This follow-up review relates to the important area of revenue protection and addresses the Internal Revenue Service’s (IRS) efforts to detect and deter electronic return preparer fraud. The Criminal Investigation (CI) function implemented the Return Preparer Program (RPP) in 1996 to protect revenue by identifying, investigating, and prosecuting abusive return preparers (including both electronic and paper returns).

Our overall objective was to assess whether the IRS effectively implemented corrective actions contained in a 1994 IRS Inspection Service (now Treasury Inspector General for Tax Administration) Audit Report on Electronic Return Preparer Fraud (Reference Number 045601). As a result of the prior review, the CI function established a multi-functional national RPP to address preparer fraud. The Office of Electronic Tax Administration (ETA) established procedures to remove dishonest electronic return preparers and to perform visitations on suspicious preparers to ensure compliance with electronic filing (e-file) procedures. ETA also strengthened admittance standards to reduce the number of abusive preparers in the e-file program. Additionally, the IRS established procedures to ensure that unscrupulous preparers are referred to the Examination function for penalty assessment or prohibition from participation in the e-file program.

However, CI can improve the effectiveness of the RPP by increasing emphasis and oversight. Additionally, ETA can improve controls over the removal of dishonest e-file preparers by separating duties performed by district ETA coordinators.

IRS management generally implemented corrective actions addressing the recommendations made in the prior review noted above. However, the effectiveness of electronic return preparer activities can be improved. Specifically:

Additional resources are needed to better address return preparer schemes. Service Center Criminal Investigation Branches (CIB) did not always have full-time resources devoted to identifying return preparer schemes, and CI field personnel did not always consider the RPP as a priority or mandated program. Additionally, there was no document that established overall authority and functional responsibility for this program. Although CI was responsible for leading the multi-functional RPP, no national analyst was dedicated to coordinate RPP activities for most of calendar year 1998.

The ETA function established procedures for removing dishonest return preparers from the e-file program. However, this process can be improved by separating the duties that the district ETA coordinators perform. These officials are responsible for promoting e-file and removing noncompliant electronic preparers. These are key duties that involve conflicting goals.

To address the issues identified in this report, we recommended that the IRS provide adequate resources for RPP activities, develop procedures establishing CI as the lead office for the RPP, and that CI assign a full-time analyst to coordinate the RPP. In addition, we recommended that the IRS assign responsibility for the removal of noncompliant return preparers to someone other than the district ETA coordinator.

Management’s Response: IRS management agreed with our recommendations and, beginning in Fiscal Year (FY) 2000, will provide increased resources to RPP activities. Additionally, a Servicewide Return Preparer Strategy is planned for implementation in FY 2000 focusing on return preparers who prepare Earned Income Tax Credit returns. As part of this strategy, a memorandum of understanding is being developed to clearly define CI as being responsible for the fraud aspect of the strategy. Future efforts will address additional areas of abuse as identified.

ETA will coordinate with Examination to assume responsibility for monitoring and removal of noncompliant electronic return originators. As a result, the duties of the ETA coordinators will no longer include compliance-type activities.

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