TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
Actions Have
Been Taken to Address Deficiencies in the Questionable Refund Program; However,
Many Concerns Remain, with Millions of Dollars at Risk
Issued on May 31, 2007
Highlights
Highlights of
Report Number: 2007-10-076 to the
Internal Revenue Service Chief, Criminal Investigation.
IMPACT ON TAXPAYERS
The Internal Revenue Service (IRS)
estimates fraudulent refund claims exceed $500 million a year. The Questionable Refund Program (QRP),
established to identify and prevent the issuance of fraudulent refunds,
received harsh criticism from the National Taxpayer Advocate as a Program that
was inefficient and ineffective and that did not afford taxpayers their rights.
The IRS reevaluated its processes and procedures
to address the Advocate’s concerns.
However, TIGTA believes several of these changes may adversely affect
the IRS’ ability to prevent issuance of millions of dollars in potentially
fraudulent refunds.
WHY TIGTA DID THE AUDIT
This
audit was initiated to evaluate the effectiveness of procedures for detecting
fraudulent and potentially fraudulent refunds.
In addition to the Advocate’s concerns, Congress has held hearings
urging the IRS to devote additional resources to and improve its detection of fraudulent
refunds.
WHAT TIGTA FOUND
The IRS did
not adequately respond to various warning signs, including five previous TIGTA
reports, that the QRP was facing problems and becoming unmanageable. For Processing Year 2006, the Criminal
Investigation function (function) discontinued freezing the subsequent year’s
return and started notifying taxpayers that their refunds have been delayed. TIGTA found these freezes can be effective if
implemented correctly and reviewed timely; in 2005, they could have prevented
issuance of over 20,000 fraudulent refunds totaling $71.7 million.
The IRS needs
to be more aggressive in the criminal and civil pursuit of fraudulent
refunds. During 2004, the function
identified over 3,000 schemes involving almost 118,000 returns claiming almost
$425 million in fraudulent refunds. However,
as of March 2006, criminal investigations had been opened on only 172
schemes involving $59 million in refunds.
Further, the IRS did not always take civil actions to adjust fraudulent refund
accounts or recover fraudulent refunds that were issued. Had the IRS taken civil action on earlier
fraudulent returns, it could have collected $27.5 million from future refunds. One reason certain types of cases are not
referred for civil action is that current law requires the IRS to issue a statutory
notice of deficiency to the taxpayers.
The IRS also did
not verify certain types of refund returns, although during 2004, over 30,000 of
these types of returns claimed over $84 million in potentially fraudulent
refunds.
WHAT TIGTA RECOMMENDED
TIGTA
recommended the Chief, Criminal Investigation, working with other functions (1)
reconsider placing a freeze on the subsequent year’s return of returns
identified as fraudulent; (2) revalidate the optimal time needed to release a
freeze; (3) work with United States Attorney’s Offices on the referral criteria
for refund schemes; (4) initiate a legislative proposal to eliminate the
requirement to issue a deficiency notice; (5) consider lowering the tolerance
for sending cases to the Examination function; (6) reconsider the decision to
exclude certain types of returns from the screening process; and (7)
reemphasize the requirement to document how fraud was determined.
The IRS
agreed with Recommendations 2, 3, and 7 and plans to take appropriate
correction action; partially agreed with Recommendation 1; and neither agreed nor
disagreed with Recommendations 4 through 6. For the latter four recommendations, the IRS plans
to evaluate results from the 2007 QRP, make recommendations on any adjustments
to procedures before the 2008 Filing Season, and agreed to work with relevant
parties to discuss initiating a legislative proposal.
The
IRS should take a leading role in
pursing a legislative change, while working with the Assistant Secretary for
Tax Policy. A legislative proposal has
the potential to improve tax administration while still protecting taxpayer
rights. In addition, this change would
allow the IRS to lower its tolerances, reduce the number of cases referred to
the Examination function, and reduce the already limited resources needed to
process these cases.
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to: http://www.treas.gov/tigta/auditreports/2007reports/200710076fr.html.
E
Phone Number: 202-927-7037
Web Site:
http://www.tigta.gov