Nearly 13,000 taxpayers may have mistakenly received $ 57 million in “pass-through” tax relief last year, according to a new IRS report.
The break – a allowable deduction for business income – was created by the tax law signed by President Donald Trump in 2017. This law significantly reduced taxes for businesses and individuals.
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The QBI deduction allows some business owners to deduct up to 20% of their business income from their taxes. Flow-through entities, such as sole proprietors, partnerships, and S corporations, can claim the deduction, although additional restrictions apply to owners of service businesses like physicians, lawyers, and accountants.
“Potentially Erroneous” QBI Deductions
The IRS has allowed business owners to claim $ 57 million in “potentially erroneous” deductions on 12,980 tax returns filed last year, according to a report released Tuesday by the Inspector General of the Treasury for the FISC administration.
The watchdog urged the tax agency to increase its oversight of the transfer deduction.
It is not entirely clear why the Inspector General of the Treasury reported these tax returns to the IRS. Many details were redacted in the report, which analyzed 2019 tax returns filed up to April 16 of last year.
The analysis also highlights the high frequency of errors relating to tax returns claiming a passed-on deduction, according to Steven Rosenthal, senior researcher at the Urban-Brookings Tax Policy Center.
For example, when the IRS selected 68 returns from the 2018 tax year for further review, the agency ultimately denied a deduction passed on to 85% of them, worth about $ 4. $ 8 million, according to the report.
“This is a rich vein for the IRS to prospect because, so far, the IRS is paid filth [almost] every time, ”said Rosenthal.
“I think QBI is written in a very complicated way, with exceptions to exceptions,” he said of the inference and why errors can occur.
Eric Hylton, commissioner of the Small Business and Self-Employed Division of the IRS, acknowledged that the deduction is complex and presents challenges for taxpayers and the federal agency.
But the 12,980 returns identified in the watchdog’s analysis represent only 0.14% of the 9.4 million who claimed a QBI deduction, Hylton said in a response accompanying the report. And about 95% of them were properly disposed of by the IRS, he said.
Pursuing additional compliance would divert resources from other areas of the agency and “reduce the overall revenue potential,” he added.
The Inspector General of the Treasury was contacted but did not respond to a request for comment at the time this story was published.