IRS Struggling to Ditch Outdated Fraud Detection System

The Internal Revenue Service has been developing a new system to detect fraudulent tax returns to replace an outdated system, but has not been able to phase out the old system, which could cost taxpayers an estimated $18 million per year to run both systems, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, said the IRS originally developed the Electronic Fraud Detection System back in 1994, and it remains the IRS’s main system for detecting fraudulent returns. The EFDS is designed to maximize revenue protection and fraud detection when tax returns are filed to reduce the issuance of questionable refunds. The IRS has been developing its Return Review Program to replace the EFDS due to fundamental limitations in technology and design. However, the IRS has not set a termination date nor established a retirement plan for the EFDS.

“If the IRS does not efficiently transition to the Return Review Program so that it can retire the Electronic Fraud Detection System, the estimated additional operation and maintenance costs of running the system could cost taxpayers approximately $18.2 million per year,” said TIGTA Inspector General J. Russell George in a statement.

The EFDS project team has taken steps to mitigate the risks associated with technical obsolescence. For example, the workload management system web release addressed concerns stemming from the client-server platform. However, a risk management plan and requirements plan were not updated. In addition, the IRS did not use the required repository for managing the testing of system requirements.

TIGTA recommended that the IRS’s chief technology officer develop a system retirement plan for the EFDS and retire the EFDS after validating the Return Review Program effectively identifies, at a minimum, all issues currently identified by the EFDS. The IRS should also update its Risk Management Plan to reflect the current organizational structure, management process methodology, documentation requirements, and mitigation strategy, TIGTA suggested. The report also recommended the IRS update its Requirements Plan to reflect the current activities, methods, and techniques that are used to perform and support requirements development and requirements management. The IRS should also ensure that contractors have software licenses to use the required repository and verify that guidance is followed, according to TIGTA.

IRS management agreed with TIGTA’s recommendations. “Though we have mitigated these risks, the IRS remains fully committed to retiring EFDS when we no longer need its functionality,” wrote IRS chief technology officer Terence V. Milholland in response to the report. “We have incorporated EFDS retirement within the Return Review Program Re-Start plan and are well underway with the completion of a detailed EFDS retirement plan. We believe the plan will be instrumental in helping to ensure that we expend funds in the most prudent manner.”