Computer Programming Can Be Used to More Effectively Stop
Refunds on Illegal Claims for Reparations Credits
March 2002
Reference Number:
2002-30-071
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
March
28, 2002
MEMORANDUM FOR
COMMISSIONER, Small
Business/Self-Employed Division
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for
Audit
SUBJECT: Final Audit Report - Computer Programming
Can Be Used to More Effectively Stop Refunds on Illegal Claims for
Reparations Credits (Audit # 200130028)
This report presents the results of our
review of the Internal Revenue Service’s (IRS) procedures and criteria to
identify claims for reparations credits and stop the associated refunds. Our objectives for this review were to
assess current controls over these claims, determine if a computer program
could be used to strengthen controls, and determine whether IRS employees were
involved in claiming or allowing these claims.
Since
the early 1990s, thousands of taxpayers have filed specious tax claims with the
IRS for reparations credits payable to descendants of slaves. The Internal Revenue Code does not provide
for, or allow, such a credit. As a
result, the IRS tries to identify tax returns containing these claims, deny the
claims, and stop any resulting refunds before they are issued to taxpayers. The vast majority of these claims are
manually identified by IRS employees before any data are input to the IRS’
computer systems.
Because
the manual screening of tax returns by IRS employees is subject to human error,
and because some employees may knowingly allow these illegal claims to be
processed, some claims for reparations credits are processed and refunds sent
to taxpayers. Early in Calendar Year
2001, the IRS found that this was occurring more often. Many taxpayers claiming reparations credits
had received refunds, some of which exceeded $80,000 for married taxpayers
claiming reparations credits for each spouse.
As a result, management from the IRS’ Frivolous Return Program asked the
Treasury Inspector General for Tax Administration (TIGTA) to help improve IRS
controls by developing a computer program to identify tax returns being
processed that contained claims for reparations credits. The TIGTA agreed to try and develop this
computer program and to initiate an audit to review IRS controls related to
these claims.
In
summary, controls designed by the IRS to identify and stop claims for
reparations credits from refunding, once the claims were entered into IRS
computers, could be significantly improved by using a TIGTA-developed computer
program. We estimate that, using this
program, IRS employees could identify 91 percent more of these returns than
they could using the existing processes.
Further,
we identified one current and eight former IRS employees who claimed
reparations credits on their own tax returns.
In addition, we identified one employee who may have knowingly honored a
claim made by another taxpayer.
Pertinent information has been referred to the TIGTA Office of
Investigations.
Management’s
Response: IRS management agreed that the IRS could use
computer programming more effectively to stop refunds on illegal claims for
reparations credits. To that end, the
permanent implementation and maintenance of a computer program similar to that
developed by the TIGTA was approved. In
addition, employees from the IRS’ Frivolous Returns Program were trained and
given access to a new computer Command Code as a potential solution during
accelerated returns processing cycles.
Management’s complete response to the draft report is included as
Appendix V.
Copies of this report are also being sent to the IRS managers who are affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Gordon C. Milbourn III, Assistant Inspector General for Audit (Small Business and Corporate Programs), at (202) 622-3837.
A
Computer Program Can Be Used to Identify Tax Returns With Claims for
Reparations Credits
Appendix I – Detailed Objectives, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Outcome Measures
Appendix V – Management’s Response to the Draft Report
Since the early 1990s, thousands of taxpayers have filed specious tax claims with the Internal Revenue Service (IRS) for reparations credits payable to descendants of slaves. The basis of the claims dates back to the post-Civil War period when the Congress supposedly voted for, and President Andrew Johnson vetoed, a bill to provide former slaves 40 acres and a mule as a form of redress for their years in slavery. An article appearing in Essence magazine in April 1993 urged descendants of slaves to claim a tax credit on their U.S. Individual Income Tax Return (Form 1040) equal to the current value of 40 acres and a mule. The article estimated that value to be $43,209.
The Internal Revenue Code does not provide for, or allow, such a credit. As a result, the IRS tries to identify tax returns containing these claims, deny the claims, and stop any resulting refunds before they are issued to taxpayers. The vast majority of these claims are manually identified by IRS employees before any data are input to the IRS’ computer systems. During Calendar Year (CY) 2001, IRS employees manually identified close to 80,000 such claims. Responsibility for working these claims once they are identified lies mainly with the IRS’ Frivolous Return Program.
Because the manual screening of tax returns by IRS employees is subject to human error, and because some employees may knowingly allow these illegal claims to be processed, some claims for reparations credits are processed and refunds sent to taxpayers. Early in CY 2001, the IRS found that this was occurring more often. Many taxpayers claiming reparations credits had received refunds. Some of the refunds exceeded $80,000 for married taxpayers claiming reparations credits for each spouse. As a result, management from the IRS’ Frivolous Return Program asked the Treasury Inspector General for Tax Administration (TIGTA) in Ogden, Utah, to help improve their controls by developing a computer program to identify tax returns which were being processed that contained claims for reparations credits. The TIGTA agreed to try and develop this computer program and to initiate an audit to review the procedures and criteria the IRS used to identify these claims and stop the associated refunds.
We conducted our audit from April to October 2001 in the
Ogden IRS Center. The audit was
conducted in accordance with Government Auditing Standards. Detailed information on our audit
objectives, scope, and methodology is presented in Appendix I. Major contributors to the report are listed
in Appendix II.
Controls designed by the IRS to
identify and stop claims for reparations credits from refunding, once the
claims were entered into IRS computers, were only partially effective. According to records maintained by the IRS’
Frivolous Return Program, the IRS stopped 406 such claims for reparations
credits (totaling over $16.4 million) from refunding from February 18 to April
21, 2001. A computer program developed
by the TIGTA, applying criteria developed with employees from the IRS’ Frivolous
Return Program, identified an additional 368 claims for reparations processed
during the same time period, that had not been previously stopped by the IRS
but could have been using this program (a 91 percent increase). For the remainder of the processing year,
the TIGTA computer program aided the IRS in identifying an additional 392
reparations claims totaling over $16.1 million. Employees in the Frivolous Returns Program were able to stop 96
percent of the claims identified by this program.
Controls designed by the IRS rely heavily on manual screening of tax returns by the IRS employees processing the returns. This manual screening is subject to human error. As a result, taxpayers filing the 368 claims during the February to April period referred to above received refunds of over $12.7 million to which they were not legally entitled. In addition, we used the TIGTA computer program to analyze a database of tax returns processed for the previous year, Tax Year (TY) 1999, and identified an estimated $18.1 million in reparations claims that were improperly refunded to taxpayers. (All of the returns claiming reparations credits that had not been previously stopped by the IRS were referred to employees in the IRS’ Frivolous Return Program, who initiated steps to recover the refunds.)
As part of our review, we worked with the TIGTA Office of Investigations to determine whether IRS employees were making claims for reparations credits or were knowingly honoring claims made by taxpayers. As a result of this effort, we identified one current and eight former IRS employees who claimed reparations credits on their own tax returns. In addition, we identified one employee who may have knowingly honored a claim made by another taxpayer. We referred all pertinent information to the TIGTA Office of Investigations.
1. The Director, Compliance, Small Business/Self-Employed (SB/SE) Division, should permanently implement and maintain the program developed by the TIGTA. The current program will need minor changes each year for maintenance.
Management’s Response: The Director, Compliance, SB/SE Division approved a National Standard Application which will permanently implement and maintain a computer program similar to that developed by the TIGTA.
The computer program developed by the TIGTA identifies
claims for reparations credits before the claims are recorded on taxpayers’
accounts. This normally gives IRS
employees time to stop any refunds associated with the claims. However, subsequent to the IRS initiating
the use of the TIGTA’s computer program, IRS records indicate 16 claims for a
reparations credit were refunded to taxpayers.
Employees
from the IRS’ Frivolous Return Program noted that all but 1 of the 16 refunded
claims were processed during the IRS’ CY 2001 accelerated processing cycles and
that procedures used to stop suspect refunds during other processing cycles
were not effective during these accelerated processing periods. However, they had not identified any other
procedures to stop the suspect refunds, which totaled over $502,000.
We
identified a computer Command Code under development for the IRS’ Criminal
Investigation function that can be used to prevent suspect refunds from being
issued during accelerated processing cycles.
Personnel from the Frivolous Return Program were not aware of this
Command Code.
2.
The Director, Compliance, SB/SE Division, should ensure
that appropriate employees from the Frivolous Return Program are given access
to and training regarding the computer Command Code under development for the
Criminal Investigation function.
Management’s Response: Employees from
the Frivolous Returns Program were trained on the new computer Command Code and
given access to it. Management is
concerned this Command Code will not help prevent direct deposit refunds
requested on paper returns. They will
continue to work with IRS programmers to prevent this type of erroneous refund.
Appendix I
Detailed Objectives, Scope, and Methodology
Our overall objectives were to:
· Assess whether the Internal Revenue Service (IRS) had sufficient controls in place to identify original and amended tax returns with claims for reparations credits.
To accomplish our objectives, we:
I. Identified and evaluated controls over original and amended tax returns to determine whether they were functioning properly to stop erroneous refunds for returns with claims for reparations credits.
A. Reviewed the Internal Revenue Manual and local procedures for handling reparation claims.
1. Assessed identified controls to determine their effectiveness for stopping refunds that were erroneously released.
2. Interviewed IRS employees in the Frivolous Return Program and the Examination function to obtain suggestions for strengthening controls that would stop the refunds from being issued.
B. Obtained documentation on reparation claims identified by the Frivolous Return Program that had been refunded to taxpayers, determined what control breakdowns allowed these refunds to be issued, and assessed whether recently implemented control procedures would prevent these from refunding in the future.
C. Using the computer program developed in step II, identified refunds, based on reparation claims, issued for Tax Years 1998 and 1999 returns and tax returns processed in the first 30 weeks of Calendar Year 2001.
II. Determined whether tax returns with claims for reparations credits could be effectively computer-identified.
A. Developed criteria to identify, during processing, original filed tax returns with the claims.
B. Developed additional criteria to identify, during processing, amended tax returns with the claims.
C. Referred cases identified by the computer in steps II. A and II. B to the Frivolous Return Program so they could be stopped during processing.
D. Interviewed employees from the Frivolous Return Program to determine which returns identified from the computer runs in steps II. A and II. B would be worked as frivolous returns with reparation claims. Determined what efforts were being made by the Frivolous Return Program to work returns with reparation claims.
E. Monitored the returns meeting criteria developed with employees from the Frivolous Return Program to determine:
1. The amount of the claim.
2. The date the claim was processed.
3. The IRS Submission Processing Center through which the claim was processed.
4. Whether the claim was identified as erroneous prior to its identification by our computer runs; how it was identified; and the IRS Functional Program area that identified it.
5. If the claim resulted in a refund.
F. Selected a random sample of 39 returns identified from the Treasury Inspector General for Tax Administration (TIGTA) computer run meeting criteria developed in conjunction with the IRS’ Frivolous Return Program as being possible reparation claims. Obtained the tax returns (or other source documents) to determine whether the taxpayers actually claimed a reparation credit on their returns. There were 212 returns processed between April 12 and June 30, 2001, that had credits that met the criteria. Our sample of 39 returns was based on a 95 percent confidence level, an estimated error rate of 5 percent, and a precision of +/- 6.2 percent.
G.
Selected a
random sample of 15 returns identified from the TIGTA computer run that had claims on line 64 of U.S. Individual Income Tax
Return (Form 1040) but did not match the other criteria developed with the
Frivolous Return Program as a possible reparation claim. Obtained the tax returns (or other source
documents) to confirm that the returns did not contain a reparation claim. There were 515 returns processed between
April 12 to June 30, 2001, that had an entry on line 64 but did not meet the
other criteria. Our sample of 15 was
based on a 95 percent confidence level, an estimated error rate of 1 percent,
and a precision of +/- 5 percent.
H. Selected the amended returns that met the dollar and other criteria used by the Frivolous Return Program and ordered the tax returns (or other source documents) to determine whether the cases were actually claims for reparations credits.
III. Evaluated the extent to which IRS employees were involved in claiming or allowing claims for reparations credits.
A. Referred the database of taxpayers making reparation claims that we obtained from step I.C to the TIGTA Office of Investigations.
B. Referred one amended return to the TIGTA Office of Investigations that was identified from step I.C as containing a reparation claim. The TIGTA Office of Investigations will analyze the processing of this return to determine if the employee was sympathetic to the taxpayer.
Appendix II
Major Contributors to This Report
Gordon C. Milbourn III, Assistant Inspector General for
Audit (Small Business and Corporate Programs)
Richard J. Dagliolo, Director
Kyle R. Andersen, Audit Manager
L. Jeff Anderson, Senior Auditor
Bill R. Russell, Senior Auditor
Greg A. Schmidt, Senior Auditor
Annette B. Hodson, Auditor
James E. Adkisson, Computer Specialist
Layne D. Powell, Computer Specialist
Appendix III
Commissioner N:C
Deputy Commissioner
N:DC
Deputy Commissioner, Small Business/Self-Employed Division S
Director, Compliance, Small Business/Self-Employed Division S:C
Director, Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk
Analysis N:ADC:R:O
Office of Management Controls N:CFO:F:M
Audit Liaison:
Commissioner,
Small Business/Self-Employed Division
S:COM
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. This benefit will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
· Revenue Protection – Potential; $90,731,930 in frivolous claims stopped (see page 2).
Methodology Used to Measure the Reported Benefit:
Identification of Population -
The Treasury Inspector General for Tax Administration
(TIGTA) Information Technology staff computer-identified reparation claims on tax returns that posted
to the Internal Revenue Service (IRS) Masterfile for Tax Years (TY) 1998 and
1999 and tax returns processed in the first 30 weeks of Calendar Year (CY) 2001. The criteria identified
all U.S. Individual Income Tax Returns (Form 1040) and amendments made to Forms 1040 claiming
credit amounts over a specified threshold (and indicative of typical reparation
claims) on line 64. The TIGTA program
identified 30,392 records for that period with credit amounts over that threshold. There were 1,184 returns that had line 64 amounts indicative of
reparation claims totaling over $35.5 million that had refunded to taxpayers
and the IRS had not stopped the refund or recovered and reversed the
refunds.
Sample Results -
The criteria used to identify the 1,184
returns were verified using a statistical sample of 39 returns from a
population of 212 returns processed between April 12 and June
30, 2001 (estimated error rate
of 5 percent, confidence level of 95 percent, precision of +/- 6.2
percent). Thirty-seven of the 39 (95
percent) were confirmed reparation claims.
Accordingly, we demonstrated that the TIGTA program was more effective
than manual methods of identifying reparation claims.
Projection of Results -
$90,731,930 –
Frivolous claims will be stopped from refunding to taxpayers – The computer run
identified 606 tax returns that were refunded reparation credits worth
$19,101,459 for TY 1999. Taking 95
percent of these amounts (to reflect the results of our sample) gave a
projected 576 returns with refunded reparations credits totaling $18,146,386
for TY 1999. These values will be used
to project the amount of tax savings over the next 5 years. TY 1999 is being used in our projections
since these returns were generally processed in CY 2000, the most recent full
year of data available. The number of
claims released to taxpayers in CY 2001 was substantially reduced by the
implementation of the TIGTA program. We
estimate that the program implemented by the TIGTA will stop at least another
2,880 (576 returns times 5 years) frivolous reparation claims worth almost $91
million ($18,146,386 times 5 years) over this 5-year period. This is a conservative estimate due to the
fact there is no built-in increase in volume or dollar amounts for this 5-year
period. In comparison, there was a 201
percent increase in the number of claims filed and a 36.5 percent increase in
the average amount per claim from TY 1998 to TY 1999.
Appendix V
Management’s Response to the Draft Report
The response
was removed due to its size. To see the
complete response, please go to the Adobe PDF version of the report on the
TIGTA Public Web Page.