Programming errors in Internal Revenue Service tax processing applications have led the tax agency to internally flag large numbers of returns as errors, finds a new Treasury Inspector General for Tax Administration audit.

The report, dated March 31 and released publically April 18, finds errors embedded into the agency's Individual Return Transaction File--a digital dossier containing, among other things, expected repayment amounts of previously extended tax credits.

For example, the file's field for an expected 2010 first time homebuyer credit repayment amount was left blank. As a result, 313,950 tax returns showing a discrepancy between filed homebuyer credit repayment amounts and the transaction file's expected repayment amount have been selected for error resolution review as of March 17, auditors say--delaying the processing of the return as well as slowing down the issuance of any possible refund. As of March 23, the IRS still hadn't corrected the problem, auditors add.

Errors in the file have produced other discrepancies, too. Some tax deductions for a new car filed in returns with a standard deduction are showing up in the IRS computer system as a deduction for real estate tax--a deduction that wasn't even possible to claim in 2010, auditors say. IRS officials told TIGTA they intend to correct the error by June 1.

IRS officials typically make changes annually to their tax processing software to keep pace with legislative updates to the tax code, which for this filing season included a tax bill passed into law at the relatively late date of Dec. 17, 2010. Because the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 became law only weeks before the 2010 tax year filing season began in January, the IRS also had to scramble to prepare certain public forms.

In related news, the IRS says the number of returns filed electronically has topped 100 million this year for the first time. As of the morning of April 18, taxpayers sent the IRS more than 101 million returns via the Internet, an increase of 8.8 percent compared to last year.

For more:   
- download the TIGTA report, 2011-40-032 (.pdf)
- see an April 18, 2011 IRS press release on e-filing

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