IRS pays out millions in fraudulent refunds

The federal government has lost as much as $300 million in improper refunds because the contractor developing a Web-based fraud detection system for the IRS failed to deliver it on time.

The tax agency has stopped only about one-third of the fraudulent claims for refunds compared with the same time period last year, the agency said.

The IRS has spent $20.5 million so far to deliver the Web-based electronic fraud detection system, which was to be ready earlier this year. Lead contractor Computer Sciences Corp. was unable to deliver it on time or put back in place the previous version of the system for this year's tax season.

The IRS uses other refund fraud detection tools, such as third-party reporting and data matching, to identify taxpayers who claim too little income or too much refund, in addition to the electronic fraud detection system as part of its Questionable Refund Program.

The electronic fraud detection system screens all returns requesting a refund to identify proper refund claims and stop improper refunds from being issued.

The new Web-based version was a business systems improvement project and not part of the business systems modernization program.

'IRS is moving aggressively to fix this problem,' said IRS Commissioner Mark Everson in a statement Friday.

Lawmakers last week questioned Eric Solomon, currently nominated to be IRS assistant Treasury secretary for tax policy, about problems in the redesign of the electronic fraud detection systems. The Senate Finance Committee learned of the problems while investigating a complaint from the National Taxpayer Advocate.

'Because of this contractor, the IRS' poor oversight of that contractor, and the IRS' own poor judgment, the IRS lost as much as $320 million over this botched project. That's money down the drain,' said committee chairman Chuck Grassley (R-Iowa).

IRS has taken action against IRS employees who failed to act responsibly and has brought in experts to help correct the way the tax agency manages contracts, Everson said.

'Now that we have received third-party reports on what happened, we are reviewing our options with the contractor,' he said.

The contractor last fall had assured IRS that the new system would be in place by January 2006, so the agency opted to go with the new system. After the contractor failed to deliver the system, the IRS ordered the contractor to stop work on the Web-based EFDS and to concentrate on restoring the existing system as soon as possible for the 2007 filing season.

The IRS, however, said it will not abandon the Web-based system, but it is critical that an electronic fraud detection system be in place for the next tax season.

The IRS paid $20.9 million for EFDS redesign work, including $18.9 million to CSC, the agency said.

Improvements in IRS automated systems over the last several years have added billions to the U.S. Treasury, Everson said.

'Given this progress, I'm particularly disappointed that our efforts here have been so ineffectual,' he said.

About the Author

Mary Mosquera is a reporter for Federal Computer Week.

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