Failure of tax fraud detection system worse than estimated
The Internal Revenue Service paid out more than $318 million in improper tax refunds this year, millions more than the tax agency had previously estimated, according to an audit report.
The IRS tried to field a new Web-based version of its decade-old digital tool for detecting fraudulent tax refund claims by January 2006, without keeping the original version in place. But when contractor Computer Sciences Corp. failed for the second time in two years to deliver the updated system, the IRS was left without an automatic electronic tool for catching people who claim improper refunds.
The failure came to public light during a Senate Finance Committee hearing on July 13. At the time, the IRS said that other detection measures captured only 34 percent of fraudulent claims for refunds compared to same period in 2005, resulting in a $200 million to $300 million government loss.
A report released Friday by the Treasury Department's inspector general for tax administration pegs the amount of improper refunds at $318.3 million. In 2005, the system detected $412 million worth of false refunds.
The report faults IRS management for treating the update as a steady state project rather than a development effort requiring closer scrutiny. The tax agency paid $20.5 million in development costs from 2002 until April 19 for the system, primarily to Computer Sciences Corp. The company did not meet its first deadline in 2005, but the IRS believed the contractor's assurances that the system would be ready in January 2006. As a result, the agency did not develop a contingency plan in case the new system did not function.
CSC continues to be the project's lead contractor. A company spokesman referred calls to the IRS.
Currently the IRS is working with CSC to restore its old system, officially called the Electronic Fraud Detection System, by January 2007. No determination has been made on whether to proceed with the Web update, according to the IRS.
The tax agency also is renegotiating its cost-reimbursement contract with the company. The IRS says it is legally obligated to pay all CSC invoices, including $459,718 that CSC billed in 2005 for additional work in restoring the old system when it failed to deliver the Web-based version for the first time. The tax agency says it hopes to introduce some performance measures into the contract, and says that any possible future contracts for a Web-based version would be performance-based.
The IRS has become a champion of performance-based contracting, especially in its historically troubled tax systems modernization effort. Although CSC is also the prime contractor for that ongoing $10 billion project, the two projects have been managed separately. The original EFDS contract, in fact, was awarded to DynCorp, which CSC acquired in 2003. The turnover rate among contractor employees was high as a result, the audit report noted. Numerous changes within the executive ranks at the IRS also contributed to the project's instability, the auditors said.
The audit report is the first of three that will examine potential tax fraud committed as a result of the failed system and cybersecurity issues. Auditors initiated the report following an Aug. 3 letter sent by House Ways and Means Committee Chairman Rep. Bill Thomas, R-Calif., to Treasury Secretary Henry Paulson. In the letter, Thomas chastised IRS officials for neglecting "to dedicate sufficient resources, expertise and oversight" to the project.
COMMENTS
- Today, it's not just IRS's problem. Sometimes, local justice system is helping and covering those tax fraud. Like the case behind whocaresusa is about $20M tax fraud with multi-million underpayment. Is that a small piece of cake? This is beyond IRS control. D. C. Posted September 9, 2008 4:11 PM
- I agree with Robert and suggest a simple solution. 1. Get rid of all taxes as they are today. 2. Impose a 10 percent tax on all imports -- goods and services both. 3. Impose an income tax of 15 percent on all income for individuals on earned income (wages, salaries, tips, commissions, stock opinion gains at time of exercise, bonuses and pension benefits). 4. Tax capital gains and other interest and investment income at a flat 15 percent for investments held over five years and at 20 percent for those held less than five years. 5. Do not tax any business but define the amount of retained earnings that a business may keep before taxes are implemented. We need this to stop individuals from accumulating income in the business to avoid personal tax and to force big corporations to either pay dividends or taxes. Business taxes are simply passed on to consumers in higher prices but do not generate a public outcry about the tax so politicians get by with murder by avoiding personal income taxes. 6. Make the Social Security and Medicare tax equal to 10 percent of the earned income in excess of $20,000 and do not have an income limit but impose the tax on all income beyond the $20,000. Have the employer provide a contribution equal to one half that imposed on the employee. 7. Impose a federal tax of 3 percent on the dollar value of ever real estate transfer in the country regardless of the type of property involved. In a property trade the tax would be imposed on the appraised value of the property involved. The tax on a trust or any other ownership form not an individual or corporation would be 3 percent of the appraised value of the property imposed every ten years or upon a change in the trust agreement. That is simple, it generates enough income and it lets people know what the impact of the Congress is by making the tax more transparent. Individuals pay enormous taxes today in higher prices and higher interest rates because of government taxes on various products and organizations that hide the tax from the consumers. Why do you think gas prices are so high? Remove the taxes and see what the price of gas really is! Taxpayer Posted September 8, 2006 8:05 AM
- Frighteningly, IRS is also not able to keep up with another huge area of outlays --amended forms refunds. A small business for which I provide accounting services identified and amended its 2004 940 filing several months ago and received a substantial refund with interest. Just this past month, IRS sent out a notice saying that they had "caught an error" in the 2004 940 (original) filing for the business and all the business owner was required to do if he/she agreed with the error was to sign and return the letter and the refund with interest would be forwarded shortly thereafter. IRS is not able to match up amendments with original returns. We notified IRS of their error and had to file a substantial letter and attachments to document why we agreed with the finding but should not get a (redundant) refund. What a mess and potential loss of billions of dollars, not to mention the extra work burden on the small business community (or at least for the honorable part of that community that will not to the trouble to refuse the erroneous refund). Thanks for highlighting this mess. As I taxpayer, I am appalled. GovExec.com reader Posted September 7, 2006 8:03 AM
