Tax Administration:

IRS Can Improve Controls Over Electronic Filing Fraud

GGD-93-27: Published: Dec 30, 1992. Publicly Released: Jan 8, 1993.

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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) internal controls for preventing and detecting fraudulent electronic returns.

GAO found that: (1) IRS increased its fraud detection personnel and improved controls over the screening of individuals and firms that prepare or transmit electronic tax returns; (2) by 1992, detection of fraudulent electronic refunds increased and the number of fraudulent returns detected before transmittal also increased; (3) the detection and investigation rate for paper returns was still higher than the detection rate for fraudulent electronic returns; (4) IRS district offices lacked authority to check national criminal history records, lacked information on applicants' filing histories, and made decisions that were not subject to review; (5) further prevention measures against fraudulent returns included screening and investigating questionable tax returns when they arrived at service centers for processing; (6) problems with the screening and investigative process included deficient screening procedures, first-time filing problems, inadequate investigative staffing, and delays in obtaining paper documents to verify electronic filing information; and (7) IRS needs to strengthen controls over its electronic filing system and stop issuing refunds before the required paper documentation.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Because it was too late to do anything differently for 1993, IRS only recommended that two pieces of identification be obtained. IRS said that it would require this in 1994. In its procedures for 1994, however, IRS again only recommended that two pieces of identification be obtained and that one be a picture identification. GAO continues to believe that these actions should be required.

    Recommendation: The Commissioner of Internal Revenue should require that preparers/transmitters obtain at least two pieces of identification from electronic filers before transmitting their returns and retain the pieces of identification with taxpayers' records. One piece of identification should be a picture identification.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: In 1993, IRS implemented special procedures for electronic returns filed by first-time filers that, in effect, provided investigative staff with more time to assess the validity of the filer and/or the return. IRS has announced plans to do even more in 1994.

    Recommendation: The Commissioner of Internal Revenue should classify electronic returns from first-time filers as questionable returns for further investigation and delay processing those returns until the validity of the filer can be established.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS has been revising its computer criteria annually and service center fraud detection teams are allowed to adapt the criteria to local circumstances. As an interim step until it modernizes its systems, IRS has been conducting a test using partial-year employer wage data from the states.

    Recommendation: The Commissioner of Internal Revenue should follow through on plans to develop improved computer checks for identifying questionable electronic returns in time for the 1993 filing season. These checks should be based on analyses of the perpetrators of electronic filing schemes and not restrict service center fraud detection teams from adapting the checks as fraud schemes are identified during the filing season. As it modernizes its computer systems, IRS should also consider electronically matching employer wage information with electronic return data as a means of validating information on electronic returns.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: In January 1994, IRS added a requirement to its Internal Revenue Manual that, at least once a week, a quality review be performed of acepted applicants to help ensure that the suitability decisions are appropriate.

    Recommendation: To help prevent the filing of fraudulent electronic tax returns, the Commissioner of Internal Revenue should establish a procedure to review electronic filing coordinators' suitability decisions.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: IRS said that it has standards and will review them with field office staff and emphasize their importance. GAO is not convinced that the standards of which IRS speaks meet the intent of the recommendation.

    Recommendation: To help prevent the filing of fraudulent electronic tax returns, the Commissioner of Internal Revenue should establish rejection standards for applicants who habitually fail to pay their taxes or file their returns on time.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: The GAO recommendation anticipated that IRS would identify electronic filing preparers/transmitters on its Master File so that those who become delinquent in their tax responsibilities after being accepted into the electronic filing program can be automatically identified for followup. Instead, according to IRS, it is achieving the same end by bumping a separate file of preparers/transmitters against the Master File. What happens to those preparers/transmitters identified by such matching depends on the type and severity of the program.

    Recommendation: To help prevent the filing of fraudulent electronic tax returns, the Commissioner of Internal Revenue should identify electronic filing preparers/transmitters on IRS computer files so that past year electronic filing participants who did not pay taxes or file returns or who otherwise failed to meet electronic filing requirements can be included in the annual suitability screening process.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Implemented

    Comments: In 1994, IRS implemented a requirement that new applicants for partnerships in the electronic filing program must submit fingerprints as part of their application and must agree to a credit check. The fingerprint requirement does not apply to CPAs, attorneys, or enrolled agents. IRS had said that it will decide after the 1995 filing season, whether to expand either of these requirements to persons already participating in the program.

    Recommendation: To help prevent the filing of fraudulent electronic tax returns, the Commissioner of Internal Revenue should seek approval to allow Criminal Investigation staff access to National Crime Information Center data for the purpose of checking the background of electronic filing applicants. Until that approval is obtained, district offices should use the National Law Enforcement Telecommunications System to check criminal records maintained by state and local law enforcement authorities.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Closed - Implemented

    Comments: According to IRS officials in the National Office and the field, IRS has been sending out warning notices and suspending some preparers/transmitters. GAO was told that a notice would be going out sometime in October 1993 to all preparers/transmitters who had not submitted required documentation for 5 percent or more of the electronic returns they submitted telling them that they are being suspended from the program. IRS did not agree with the second part of the recommendation, saying it would defeat the purpose of electronic filing. GAO does not expect IRS to retreat from its position and is closing out the recommendation. The ultimate solution would be for IRS to be authorized to accept an electronic signature or some alternative, but it is unclear if and when that might happen.

    Recommendation: Until electronic filing paper documents are no longer required, the Commissioner of Internal Revenue should: (1) follow established procedures for warning and suspending preparers/transmitters who do not submit timely paper documents; and (2) discontinue issuing refunds until the associated electronic return can be matched with a corresponding taxpayer signature document.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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