IRS cites lack of resources to review potential fraud cases

Official says scrutinizing more refund claims before payment would require tough trade-offs.

The Internal Revenue Service is not prepared to handle the heavier workload that would result from aggressively pursuing cases of refund fraud, an agency official said in response to a new audit report.

The audit of the IRS Questionable Refund Program by the Treasury inspector general and the response point to resource shortages that threaten the agency's ability to pursue low-value cases of tax cheating even when they are relatively simple.

The IG office reviewed changes to the program instituted before the 2006 filing season to address congressional and taxpayer advocate concerns over a backlog of cases in which taxpayers were not notified when their refund was frozen -- in some cases for several years -- because of fraud concerns.

The changes limited the duration of the freezes, but the IG office said that resulted in the issuing of nearly $15.9 million in potentially fraudulent refunds.

"The IRS reacted to legitimate congressional concerns that taxpayers were not being notified when their refunds were delayed, sometimes for years," said Russell George, Treasury's inspector general for tax administration. "Unfortunately, the IRS overreacted, and it is costing taxpayers millions of dollars."

The IG office made seven recommendations for how to better balance taxpayer rights with the need to verify refunds that appear fraudulent. But in a response, Eileen Mayer, the agency's criminal investigations chief, agreed to only three of those, with two requiring just a renewed effort at activities already under way.

Mayer partially agreed with a recommendation that IRS go back to automatically placing a freeze on subsequent-year returns of accounts where potential fraud was identified. "The IRS will consider the … recommendations, as well as any trade-offs that would have to be made against other enforcement priorities in order to work [on] the additional inventory that would result," she wrote.

A recommendation that IRS lower the threshold for referring cases for further examination met with similar concerns. "While the IRS would like to address all cases of potential noncompliance, IRS enforcement resources are limited," Mayer wrote. "Each year, top IRS management makes carefully thought out business decisions about how to deploy these resources. Trade-offs must be made among competing priorities of which [this program] is one among many."

Mayer said that with new changes made to the program for the 2007 filing season, including replacement of a computerized fraud screening program that was offline in 2006 due to programming delays, the agency would evaluate the system before making decisions on certain of the recommendations.

The shortfalls Mayer described mirror issues that have also surfaced with a controversial initiative to hire private debt collection firms to handle some simple tax debts.

Critics contend that collecting taxes is inherently governmental work that should not be outsourced, and that putting taxpayer information in the hands of contractors poses risks to information security.

IRS Commissioner Mark Everson concedes that having agency employees collect the debts is more cost-effective, but says the agency does not have the resources to deal with those relatively low-value cases. If more personnel were hired, he would prefer to assign them to more lucrative cases, he has said.