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General government: Tax Fraud and Noncompliance (2018-19)

Congress and the Internal Revenue Service should take actions to improve the agency’s ability to detect and prevent refund fraud and other noncompliance prior to issuing tax refunds, which could protect hundreds of millions of dollars annually.

Year Identified: 2018
Area Number: 19
Area Type: Cost Savings & Revenue Enhancement

9 Total Action(s)

Action 1
Addressed

The Acting Commissioner of Internal Revenue should develop an evaluation plan to fully assess the benefits and costs, including taxpayer burden, of modifying the February 15 refund hold, and determine how this effort informs the Internal Revenue Service's (IRS) overall compliance strategy for refundable tax credits and fraud risk management.

Type
Executive Branch
Last Updated
August 31, 2021
Progress:

IRS has taken actions to assess the benefits and costs of modifying the February 15 refund hold, as GAO recommended in January 2018. In November 2018, IRS provided its assessment of the February 15 refund hold. In it, IRS reiterated its findings regarding the benefits of the refund hold. These benefits included potential savings if IRS modified the hold to include all taxpayers, extended the hold to a later date when more W-2 data are available, or both.

While IRS did not fully assess costs or taxpayer burden associated with modifying the February 15 refund hold, it took actions in January 2019 and January 2020 that suggest cost and burden were considerations. Specifically, IRS began holding returns at higher risk for fraud and noncompliance, and for which IRS did not have a W-2, beyond the February 15 refund hold until a W-2 was available to verify against the return. In March 2021, IRS officials stated that the agency had been able to automate these functions so that staff were not required to manually review the returns, allowing staff to work on other tasks. Further, IRS continued to select returns to hold using a risk-based method, in part, to limit taxpayer burden by not affecting larger populations expecting refunds. IRS’s assessment using key data allowed it to make more informed decisions to better use W-2 information and prevent issuing invalid refunds.

Implementing Entity:
Internal Revenue Service
Action 2
Addressed

Based on the benefits and costs assessment in action 1, the Acting Commissioner of Internal Revenue should use the Internal Revenue Service's (IRS) existing authority to modify the refund hold such that it minimizes the risk of releasing fraudulent or noncompliant refunds.

Type
Executive Branch
Last Updated
August 31, 2021
Progress:

IRS took actions consistent with GAO's January 2018 recommendations by modifying its filters to hold more returns claiming the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) beyond the February 15 refund hold date based on a risk-based selection method. In addition, beginning in the 2020 filing season, IRS made similar changes to hold more high-risk returns not claiming EITC or ACTC until W-2 data was available. These actions are consistent with GAO's recommendation. By taking these actions, IRS is better able to use W-2 information and prevent issuing invalid refunds.

Implementing Entity:
Internal Revenue Service
Action 3
Addressed

The Commissioner of Internal Revenue should increase the frequency at which incoming W-2 information is made available to the Return Review Program (RRP).

Type
Executive Branch
Last Updated
March 31, 2020
Priority Rec.
Priority recommendations are those that GAO believes warrant priority attention from heads of key departments or agencies.
Progress:

In January 2019, the Internal Revenue Service (IRS) increased the frequency by which it loads incoming W-2 data to its Return Review Program, as GAO recommended in July 2018. IRS receives and loads employer-provided W-2 data to the Information Return Master File, which then makes the data available to the Return Review Program for matching with taxpayer-reported data. Because refunds were not held until the weekly data were available, refunds were being released without being matched. IRS changed from weekly to daily loading of W-2 data to the Information Return Master File and the Return Review Program enabling matching prior to release of refunds. Matching W-2 data with taxpayer returns is a critical part of the systemic verification process and improves fraud detection. The increased availability of W-2 data will increase the number of returns matched prior to refund issuance and help IRS avoid issuing invalid refunds.

Implementing Entity:
Internal Revenue Service
Action 4
Addressed

The Commissioner of Internal Revenue should update and expand a 2012 analysis of the costs and benefits of digitizing returns filed on paper to consider any new technology or additional benefits associated with the Return Review Program's (RRP) enhanced enforcement capabilities.

Type
Executive Branch
Last Updated
March 31, 2020
Priority Rec.
Priority recommendations are those that GAO believes warrant priority attention from heads of key departments or agencies.
Progress:

The Internal Revenue Service (IRS) has considered the costs and benefits of digitizing returns filed on paper, as GAO recommended in July 2018. In December 2019, IRS officials reported that the agency plans to begin scanning and digitizing individual tax returns filed on paper beginning in October 2021. Consistent with GAO's recommendation, IRS is considering additional benefits that increased digitization of paper returns could have on the Return Review Program's enhanced enforcement capabilities. For example, in November 2018 IRS reported that digitizing paper returns at intake would allow IRS to reduce processing time, use the same filtering on all paper and electronic forms, and allow more pre-refund audits or investigations, among other benefits.

Implementing Entity:
Internal Revenue Service
Action 5
Partially Addressed

Based on the assessment in action 4, the Commissioner of Internal Revenue should implement the most cost-effective method to digitize information provided by taxpayers who file returns on paper.

Type
Executive Branch
Last Updated
August 31, 2021
Priority Rec.
Priority recommendations are those that GAO believes warrant priority attention from heads of key departments or agencies.
Progress:

The Internal Revenue Service (IRS) agreed with GAO’s July 2018 recommendation, and in January 2020, IRS reported that the agency plans to begin scanning and digitizing individual tax returns filed on paper beginning in July 2022. As of March 2021, IRS has reported that it completed the first phase of its IRS Digitization Strategy. Digitizing paper returns at intake could allow IRS to reduce processing time, use the same Return Review Program (RRP) fraud filters on all paper and electronic forms, and allow more pre-refund compliance checks or investigations, among other benefits.

Implementing Entity:
Internal Revenue Service
Action 6
Not Addressed

Congress should consider legislation to require that returns prepared electronically but filed on paper include a scannable code printed on the return.

Type
Congressional
Last Updated
August 31, 2021
Progress:

No current legislative action identified. In July 2019, a bill was introduced containing a provision which, if enacted, would have imposed this requirement as GAO recommended in July 2018 (section 6 of S. 2175, 116th Cong.), but this legislation did not pass out of committee and expired at the end of the 116th Congress. No such legislative action has been identified under the 117th Congress as of June 2021. Requiring returns prepared electronically but filed on paper to include a scannable code would allow the Internal Revenue Service (IRS) to scan and digitize information from these returns. It could also strengthen IRS's tax enforcement efforts, resulting in increased compliance revenue.

Implementing Entity:
Congress
Action 7
Partially Addressed

The Commissioner of Internal Revenue should evaluate the costs and benefits of expanding the Return Review Program (RRP) to analyze individual returns not claiming refunds to support other enforcement activities.

Type
Executive Branch
Last Updated
August 31, 2021
Priority Rec.
Priority recommendations are those that GAO believes warrant priority attention from heads of key departments or agencies.
Progress:

The Internal Revenue Service (IRS) agreed with GAO’s July 2018 recommendation, noting that an agency goal is to expand the use of RRP to improve tax compliance and enforcement. As of March 2021, IRS has analyzed labor and other costs associated with expanding RRP, but has not quantified the potential benefits. IRS told GAO it plans to analyze potential benefits in the future as the agency further develops RRP. A more thorough analysis of the benefits and costs of expanding RRP would help IRS identify opportunities to operate more efficiently—such as by streamlining the detection and treatment of fraud—and increase taxpayer compliance.

Implementing Entity:
Internal Revenue Service
Action 8
Not Addressed

Based on the assessment in action 7, the Commissioner of Internal Revenue should expand the Return Review Program (RRP) to support identified activities.

Type
Executive Branch
Last Updated
August 31, 2021
Progress:

No executive action taken. According to Internal Revenue Service (IRS) officials, expanding the use of the Return Review Program (RRP)—as GAO recommended in July 2018—is an agency goal. However, as of March 2021, the agency is still working to assess opportunities to develop and expand RRP, as described in action 7. Expanding RRP to support other enforcement activities could help IRS streamline its detection and treatment of fraud and increase taxpayer compliance.

Implementing Entity:
Internal Revenue Service
Action 9
Addressed

Congress should consider providing the Secretary of the Treasury with the regulatory authority to lower the threshold for electronic filing (e-file) of W-2s from 250 returns annually to between 5 to 10 returns, as appropriate. This action was identified in GAO's August 2014 report, Identity Theft: Additional Actions Could Help IRS Combat the Large, Evolving Threat of Refund Fraud, and was added to the Action Tracker in April 2016 under the "Identity Theft Refund Fraud" area (2016 Area 22).

Type
Congressional
Last Updated
March 31, 2020
Progress:

In July 2019, Congress passed and the President signed the Taxpayer First Act lowering the e-filing threshold for all returns over time, including Forms W-2 (Public Law 116-25), as GAO suggested in August 2014. Specifically, section 2301 of the act will lower the threshold to 100 returns in 2021 and to 10 in 2022 and later. This legislation builds on section 301 of the Tax Technical Corrections Act of 2018, division U of the Consolidated Appropriations Act, 2018 (Public Law 115-141), which lowered the e-filing threshold for partnerships. Lower thresholds for all W-2 filers will help the Internal Revenue Service prevent identity theft refund fraud and improper payments by increasing the number of returns available for electronic record matching and thus enhancing its ability to verify the employment information reported on tax returns before issuing refunds. Additionally, increasing electronic filing of W-2 returns will lower the Social Security Administration's administrative costs for processing W-2 information.

Implementing Entity:
Congress
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