TIGTA: IRS needs to do better on fraudulent refunds

The Internal Revenue Service has experienced major growth in dealing with fraudulent refunds in recent years, having issued an estimated $1.6 billion of fraudulent refunds during the 2006 and 2007 filing seasons, the Treasury Inspector General for Tax Administration (TIGTA) said in a report released today. The Questionable Refund Program in IRS’ Criminal Investigation Division is designed to find and stop fraudulent claims for refunds on income tax returns. For several years, the IRS had depended on the Electronic Fraud Detection System to identify fraudulent refunds, according to the report. However, system development problems prevented the system from operating during 2006, and the IRS estimated it issued $894 million in fraudulent refunds, the report said. The number of potentially fraudulent returns that would have been identified if dollar threshold restrictions were not applied rose by an “alarming” 70 percent between the 2006 and 2007 processing years, TIGTA said. The IRS has been able to tackle only  48.7 percent of questionable claims for refunds on income tax returns, potentially allowing up to $742 million in fraudulent refunds to be issued in 2007 because of resource limitations, the report said. If the trend continues during the next few years, it could result in significant annual revenue loss to the federal government, said Michael Phillips, TIGTA’s deputy inspector general for audit. “This trend is becoming unmanageable, and the IRS cannot afford to continue handling it in the same manner as in the past,” he said. The report noted that a former IRS commissioner said in 2006 there would little chance for recovering the fraudulent refunds paid that year because it was difficult to retrieve money once it had been issued. The IT system was operational again during 2007 and let the IRS identify more than 240,000 fraudulent tax returns with almost $1.2 billion in refund claims, the report said. The increase in fraudulent refunds in 2006 and 2007 is significant compared with $412 million in refunds stopped during 2005, TIGTA said. The IRS has limited the selection of returns to only those with the highest dollar value and highest potential for fraud because it did not have the resources to handle the volume, the report said. “While the dollar limits allowed the centers to verify a higher percentage of fraudulent returns, they excluded thousands of returns from the screening process,” Phillips said. TIGTA recommended that IRS: • Implement procedures to make sure that suspicious tax returns are identified by the fraud detection system. • Assure that resources are available to verify the accuracy of these returns. • Require its fraud centers to use the automated quality review tool. • Revise the process for controlling and freezing refund claims identified as potentially fraudulent.