EXPANDED ACCESS TO WAGE ANDWITHHOLDING INFORMATION CANIMPROVE IDENTIFICATION OFFRAUDULENT TAX RETURNS
Final Report issued on September 30,2010
Highlights of Reference Number: 2010-40-129to the Internal Revenue Service Commissionerfor the Wage and Investment Division.
IMPACT ON TAXPAYERS
As of April 17, 2010, the Internal RevenueService (IRS) identified 249,185 tax returns with$1.51 billion being claimed in fraudulent refunds.While the IRS has shown a significant increasein the number of fraudulent tax returns identifiedand refunds stopped, it needs expanded andexpedited access to wage and withholdinginformation to assist in its efforts.
WHY TIGTA DID THE AUDIT
This audit was initiated because unscrupulousindividuals continue to submit tax returns withfalse income documents to the IRS for the solepurpose of receiving a fraudulent refund. InOctober 2009, the IRS transferred responsibilityfor its pre-refund fraudulent tax return detectionactivities to its Accounts Management function.Management noted that transferring theseactivities will capitalize on opportunities tocomplete this work more efficiently. Our overallobjective was to assess the IRS’ TaxpayerAssurance Program processes to identifypotentially fraudulent tax returns for screening.
WHAT TIGTA FOUND
Expanded and expedited access to wage andwithholding information would significantlyincrease the IRS’ ability to more efficiently andeffectively verify wage and withholdinginformation reported on a tax return whenprocessed. Our analysis of the 151,776 TaxYear 2008 tax returns sent to an examiner forscreening and then released for processingidentified that 96,178 (63 percent) of these taxreturns had valid wages reported. TIGTAestimates that the IRS needlessly expended22,110 hours screening these tax returns.Currently, the law limits IRS access to theUnited States Department of Health and HumanServices wage information. In addition,processes have not been developed to expeditethe use of wage and withholding data receivedfrom the Social Security Administration.
In addition, TIGTA found that the majority of taxreturns the IRS identifies as being filed byprisoners are not being sent to screening toassess fraud potential.
Our review identified253,929 (88 percent) of the 287,918 tax returnsfiled by a prisoner as of March 24, 2010, werenot selected for screening. Of those tax returnsnot screened, 48,887 individuals had no wageinformation reported to the IRS by employers.These 48,887 prisoners claimed refunds totalingmore than $130 million including Earned IncomeTax Credit (EITC) claims of $78.5 million. Someof these refunds may have been stopped byother compliance activities. For example,TIGTA determined that the IRS prevented theissuance of nearly $18.1 million in EITC claimsfor 4,532 of the 48,887 prisoner tax returns.
WHAT TIGTA RECOMMENDED
Legislation is needed to expand IRS access tothe United States Department of Health andHuman Services wage information. TIGTArecommended that the Commissioner, Wageand Investment Division, obtain wageinformation for
returns with EITCclaims and develop a process to expedite theavailability of wage and withholding informationreceived from the Social Security Administration.The Commissioner should also verify whetherthe 48,887 tax returns with tax refunds that werefiled by prisoners with no reported wages werefraudulent and identify revisions that could bemade to data mining criteria to better identifyfraudulent tax returns filed by prisoners.In their response to the report, IRS officials fullyagreed with three recommendations andpartially agreed with the other. The IRS plans tofirst examine the benefits of obtaining wageinformation for
returns with EITCclaims prior to implementing any processmodifications.