failed US government system allows $300m phoney tax refunds

The US Internal Revenue Service (IRS) may have allowed around $318m (£176m) in fraudulent tax refund claims because of an inoperable fraud detection system.

The US Internal Revenue Service (IRS) may have allowed around $318m (£176m) in fraudulent tax refund claims because of an inoperable fraud detection system.

The IRS had commissioned an upgrade to its Electronic Fraud Detection System (EFDS) prior to processing 2006 tax refund claims.

The new web-based EFDS system was supposed to make it easier for IRS enforcement officers to pinpoint and stop phoney claims.

But because contractors were unable to deliver a working system on time for the 2006 tax refund claims, the IRS was forced to rely on other manual checking procedures.

A report from the US Treasury Inspector General for Tax Administration suggests that this failure may have led to fraudulent claims worth around $318m being allowed.

The report says that due to system development problems, the implementation date was delayed until January 2006.

However, this implementation date was not met. In April, all system development activities for the web EFDS were stopped, and all efforts were focused on restoring the old EFDS for use in January 2007. As a result, the IRS has been unable to use the EFDS to prevent fraudulent refunds during 2006.

The report says that a “lack of adequate executive oversight and monitoring of the web EFDS project contributed to the EFDS not being implemented for 2006”.

The report says that although numerous indications of potential risks and problems were raised throughout the project, effective corrective actions were not taken.

Also, three key project management documents were not maintained properly. And during development of the web EFDS, there were numerous changes in project management and executives responsible for overseeing the project.

“Frequent changes in leadership can affect project continuity and direction and may indicate other problems with the project. There was also excessive turnover of contractor employees working on the project, partially due to mergers of the contractor firms,” says the report.

The report said, “Because the web EFDS was not implemented as scheduled in 2005 and 2006, and there are no current plans to continue development of the web EFDS, we estimate the IRS inefficiently used resources totalling $20.5m for contractor costs associated with development of the web EFDS.

“An undeterminable amount of internal staffing costs were also incurred in trying to test the new system and monitor the primary contractor’s activities,” said the report.

IRS management has accepted the report.


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