Don't Mess With Taxes

A couple of days ago I blogged about the millions of dollars lost to tax fraud committed by people already behind bars.

Well, we apparently need to incarcerate a few more folks.

Between 2006 and 2007, the IRS issued approximately $1.6 billion in fraudulent refunds to taxpayers. Even worse, it could have been prevented.

Those unwarranted refunds were the result of a failed fraud detection system and insufficient resources to work all the fraudulent returns.

That's the bad news from the Treasury Inspector General for Tax Administration (TIGTA) in connection with its recent review of the Internal Revenue Service's Questionable Refund Program, or QRP.

This latest TIGTA's report on tax fraud and its costs concluded that, during the 2006 filing season, the IRS detected and stopped $188 million in fraudulent refunds. However, the agency failed to stop an estimated $894 million in fraudulent refunds because its fraud detection system was not operational.

The fraud detection system was available for the 2007 filing season, and it helped the IRS stop $1.2 billion in fraudulent refunds. But TIGTA estimates an additional $742 million in fraudulent refunds still made their way into the hands of criminals.

This represents a significant increase in both the number of fraudulent returns and refund amounts from previous years. The table below shows the number of fraudulent returns identified by the QRP during the 2007 return processing year and the previous four years, as well as the refund amounts that were claimed and stopped.

"The IRS has numerous compliance priorities in addition to the Questionable Refund Program, which it must balance against its limited resources. However this is a significant revenue loss to the federal government and that must be addressed," said J. Russell George, Inspector General at TIGTA. "The United States faces an estimated $345 billion tax gap each year. In a time of economic challenge, every effort must be made to prevent the loss of money to the U.S. Treasury."

The IRS didn't agree with all of TIGTA's recommendations. However, it did concur with the suggestion that the tax agency develop a long-term, strategic approach to balancing available resources to address the growth in refund fraud and other compliance priorities.

This 2008 report is just the latest in a series of TIGTA audits of problems with the QRP.

In March 2007, TIGTA issued a report concluding that the IRS' Electronic Fraud Detection System was not operational during return processing year 2006. That resulted in the issuance of an estimated $318.3 million in fraudulent refunds.

Three months later, another TIGTA report found that the growth in refund fraud, combined with the IRS' priority of protecting revenue by freezing refunds, may have contributed to additional QRP problems.