TREASURY INSPEcTOR GENERAL
FOR TAX ADMINISTRATION
FURTHER IMPROVEMENTS ARE NEEDED TO THE INTERNAL REVENUE SERVIcE'S PROcESS FOR ADMITTING PREPARERS AND TRANSMITTERS INTO ITS ELEcTRONIc FILING PROGRAM
Reference No. 092104
The General Accounting Office (GAO) and the Internal Revenue Service (IRS) Inspection Service (now the Treasury Inspector General for Tax Administration (TIGTA)) have repeatedly reported on the high number of fraudulent refunds claimed on electronically filed returns. In October 1994, the Department of the Treasury’s Under Secretary (Enforcement) testified before the congress that up to "$5 billion in problematic refunds [was being] paid out annually." One way the IRS acts to deter the filing of fraudulent tax returns is by controlling access to the Electronic Filing (e-file) program. Under this control procedure, Electronic Return Originators (EROs, also referred to as electronic return preparers and/or transmitters) are screened against established criteria prior to being accepted for the next year’s Electronic Filing Program. This screening process is commonly referred to as determining the "suitability" of EROs to participate in e-file.
In response to a material weakness initially identified during a 1992 Federal Managers’ Financial Integrity Act (FMFIA) review, the IRS centralized the national screening of the ERO suitability from 33 sites into a consolidated site. During the first centralization phase, effective for processing 1997 tax returns, the consolidated site undertook the screening of new applications for becoming EROs. The suitability screening for the remaining EROs continued to be decentralized, with the decisions on suitability being made by personnel in the 33 IRS districts.
For the 1998 filing season, the IRS determined the suitability of 19,285 new applicants to participate in e-file as EROs. The IRS concluded that 18,780 (97 percent) of the new applicants were suitable to participate.
Our audit objective was to determine if the IRS’ suitability screening process was effective in assuring that only appropriate EROs participated in the e-file program.
For the 1998 filing season, the IRS implemented significant improvements to the suitability screening process, particularly the implementation of the consolidated site for processing new applications. To further enhance this improvement, the IRS should consider more stringent enforcement of existing criteria and improved automated suitability screening. This would help ensure that only EROs meeting minimum tax compliance and background qualification requirements participate in the Electronic Filing Program in the future. This should further help limit the IRS’ susceptibility to filing fraud. The results of our three primary test areas showed that:
Suitability Decisions Made on New Electronic Filing Program Applicants Were Reasonably Accurate and consistent
The Office of Electronic Tax Administration (ETA) actions to consolidate the processing of new applications into one location resulted in reasonably accurate and consistent initial suitability decisions. Our analysis showed that consolidated site tax examiners made an accurate suitability decision on 92 of the 96 cases tested.
Annual Suitability Screening conditions Allowed Inappropriate Electronic Return Originators to Participate in Electronic Filing
The 1998 suitability screening process could have been more effective in preventing inappropriate EROs from participating in the Electronic Filing Program. An analysis of the overall universe of EROs (new applicants and current participants) accepted to participate in e-file showed that 1,733 EROs had one or more inappropriate characteristics, yet were allowed to participate in the 1998 e-file program. A detailed analysis of 90 of these EROs showed that they transmitted 13,392 e-file returns, an average of 149 per ERO.
Appeal Procedures for Applicants That Failed Suitability Should Be Strengthened
During the first phase of the appeals process, 85 percent (401 of 470) of the EROs that failed suitability had the decision reversed and were admitted into the e-file program.
Prior Suitability-Related Recommendations Had Not Been Implemented
ETA management had not fully implemented 16 of 62 suitability-related recommendations made in relation to FMFIA, GAO, TIGTA, and e-file Task Force activities. For example, after repeated recommendations, management has been unable to update computer programming so that tax examiners making ERO admission decisions could be made aware immediately of ERO tax compliance information that could affect continued participation.
Summary of Recommendations
The risk of allowing inappropriate preparers/transmitters to participate in the IRS’ e-file program as EROs could be reduced by ensuring that application processing procedures are followed and that more aggressive and consistent procedures are developed to check and remove questionable preparers/transmitters from the program. IRS management should also develop procedures to ensure a separation of duties between employees responsible for the initial failed suitability decision and the employees responsible for the initial appeal decision.
ETA management also should improve suitability computer programming so participants that were identified during annual suitability as having incomplete filing data are automatically rechecked prior to the start of the filing season. Improvements should also be made to the IRS’ computer systems to identify EROs and generate a report when specific transactions appear on an ERO's tax account that would affect suitability. In addition, the IRS should utilize the criminal Investigation Management Information System (cIMIS) to more efficiently and effectively identify EROs who have a criminal history.
ETA management should review prior FMFIA, GAO, e-file Task Force, and TIGTA suitability-related recommendations and ensure that they are implemented.
Management's Response: ETA stated that they have taken or will take actions as a result of our recommendations. To improve the e-file program, ETA agreed to: (1) update procedures and/or hold meetings to ensure that consistent suitability procedures and instructions are used to check and remove questionable preparers; (2) update applicable suitability procedures to separate the appeal process from the original determination process; (3) start preliminary coordination to correct suitability programming; and (4) review prior suitability-related recommendations and determine if they should be implemented.
In addition, ETA management agreed that implementing the recommendation to develop a code on an IRS computer system, when specific transactions appear on an ERO’s tax account, would provide early notification of instances that potentially impact suitability. However, ETA stated that the implications to a computer system, and the extensive programming needed, prevented their ensuring its implementation.
ETA management disagreed with our recommendation that the IRS should compare the ERO automated database to the cIMIS database to identify accepted EROs who have a criminal investigation history. However, ETA officials stated that they would research the cIMIS computer database further to determine if it could be beneficial to the Electronic Filing Program.
Office of Audit comments: We encourage ETA management to reconsider its decision not to use available computer based tools to help identify accepted EROs who have a criminal investigation history. We strongly believe that the use of cIMIS would provide important background information with minimal expense and fewer delays than the primary source currently used. Our limited test of cIMIS matching identified three accepted EROs who had criminal histories or criminal investigation case information.
Regarding the lack of IRS programming capability, we suggest the IRS begin to look to external alternatives if internal IRS resources remain in short supply. In addition, we also suggest ETA management closely supervise and control the review and implementation of prior FMFIA, GAO, e-file Task Force, and TIGTA recommendations to ensure thorough completion.