On October 28, the Treasury Inspector General for Tax Administration (TIGTA) released the results of its review of the Internal Revenue Service’s fraudulent tax return detection system, the Electronic Fraud Detection System (EFDS), concluding that inadequate income and withholding verification resulted in the IRS’s missing many fraudulent returns (TIGTA, Income and Withholding Verification Processes Are Resulting in the Issuance of Potentially Fraudulent Tax Refunds, Rep’t No. 2013-40-083 (8/7/13)).

The IRS claimed to prevent $1.2 billion of fraudulent tax refunds in 2013, but TIGTA found in an analysis of 2010 tax year returns that the IRS’s EFDS did not screen 92% of the 1.5 million returns that TIGTA identified as potentially fraudulent. Although income and withholding verification is the most efficient method to detect fraud, the IRS is stymied in using that system because most of the information necessary to do this verification is received after many taxpayers have filed their income tax returns. (A new system, the Return Review Program, is expected to replace EFDS beginning in 2015.)

TIGTA specifically reviewed a random sample of 272 of the 120,197 potentially fraudulent 2010 tax returns for which tax refunds were issued and that received a high enough EFDS score to be sent for income and withholding verification. TIGTA found that IRS examiners confirmed that 96 of these tax returns had false income and withholding, but the IRS did not take timely
actions to prevent the issuance of the fraudulent refunds. Another 8 tax returns were not screened within the required time period to prevent the Read More