In brief
The IRS accepted more than 470,000 e-filed 2025 returns claiming $977 million in questionable vehicle-loan interest deductions.
The Treasury Inspector General estimated the related tax effect at $122 million.
The IRS agreed to build a post-processing compliance plan but disputed two recommended business-rule changes.
The new car loan interest deduction arrived fast. The controls did not.
A Treasury watchdog found that the IRS accepted more than 470,000 electronically filed 2025 returns claiming $977 million in questionable deductions. The estimated tax effect was $122 million.
That does not mean every claim was fraudulent. It means the returns matched patterns that should have received stronger review.
A rushed filing-season build
Congress enacted the tax package in July 2025. That left the IRS with limited time to write guidance, update forms, and build processing checks before the 2026 filing season.
The agency was doing that work while staff and budgets were under pressure. The Treasury Inspector General for Tax Administration found that the IRS generally implemented four new deductions covering tips, overtime, passenger vehicle loan interest, and seniors.
But the audit also found gaps in guidance, processing controls, and the compliance plan.
Why the returns got through
The IRS uses business rules to reject electronic returns that fail required criteria. For the vehicle interest deduction, the agency did not put one proposed rejection rule in place on time.
The IRS was concerned about the legal risk of rejecting an otherwise valid return. That concern is understandable. A blunt rejection rule can block a taxpayer who has a legitimate claim but entered information in an unexpected way.
The tradeoff is that weak front-end screening pushes the problem downstream. As of August, the watchdog said the IRS had not established a post-processing strategy to find and address potentially improper claims.
In plain English, questionable returns went through, and the cleanup plan was not ready.
Overtime guidance had problems too
The watchdog also challenged the IRS's early guidance for the new overtime deduction. It said the guidance did not adequately explain which workers are exempt under the Fair Labor Standards Act.
The IRS later expanded its FAQs after coordinating with the Treasury Department, Labor Department, and Office of Personnel Management. The agency argued that labor-law interpretation is not its job and that it had directed taxpayers to Labor Department materials.
That jurisdiction fight is useful context, but it does not make the filing question disappear. Taxpayers and preparers still need to determine whether the pay qualifies before claiming the deduction.
What the IRS agreed to do
TIGTA made four recommendations. The IRS addressed the overtime guidance issue and agreed to develop a post-processing compliance plan for questionable claims.
It disagreed with two recommendations involving business rules for the vehicle deduction. That means future enforcement may depend more on notices and after-the-fact review than on stopping returns at the electronic filing door.
The file needs to tell the story
Tax firms should not treat a successfully accepted return as proof that a deduction was valid. Acceptance only means the return cleared the filing system.
For vehicle loan interest claims, firms should keep the loan documents, purchase details, vehicle eligibility support, interest calculations, and any client representations used to prepare the return. For overtime claims, the file should support the worker's eligibility and the amount treated as qualified overtime.
The IRS may improve its filters. It may also look backward. A clean workpaper file is what separates a defensible claim from a number that merely slipped through.
