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IRS Needs Better Controls Over Fraudulent Refunds: TIGTA

by Mike Godfrey, Tax-News.com, Washington

28 December 2015


Ineffective monitoring of potentially fraudulent tax returns has resulted in the erroneous release of refunds by the US Internal Revenue Service (IRS), according to an audit report by the Treasury Inspector General for Tax Administration (TIGTA).

The audit was initiated because an IRS employee reported to the TIGTA Office of Investigations that the IRS was not working some taxpayer cases in which refunds had been withheld. The Office of Investigations identified that the IRS did not address these tax accounts during the 2014 calendar year to ensure that the refunds were not erroneously released before the information therein was verified.

TIGTA noted that the IRS's Return Integrity and Compliance Services function is responsible for identifying, evaluating, and preventing the issuance of improper refunds. This mission includes protecting revenue by identifying potentially fraudulent tax returns and verifying the accuracy of reported income and withholding information.

The IRS reported that the Integrity and Verification Operations function prevented more than USD15bn in fraudulent refunds in 2014.

However, TIGTA identified that, because of a programming error, refunds worth over USD27m were erroneously issued for about 13,000 returns covering the 2013 tax year. That programming error is overriding the IRS's two-week processing delay on some refund tax returns that the IRS identifies as potentially fraudulent, TIGTA said.

TIGTA also identified 3,910 returns for the 2013 tax year that the IRS selected for verification but which were unlikely to have been verified. The IRS issued refunds totaling over USD19m for these tax returns. Refund holds were either not set correctly or did not function as intended.

"While the IRS has made important strides in its programs that prevent the issuance of fraudulent refunds, our auditors found that it is not always ensuring that tax examiners timely complete their verification work before releasing refunds," said Russell George, the TIGTA.

TIGTA recommended, and the IRS agreed, that the agency should correct the programming error; develop a process to ensure that tax examiners verify a potentially erroneous refund before its release; identify why refund holds placed on some accounts were not delaying processing of the tax returns; and develop a periodic reconciliation process to ensure that refunds associated with identified potentially fraudulent tax returns are not erroneously released.

TAGS: compliance | tax | tax compliance | Internal Revenue Service (IRS) | tax authority | United States | tax breaks | individual income tax | Compliance | Tax

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