IRS Possibly Issues $1 Billion Worth Of Bogus Refunds

The sad state of the IRS’s computer networks has been documented in government reports for years.  Now, as the federal government’s deficit balloons past $1 trillion, the notion that the agency’s poor data collection practices may have generated $1 billion in bogus refunds is downright shocking.

Yet, that’s exactly what the Treasury Inspector General for Tax Administration (TIGTA) claimed in a report released yesterday.   The TIGTA argues that the IRS could make “better use” of third-party data to “identify and prevent more than $1 billion in potentially erroneous refunds.”  Almost as mind-blowing are revelations that the IRS does not have a “central control point” for third-party data collection and lacks standards for validating data used to double-check the information that taxpayers report on their tax returns, such as Social Security numbers. For the 2006 tax year, the IRS received almost 1.8 billion documents from sources such as banks and government agencies.

Perhaps no program illustrates the data verification problem better than the Earned Income Tax Credit (EITC), the report says. The IRS estimates that there are more than $10 billion in bogus EITC claims each year.

“These problems allow a substantial number of erroneous refunds and credits to be granted that are not allowable by law,” said J. Russell George, the Treasury Inspector General for Tax Administration, in a press release. “For example, I am troubled that we found a lack of adequate corrective action by the IRS to address improper claims in the EITC Program, which is particularly vulnerable to fraud.”

The IRS has vowed for years to crack down on taxpayers who steal money from the program designed to help the poor.  People have been caught bilking the system through multiple returns with phony Social Security numbers or claims of non-existent children and fictional spouses. The IRS estimates that there are more than $10 billion in phony EITC claims filed annually.  Even rich folks get in on the action. Federico Hernandez, who was convicted of illegally hiding $8.8 million from the IRS, claimed such little income that he collected the EITC, according to Forbes.

“For many years official Washington has known about rampant fraud in the EITC program,” wrote Ernest Istook, a distinguished fellow at the conservative Heritage Foundation, in a 2008 article. “Lawmakers have held multiple hearings and received repeated reports from the IRS and watchdog agencies. But watchdogs are ignored because most elected officials treat EITC as a sacred cow. EITC is America’s second-largest public assistance program, exceeded only by Medicaid.”

To address this problem, the inspector general recommended that the IRS freeze refunds for taxpayers with suspect EITC claims and adjust the returns if taxpayers do not respond within a specific time period. The IRS rejected this idea along with the inspector general’s idea to create a centralized control point for all third-party data, saying that existing procedures are sufficient.

What’s even more depressing is how often the dismal state of the IRS’s computer networks have been noted over the years.  Here are some highlights: