Income and Witholding information - EFDS

[Guest Taxed]

Treasury Inspector General for Tax Administration

Office of Audit

INCOME AND WITHHOLDING VERIFICATION PROCESSES ARE RESULTING IN THE ISSUANCE OF POTENTIALLY FRAUDULENT TAX REFUNDS

Issued on August 7, 2013

Highlights

Highlights of Report Number: 2013-40-083 to the Internal Revenue Service Commissioner for the Wage and Investment Division.

IMPACT ON TAXPAYERS

A common characteristic of fraudulent tax returns is that the income and withholding reported on the tax return is false. The Electronic Fraud Detection System (EFDS) is the IRS’s primary tool used to identify potentially fraudulent tax returns at the time they are processed. Ineffective income and withholding verification processes are resulting in the issuance of potentially fraudulent tax refunds.

WHY TIGTA DID THE AUDIT

For Processing Year 2013, as of April 3, 2013, the IRS reported that, through its income and withholding verification processes, it prevented the issuance of almost $1.2 billion in fraudulent tax refunds. The overall objective of this review was to assess the effectiveness of the EFDS in identifying tax returns which report false income and withholding.

WHAT TIGTA FOUND

The TIGTA has reported and testified before Congress that access to the current year third-party income and withholding information at the time tax returns are processed is the single most important tool that the IRS needs to identify and prevent tax refund fraud. However, most current year third‑party information is not available until well after the tax return filing season begins and tax returns are processed. In July 2012, TIGTA reported that analysis of Tax Year 2010 tax returns identified almost 1.5 million tax returns that were not detected by the IRS as potentially fraudulent despite having the same characteristics as IRS confirmed identity theft fraudulent tax returns. Analysis of the 1.5 million undetected tax returns identified that only 120,197 (8 percent) received a fraud score high enough to be sent for verification.

Our review of a random sample of 272 of the 120,197 tax returns found that the income and withholding verification process is not always effective in stopping the issuance of fraudulent refunds.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS ensure that actions are taken to prevent the issuance of potentially fraudulent refunds when tax returns are not timely screened and verified and ensure that case actions are sufficiently documented. In addition, procedures should be revised to ensure that when tax returns identified as potentially fraudulent are also assigned to another IRS function, the tax refunds are held until the tax return is screened and verified.

In their response to the report, IRS officials stated that they agreed with our recommendations and have implemented actions to extend tax account freezes to prevent the release of potentially fraudulent tax refunds. They plan to reemphasize documentation requirements of case actions and revise instructions for Tax Examiners to require positive verification that an issue triggering an error code or referral has been addressed.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

http://www.treas.gov/tigta/auditreports/2013reports/201340083fr.html.

[jshtax]

I have a client that has been waiting since March 12th to get their $70000 refund. They have supplied all information requested but the IRS will not correct their files and issue the refund.

[Guest Taxed]

You will need to get a power of attorney letter and call IRS directly. There may be other issues involved.

[jshtax]

Told client its not all bad since IRS will pay them interest higher than they can earn elsewhere.