Programming Error, Poor Oversight Cost $46 mn in Bad Refunds

Ineffective monitoring of refunds and a computer programming error caused the Internal Revenue Service to issue more than $46 million in erroneous refunds, according to a new report.

The report from the Treasury Inspector General for Tax Administration was the result of an audit of the IRS’s Return Integrity and Compliance Services organization, which is responsible for identifying, evaluating, and preventing the issuance of improper refunds. The investigation was initiated after an IRS employee reported that the service was not working some taxpayer cases in which refunds had been held.

According to the TIGTA report, a programming error that overrode the IRS’s two-week processing delay on tax returns that have been identified as potentially fraudulent led the service to erroneously issue $27 million of refunds for 13,043 tax year 2013 tax returns. The portion of the refund that is not under review is erroneously issued before the IRS can complete its verification of income and withholding.

TIGTA also identified 3,910 tax year 2013 returns that the IRS selected for verification with no indication that tax examiners verified the returns. The IRS issued refunds totaling over $19 million for these returns. Refund holds were either not set correctly or not functioning as intended.

“While the IRS has made important strides in its programs that prevent the issuance of fraudulent refunds, our auditors found that it is not always ensuring that tax examiners timely complete their verification work before releasing refunds,” said Inspector General J. Russell George in a statement.

TIGTA recommended that the IRS:

• Correct the programming glitch;
• Develop a periodic reconciliation process to ensure that refunds associated with identified potentially fraudulent tax returns are not erroneously released;
• Develop a process to ensure that tax examiners verify a potentially erroneous refund claimed by a taxpayer within the refund hold period or place an unexpiring refund hold on the taxpayer’s account until verification can be completed as required; and,
• Identify why refund holds placed on some accounts were not delaying processing of the tax returns and address the causes.

The IRS agreed with all recommendations and stated that it was taking corrective action. It also noted that the Integrity and Verification Operations function prevented more than $15 billion in refunds for over 2 million tax returns for confirmed identity theft or fraud during 2014.