDCC eligibility
programming and processes to identify potentially erroneous CDCC
requirements.
claims. As a result, the IRS may potentially allow improper payments
Impact on Tax Administration associated with erroneous CDCC claims.
Although refundable credits help What TIGTA Recommended
low-income individuals reduce
TIGTA made nine recommendations to the Commissioner, Wage and
their tax burden and provide
Investment Division, that included developing post-refund
incentives for specific activities
compliance processes to identify tax returns with potentially
such as seeking or obtaining a job,
erroneous CDCC claims. TIGTA also recommended that the IRS seek
unintended consequences are that
legislative authority to disallow the CDCC in certain cases.
they can result in the issuance of
improper payments and can be The IRS agreed with seven of the nine recommendations. The IRS
the targets of unscrupulous would not commit to developing some of the recommended
individuals. As such, they pose a processes such as post-refund compliance reviews for ineligible care
significant risk as an avenue for providers.
those seeking to defraud the
Government.
U.S. DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
March 14, 2022
MEMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE
FROM: Michael E. McKenney
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – American Rescue Plan Act: Assessment of
Processes to Identify and Address Improper Child and Dependent Care
Credit Claims (Audit # 202140728)
This report presents the results of our review to assess the Internal Revenue Service’s
implementation of the expanded Child and Dependent Care Credit (CDCC) eligibility
requirements. The American Rescue Plan Act1 temporarily expands the CDCC for taxpayers who
work or are looking for work. The CDCC will be fully refundable for Tax Year 2021. The amount
of the credit, rate used to determine the credit, and income phase-out limits increased
significantly. In addition, the amount of employer-provided dependent care benefits has more
than doubled. These changes make the CDCC one of the largest refundable credits. This review
is part of our Fiscal Year 2022 Annual Audit Plan and addresses the major management and
performance challenge of Reducing Fraudulent Claims and Improper Payments.
Management’s complete response to the draft report is included as Appendix III.
Copies of this report are also being sent to the Internal Revenue Service managers affected by
the report recommendations. If you have any questions, please contact me or Russell P. Martin,
Assistant Inspector General for Audit (Returns Processing and Account Services).
1
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.).
American Rescue Plan Act: Assessment of Processes to Identify
and Address Improper Child and Dependent Care Credit Claims
Table of Contents
Background .....................................................................................................................................Page 1
Results of Review .......................................................................................................................Page 5
****2**** Needed to Identify and Address Improper Child
and Dependent Care Credit Claims During Tax Return
Processing *******************2*******************...................................................Page 8
Recommendations 1 and 2: .....................................................Page 9
Processes Are Needed to Identify and Address Erroneous
Claims When the Qualifying Person Is the Primary or
Secondary Taxpayer ............................................................................................................Page 10
Recommendations 3 and 4: .....................................................Page 11
****2**** Individual Taxpayer Identification Numbers Are
Accepted for Child and Dependent Care Credit Claims ........................................Page 11
Recommendations 5 and 6: .....................................................Page 12
Vague Guidance in Form 2441 Instructions and
Publication 503 May Cause Taxpayers to Incorrectly Claim
Child and Dependent Care Credits ................................................................................Page 13
Recommendation 7: ...................................................................Page 13
Recommendation 8: ...................................................................Page 14
Married Taxpayers File Separately to ********2********
****************2**************** Child and Dependent
Care Credits ............................................................................................................................Page 14
Recommendation 9: ...................................................................Page 15
Appendices
Appendix I – Detailed Objective, Scope, and Methodology ................................Page 16
Appendix II – Form 2441, Child and Dependent Care Expenses ........................Page 18
Appendix III – Management’s Response to the Draft Report .............................Page 20
Appendix IV – Glossary of Terms ...................................................................................Page 29
Appendix V – Abbreviations.............................................................................................Page.30
American Rescue Plan Act: Assessment of Processes to Identify
and Address Improper Child and Dependent Care Credit Claims
Background
The Child and Dependent Care Credit (CDCC) provides a tax credit for paid expenses for the care
of a qualifying individual to enable the taxpayer, and their spouse if filing a joint return, to work
or actively look for work. Provision 9631 of the American Rescue Plan Act 1 temporarily makes
the CDCC fully refundable 2 for Tax Year 2021 for taxpayers whose main home is in the United
States for more than half the tax year. The Act also increases the amount of the credit for
Tax Year 2021. These changes will make the CDCC one of the largest refundable tax credits
administered by the Internal Revenue Service (IRS). Figure 1 provides an overview of the
changes to the CDCC for Tax Year 2021.
Figure 1: Comparison of Changes to CDCC Requirements
Old Provision American Rescue Plan Act Provision
$3,000 (one qualifying person); $8,000 (one qualifying person);
Maximum Qualifying Expenses
$6,000 (two or more) $16,000 (two or more)
35% of qualifying expenses 50% of qualifying expenses
Maximum Credit
(with phase-down to 20%) (two-part phase-out)
Limited to tax liability
Limitation Refundable
(nonrefundable)
Begins at $125,000; ends at
Adjusted Gross Income Phase-Out Begins at $15,000
$438,000
Employer-Provided Dependent
Limited to $5,000 Limited to $10,500
Care Benefits Exclusion
Source: Treasury Inspector General for Tax Administration (TIGTA) comparison of CDCC old and new
provisions.
Figure 2 shows the number of tax returns and the amount of CDCC claimed for Tax Years 2017
through 2019.
Figure 2: CDCC Claims for Tax Year 2017 Through Tax Year 2019
Taxpayers Filing a Tax
Tax Year Return With CDCC Claim CDCC Claimed
2017 6,481,296 $3.7 Billion
2018 6,431,949 $3.7 Billion
2019 6,292,732 $3.7 Billion
Totals 19,205,977 $ 11.1 Billion
Source: TIGTA analysis of Individual Return Transaction File.
1
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.).
2
A refundable credit is not limited to the amount of an individual’s tax liability and can result in a Federal tax refund
that is larger than the amount of Federal income tax withholding for that year. See Appendix IV for a glossary of
terms.
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American Rescue Plan Act: Assessment of Processes to Identify
and Address Improper Child and Dependent Care Credit Claims
Process for claiming the CDCC
A taxpayer must file Form 2441, Child and Dependent Care Expenses, 3 and enter the name,
address, Taxpayer Identification Number (TIN) of the provider, and amount paid to the person or
organization who provided the care to claim the CDCC. The care provider cannot be the
taxpayer’s spouse at any time during the year, a person whom the taxpayer (or taxpayer’s
spouse) can claim as a dependent, the taxpayer’s child under age 19 even if not claimed as a
dependent, or a parent of the qualifying person if the qualifying person is the taxpayer’s child
and under age 13. The taxpayer is also required to enter the qualifying person’s name, TIN, and
qualified expenses incurred and paid for the care of that qualifying person. A qualifying person
is:
• A qualifying child under age 13 whom the taxpayer can claim as a dependent. If the
child turned 13 during the year, the child is a qualifying person for the part of the year
they were under age 13.
• The taxpayer’s disabled spouse who was not physically or mentally able to provide their
own care.
• Any disabled person who was not physically or mentally able to provide their own care
whom the taxpayer can claim as a dependent or could claim as a dependent except:
o The disabled person had gross income of $4,200 or more in Tax Year 2019.
o The disabled person filed a joint return.
o The taxpayer (or their spouse if filing jointly) could be claimed as a dependent on
another taxpayer’s return.
Figure 3 illustrates the eligibility criteria for the CDCC.
3
See Appendix II.
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American Rescue Plan Act: Assessment of Processes to Identify
and Address Improper Child and Dependent Care Credit Claims
Figure 3: CDCC Eligibility
Source: TIGTA analysis of process from Publication 503, Child and Dependent Care Expenses.
Processing Form 2441
The IRS processes tax returns, related documents, and payments at three Submission Processing
sites in Kansas City, Missouri; Austin, Texas; and Ogden, Utah. The IRS has developed filters
used to identify CDCC claim errors before paper and electronically filed (e-filed) tax returns are
accepted for posting to the Master File. For example:
• Modernized Electronic Filing Business Rules – For Tax Year 2019, there were 21 active
Modernized Electronic Filing business rules that systemically check information specific
to Form 2441 CDCC claims. For example, these rules check to ensure that the:
o Qualifying person’s TIN does not equal the Social Security Number (SSN) of another
qualifying person, the provider, or the primary/secondary taxpayer on the same
Form 2441.
o Amount of the CDCC on Form 2441 is correctly carried forward to the front of the tax
return.
o Care Provider(s) Identifying Number field contains an Employer Identification
Number (EIN) or SSN.
o Qualifying expenses are greater than $0.
o Dollar figure is entered in the field Amount paid to care provider(s).
o Qualifying person’s name and SSN are entered on the form.
o Care provider’s SSN is not the same as the primary or secondary SSN.
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American Rescue Plan Act: Assessment of Processes to Identify
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o Qualifying person’s SSN is a valid, issued number.
o Qualifying person’s SSN is not used on another Form 2441 for the same tax year.
o Prior Year Qualifying Expense is annotated on Form 2441 and the qualifying person’s
name, SSN, provider information, and credit amount are provided.
• Code and Edit Rules – Both paper and e-filed tax returns are subject to review to ensure
that the tax returns are perfected before entering the processing stream. For e-filed
returns, this process occurs after the tax return is accepted. For paper tax returns
claiming the CDCC, tax examiners in the Code and Edit function review and edit the
accuracy of the information for the lines on Form 2441 listed below. To address errors,
tax examiners may correspond (via letter) with the taxpayer to request additional
information. Tax examiners review the tax returns with CDCCs for the following
conditions: 4
o Care Provider’s Name – Line 1(a): The first four letters of the corporation or surname
is underlined.
o Provider’s Identifying Number – Line 1(c): If the TIN is missing, qualifying expenses
will be disallowed unless “Tax Exempt,” “Due Diligence,” or “LAFCP” 5 is notated.
o Qualifying Person’s Last Name – Line 2(a): If missing, the tax examiner attempts to
identify the information using the dependent information on the front of the return,
Schedule EIC, Earned Income Credit, any attachments, and primary taxpayer’s name.
o Qualifying Person’s TIN – Line 2 (b): The tax examiner attempts to identify the TIN
elsewhere on the tax return or attachments.
o Qualifying Expenses – Line 3: If blank and unable to compute, correspond with the
taxpayer using Letter 12-C, Individual Return Incomplete for Processing: Forms 1040
& 1040-SR. 6
o Earned Income – Lines 4 and 5 (if Married Filing Jointly): The tax examiner attempts
to identify the income using the tax return, schedules, and attachments.
• Error Resolution System – The IRS uses its Error Resolution function to identify and address
tax return errors. The following are the error conditions identified and error codes set by
IRS systems for e-filed and paper tax returns with a CDCC claim:
o Error Code 278 generates when a CDCC is present and Adjusted Gross Income per
the return is equal to one of the following amounts: $15,000, $17,000, $19,000,
$21,000, $23,000, $25,000, $27,000, $29,000, $31,000, $33,000, $35,000, $37,000,
$39,000, $41,000, or $43,000. 7
o Error Code 279 generates when both of the following exist: a) the taxpayer’s amount
for the CDCC on Form 2441 and the computer’s amount differ and b) a math error is
4
Internal guidelines instruct the tax examiner to correspond for any missing required provider information when
corresponding for other missing return items.
5
LAFCP means Living Abroad Foreign Care Provider.
6
Form 1040, U.S. Individual Income Tax Return; Form 1040-SR, U.S. Tax Return for Seniors.
7
To determine the amount of the credit, the taxpayer multiplies their work-related expenses by a percentage that is
dependent on the adjusted gross income shown on their tax return.
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American Rescue Plan Act: Assessment of Processes to Identify
and Address Improper Child and Dependent Care Credit Claims
present. These errors are identified on paper and e-filed tax returns via computer
programming.
o Error Code 579 generates when one of the following exists: the taxpayer reports all
income but did not compute the tax or any of the allowable carryover statutory
credits (e.g., Foreign Tax Credit, General Business Credit) differ from their respective
computer-generated amounts.
Results of Review
As we previously noted, the CDCC will be one of the largest fully refundable tax credits that can
be claimed by individuals. Our prior and extensive reviews of the IRS’s administration of
refundable credits has identified that, although refundable credits help low-income individuals
reduce their tax burden and provide incentives for specific activities such as seeking or obtaining
a job, unintended consequences are that they can result in the issuance of improper payments
and can be the targets of unscrupulous individuals. As such, they pose a significant risk as an
avenue for those seeking to defraud the Government. When the IRS makes payments to
individuals and businesses, it must make every effort to confirm that the right recipient is
receiving the right payment for the right reason at the right time. Not collecting or analyzing
sufficient taxpayer information may lead to erroneous credits and improper payments.
Recognizing the significant risk of potentially improper/fraudulent CDCC claims, we analyzed the
nearly 6.3 million Tax Year 2019 tax returns that received CDCCs to evaluate IRS processes to
detect potentially fraudulent and erroneous claims. Our review identified a number of
weaknesses in the controls over the processing of CDCC claims. We issued 11 alerts to the IRS
so it could address the processing deficiencies before taxpayers begin filing claims for the
refundable CDCC during Processing Year 2022. IRS management agreed to take actions to
address processing weaknesses associated with six of these alerts, including the following:
• The care provider listed on Form 2441 is not an eligible care provider (because they are a
relative) – Our analysis identified 5,669 tax returns with erroneous CDCC claims totaling
more than $3.3 million whereby the taxpayer incorrectly claimed qualified care expenses
paid to the primary taxpayer, secondary taxpayer, or a dependent on the tax return. IRS
internal guidelines state that, if the care provider is the primary taxpayer, spouse, or a
dependent of the taxpayer, the CDCC amount should be disallowed. However,
management noted that these tax returns were not identified because the IRS’s internal
guidelines did not include instructions to disallow the credit on paper returns. In
addition, the e-file business rules only rejected tax returns when the care provider TIN
matched the primary or secondary TIN on the tax return. The rules did not check
whether the care provider TIN matched a dependent TIN.
Management Action in Response to E-Mail Alert: For paper tax returns, IRS
management agreed to update internal guidelines to instruct tax examiners to disallow
the expenses if the care provider TIN is the same as the primary taxpayer, spouse, or a
dependent of the taxpayer. For e-filed tax returns, the IRS agreed to add a business rule
that will reject an e-filed tax return when the care provider’s TIN matches the TIN of a
dependent of the taxpayer.
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American Rescue Plan Act: Assessment of Processes to Identify
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• The care provider TIN on Form 2441 is invalid – Our analysis identified 5,448 tax returns with
erroneous CDCC claims totaling over $3.3 million in the CDCC whereby the care
provider’s TIN was obviously invalid (e.g., 123456789, 111111111, or 888888888). Unless
an exception applies, taxpayers claiming the CDCC must identify all persons and
organizations that provide care for their child or dependent by entering the care
provider’s name, address, and TIN on Line 1 of Form 2441. If the care provider is an
individual, the TIN is their SSN. If the care provider is an organization, then it is the EIN.
According to IRS management, the invalid provider TINs were not identified because the
provider TINs were not being verified during processing.
Management Action in Response to E-Mail Alert: IRS management agreed to
develop programming so that e-filed tax returns for Processing Year 2022 will be
rejected when an obviously invalid care provider TIN (e.g., 123456789, 111111111, or
888888888) is present on Form 2441. For Forms 2441 with an invalid care provider TIN
submitted with a paper tax return, internal guidance will be updated to disallow the
credit when an invalid care provider TIN is present on Form 2441.
• The required qualifying person’s name and TIN on Form 2441 are missing – Our analysis
identified 741 tax returns with erroneous CDCC claims totaling $464,400 whereby the
qualifying person’s name or TIN was not entered on Form 2441. Taxpayers claiming the
CDCC must enter the qualifying person(s) name and TIN on Line 2 of Form 2441. The
credit may be reduced or disallowed if the correct information is not provided by the
taxpayer. IRS management noted that these erroneous credits were allowed as a result
of employee error. Specifically, the tax examiners did not follow internal guidelines to
disallow the credit when the qualifying person’s name and TIN was not provided.
Management Action in Response to E-Mail Alert: IRS management agreed to review
and revise its internal guidance to provide additional clarification as needed to ensure
that Error Resolution function examiners understand the requirements. For e-filed tax
returns, the IRS agreed to update programming that will reject the tax return when the
qualifying person’s name and TIN is not provided on Form 2441.
• Excess qualifying expenses are allowed when a qualifying person listed on Form 2441 is not
alive – Our analysis identified eight tax returns with erroneous CDCC claims totaling
$7,150 whereby the taxpayers included qualifying persons on Form 2441 who were not
yet alive during the respective tax year of the CDCC. Specifically, the qualifying persons
we identified were born after December 31, 2019.
Management Action in Response to E-Mail Alert: For Processing Year 2022, IRS
management agreed to develop a compliance filter to identify for further review any tax
returns claiming a CDCC for a child who was born after the tax year for which the claim
was made. IRS management plans to request IRS Counsel guidance to reject a
submission if the date of birth is after the tax period of the return.
• Programming limitations allow taxpayers to circumvent limits for prior year expenses – Our
analysis identified 1,183 Tax Year 2019 tax returns with erroneous CDCC claims totaling
over $1.5 million for prior year expenses when the taxpayer claimed the maximum
amount of qualified expenses for the tax year on a Tax Year 2018 Form 2441. Taxpayers
with qualifying expenses for Tax Year 2018 that were not paid until Calendar Year 2019
may increase the amount of the allowable CDCC in Tax Year 2019. However, the total
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American Rescue Plan Act: Assessment of Processes to Identify
and Address Improper Child and Dependent Care Credit Claims
amount of CDCC attributable to expenses incurred in Calendar Year 2018 and paid in
Calendar Year 2019 cannot exceed $1,050 for one qualifying person ($2,100 for two or
more). This amount is added to the taxpayer’s Tax Year 2019 credit. Current processes
do not review the prior year tax return to ensure that the maximum credit has not
already been claimed. According to IRS management, the excess expenses were allowed
because IRS systems do not have sufficient information from the tax return to verify the
accuracy of the prior year expenses claimed on Form 2441 because prior year expenses
information is not transcribed from the tax return. As such, the IRS programmed its
system to allow a maximum of $2,100 for all prior year CDCC claims on Tax Year 2021 tax
returns.
Management Action in Response to E-Mail Alert: For Processing Year 2022, IRS
management agreed to develop a compliance filter to identify tax returns claiming
questionable prior year expenses and the refundable CDCC for further review.
• The primary and secondary taxpayer do not both have earned income listed on Form 2441 – Our
review identified 329 tax returns with erroneous CDCC claims totaling $309,045 whereby
earned income was not reported on Form 2441 as required. Specifically, we found that
earned income was not always reported for both the primary and secondary taxpayer on
a jointly filed tax return and for the primary taxpayer for all other filing statuses when a
CDCC was claimed on the tax return. Taxpayers may be able to claim the CDCC if they
paid qualifying expenses to care for their child or other qualifying person so they (and
their spouse if filing jointly) could work or look for work. Generally, both the taxpayer
and spouse must have earned income (including wages, salaries, tips, other taxable
employee compensation, or net earnings from self-employment) during the year. 8
Current processes require the tax examiners to review the tax return and attachments to
identify income (such as from Forms W-2, Wage or Tax Statement; Schedule C, Profit or
Loss from Business; or Schedule SE, Self-Employment Tax) when the taxpayer does not
identify earned income on Form 2441. According to IRS management, the erroneous
CDCC credits were due to tax examiner error when earned income was not reported.
Management Action to E-Mail Alert: IRS management agreed to reinforce internal
guidance to tax examiners to ensure that examiners understand they should use income
from Form 1040 in the validation of the credit claimed on Form 2441.
We commend management for taking the actions detailed previously to address the processing
deficiencies we identified. However, we remain concerned that the IRS is not taking actions to
address the additional processing deficiencies we alerted it to during this audit. This includes
not taking the steps needed to capture key information from paper tax returns that can be used
to ensure that requirements to claim the CDCC are met at the time tax returns are processed. In
addition, the IRS is not taking actions to update its filing instructions and publications to provide
additional guidance to taxpayers, revising programming and processes to identify potentially
erroneous CDCC claims, or taking actions to prevent married taxpayers from filing separately to
8
Section 21(d) creates a special rule for taxpayers that are disabled or are full-time students (or who have spouses
who are disabled or full-time students) which treats these individuals as having received a certain amount of earned
income for purposes of the CDCC. While the imputed income is not reported on the tax return, it is taken into
account when determining the amount of the CDCC.
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American Rescue Plan Act: Assessment of Processes to Identify
and Address Improper Child and Dependent Care Credit Claims
circumvent the CDCC limits. As a result, the IRS may potentially allow improper payments
associated with erroneous CDCC claims.
**2** Needed to Identify and Address Improper Child and Dependent Care
Credit Claims During Tax Return Processing ***********2***********
**2**
Our review identified *****************************2************************************************
*********************2************************ will allow the IRS to better identify erroneous CDCC
claims at the time tax returns are processed or to aid in the post-processing analysis of tax
returns. For each of the fields detailed below, *************************2**************************
******2****** for use in verifying that CDCC claims meet requirements:
• The care provider’s *******2******* (including annotations of *********2**********
******2****** – Our analysis of the nearly 6.3 million Tax Year 2019 tax returns that
received CDCCs identified 43,818 paper tax returns with potentially erroneous CDCC
claims totaling nearly $26.5 million whereby the taxpayer claimed qualified care expenses
but did not provide the ****************2*****************. Internal Revenue Code
§ 21(e)(9) requires taxpayers to identify all persons or organizations that provide care for
a qualified child or dependent by giving the provider’s name, address, and TIN to receive
the CDCC. A provider TIN must be present for a taxpayer to qualify for the CDCC unless
the provider is tax-exempt and not required to obtain an SSN or EIN, the taxpayer was
unable to obtain the SSN or EIN after reasonable efforts, or the taxpayer is living abroad
and the care provider may not have (and may not be required to get) an SSN or EIN. In
these situations, the taxpayer notes “Tax Exempt,” “Due Diligence,” or “LAFCP” on the
form. According to the IRS’s processes, if the required provider information is missing,
the tax examiner must correspond with the taxpayer if other items are missing on the tax
return.
We alerted the IRS on July 15, 2021, that it is allowing erroneous CDCCs when the
taxpayer does not *************2************** listed on Form 2441. IRS management
disagreed with our preliminary audit results, stating that current procedures do not
require ***********************************2*****************************. The physical tax
returns are *********2*********, and the data captured in the IRS’s database from the
********************************************2***************************. Therefore, IRS
management stated that they could not determine if these credits were allowed in error.
IRS management’s position is that the allowed credit is correct because they *****2******
********************************************2************************************************
********************************************2************************************************
*******************2*******************.
• The amount paid to the care provider – As we discussed previously, we identified 1,183 tax
returns totaling over $1.5 million in erroneous CDCCs for prior year expenses when the
taxpayer claimed the maximum amount of qualified expenses for the tax year on the Tax
Year 2018 Form 2441. These taxpayers received CDCCs for which they were not entitled.
IRS systems provide a graphic interface that shows all data on a Form 2441 when the form is
submitted with an e-filed tax return. Data from a paper tax return ***********2************ that
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American Rescue Plan Act: Assessment of Processes to Identify
and Address Improper Child and Dependent Care Credit Claims
the clerks in the Data Transcription function **********2********** IRS systems. To review data on
a paper tax return that **********2**********, IRS management must ************2************.
Figure 4 shows an excerpt of Form 2441 and the fields that are transcribed (denoted with a “T”).
Figure 4: Fields Transcribed From Form 2441
Source: Excerpt of Form 2441.
Management stated that no new programming changes can be made for Tax Year 2021;
however, they plan to evaluate the need for ************2************ related to the care
provider’s name and TIN if the refundable CDCC is extended beyond Tax Year 2021. Without
sufficient information about the care provider and the amount paid for care, erroneous credits
may be allowed.
The Commissioner, Wage and Investment Division, should:
Recommendation 1: Update processes to *****2***** from Form 2441 the care provider’s **2**
******************2*******************, and the amount paid to the care provider.
Management’s Response: The IRS partially agreed with this recommendation. At the
time of this response, legislation has not been enacted to extend the refundable credit
status of the CDCC or to retain the amount of credit allowable for Tax Year 2021.
However, IRS management plans to monitor pending legislation and, if the CDCC is
subsequently extended as a refundable credit for Tax Year 2022 or later, they will
evaluate their processes and request the requisite programming and procedural changes
to address this issue.
Recommendation 2: Update paper verification processes to generate errors in the Error
Resolution System when the ****************2****************, or amounts paid to the care
provider are missing.
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Management’s Response: The IRS partially agreed with this recommendation. At the
time of this response, legislation has not been enacted to extend the refundable credit
status of the CDCC or to retain the amount of credit allowable for Tax Year 2021.
However, IRS management plans to monitor pending legislation and, if the CDCC is
subsequently extended as a refundable credit for Tax Year 2022 or later, they will
evaluate their processes and request the requisite programming and procedural changes
to address this issue.
Processes Are Needed to Identify and Address Erroneous Claims When the
Qualifying Person Is the Primary or Secondary Taxpayer
Our review of the nearly 6.3 million Tax Year 2019 tax returns that received CDCCs identified
3,322 tax returns with erroneous CDCC claims totaling more than $2.0 million whereby the
taxpayer claimed qualified care expenses for an individual who is the primary or secondary
taxpayer on the tax return. For Tax Year 2019, Internal Revenue Code § 21(a)(1) allows taxpayers
to claim payments for child and dependent care for:
• A qualifying child who is a dependent and under age 13 when the care was provided or,
if the child turned 13 during the year, the child is a qualifying person for the part of the
year they were under age 13.
• A spouse who was not physically or mentally able to provide their own care and lived
with the taxpayer for more than half the year.
• A person who was not physically or mentally able to provide their own care, lived with
the taxpayer for more than half the year, and was either the taxpayer’s dependent or
would have been the taxpayer’s dependent except that their gross income exceeded
$4,200, they filed a joint return, or the taxpayer could be claimed as a dependent on
someone else’s Tax Year 2019 tax return.
We alerted the IRS on July 7, 2021, that the IRS may be allowing CDCCs when a qualifying
person listed on Form 2441 is not an eligible qualifying person. IRS management disagreed
with our concerns, noting that taxpayers are allowed to claim care expenses for a spouse who is
physically or mentally incapable of caring for themselves. Special rules also apply for
determining the amount of earned income a disabled spouse or a full-time student spouse is
treated as having for purposes of the CDCC calculation. To address the IRS’s concern cited as
the basis for its disagreement, we reviewed a judgmental sample 9 of 14 tax returns we identified.
****************************************************2************************************************
**********2*********, we used the available information from the tax returns and supporting
schedules and attachments to determine that the adult qualifying person on Form 2441 was
either working, evidenced by Forms W-2 attached to the tax return, or the tax return was
notated that the qualifying person was unemployed. Without additional information from the
taxpayer, the IRS cannot determine **************2************************************************
****************************************************2***********************************.
9
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The Commissioner, Wage and Investment Division, should:
Recommendation 3: Revise Form 2441 to include checkboxes to note whether dependent care
expenses are for a spouse or dependent who is physically or mentally incapable of caring for
themselves or if special deemed earned income rules apply.
Management’s Response: The IRS agreed with this recommendation and plans to
revise Form 2441 for Tax Year 2022 by adding a checkbox to indicate whether a taxpayer
or their spouse was a student or disabled during the tax year and they intend to enter
deemed income on Form 2441. There will also be a line that directs the reader to the
instructions for Form 2441, where more information about who qualifies as a student or
disabled is provided. Management also plans to add a new question to Form 2441 to
identify disabled individuals since anyone over the age of 12 listed on line 2 must be
disabled. For Tax Year 2021, the IRS revised the instructions for Form 2441 by adding a
caution paragraph that states “Don't list a person on line 2 unless they qualify as an
eligible person under Qualifying Person(s), earlier.” This paragraph was added to
address the issue of potentially ineligible individuals being listed as qualifying
individuals.
Recommendation 4: Develop a process to identify tax returns with adult **********2**********
**************************2*****************************. These tax returns should be considered
for selection for post-refund compliance reviews.
Management’s Response: The IRS agreed with this recommendation and has
developed a compliance filter for Processing Year 2022 to identify tax returns claiming
the CDCC for an adult who may not be disabled for possible post-refund treatment.
Returns will be evaluated to determine potential noncompliance. IRS management also
plans to assess this population once adequate data are available from Tax Year 2021
returns to determine the scope of potential noncompliance that meets their selection
tolerance.
***2*** Individual Taxpayer Identification Numbers Are Accepted for Child
and Dependent Care Credit Claims
Our analysis of nearly 6.3 million Tax Year 2019 tax returns that received CDCCs identified
49,859 tax returns whereby ****2**** Individual Taxpayer Identification Number (ITIN) was used
to identify the primary or secondary taxpayer or dependent(s). We also identified ****2*** ITINs
used to identify care providers as well as ****2**** ITINs that were used on multiple tax returns.
As a result, the IRS allowed more than $30 million in erroneous CDCCs.
Publication 503, Child and Dependent Care Expenses, explains that taxpayers may be able to
claim the CDCC if they paid qualifying expenses to care for their child or other qualifying person
so they (and their spouse if filing jointly) could work or look for work in Tax Year 2019. To be
able to claim the CDCC, taxpayers must identify the name and TIN of qualifying persons as well
as the name, address, and TIN of the care provider on Form 2441 unless an exception applies.
While ITINs are acceptable to identify persons on a tax return who do not have an SSN, expired
ITINs must be renewed before they are used on a tax return.
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We alerted the IRS on July 16, 2021, that it is allowing the CDCC when a taxpayer uses an
****2**** ITIN on Form 2441. IRS management partially agreed with our findings. IRS
management stated that *************************2*********** and that ***********2************
****************************************************2*************************** used to identify the
primary or secondary taxpayer. The IRS agreed to modify the programming for Processing
Year 2022 to generate errors in the Error Resolution System when the ITIN of one of the first two
dependents on a tax return has ****2****. Error Resolution function tax examiners will disallow
the credit for the dependent with the ****2**** ITIN. However, IRS management’s proposed
action will only address 536 of the 46,554 ***2*** ITINs we identified.
We question management’s disagreement to address claims whereby the primary or secondary
taxpayer has an ****2**** ITIN as the IRS has a process that does exactly this for other types of
credit claims. Specifically, Congress enacted the Protecting Americans From Tax Hikes Act 10 on
December 18, 2015, which included refundable credit program integrity provisions specifically
intended to reduce fraudulent and improper Earned Income Tax Credit, Child Tax Credit,
Advance Child Tax Credit, and American Opportunity Tax Credit payments. In response, the IRS
has developed processes to systemically identify both e-filed and paper tax returns that contain
******2****** ITIN. Once identified, these tax returns are forwarded to the IRS Error Resolution
function for additional review. Once received, IRS Error Resolution function employees confirm
the status of the ITIN using the National Account Profile. Tax returns with ********2********
****2**** are adjusted to disallow tax credits associated with the ******2******. The IRS
acknowledged that, while the Protecting Americans From Tax Hikes Act included more stringent
TIN requirements for certain refundable credits, it did not *******************2********************
****2****. Thus, the IRS cannot apply ******2****** to the CDCC. Finally, the IRS has not sought
the legal authority to disallow the CDCC when a taxpayer uses an ****2**** ITIN for the primary
or secondary taxpayer or the care provider.
The Commissioner, Wage and Investment Division, should:
Recommendation 5: Work with the Department of the Treasury, Office of Tax Policy, to obtain
the legal authority to disallow the CDCC when the primary or secondary taxpayer is identified by
an ***2*** ITIN on Form 2441.
Management’s Response: The IRS agreed with this recommendation and plans to
elevate this issue to the Office of Tax Policy for consideration as a legislative request.
However, IRS management stated the legal authority to deny the CDCC to individuals
filing with ***2*** ITINs must ultimately be provided by Congress.
Recommendation 6: Develop a process to identify tax returns with ***2*** ITINs used to
identify the care provider. These tax returns should be considered for selection for post-refund
compliance reviews.
Management’s Response: The IRS disagreed with this recommendation. IRS
management stated that they do not have the legal authority to disallow the CDCC when
a taxpayer uses an ***2*** ITIN for the care provider.
10
Pub. L. No. 114-113, Div. Q, 129 Stat. 2242.
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Office of Audit Comment: We agree that the IRS currently does not have the
legal authority to disallow the CDCC with *****2***** ITIN at the time tax returns
are processed. To address the current lack of legal authority, our
recommendation focuses on developing procedures to identify these claims to
then address them via post-refund treatment.
Vague Guidance in Form 2441 Instructions and Publication 503 May Cause
Taxpayers to Incorrectly Claim Child and Dependent Care Credits
Our review of nearly 6.3 million Tax Year 2019 tax returns that received CDCCs identified
9,936 tax returns that received more than $5.7 million in potentially erroneous CDCCs that
claimed qualified expenses listing expenses for a care provider **************2*******************
****************************************************2**************. For example, these tax returns
claimed qualifying expenses for ***********2***********. Our research of the provider websites
****************************************************2**************** did offer **********2**********
*****2****; however, the IRS does not ****************************2********************************
******************2******************. As such, taxpayers may be *************2*************** per
Form 2441 instructions, and the IRS *****************************2********************************
***2***.
Form 2441 instructions state that a taxpayer can include the cost of care provided outside the
home for a qualifying person who regularly spends at least eight hours a day in the home. The
instructions note that taxpayers can include the cost of a day camp, even if it specializes in a
particular activity such as computers or soccer. Expenses for sending a qualifying person to an
overnight camp, summer school, or tutoring program should not be included.
We alerted the IRS on July 30, 2021, that the instructions for Form 2441 and Publication 503 are
vague in some areas and could cause taxpayers to incorrectly claim CDCCs. For example,
Form 2441 instructions do not provide clear guidance on qualifying expenses from a qualifying
care provider. IRS management disagreed with our concerns, stating that Form 2441
instructions and Publication 503 already state that the care of a qualifying person “doesn’t
include the cost of food, lodging, education, clothing, or entertainment.” Further, they noted
that day camp is considered qualifying care, and Form 2441 instructions and Publication 503
state that, “You can include the cost of a day camp, even if it specializes in a particular activity,
such as computers or soccer.”
However, it is not clear from the care provider titles used by the taxpayers that the swim or
karate lessons were part of a day camp scenario. From researching websites for the care
providers listed, it did not appear that the care providers offered day camps but only specific
lessons. IRS management should clarify Form 2441 instructions and Publication 503, using
examples, so that taxpayers may better understand the distinction between a day camp that
focuses on karate, for example, versus taking a qualifying person to hourly karate lessons a
number of days per week.
The Commissioner, Wage and Investment Division, should:
Recommendation 7: Revise Form 2441 instructions and Publication 503, using examples, so
taxpayers may better understand the requirements for qualifying care and expenses.
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Management’s Response: The IRS agreed with this recommendation and has added
two examples on page 8 of Publication 503, under “Camp,” to help clarify that expenses
incurred for summer camp qualify for the credit, but expenses incurred for summer
tutoring do not qualify. The examples are based on examples in Treasury Regulation
§ 1.21-1(d)(12).
Recommendation 8: Develop a process to identify tax returns with care provider
****************************************************2******************************. These tax
returns should be selected for post-refund compliance reviews.
Management’s Response: The IRS disagreed with this recommendation. IRS
management believes the determination as to whether the expenses qualify for the
dependent care depends on the Treasury Regulation rules and the specific facts and
circumstances of each situation.
Office of Audit Comment: We agree that the determination as to whether
expenses qualify depends on the specific facts and circumstances of each
situation. As such, our recommendation focuses on developing procedures to
identify tax returns claiming CDCC with questionable qualifying expenses (e.g.,
*******************2**********************) to allow the IRS the opportunity to
review these in a post-refund environment. This would allow the IRS to evaluate
the facts and circumstances on a case-by-case basis.
Married Taxpayers File Separately to ************2****************
****2**** Child and Dependent Care Credits
Our review of nearly 6.3 million Tax Year 2019 tax returns that received CDCCs identified
580 married couples claiming $643,239 in potentially erroneous CDCCs when the taxpayers filed
using a Married Filing Separately status but both the ********************2***********************
*******************2********************** and both were allowed the CDCC. Taxpayers may be
able to claim the CDCC when they paid qualifying expenses to care for their child or other
qualifying person so they could work or look for work. Internal Revenue Code § 21(e)(2)
requires married couples to file a joint return to receive the CDCC unless the taxpayer is legally
separated or living apart from their spouse during the last six months of the year.
The IRS currently does not have *******************************2***********************************
****************************************************2************************************************
****************************************************2************************************************
****************************************************2************************************************
********2********. We identified 174 couples who filed using the ****************2****************
****************************************************2************************************************
****************************************************2*************************** for Tax Year 2019.
These couples were allowed $269,188 in CDCCs.
We alerted the IRS on September 1, 2021, that it does ********************2**********************
****************************************************2************************************************
***************2*******************. The IRS agreed with our findings. IRS management noted in
its response to our e-mail alert that this **********2************************************************
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****************************************************2************************************************
****************************************************2************************************************
****************************************************2*********************************.
We agree that these tax returns would require a **********2**********. However, systemically
identifying these tax returns would assist the IRS to flag the returns that meet this criteria for
further review. As such, our recommendation is designed to help the IRS identify which tax
returns would need to be reviewed either at the time of processing or in a post-refund
environment. On December 6, 2021, the IRS informed us that Processing Year 2022 tax returns
which claim the CDCC for a child who has been claimed as a dependent by **********2**********
***********************2*************************.
Recommendation 9: The Commissioner, Wage and Investment Division, should coordinate
with the Small Business/Self-Employed Division to develop a compliance plan for post-refund
treatment of cases involving **********************2**********************************************
****************************************************2**********************************************
****************************************************2**********************************************
****2****.
Management’s Response: The IRS agreed with this recommendation. For Processing
Year 2022, returns that claim the CDCC for a ********************2*************************
**************2**************** are considered for further review under the Wage and
Investment Division duplicate TIN process already in place. However, IRS management
plans to assess this population once adequate data are available from Tax Year 2021
returns to determine the scope of potential noncompliance that meets our selection
tolerance.
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Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this audit was to assess the IRS’s implementation of the expanded CDCC
eligibility requirements. To accomplish our objective, we:
• Analyzed the nearly 6.3 million Tax Year 2019 tax returns processed during Processing
Year 2020 that received the CDCC to evaluate existing IRS processes to detect potentially
fraudulent and erroneous claims.
o Reviewed a judgmental 1 sample of 14 of 3,322 Tax Year 2019 tax returns whereby
the taxpayer claimed qualified care expenses for an individual who is the primary
or secondary taxpayer on the tax return. We selected five tax returns with the
largest CDCC dollar amounts and the 10 tax returns that were assigned Error
Codes 279 or 579. One of the tax returns was in both of these populations.
• Determined if the IRS’s established business rules were appropriately rejecting
incorrect/incomplete Forms 2441.
• Determined if the Code and Edit function appropriately identified incorrect/incomplete
paper Forms 2441 and prevented incorrect claims from processing.
• Determined if the Error Resolution function correctly identified incorrect/incomplete
Forms 2441 and disallowed the CDCC claimed on tax returns with Form 2441 errors.
Performance of This Review
This review was performed with information obtained from the IRS Wage and Investment
Division’s Customer Account Services and Return Integrity and Compliance Services in Atlanta,
Georgia, and the Submission Processing branch in Austin, Texas, during the period March
through November 2021. 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 Russell Martin, Assistant Inspector General for Audit
(Returns Processing and Account Services); Linna Hung, Director; Paula Johnson, Audit Manager;
Edgar Moon, Lead Auditor; Audrey Graper, Auditor; and Julia Woods, Information Technology
Specialist (Data Analytics).
Validity and Reliability of Data From Computer-Based Systems
During this review, we obtained extracts from the IRS’s Individual Master File and Individual
Return Transaction File databases for Processing Years 2018, 2019, and 2020 that were available
on TIGTA’s Data Center Warehouse. We obtained extracts of Tax Year 2019 Form 2441
information from the Individual Return Transaction File database that was available on TIGTA’s
1
A judgmental sample is a nonprobability sample, the results of which cannot be used to project to the population.
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Data Center Warehouse. Before relying on the data, we ensured that each file contained the
specific data elements we requested. In addition, we selected random samples of either the
extract or the results throughout the analysis and verified that the data in the extracts were the
same as the data captured in the IRS’s Integrated Data Retrieval System and Employee User
Portal. We also performed analysis to ensure the validity and reasonableness of our data, such
as ranges of dollar values and tax periods. Based on the results of our testing, we believe that
the data used in our review were sufficiently reliable for the 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 for the IRS’s
implementation of the expanded CDCC eligibility requirements. We tested these controls by
reviewing and analyzing relevant documents, data, and calculations related to the issuance of
the CDCC.
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Appendix II
Form 2441, Child and Dependent Care Expenses
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Appendix III
Management’s Response to the Draft Report
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2
Excess qualifying expenses allowed when a 8 returns >99.9%
qualifying person was not yet born
Programming limitations allow taxpayers to 1,183 returns >99.9%
circumvent limits for prior year expenses
Primary and secondary taxpayer do not both have 329 returns >99.9%
earned income listed on Form 2441
Care providers ******************2******************** on 43,818 returns >99.3%
Form 2441
CDCC expenses allowed for the primary or secondary 3,322 returns >99.9%
taxpayer
An ****2**** Individual Taxpayer Identification Number 49,859 returns >99.2%
(ITIN) was used to identify the primary, secondary or
dependent(s)
Qualifying expenses allowed for a care provider 9,936 returns >99.8%
whose main purpose did not appear to be for a
qualifying person’s well-being and protection
Taxpayers filed Married Filing Separately, ******2***** 580 returns >99.9%
******************************2*****************************
******************************2*****************************
********2********.
Total 120,893 returns >98.0%
Due to the closure of several Federal Records Centers (FRCs), Submission Processing
was unable to retrieve the 2019 paper tax returns identified by TIGTA where the
provider tax identification number (TIN) was missing. IRS management disagreed on
43,818 paper tax returns because Submission Processing could not conclusively
categorize them as processing errors without viewing actual paper returns, and TIGTA
confirmed that they had not reviewed the actual paper returns. After working with
Counsel on math error authority for tax returns with ****2**** Individual Taxpayer
Identification Numbers (ITIN), Submission Processing has updated its programming to
stop the CDCC claimed for dependents with an ****2**** ITIN. Counsel confirmed that
Submission Processing does not have ****************************2***************************
******************************2*****************************.
As recognized, the IRS was responsive to many alerts to address processing
deficiencies before taxpayers begin filing claims for the refundable CDCC during
Processing Year 2022. The changes to the CDCC will make it one of the largest
refundable credits. As a result, we developed new processing procedures for the
expanded CDCC eligibility requirements and developed compliance filters to ensure
taxpayers who are eligible receive the CDCC.
We also updated the 2021 Instructions for Form 2441, Child and Dependent Care
Expenses, and Publication 503, Child and Dependent Care Expenses. The updated
instructions and publication are currently available for tax year 2021. We started the
process to update Form 2441, Dependent Care Expenses, and pending comment and
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Attachment
Recommendations
The Commissioner, Wage and Investment (W&I) Division, should:
RECOMMENDATION 1
Update processes to *******2******* from Form 2441 the care provider’s *******2*******
*************2************, and the amount paid to the care provider.
CORRECTIVE ACTION
At the time of this response, legislation has not been enacted to extend the refundable
credit status of the Child and Dependent Care Credit (CDCC), or to retain the amount of
credit allowable for tax year 2021. We will monitor pending legislation and, if the CDCC
is subsequently extended as a refundable credit for tax years 2022 or later, we will
evaluate our processes and request the requisite programming and procedural changes
to address this issue.
IMPLEMENTATION DATE
N/A
RESPONSIBLE OFFICIAL
N/A
CORRECTIVE ACTION MONITORING PLAN
N/A
RECOMMENDATION 2
Update paper verification processes to generate errors in the Error Resolution System
when the ****************2****************, or amounts paid to the care provider are
missing.
CORRECTIVE ACTION
At the time of this response, legislation has not been enacted to extend the refundable
credit status of the Child and Dependent Care Credit (CDCC), or to retain the amount of
credit allowable for tax year 2021. We will monitor pending legislation and, if the CDCC
is subsequently extended as a refundable credit for tax years 2022 or later, we will
evaluate our processes and request the requisite programming and procedural changes
to address this issue.
IMPLEMENTATION DATE
N/A
RESPONSIBLE OFFICIAL
N/A
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2
CORRECTIVE ACTION MONITORING PLAN
N/A
RECOMMENDATION 3
Revise Form 2441 to include checkboxes to note whether dependent care expenses are
for a spouse or dependent who is physically or mentally incapable of caring for
themselves or if special deemed earned income rules apply.
CORRECTIVE ACTION
For tax year 2021, the IRS revised the Instructions for Form 2441, Child and Dependent
Care Expenses, by adding a caution paragraph for Line 2 that states “Don't list a person
on line 2 unless they qualify as an eligible person under Qualifying Person(s), earlier.”
This paragraph was added to address the issue of potentially ineligible individuals being
listed as qualifying individuals.
For tax year 2022, we will revise Form 2441 by adding a checkbox to Part I, line C. The
line C checkbox will be used to indicate whether a taxpayer or their spouse was a
student or disabled during the tax year and they intend to enter deemed income on
Form 2441. The line also directs the reader to “If You or Your Spouse Was a Student or
Disabled” in the Instructions for Form 2441, where more information about who qualifies
as a student or disabled is provided. We will also add a new question to Form 2441,
Part II, line 2, column (c), to identify disabled individuals, since anyone over the age of
12 listed on line 2 must be disabled.
IMPLEMENTATION DATE
February 15, 2023
RESPONSIBLE OFFICIAL
Director, Refundable Credit Program Management, Return Integrity and Compliance
Services, Wage and Investment Division
CORRECTIVE ACTION MONITORING PLAN
We will monitor this corrective action as part of our internal management control
system.
RECOMMENDATION 4
Develop a process to identify tax returns with adult ********************2********************
********************2********************. These tax returns should be considered for
selection for post-refund compliance reviews.
CORRECTIVE ACTION (1 of 2)
For Processing Year 2022, W&I developed a compliance filter to identify tax returns
claiming CDCC for an adult who may not be disabled for possible post-refund treatment.
Returns will be evaluated to determine potential non-compliance.
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3
IMPLEMENTATION DATE
Implemented
RESPONSIBLE OFFICIAL
Director, Refundable Credit Program Management, Return Integrity and Compliance
Services, Wage and Investment Division
CORRECTIVE ACTION MONITORING PLAN
We will monitor this corrective action as part of our internal management control
system.
CORRECTIVE ACTION (2 of 2)
We agree to assess this population once adequate data is available from tax year 2021
returns to determine the scope of potential noncompliance that meets our selection
tolerance.
IMPLEMENTATION DATE
March 15, 2023
RESPONSIBLE OFFICIAL
Director, Examination Case Selection, Small Business/Self-Employed Division
CORRECTIVE ACTION MONITORING PLAN
We will monitor this corrective action as part of our internal management control
system.
RECOMMENDATION 5
Work with the Department of the Treasury, Office of Tax Policy, to obtain the legal
authority to disallow the CDCC when the primary or secondary taxpayer is identified by
an ****2**** ITIN on Form 2441.
CORRECTIVE ACTION
We will elevate this issue to the Office of Tax Policy for consideration as a legislative
request; however, the legal authority to deny the Child and Dependent Care Credit to
individuals filing with ****2**** Individual Taxpayer Identification Numbers, must
ultimately be provided by Congress.
IMPLEMENTATION DATE
June 15, 2023
RESPONSIBLE OFFICIAL
Director, Submission Processing, Wage and Investment Division
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4
CORRECTIVE ACTION MONITORING PLAN
We will monitor this corrective action as part of our internal management control
system.
RECOMMENDATION 6
Develop a process to identify tax returns with ***2**** ITINs used to identify the care
provider. These tax returns should be considered for selection for post-refund
compliance reviews.
CORRECTIVE ACTION
The IRS does not have legal authority to disallow the CDCC when a taxpayer uses an
****2**** ITIN for the care provider.
IMPLEMENTATION DATE
N/A
RESPONSIBLE OFFICIAL
N/A
CORRECTIVE ACTION MONITORING PLAN
N/A
RECOMMENDATION 7
Revise Form 2441 instructions and Publication 503, using examples, so taxpayers may
better understand the requirements for qualifying care and expenses.
CORRECTIVE ACTION
The IRS added two examples on page 8 of Publication 503, Child and Dependent Care
Expenses, under “Camp”, to help clarify that expenses incurred for summer camp
qualify for the credit, but expenses incurred for summer tutoring do not qualify. The
examples are based on Examples 4 and 5 in Treasury Regulation § 1.21-1(d)(12).
IMPLEMENTATION DATE
February 15, 2022
RESPONSIBLE OFFICIAL
Director, Refundable Credit Program Management, Return Integrity and Compliance
Services, Wage and Investment Division
CORRECTIVE ACTION MONITORING PLAN
We will monitor this corrective action as part of our internal management control
system.
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5
RECOMMENDATION 8
Develop a process to identify tax returns with **********************2**********************
**************************************************2********************************************.
These tax returns should be selected for post-refund compliance reviews.
CORRECTIVE ACTION
The determination as to whether the expenses qualify for the dependent care depends
on the Treasury Regulation rules and the specific facts and circumstances of each
situation.
IMPLEMENTATION DATE
N/A
RESPONSIBLE OFFICIAL
N/A
CORRECTIVE ACTION MONITORING PLAN
N/A
Recommendation
RECOMMENDATION 9
The Commissioner, Wage and Investment Division, should coordinate with the Small
Business/Self-Employed Division to develop a compliance plan for post-refund
treatment of cases involving *******************************2********************************
**************************************************2************************************************.
**************************************************2************************************************.
*********************2*******************.
CORRECTIVE ACTION (1 of 2)
For Processing Year 2022, returns which claim the CDCC for a child who has been
****************************2**************************** are considered for further review
under the W&I duplicate TIN process already in place.
IMPLEMENTATION DATE
Implemented
RESPONSIBLE OFFICIAL
Director, Refundable Credit Program Management, Return Integrity and Compliance
Services, Wage and Investment Division
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Appendix IV
Glossary of Terms
Term Definition
Data Center Warehouse A TIGTA repository of IRS data.
The internal IRS portal that allows employees to access IRS data and
Employee User Portal systems (such as tax administration processing systems and financial
information systems) in a secure, authenticated session.
Employer Identification
A unique, nine-digit number used to identify a taxpayer’s business account.
Number
A system for the examination and correction of returns rejected because of
Error Resolution System
taxpayer and processing errors.
Individual Return A database maintained by the IRS that contains information on the
Transaction File individual tax returns it receives.
Individual Tax A nine-digit number assigned by the IRS to taxpayers who are required to
Identification Number have a TIN for Federal tax purposes but are not eligible to obtain an SSN.
Integrated Data Retrieval IRS computer system capable of retrieving or updating stored information.
System It works in conjunction with a taxpayer’s account records.
The IRS database that stores various types of taxpayer account information.
Master File This database includes individual, business, and employee plans and exempt
organizations data.
A web-based platform for filing approximately 330 tax forms with the IRS. It
Modernized Electronic
serves to streamline filing processes and reduce the costs associated with a
Filing
paper-based process.
IRS database that is a compilation of selected entity data from various IRS
National Account Profile
Master Files that also includes data from the Social Security Administration.
Perfecting Making returns acceptable for data entry through the editing process.
The calendar year in which the tax return or document is processed by the
Processing Year
IRS.
A 12-month accounting period for keeping records on income and
Tax Year expenses used as the basis for calculating the annual taxes due. For most
individual taxpayers, the tax year is synonymous with the calendar year.
A nine-digit number assigned to taxpayers for identification purposes.
Taxpayer Identification
Depending upon the nature of the taxpayer, the TIN is either an EIN, an
Number
SSN, or an ITIN.
The process of transferring information from documents to a
Transcription
computer-readable form.
Page 29
American Rescue Plan Act: Assessment of Processes to Identify
and Address Improper Child and Dependent Care Credit Claims
Appendix V
Abbreviations
CDCC Child and Dependent Care Credit
E-File(d) Electronically File(d)
EIN Employer Identification Number
IRS Internal Revenue Service
ITIN Individual Taxpayer Identification Number
SSN Social Security Number
TIGTA Treasury Inspector General for Tax Administration
TIN Taxpayer Identification Number
Page 30
To report fraud, waste, or abuse,
call our toll-free hotline at:
(800) 366-4484
By Web:
www.treasury.gov/tigta/
Or Write:
Treasury Inspector General for Tax Administration
P.O. Box 589
Ben Franklin Station
Washington, D.C. 20044-0589
Information you provide is confidential, and you may remain anonymous.
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