The Internal Revenue Service (IRS) needs to do a better job of identifying and stopping fraudulent claims for income tax refunds, according to the Treasury Inspector General for Tax Administration (TIGTA) in a report released yesterday. Of the more than $1 billion in fraudulent refunds it issued, IRS investigators never even reviewed an estimated $742 million because they lacked the resources to screen refunds at lower dollar values.
The report urges the IRS to make its refund screening program, the Questionable Refund Program, a top priority and divert resources to combating fraud cases. While this could hurt other operations within the IRS, the report is very clear that the IRS cannot afford to continue down this path. Because the system picks up only those refunds with higher dollar values, about 500,000 potentially fraudulent refunds did not go through the screening process. This number is 70 percent higher than in 2005 and if the trend continues it will result in significant revenue loss to the federal government.
There is some rather good news: the IRS did stop more than $1.2 billion in fraudulent refunds during the 2007 filing season, compared with $412 million in 2005, the last year the detection system was functional. In 2006 a technical problem in the fraud detection system hampered fraud detection efforts and only $189 million in fraudulent refunds were identified and stopped while an estimated $894 million were paid out.
Even in the good news though is a disturbing trend; tax cheats attempted to defraud the government of over $2 billion, reflecting an increase of approximately 100 percent from 2005 to 2007. Is this just a sign of the economic times as taxpayers try to milk the system for a little bit more than they are really owed? Or are cheaters getting emboldened by previous success while the IRS looks the other way?
The TIGTA also praised the IRS for a “generally successful” 2008 filing season during which returns and refunds were processed in a timely fashion in a separate report also released yesterday. Analysis of the veracity of those refunds is, unfortunately, not yet available.
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