IRS gave car tax credit without proof of purchase

The IRS issued $150 million worth of car tax deductions to people with no proof of purchase, according to the Tax Inspector General.

NEW YORK (CNNMoney) -- The Internal Revenue Service may have granted more than $150 million in car purchase tax deductions to thousands of people who didn't have to prove they actually bought the car.

The Treasury Inspector General for Tax Administration said, in a report issued Wednesday, that the IRS failed to identify 4,257 people who claimed $150.1 million in "excessive" qualified motor vehicle deductions.

Treasury Inspector General J. Russell George said the investigation of IRS deductions, related to the 2009 American Recovery and Reinvestment Act stimulus program, "found that individuals do not have to provide any third-party documentation to support that they actually purchased a qualified motor vehicle."

The report applies to the stimulus period from Feb. 17 to Dec. 31, 2009, when the government awarded deductions for state sales and excise taxes paid on qualified vehicle purchases -- which, in this case, was any car, motorcycle or light truck that weighed 8,500 pounds or less, or a mobile home of any weight. It said the taxpayers were not required to provide documentation of the amount paid in those taxes -- assuming that they actually bought a car and paid the taxes.

The Treasury Inspector also found that 473 people "erroneously received" about $1 million in qualified motor vehicle deductions because the IRS couldn't tell that the applicants were in prison, dead or underage.

"It is imperative that the IRS address the weakness in this report," said George, in a press release. "These are taxpayers' dollars and the [IRS] must ensure that only those who deserve this and other tax benefits receive them."

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The inspector's report contained a response from Richard Byrd, commissioner of the wage and investment division of the IRS. His letter said the inspector's report "identified areas where we have already implemented changes to strengthen controls, or are in the process of doing so."

The IRS also told the inspector that more than 4.3 million taxpayers claimed the deduction: "Your report identifies a small percentage of cases in which taxpayers may have claimed questionable [qualified motor vehicle] deductions."

The bad news for anyone who thought got away with a break: IRS said it will review the returns featured in the study and conduct audits if warranted.