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IRS May Delay More Tax Refunds To Tackle Fraud

Mike Godfrey,, Washington

06 February 2018

The Internal Revenue Service has been successful in implementing processes to identify and prevent fraud but could do more to strengthen pre-refund verification, according to a new report from the US Government Accountability Office (GAO) on last year's tax filing season.

The report finds that fraudsters used false identities to steal at least USD1.68bn in tax refunds in 2016.

To help address fraud and compliance issues, Congress moved up the deadline for employers to submit W-2s and had IRS hold refunds for those claiming certain tax credits beginning in 2017. These changes gave IRS more time to work on identifying discrepancies before issuing refunds.

The GAO found that this process has produced the desired results, in helping the IRS to identify and prevent fraud. It put forward six recommendations to support it to verify the veracity of refund requests. These include that the IRS should take steps to allow it to review more W-2s before issuing refunds.

The IRS received over 214 million forms W-2 by February 15, 2017 – more than double those received by the same time in 2016. However, the IRS was unable to verify over half of the returns it held until February 15 before issuing the refunds, and admitted that it could have detected significantly more in potential fraud and noncompliance if it held all refunds until late February, when it had more W-2 data available.

In that analysis, the IRS estimated that it could have protected USD100m in fraud and noncompliance had it held all taxpayer refunds until February 15 – USD35 million more than it protected by holding refunds with the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC).

The GAO report recommended that the IRS collect data to track late W-2 filing penalties and assess options for earlier enforcement; and assess the benefits and costs of using existing authority to hold refunds longer, hold all refunds, or both, and expand systemic verification to other areas.

IRS agreed steps to respond to five of the six recommendations but said it could not enforce penalties earlier.

TAGS: compliance | tax | law | tax credits | Internal Revenue Service (IRS) | enforcement | United States | penalties | Tax

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