Wasteful IRS Program Fails to Prevent Tax Fraud
By Sean Kennedy
WasteWatcher, April 2017
The least favorite government agency during the month of April is the Internal Revenue Service (IRS) (although that may be true every month of the year). During the 2015 tax season, only 38 percent of phone calls were answered, as the IRS hung up on more than 30 million taxpayers. The tax code and tax regulations combined are more than 70,000 pages long. Annual compliance with IRS paperwork takes 8.9 billion hours and costs the economy $409 billion in lost productivity.
Now taxpayers can add another reason to this (partial) list of complaints about the IRS and the tax code. A program intended to uncover and prevent the filing of fraudulent tax returns has failed to perform as expected. If taxpayers are going to be overburdened when they attempt to pay their fair share of taxes, they should expect the IRS to be vigilant about making sure that the system is fair for everyone.
In 1994, the IRS created the Electronic Fraud Detection System (EFDS), which is intended to identify fraudulent tax returns. Like other efforts to modernize or replace outdated federal agency information technology systems, the first attempt to replace the EFDS was unsuccessful. As a result, according to the IRS Taxpayer Advocate, “… the IRS completed the 2006 filing season with no upfront fraud detection system in place. In 2009, the IRS began developing the Return Review Program (RRP) to replace EFDS. In 2010, the IRS declared EFDS “too risky to maintain, upgrade, or operate beyond 2015.”
Despite the recognized need to get the RRP in place in a timely manner, the program is still in development, and is now estimated to be completed in 2022. The program is also ineffective. According to a December 11, 2015 Treasury Inspector General for Tax Administration (TIGTA) report, during a two-year pilot program, the RRP missed 54,175 fraudulent returns totaling $313 million.
Anyone familiar with the long history of failed federal IT investments will not be surprised to learn that the program has also encountered substantial cost overruns. In February 2015, the Government Accountability Office (GAO) reported that the RRP had exceeded its initial budget by $86.5 million. The quality of information on the RRP released by the IRS for review by the public has also been substandard. A June 2016 GAO report noted the lack of transparency in the RRP’s data, stating that the “IRS used a method inconsistent with best practices for determining the amount of work completed by its own staff.”
On far too many occasions, the federal government tries to build IT systems, particularly software, that is available in the private sector at a lower cost. In fact, Federal Acquisition Regulation 12.101 requires agencies to “conduct market research to determine whether commercial items or nondevelopmental items are available that could meet the agency’s requirements,” and to select them if available. In other words, if it is available in the private sector, also known as “commercial off-the-shelf,” or COTS, it should be used. In the case of the RRP, a July 26, 2013 TIGTA report found that, “…alternative commercial software products were not fully considered prior to selecting technology solutions for the RRP system.”
A March 7, 2017 letter by Senate Finance Committee Chairman Orrin Hatch (R-Utah) to IRS Commissioner John Koskinen probed why the IRS failed in this regard, and questioned the efficacy of the RRP system. Indeed, while the IRS civil division continues to invest in the underperforming RRP, the IRS criminal division is already utilizing a private sector platform for its anti-fraud efforts.
A September 29, 2015 TIGTA report noted that, “… 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.”
As the IRS continues to process tax returns, it should provide a better return on its efforts to prevent the filing of fraudulent returns. The best way to accomplish that goal would be to immediately seek out and utilize existing, successful platforms in the private sector, and then say RIP to the RPP.