Failure of digital detection system allows millions in tax fraud
The IRS said it has paid up to $300 million in fraudulent claims for the 2006 season because a new detection system wasn't in place in time.
The Internal Revenue Service paid up to $300 million in bogus tax refunds this year because it failed to complete an update of its digital tool for catching falsified tax returns.
The IRS had tried to field a new Web-based version of its Electronic Fraud Detection System in time for the 2006 filing season, without keeping the original EFDS. When contractors led by Computer Sciences Corp. failed to deliver an updated version in January, the tax season had to proceed without any electronic detection system in place, the IRS said.
Other detection measures have captured only 34 percent of fraudulent claims for tax refunds when compared to same period in 2005, resulting in a $200 million to $300 million government loss, according to an IRS statement released Friday.
EFDS was designed to digitally check every tax return requesting a refund, which amounted to about 80 percent of all individual returns filed during fiscal 2005. The IRS first fielded EFDS as a prototype in 1995, and deployed it nationwide in 1996. In written 2005 congressional testimony, an IRS official described it as the second largest database maintained by the agency.
The tax agency began an initiative to update EFDS in 2002, spending $20.9 million, including $18.9 million with Computer Sciences Corp., which the IRS described as the "main contractor." CSC also is the prime contractor of the IRS' ongoing modernization project, which has suffered difficulties, although an IRS spokeswoman said the failed EFDS project was not part of the modernization initiative.
In a prepared statement released Friday, IRS Commissioner Mark W. Everson said the agency has taken "appropriate action against IRS employees who failed to act responsibly, up to and including dismissal," and is reviewing options for its contractors.
CSC spokesman Chuck Taylor said the company is "working closely with the IRS to review options and execute a plan that ensures the legacy system is operational for the 2007 filing season." CSC is one of three companies the IRS hired to update EFDS, Taylor said.
Sources said the IRS felt compelled to make a public statement about the EFDS collapse after a Senate Finance Committee hearing Thursday on Eric Solomon's nomination as assistant Treasury secretary for tax policy. During the hearing, Chuck Grassley, R-Iowa, chairman of the committee, asked Solomon to look into the EFDS failure.
In a follow-up statement released Friday, Grassley said the IRS was less than forthcoming about its EFDS failures. The finance committee "learned about this mess through back channels, not from the IRS," Grassley said. "I wonder if the IRS ever would have come clean if congressional committees hadn't started looking into the issue." The Treasury inspector general for tax administration said the office is conducting an investigation and will release a report shortly.
Grassley also criticized the agency for continuing to rely on "a contractor that for the past two filing seasons couldn't deliver what it promised."
During the hearing, Sen. Max Baucus, D-Mont., the committee's ranking member, asked Solomon whether there will be any fraud detection system in place for the 2007 filing season.
Solomon replied that he hoped a system would be in place, according to a committee release.