The General Accounting Office and the Treasury Inspector General for Tax Administration have repeatedly reported on the high number of fraudulent refunds claimed on tax 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." The Internal Revenue Service (IRS) established the Questionable Refund Program in 1977 to detect and stop fraudulent claims for refunds on income tax returns. The program’s major operations occur in the service centers by Criminal Investigation’s (CI) Questionable Refund Detection Teams (QRDT).

Our review assessed the effectiveness of selected activities of the QRDTs. Specifically, we determined whether the QRDTs effectively and consistently used available information to identify fraudulent returns and refund schemes. Further, we determined whether fraudulent returns were properly controlled and fraudulent refunds were stopped, as appropriate.

CI management can strengthen controls to better ensure fraudulent returns are identified and refunds are stopped, as required. Actions can be taken to improve the effectiveness of QRDT activities. Specifically:

Controls should ensure that fraudulent tax refunds ****2b,2e****. Our review of 669 fraudulent returns identified by QRDT personnel in calendar year 1998 showed that 50 of these returns involved refunds where the taxpayer had a ****2b,2e****. In 35 (70 percent) of these cases, QRDT personnel did not ****2b,2e****.

The Electronic Fraud Detection System (EFDS) is the major fraud detection tool for electronically filed returns with a separate database located at each of the five service centers that process electronically filed (e-file) returns (Andover, Memphis, Austin, Cincinnati, and Ogden). The Treasury Enforcement Communications System (TECS) is a nationwide system available to QRDT personnel to initially identify schemes perpetrated in more than one service center (i.e., multi-center schemes). QRDT personnel generally researched their local EFDS database to identify fraudulent returns. The four remaining EFDS databases were not always accessed to identify fraudulent returns. Additionally, QRDTs did not always use the TECS.

Generally, QRDT personnel properly controlled fraudulent returns by entering the required information (i.e., transaction codes) on the IRS computer system. However, these controls were not always removed from the IRS computer system as required. Our sample of 400 cases showed that computer controls for 20 cases (5 percent) should have been removed from the IRS computer system. Further, QRDT personnel did not always apply consistent criteria when determining the specific computer controls used to monitor taxpayers who have filed fraudulent returns, and the length of time these computer controls are maintained on taxpayer accounts.

Guidelines specify that QRDT personnel should verify the validity of a refund within 10 working days of delaying its issuance to a taxpayer. We obtained information from the IRS computer system showing instances where QRDT personnel, at the four sites visited, delayed the issuance of suspicious refunds during the period February through December 1998. Our review of 100 of these cases showed that 43 refunds were not verified and issued to taxpayers within 10 working days as specified. These refunds were issued to taxpayers from 11 to 166 working days after they were delayed, with an average of 42 days.

CI management can improve QRDT activities by establishing national guidelines detailing the process staff should follow to ****2b,2e****. Guidelines should also be developed to ensure that personnel use established controls designed to monitor the activity of taxpayers who previously filed fraudulent returns in a consistent manner. QRDT personnel should better use information available on the EFDS and the TECS to identify fraudulent refund schemes. Finally, CI management should re-emphasize the need to verify suspicious returns as fraudulent or legitimate in a timely manner, and release refunds to taxpayers when appropriate.

Management Response: Criminal Investigation management agreed with the facts contained in a discussion draft report previously provided. However, the IRS’ official response was not available for inclusion at the time this final report was issued. We provided the IRS management with a draft of this report on November 1, 1999, with a 30 calendar-day comment period.

2b = Law Enforcement Guideline(s)
2e = Law Enforcement Procedure(s)