TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

 

 

Processes for the Direct Deposit of Tax Refunds Need Improvement to Increase Accuracy and Minimize Fraud

 

 

September 25, 2012

 

Reference Number:  2012-40-118

 

 

 

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.

 

Redaction Legend:

2(f) = Risk Circumvention of Agency Regulation or Statute

 

 

Phone Number  /  202-622-6500

E-mail Address /  TIGTACommunications@tigta.treas.gov

Website           /  http://www.treas.gov/tigta

 

 

HIGHLIGHTS

PROCESSES FOR THE DIRECT DEPOSIT OF TAX REFUNDS NEED IMPROVEMENT TO INCREASE ACCURACY AND MINIMIZE FRAUD

Highlights

Final Report issued on September 25, 2012

Highlights of Reference Number:  2012-40-118 to the Internal Revenue Service Deputy Commissioner for Services and Enforcement.

IMPACT ON TAXPAYERS

More than 842,000 taxpayers chose to split their tax refunds between two to three different checking or savings accounts using Form 8888, Allocation of Refund (Including Savings Bond Purchases).  However, more than 65,300 bank accounts had multiple[1] d such direct deposits, accounting for more than 949,000 refunds for approximately $1.6 billion.  While direct deposits should only be made to accounts in the taxpayer’s name, the current practice of **2(f)** ********************2(f)***************************** *************2(f)********* increases the potential for fraud, misuse, and abuse.

WHY TIGTA DID THE AUDIT

The overall objective of this audit was to evaluate the IRS’s controls over the direct deposit of refunds.  This audit addresses the major management challenges of Providing Quality Taxpayer Service Operations and Fraudulent Claims and Improper Payments.

WHAT TIGTA FOUND

While some actions have been taken, IRS processes are not *************2(f)************ **********************2(f)********************* **********************2(f)******************* **********************2(f)***************************.

Additionally, the option to split a refund between multiple accounts increases the risk of fraud.  TIGTA identified more than 4,400 bank accounts listed on tax return preparers’ personal returns that had multiple deposits.  More than 202,000 refunds for more than $309 million were sent to these bank accounts.  This raises a concern as to whether some tax return preparers are diverting clients’ refunds or portions of refunds *************2(f)********* to pay tax preparation fees or for other reasons.  TIGTA also identified more than 200 bank accounts listed on IRS employees’ tax returns that had multiple direct deposits.  More than 10,600 refunds for more than $14 million were sent to these bank accounts.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS *****2(f)****** ***2(f)****************tax return preparers and IRS employees who potentially divert direct deposits *****2(f)*****************.

In their response to the report, IRS officials agreed with the recommendation and plan to take appropriate corrective actions.

 

September 25, 2012

 

 

MEMORANDUM FOR DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT

 

FROM:                       Michael E. McKenney /s/ Michael E. McKenney

                                  Acting Deputy Inspector General for Audit

 

SUBJECT:                  Final Audit Report – Processes for the Direct Deposit of Tax Refunds Need Improvement to Increase Accuracy and Minimize Fraud (Audit # 201140021)

 

This report presents the results of our review to evaluate the Internal Revenue Service’s controls over the direct deposit of refunds.  This audit is included in our Fiscal Year 2012 Annual Audit Plan and addresses the major management challenges of Providing Quality Taxpayer Service Operations and Fraudulent Claims and Improper Payments.

Management’s complete response to the draft report is included as Appendix IV.

Copies of the report are also being sent to the Internal Revenue Service managers affected by the report recommendation.  Please contact me at (202) 622-6510 if you have questions or Augusta R. Cook, Acting Assistant Inspector General for Audit (Returns Processing and Account Services), at (770) 617-6434.

 

 

Table of Contents

 

Background

Results of Review

Processes Are Not Sufficient to Ensure Tax Refunds Are Deposited ****************2(f)*********************

The Option to Split Income Tax Refunds Could Increase the Risk of Fraud, Misuse, and Abuse

Recommendation 1:

Appendices

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Management’s Response to the Draft Report

 

 

Abbreviations

 

 

 

Background

 

The majority of individual taxpayers are now choosing to have their Federal tax refunds directly deposited to their checking or savings accounts or to a debit card.[2]  The Internal Revenue Service (IRS) deposited more than 79 million refunds (72 percent of total refunds) directly into taxpayers’ bank accounts during Calendar Year 2011.  These direct deposits accounted for more than $246 billion in refunds, averaging $3,109 each.  Figure 1 shows the increase in the use of direct deposits over the last five calendar years.

Figure 1:  Calendar Year Direct Deposit Refund Statistics

Figure 1 was removed due to its size.  To see Figure 1, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

Source:  IRS.gov, the IRS’s public Internet site, and IRS management reports.

Taxpayers have more choices and flexibility for direct deposits of their Federal income tax refunds than ever before.  Taxpayers can opt to split their refunds among up to three different checking or savings accounts by simply filling out Form 8888, Allocation of Refund (Including Savings Bond Purchases).  To obtain a tax refund via direct deposit, the taxpayer is required to provide the bank routing and account numbers and the type of bank account (checking or savings).

Figure 2 provides an example of where the required information is to be provided on the Form 8888.

Figure 2:  Excerpt From Form 8888

Figure 2 was removed due to its size.  To see Figure 2, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

Source:  www.IRS.gov.

In Calendar Year 2011, more than 842,000 individuals chose to split tax refunds totaling more than $3.4 billion between two to three different checking or savings accounts.  The number of individuals using the split refund option increased 41 percent over Calendar Year 2010, and the amount of refunds increased by 33 percent.

This review was performed at the IRS campus[3] in Fresno, California, during the period August 2011 through June 2012.  The review also included discussions with IRS personnel in the Wage and Investment Division Headquarters in Atlanta, Georgia, and Criminal Investigation and the National Taxpayer Advocate in Washington, D.C.  Additionally, discussions were held with the Financial Management Service, the Federal Reserve Board, and the National Automated Clearing House Association (NACHA – The Electronic Payments Association, hereafter referred to as “the NACHA”).

We conducted this performance audit in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective.  We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.  Detailed information on our audit objective, scope, and methodology is presented in Appendix I.  Major contributors to the report are listed in Appendix II.

Results of Review

 

Processes Are Not Sufficient to Ensure Tax Refunds Are Deposited ************************2(f)*****************

Treasury Inspector General for Tax Administration (TIGTA) auditors analyzed the 79 million Tax Year[4] 2010 Form 1040, U.S. Individual Income Tax Return, refund returns with direct deposits[5] and selected a statistically valid random sample of 400 of these tax returns for further analysis.  The results showed that although the IRS takes actions to ensure the accuracy of direct deposit information, *******************************2(f)************************* ***************************2(f)********************************.

The IRS ensures that *******************************2(f)********************** **************************************2(f)********************************** **************************************2(f)********************************* **************************************2(f)************************************ *********************************2(f)**********************************.

The IRS also educates taxpayers and tax return preparers of the requirement that direct deposits ************************2(f)**********************.

·       Form 1040 and Form 8888 instructions both inform taxpayers that the direct deposit request will be rejected if their refund is deposited to an account that is not in their name.

·       Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, informs Electronic Return Originators[6] that taxpayers should not request a deposit of their refund to an account that is not in their own name (such as their tax return preparer’s own account).

·       Publication 4491, VITA/TCE Training Guide, instructs volunteers to advise taxpayers that their refunds may only be directly deposited into their own accounts.

Nevertheless, tax refunds ****************************2(f)************************ ******2(f)***** and certain accounts continue to receive multiple tax refunds.

 

By matching bank routing and account numbers listed on the 400 tax returns sampled to the direct deposits population database, we found that that the account numbers listed on 10 (2.5 percent) of the 400 returns had received multiple[7] direct deposits.  More than 2,100 refunds totaling $2.2 million were deposited to the bank accounts listed on these 10 tax returns.  Overall, of the approximately 79 million Tax Year 2010 Forms 1040 with direct deposits of refunds, more than 65,300 unique bank accounts had multiple direct deposits – accounting for approximately 949,000 refunds totaling $1.6 billion.

Federal regulations specify that direct deposit payments should be made only to a bank account *************2(f)***************.  For consumer protection, the regulations are designed to ensure that payments reach the intended recipient *********************2(f)************ *****************************2(f)*******************************.[8]

The IRS provides financial institutions with identifying information that could be used to ensure that refunds are deposited only into an account in the name of the taxpayer

Information that could be used to ensure that tax refunds are deposited into an account **2(f)**************** is provided by the IRS to the Financial Management Service, which then transmits the information to financial institutions.  This information includes ****2(f)***** *****************************2(f)************************************.  Rules and regulations that govern the Automated Clearing House[9] network are established by the NACHA.  **************************************2(f)****************************************************2(f)*************************.  Financial Management Service guidance also states that the financial institution is not liable for any loss when deposits are made in accordance with instructions from the IRS (i.e., the refund is deposited into the bank account specified by the IRS).

Representatives from the NACHA indicated that some banks, possibly those with fewer direct deposits, *******************2(f)**********************************.  However, the representatives stated that not all financial institutions have the capability to perform such a match using an automated process.  Consequently, expenses would be incurred to either upgrade the automated systems or to manually process the tax refund transactions. 

TIGTA has previously reported that processes are insufficient to ensure the accuracy of tax refund direct deposits and minimize fraud

A Fiscal Year 2008 TIGTA review found that the IRS had not developed processes to ensure tax refunds were deposited only to an account ***2(f)**************.[10]  We recommended that the IRS coordinate with responsible Federal agencies and banking institutions to develop a process to ensure that direct deposit payments are made ******************2(f)****************** **2(f)** and to limit the number of direct deposits being sent to the same account.  In response, the IRS considered limiting the number of direct deposits being sent to the same account; however, it had numerous concerns, including circumstances where multiple deposits to a single account were legitimate and acceptable because the accounts were held in the names of multiple individuals.

The IRS asked the Financial Management Service to consider proposing a regulation to require financial institutions to match account numbers with another piece of information, such as a Social Security Number or name, in Federal direct deposit payments to reduce the number of tax refunds that are delivered to the wrong account.  The Financial Management Service responded that it did not believe that it would be productive to propose such a regulation.  It explained that it published a proposed regulation in 1998 that would have required financial institutions to match the account number against another piece of information in the entry, such as the name or Social Security Number.  After considering the comments received, it decided to not finalize the proposal.  However, since that time, tax-related identity theft and refund fraud have grown significantly.

The inability to ensure the accuracy of direct deposits increases fraud potential

In a July 2012 audit report on identity theft, we reported that direct deposit, including debit cards, continues to be a key method individuals use to obtain fraudulent tax refunds.[11]  Limiting the number of tax refunds that can be deposited to the same account could potentially decrease losses associated with fraud. 

Direct deposit is frequently the payment method used by individuals who attempt to commit filing fraud.  Direct deposit provides the ability to quickly receive fraudulent tax refunds without the difficulty of having to negotiate a tax refund paper check.  To cash a check, individuals usually have to provide picture identification matching the name on the tax refund check—in the case of identity theft, the name of the legitimate taxpayer.  This means that the identity thief would need to obtain false identification to cash the fraudulently obtained tax refund check. 

In our July 2012 report, we recommended that the IRS:

• As previously recommended, coordinate with responsible Federal agencies and banking institutions to develop a process to ensure that tax refunds issued via direct deposit to either a bank account or a debit card account are made only to an account in the taxpayer’s name.
• As previously recommended, limit the number of tax refunds issued via direct deposit to the same bank account or debit card account in an attempt to reduce the potential for fraud.
• Develop processes to identify and quantify direct deposits of tax refunds to accounts associated with a debit card as well as the ability to associate tax refunds deposited to a debit card to a specific tax account.
• Work with the Department of the Treasury to ensure financial institutions and debit card administration companies authenticate the identity of individuals purchasing a debit card.  Furthermore, prevent the direct deposit of tax refunds to debit cards issued or administered by financial institutions and debit card administration companies that do not take reasonable steps to authenticate individuals’ identities.

The IRS agreed with all four recommendations; therefore, we are not making recommendations related to this issue at this time.

The Option to Split Income Tax Refunds Could Increase the Risk of Fraud, Misuse, and Abuse

Tests results showed multiple direct deposits of refunds were made to bank accounts listed on tax return preparers’ own personal tax returns.  This could indicate that tax return preparers are using the split refund option as a way for taxpayers to pay for their tax preparation services or to pay for Refund Anticipation Loans and Refund Anticipation Checks.[12]  The purpose of Form 8888 is to provide taxpayers the ability to allocate their refunds to more than one of their bank accounts.  The law specifically prohibits the deposit of an income tax refund into a tax return preparer’s bank account.[13]  However, the IRS ******************************2(f)************** ***************************************2(f)**************************.

Our analysis of the more than 79 million Tax Year 2010 returns identified 4,406 bank accounts listed on tax return preparers’ personal tax returns that had multiple tax refunds directly deposited.[14]  More than 202,000 taxpayer refunds totaling more than $309 million[15] were sent to these bank accounts.  Figure 3 provides a breakdown of the most significant examples of multiple taxpayer tax refunds being deposited to bank accounts listed on tax return preparers’ personal tax returns. 

Figure 3:  Examples of Bank Accounts Listed on Preparers’ Tax Returns
Receiving More Than 1,500 Direct Deposits From Other Taxpayers

Source:  TIGTA analysis of Tax Year 2010 returns.

Our analysis of 4,406 bank accounts listed on tax return preparer’s personal Tax Year 2010 returns with multiple direct deposits showed that almost 60 percent of the refunds directed to the accounts were for $500 or less.  Figure 4 shows the stratification by refund amount deposited to the account.  Figure 5 shows the top five common refund amounts deposited to the accounts.

Figure 4:  Stratification, by Dollar Amount, of Refunds Directly
Deposited to Bank Accounts Listed on Preparers' Tax Returns
(Accounts With Multiple Refunds)

Source:  TIGTA analysis of Tax Year 2010 returns. ** Percentage differences are due to rounding.

 

Figure 5:  Top Five Common Refund Amounts Deposited
to the Bank Accounts Listed on Preparers' Tax Returns

Source:  TIGTA analysis of Tax Year 2010 returns.

We could not verify that the tax return preparers owned the bank accounts.  However, the same account on the tax preparer’s individual tax return was used on multiple returns he or she prepared. 

Many tax return preparers may have diverted funds to their own bank accounts to pay tax preparation fees or provide Refund Anticipation Loans.  Publication 1345 states that taxpayers should not request a deposit of their refund to an account that is not in their own name (such as their tax preparer’s own account).  Additionally, it directs tax return preparers to work with a separate financial institution to provide Refund Anticipation Loans.  Financial institutions generally use ****2(f)****************** of the taxpayer as part of the account number to differentiate recipients and to make each account unique.

Multiple direct deposits of refunds were sent to bank accounts listed on IRS employees’ tax returns

Our analysis of the Tax Year 2010 returns identified 209 bank accounts listed on IRS employees’ tax returns that had multiple direct deposits.[16]  There were 10,601 refunds sent to these bank accounts, and the refunds totaled more than $14 million.  Figure 6 provides a breakdown of the most significant examples.

Figure 6:  Examples of Bank Accounts Listed on IRS Employees’
Tax Returns Receiving More Than 200 Direct Deposits[17]

Source:  TIGTA analysis of Tax Year 2010 returns.

As with the return preparers, we could not verify that the IRS employees owned the bank accounts in question.

Recommendation

Recommendation 1:  The Deputy Commissioner for Services and Enforcement should *******2(f)******************* tax return preparers and IRS employees who potentially *********************2(f)************************.

Management’s Response:  New filters are being developed for the 2013 Filing Season regarding multiple deposits to the same account.  These filters will assist in addressing the issues identified in the report.  The IRS is also developing a messaging strategy for the 2013 Filing Season to remind taxpayers and tax return preparers that refunds due to taxpayers may not be ***************2(f)************************  The strategy will also inform taxpayers they should not permit any portion of their refund to be ******************************************2(f)********************** **2(f)***.  In addition to the communication strategy and efforts already underway to restrict direct deposits of tax refunds to taxpayer-owned accounts, the IRS is developing controls to identify instances where it appears tax return preparers and IRS employees may be improperly using the direct deposit program for unintended purposes.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

Our overall objective was to evaluate the IRS’s controls over the direct deposit of refunds.  To meet this objective, we performed the following tests:

I.                 Determined whether conditions identified in the prior TIGTA audit[18] still existed and whether the recommendations were implemented and corrective actions were effective.

A.    Reviewed the Joint Audit Management Enterprise System report from the prior TIGTA audit and determined if the recommendations had been implemented.  We identified the industry standards for controlling direct deposit transmission and whether compliance with 31 Code of Federal Regulation Section 210.5 was being enforced.

B.    Interviewed IRS staff in the Wage and Investment Division and the National Taxpayer Advocate office to evaluate material changes to controls over direct deposits and their impact on tax administration.

C.    Interviewed officials from the Financial Management Service and the Federal Reserve and determined whether material changes had been made to direct deposit processing since the prior TIGTA audit.

D.    Interviewed NACHA officials and determined whether material changes had been made to direct deposit processing since the prior TIGTA audit.  We discussed matching direct deposit refund payments using taxpayer ***2(f)*************** identity indicators before the acceptance of the direct deposit.

II.               Determined whether controls over the direct deposit of refunds into taxpayer bank accounts were adequate to ensure that deposits were accurately processed. 

A.    Researched TIGTA and Government Accountability Office audit reports for previously reported control breakdowns.

B.    Researched the Internal Revenue Manual and determined if procedures used by the IRS to process direct deposits requested on Forms 1040, U.S. Individual Income Tax Return, and Forms 8888, Allocation of Refund (Including Savings Bond Purchases), were adequate.

C.    Obtained an Individual Master File[19] computer extract and identified more than 79 million Tax Year 2010 Form 1040 refund returns with direct deposits.  A statistically valid random sample of 400 returns was selected using a 5 percent margin of error, a 95 percent confidence level, and a 50 percent response distribution.  We reviewed the sample of 400 returns to determine if direct deposits requested on Forms 1040 and Forms 8888 were accurately processed.

III.       Analyzed the TIGTA Data Center Warehouse[20] Individual Master File Refund Files[21] and identified potential fraud cases involving direct deposits, including the misuse of Forms 8888.

A.    Interviewed IRS officials in the Wage and Investment Division Customer Account Services function, the National Taxpayer Advocate’s office, and Criminal Investigation regarding current and past procedures for misdirected direct deposits by employees or third parties, misuse or abuse of Forms 8888 to collect fees by tax return preparers, refund theft steps taken to advocate for affected taxpayers and the IRS, and preventive controls in place.

B.    Analyzed trends in IRS employee-related direct deposit fraud cases.  We obtained the TIGTA Office of Investigations database of completed direct deposit fraud cases.  We obtained employee data from the Treasury Integrated Management Information System[22] on current and separated employees.  We matched employees to the Refund Files and obtained employee bank information.  We queried the match and identified multiple direct deposits going into same bank account.  We reviewed cases that represented anomalies.

C.    Analyzed trends in tax return preparer-related direct deposit fraud cases or misuse of Forms 8888.  We matched the Preparer Tax Identification Number Files (all years) to the Refund Files and obtained tax return preparer bank information.[23]  We queried the match and identified multiple direct deposits going into same bank account.  We reviewed cases that represented anomalies.

D.    Identified multiple direct deposits going to the same account number.  We analyzed returns and determined if there was a logical reason for the multiple refunds.

Data validation methodology

During this review, we relied on data extracted from the TIGTA Data Center Warehouse of the IRS’s Individual Master File and the Refund Files for Processing Year[24] 2011.  Before relying on the data, we ensured that each file contained the specific data elements we requested.  In addition, we reviewed random samples of 25 records from both the Individual Master File and Refund File extracts and verified that the data in the extracts was the same as the data captured in the IRS’s Integrated Data Retrieval System.[25]  These tests demonstrated that the data were sufficiently reliable and could be used to meet the objectives of this audit.

We also relied on data extracts of the Preparer Tax Identification Number Files, the Treasury Integrated Management Information System, and the Bank Routing Number File.  Before relying on the data, we ensured that each file contained the specific data elements we requested.  However, for these data files we relied on data validity and reliability checks routinely done by the Data Center Warehouse staff. 

Internal controls methodology

Internal controls relate to management’s plans, methods, and procedures used to meet their mission, goals, and objectives.  Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations.  They include the systems for measuring, reporting, and monitoring program performance.  We determined the following internal controls were relevant to our audit objective:  Accounts Management and Submission Processing functions’ policies, procedures, and practices related to processing direct deposit tax refunds.  We evaluated those internal controls by interviewing management and operational personnel, reviewing policies and procedures, participating in walkthroughs, and analyzing actual direct deposit refunds that were processed.

 

Appendix II

 

Major Contributors to This Report

 

Augusta R. Cook, Acting Assistant Inspector General for Audit (Returns Processing and Account Services)

Kyle R. Andersen, Director

Roy E. Thompson, Audit Manager

Jane G. Lee, Lead Auditor

Jennie G. Choo, Senior Auditor

Laura Paulsen, Senior Auditor

 

Appendix III

 

Report Distribution List

 

Commissioner  C

Office of the Commissioner – Attn:  Chief of Staff  C

Deputy Commissioner for Operations Support  OS

Commissioner, Wage and Investment Division  SE:W

Chief, Criminal Investigation  SE:CI

Chief Technology Officer  OS:CTO

Deputy Commissioner, Services and Operations, Wage and Investment Division  SE:W

Director, Customer Account Services, Wage and Investment Division  SE:W:CAS

Director, Refund Integrity and Correspondence Services  SE:W:RICS

Director, Submission Processing, Wage and Investment Division  SE:W:CAS:SP

Chief Counsel  CC

National Taxpayer Advocate  TA

Director, Office of Legislative Affairs  CL:LA

Director, Office of Program Evaluation and Risk Analysis  RAS:O

Office of Internal Control  OS:CFO:CPIC:IC

Audit Liaisons:

     Chief, Program Evaluation and Improvement, Wage and Investment Division  SE:W:S:PEI

     Director, Communications and Liaison, National Taxpayer Advocate  TA

 

Appendix IV

 

Management’s Response to the Draft Report

 

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

ATLANTA, GA. 30308

 

  COMMMISSIONER

WAGE AND INVESTMENT DIVISION

 

September 12, 2012

 

 

MEMORANDUM FOR MICHAEL E. MCKENNEY

 ACTING DEPUTY INSPECTOR GENERAL FOR AUDIT

 

FROM:                                 Peggy Bogadi /s/ Peggy Bogadi

 Commissioner, Wage and Investment Division

 

SUBJECT:                          Draft Audit Report - Processes for the Direct Deposit of Tax Refunds Need Improvement to Increase Accuracy and Minimize Fraud (Audit #201140021)

 

With the rapid growth in the use of direct deposits for receiving tax refunds, the ability for taxpayers to allocate their refunds among up to three accounts was introduced as a means by which to give taxpayers greater control over their refunds and encourage saving.  The split refund option was first offered to taxpayers during the 2007 Filing Season, and the ability to purchase United States Savings Bonds with a refund was added in 2010.  As the use of the option increased, some taxpayers began directing refunds for seemingly innocuous purposes, ******************2(f)********************, but, as noted in the report, this is an impermissible use of the split refund program.  As discussed in more detail below, the IRS is taking a number of actions in this area.

 

As noted in the report, when tax refunds are issued, the IRS passes additional identifying information to the Financial Management Service (FMS), which, in tum, provides that information to the financial institutions when electronic payments are transmitted.  However, *******************************2(f)***********************************************************2(f)********************************************** and have contributed to our efforts to stop fraudulent refunds.

 

With regard to the finding of accounts receiving multiple deposits from multiple taxpayers, it is important to note that the Treasury Inspector General for Tax Administration (TIGTA) has not verified ownership of the bank accounts in question.  There are circumstances where multiple deposits to a single account are legitimate and acceptable.  Thus, the IRS must initiate appropriate investigatory proceedings to ascertain ownership.  Nonetheless, we agree with the TIGTA that the findings are indicative that additional controls are needed to identify and question these multiple deposits and the IRS is making changes in this area for the 2013 filing season.  Still, caution must be exercised in drawing conclusions as to the extent of fraudulent activity present.

 

As mentioned, we are taking steps to address the split refund issue for the 2013 Filing Season.  We believe, first and foremost, that taxpayer education is essential in effectively restricting direct deposits to accounts actually owned by the taxpayers.  We are developing a communication strategy to address the issue and are considering modifying the instructions for Form 8888, Allocation of Refund (Including Savings Bond Purchases), to remind taxpayers that refunds should not be directed to accounts they do not own.  We are also refining fitters for next filing season to be more effective in this area in ***********************************2(f)************************* ***********************************2(f)******************************** ***********************************2(f)*********************************************************************2(f)********************************* *****************2(f)***************************.

 

Finally, regarding the finding of multiple deposits to accounts listed on the tax returns of IRS employees, we take this very seriously and have reviewed these transactions.  We must stress caution in drawing conclusions until all facts are known, including ownership of the accounts listed, and whether spousal activity could be affecting the data.  IRS employees like other taxpayers may have directed a portion of their refunds for impermissible, but nonfraudulent purposes, ***************2(f)***********************.  Your report indicates that 209 accounts listed on employee returns had multiple direct deposits.  It is important to note that this does not represent 209 different employees receiving multiple direct deposits to their accounts.  The smaller number of employee accounts that appear to have received questionable deposits have been referred to the TIGTA Office of Investigations to determine if any conduct violations have been committed by the employees.

 

Attached are our comments to your recommendations.  If you have any questions, please contact me, or a member of your staff may contact Peter J. Stipek, Director, Customer Account Services, Wage and Investment Division, at (404) 338-8910.

 

Attachment

 

Attachment

 

RECOMMENDATION

 

RECOMMENDATION 1

The Deputy Commissioner for Services and Enforcement should ***2(f)******** ******2(f)**** tax return preparers and IRS employees *************2(f)**********

************2(f)****************.

 

CORRECTIVE ACTION

New filters are being developed for the 2013 filing season regarding multiple deposits to the same account.  These will assist in addressing the issues identified in the report.  We are also developing a messaging strategy for the 2013 Filing Season to remind taxpayers and tax return preparers that refunds due to taxpayers may not be *****2(f)******* **************2(f)***************.  The strategy will also inform taxpayers they should not permit any portion of their refund to be ****************2(f)********** ******************************2(f)************************.  In addition to the communication strategy and efforts already underway to restrict direct deposits of tax refunds to taxpayer-owned accounts, we are developing controls to identify instances where it appears tax return preparers and IRS employees may be improperly using the direct deposit program for unintended purposes.

 

IMPLEMENTATION DATE

Communication Strategy - January 15, 2013

Development of Controls - January 15, 2013

 

RESPONSIBLE OFFICIAL

Director, Return Integrity and Correspondence Services, Wage and Investment Division

 

CORRECTIVE ACTION MONITORING PLAN

We will monitor these corrective actions as part of our internal management control system.