IRS Improves It Performance When Handling Fraudulent Returns In 2011

A report issued by the Treasury Inspector General for Tax Administration (TIGTA) after examining the 2011-filing season found that the IRS had improved its capturing of fraudulent returns by 171 percent.

The complexity of processing the sheer volume the IRS faces every year is daunting. In 2011, the service processed 130.7 million returns, issued 98 million refunds worth $277 billion. Of that number, over 700,000 fraudulent returns, requesting nearly $5 billion in refunds, were stopped.

The service also improved the screening of prisoner filings, managing a 256 percent increase from the previous year. This is progress, especially when considered in the context of the challenges the IRS faces in managing substantive changes to the tax code combined with the operational challenges posed by its computer systems.

New Legislation Causes Problems

Congress is always "fine tuning" the tax code, and that tuning now means Title 26 of the United States Code (which contains the tax code) runs to over 2,400 sections. In addition, the regulations that interpret those statue sections are far larger, consuming over 6,700 sections of the code of federal regulations (CFR) and many thousands of pages.

Every time Congress changes some part of the tax code, the IRS has to modify all of its forms and processes that are affected by the change. Because most the actual processing is done by computers, this also means all of the computer software must be modified. And this is not a trivial matter.

IMF and CAGE

The IRS has had no end of trouble in its attempts to modernize it computer systems. The current primary computer system for processing returns is known as the Individual Master File (IMF). It runs on mainframes and was written in the assembly language COBAL (a 1959 programming language). It was first implemented during the Kennedy administration.

The IRS began attempts to upgrade and modernize the system during the 1990s. The effort lasted until 2003, when the New York Times reported the five-year project was behind in five out of five categories and some areas were 27 months behind schedule.

In 2011, TIGTA issued another report on the implementation of Customer Account Data Engine (CADE), the eventual replacement for the Individual Master File system. While progress has been made, it tends to be glacial; with the IRS estimating that full implementation of CADE will not occur until 2018 and possibly as late as 2028.

Given the billions in revenue the IRS is responsible for, and the danger when changing the massive, ancient (although fully functional) computer system, is the risk of losing information. Even with this concern in mind, the IRS sometimes loses track of "stuff."

In 2006, the IRS suffered $318 million in fraudulent refunds; this year, other improvement notwithstanding, the IRS paid $140.2 million to taxpayers due to processing errors on inaccurate tax credit claims, and it was unable to identify the 140,596 taxpayers.

This year, changes made by Congress caused additional problems for the IRS and for taxpayers. The TIGTA found there were problems caused by programming issues, some taxpayers returns were delayed if they filed with certain deductions and there was a failure to identify and prevent erroneous claims during the processing of some returns. The report identified suggested areas for improvement for the IRS.

Homebuyer Credits

There were problems with the first-time homebuyer credit. The First-Time Homebuyer Credit from 2008 worked like a no interest loan, where the taxpayer would receive the credit on their 2008 return and then repay the "credit" in 15 yearly repayments beginning in 2010. The IRS had identified 1.5 million taxpayers in this category. The law was extended in 2009 and 2010.

The TIGTA report found 10,581 taxpayers who had claimed the Homebuyer Credit, but property records indicated they were ineligible for the credit. These taxpayers claimed $65.6 million in credits.

Two groups were described. One group of 2,812 taxpayers, who received $16.4 million in credits, had purchased their house prior to November 7, 2009. However, to qualify for the credit, they needed to have purchased the home after November 6, 2009.

The second group who obtained $11.4 million in Homebuyer credits did not comply with the requirement that they actually buy the home (complete the transaction) prior to claiming it on their return.

Obviously, the IRS systems should be able to catch errors this simple. The TIGTA had recommended that the IRS use third-party property transaction records to help determine which Homebuyer Credits had been allowed in error.

Recommendations

Overall, the TIGTA made 14 recommendations to the IRS, of which the most significant were:

  • Ensure that taxpayers TIGTA has identified as erroneously claiming the credits and deductions are entitled to claim them
  • Initiate a recovery program for erroneously paid claims
  • Revise the programming for First-Time Homebuyer Credit repayments
  • Seek math-error authority for certain credits detailed in the report

The IRS disagreed with only two recommendations involving the First-Time Homebuyer Credit.

The IRS agreed with TIGTA to work on these improvements, some of which have already been implemented. Nevertheless, glaciers tend to move at rates measured in inches per year.

Penalties For Filing Fraudulent Return

If you had a return that contained errors, claimed ineligible deductions and/or credits, you must pay the additional taxes due and interest and may be subject to additional numerous penalties. If the IRS suspects what has happen rises beyond inadvertence or negligence, and qualifies as tax evasion, or intentional fraud and false statements, you could be subject to criminal prosecution.