By Kevin Drawbaugh
WASHINGTON (Reuters) - A tax break that spurred car buying in 2009 was erroneously allowed in some cases, including claims made in the names of people who were in prison, dead or underage, said a U.S. report on Wednesday.
The report criticized the Internal Revenue Service's handling of the qualified motor vehicle (QMV) deduction, a measure that expired on December 31, 2009. It was part of the Obama administration's economic stimulus package that year.
The tax-collecting IRS should have done more to verify that those who claimed the deduction were entitled to receive it, said the report from the Treasury Inspector General for Tax Administration, a government IRS watchdog.
Taxpayers who claimed the deduction were not required to provide independent proof that a vehicle was actually purchased or, if one was, how much was paid in deductible sales and excise taxes, said the inspector general.
The IRS has agreed to review instances that the watchdog has found questionable and tighten its procedures just in case the deduction is ever renewed, the report said.
"We have already implemented changes to strengthen controls, or are in the process of doing so," the IRS said in a formal response to the watchdog's report.
The report said the IRS failed to identify 4,257 individuals who made QMV claims above a level the IRS had red-flagged as excessive. Altogether, these individuals claimed more than $151.1 million in QMV deductions, based on the inspector general's 2010 review of 2009 returns.
"Identification of those individuals might have prevented the issuance of erroneous refunds," said the report.
Widely promoted by car dealers at the time with the economy in recession for much of the year, the QMV deduction helped drive vehicle sales through 2009. More than $7.2 billion in QMV deductions were claimed by almost 4.4 million taxpayers, according to the report.
"Some individuals may have erroneously been allowed QMV deductions for vehicles that were not purchased," it said.
About $1 million in deductions went to 473 people in error "because the IRS did not have processes to identify the individuals were in prison, deceased or underage," it said.
Of that total, 439 were prisoners, who deducted a total of $955,843 in sales tax for the purchase of vehicles in 2009 "even though they were in prison for a full year in 2009 when the vehicle was purportedly purchased," the report said.
Another $36,490 in claims were allowed for people who were dead before the start of the deduction's short career, from mid-February 2009 to the end of that year, it said.
The watchdog also found that 18 individuals under the age of 15 got $31,139 in QMV deductions. In the United States, minors generally are not allowed to buy a motor vehicle.
The IRS said the report found "a small percentage of cases in which taxpayers may have claimed questionable QMV deductions. We agree these returns are worthy of additional scrutiny and we will review them," the agency said.
(Editing by Bernard Orr)