The IRS did not have sufficient controls and processes in place to identify erroneous Foreign Tax Credit (FTC) claims, the Treasury Inspector General for Tax Administration (TIGTA) has reported. The audit was initiated to determine whether the IRS controls ensured that the FTC was accurately claimed on a tax return when foreign government taxes were used to offset federal taxes. The FTC was intended to reduce the double taxation burden that would otherwise occur when foreign source income is taxed, and could significantly affect the amount of taxes paid by individuals on U.S. tax returns.

Approximately 73-percent of the returns were prepared by paid tax preparers that improperly allowed FTCs, TIGTA noted. In addition, the IRS did not refer 1,161 examination cases that potentially met mandatory FTC referral criteria to international examination specialists.

TIGTA recommended that the IRS: (1) establish controls to ensure that the Form 1116, Foreign Tax Credit, is attached when required; (2) ensure that any training materials and additional guidance related to FTCs are updated, and that employees comply with the updated guidance; (3) develop a compliance strategy to address the risks identified with taxpayer FTC issues; (4) capture and maintain key FTC statistics; (5) improve education, outreach, and enforcement activities to correct the paid preparer issues related to the FTC; and( 6) revise the Internal Revenue Manual and the Specialist Referral System User Guide to clearly define the referral criteria that will be followed to ensure that tax returns in the examination function inventory with FTCs are referred as required. The IRS agreed with five of TIGTA’s recommendations and took corrective action.

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