Audit: IRS needs stronger oversight of tax deduction

The IRS could save tens of millions of dollars by beefing up oversight of a tax deduction for retirement contributions used by the self-employed, according to a new federal audit.

Treasury's inspector general for tax administration said that the found dozens of cases when a taxpayer deducted contributions to a Simplified Employee Pension, but did not report the self-employment income required to claim that deduction.

In all, the inspector general said the IRS could have protected about $14 million in 2011 with better oversight, and could save an additional $71 million over five years.

Simplified employee pensions give self-employed taxpayers an easier way to contribute to their own or their employees' retirement. 

But taxpayers do have to prove self-employment income to deduct those contributions. The inspector general found several cases where taxpayers improperly claimed thousands of dollars.

The IRS acknowledged that it allowed some returns to claim the deduction without any proof of self-employment income, and that it would double its efforts to remind employees about that requirement for the 2014 filing season.