Treasury
Inspector General for Tax Administration
Office of Audit
INADEQUATE CONTROLS OVER DISHONORED
CHECKS PUT MILLIONS OF DOLLARS AT RISK FOR ERRONEOUS REFUND ISSUANCE
Issued on September 23, 2009
Highlights
Highlights of
Report Number: 2009-40-143 to the
Internal Revenue Service Commissioner for
the Wage and Investment Division.
IMPACT ON TAXPAYERS
In some instances a taxpayer’s
payment cannot be processed by the bank.
The Internal Revenue Service (IRS) refers to an unprocessed payment as a
“dishonored check.” Our analysis
determined the IRS generated refunds resulting from dishonored check
overpayments totaling approximately $53 million to 15,192 taxpayers during the
period January through July 17, 2008. TIGTA
estimates the IRS was unable to stop more than $20 million in refunds from
being erroneously issued to 13,891 taxpayers (91 percent).
WHY TIGTA DID THE AUDIT
The objective of this review was to assess the efficiency
and effectiveness of the processing of dishonored checks. This review was initiated as a result of the
prosecution of an individual who sent 150 dishonored checks totaling more than
$3.3 million to the IRS and was able to successfully receive more than
$107,000 in erroneous refunds as a result of the IRS not timely stopping the
issuance of the refunds.
WHAT
TIGTA FOUND
Although the
number of payments that are dishonored represents less than 1 percent of the
payments processed by the IRS, weaknesses in the IRS’ dishonored check
processing put millions of dollars at risk.
Our
review of a statistically valid sample of 268 taxpayer accounts (294 refunds) identified:
·
130 (55 percent)
of the 236 dishonored checks subject to the 21-day standard were not worked
within 21 days. In general, it took the
IRS approximately 40 days from the date of the original payment to reverse the
payment as dishonored.
·
Tax Examiners did
not prepare and forward necessary documentation to the IRS’ Erroneous Refund
Unit as required in 193 (79 percent) of the 245 dishonored check refunds in our
sample that were erroneously issued to taxpayers.
Establishing
an effective process to identify and stop dishonored check overpayments from
refunding until the IRS is reasonably sure the related payment has cleared the
bank would protect more than $20 million a year, almost $102 million over the
next 5 years, from erroneously being issued to taxpayers. In addition, the IRS could redirect resources
costing $119,308 per year ($596,540 over 5 years) currently used in the
Erroneous Refund Unit to recover these refunds.
Finally,
the IRS has the opportunity to enhance its systemic controls to prevent the
erroneous issuance of refunds resulting from a dishonored check as it
modernizes its payment processing in the Submission Processing sites.
WHAT TIGTA RECOMMENDED
TIGTA
recommended the Commissioner, Wage and Investment Division, establish a
systemic process to identify and stop refunds of dishonored check overpayments
and identify refunds issued to taxpayers in Calendar Years 2008 and 2009 that
were not referred to the Erroneous Refund Unit and initiate recovery of the
refunds. In the long term, the
Commissioner should modify the IRS’ payment processing modernization project to
include converting paper checks to electronic fund withdrawals.
In their
response to the report, IRS officials agreed to three of the four
recommendations. The IRS plans to develop
a process to systemically stop refunds of dishonored check overpayments and stated
they plan to initiate recovery of Calendar Years 2008 and 2009 refunds not
previously referred to the Erroneous Refund Unit. The IRS did not agree with our recommendation
to modify its payment processing modernization project to convert paper checks
to electronic fund withdrawals because of limitations with its current system.
TIGTA
recognizes the current limitations the IRS has regarding the conversion of
paper checks to electronic fund withdrawals.
No process has been established to convert paper checks to an electronic
payment for transmission to the bank.
The Electronic Federal Tax Payment System does not have the
functionality to allow for this. As the
IRS moves forward with its payment modernization, consideration should be given
to develop such a process.
READ THE
FULL REPORT
To view the report,
including the scope, methodology, and full IRS response, go to:
http://www.treas.gov/tigta/auditreports/2009reports/200940143fr.html.
Email Address: inquiries@tigta.treas.gov
Phone Number: 202-622-6500
Web Site:
http://www.tigta.gov