Improvements Are Needed in the Screening and Monitoring of E-File
Providers to Protect Against Filing Fraud
November 2003
Reference
Number: 2004-40-013
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
November
3, 2003
MEMORANDUM FOR
COMMISSIONER, WAGE AND INVESTMENT DIVISION
COMMISSIONER,
SMALL BUSINESS/SELF-EMPLOYED DIVISION
FROM: Gordon C. Milbourn III /s/ Gordon C. Milbourn III
Assistant Inspector General
for Audit (Small Business and
Corporate Programs)
SUBJECT: Final Audit Report - Improvements Are
Needed in the Screening and Monitoring of E-File Providers to Protect
Against Filing Fraud (Audit # 200340040)
This
report presents the results of our review to assess the Internal Revenue
Service’s (IRS) regulation of Electronic Return Originators (ERO). Our assessment included the results from
previously issued Treasury Inspector General for Tax Administration (TIGTA)
audit reports along with information provided in an interview with an ERO
convicted of electronically filing (e-filing) fraudulent tax
returns. Our review was performed to
follow up on the current status of recommendations addressing the concerns
identified in the previous reports.
The
IRS’ e-file Program offers taxpayers an alternative to filing a
traditional paper tax return. The e-file
Program enables taxpayers to send their tax returns to the IRS in an electronic
format via an authorized IRS e-file Provider, known as an ERO. The ERO is the first point of contact for
most taxpayers filing a tax return through the e-file Program. As of July 2003, 154,468 EROs were
authorized to participate in the e-file Program, and they had e-filed
over 36 million of the over 52 million e-filed tax returns.
The
primary means by which the IRS regulates EROs are the ERO application screening
process and the ERO monitoring program.
The ERO application screening process is used by the IRS to ensure that
the individuals applying for entry into the e-file Program have met
required screening and verification checks before they are authorized to
participate in the Program. The ERO
monitoring program is designed to ensure EROs are in compliance with e-file regulations.
The
IRS continues to authorize individuals to participate in the e-file
Program without ensuring they have met all required screening checks. These checks include: (1) meeting age and/or
citizenship requirements, (2) ensuring the validity of an individual’s current
standing when a professional certification is provided in lieu of a fingerprint
card, and (3) passing a criminal background check. For the limited number of individuals that were subjected to a
criminal background check, procedures did not ensure that the results from the
criminal background check were properly analyzed prior to making a decision
regarding acceptance in the Program.
In
2003, the IRS took steps to strengthen its monitoring program by requesting
computer programming that will continuously monitor the tax accounts of EROs
for suspect transactions. However,
improvements are needed in the process followed to monitor individuals once
they have been authorized to participate in the e-file Program. Specifically, the monitoring program does
not include requirements to perform periodic criminal background checks, or to
analyze and use the results of the percentage of rejected returns by an ERO as
an indicator of noncompliance or possible educational outreach opportunities. Furthermore, goals and measurements to
assess the effectiveness of the ERO monitoring program have not been
established.
Both the TIGTA and an IRS
Task Force have made numerous recommendations to address the above detailed
weaknesses in the ERO screening process and monitoring program. However, the IRS has taken corrective
actions in response to only some of these recommendations (see Appendix V for
details on previous recommendations).
As a result of applicant
screening and monitoring control weaknesses, individuals have been accepted
into the Program and have used it to commit filing fraud. For example, 1 ERO filed approximately 9,000
fraudulent returns over a 3-year period and received approximately $7 million
in fraudulent refunds in 1 year alone.
This ERO had a criminal history and an e-file reject rate of over
40 percent. The high reject rate
occurred because the ERO used the IRS to verify whether illegally obtained
Social Security Numbers the ERO used on the fraudulently prepared e-filed tax
returns were valid per IRS records.
This ERO has pled guilty to filing false, fictitious, and fraudulent
claims against the United States (U.S.) (tax returns) for 5 years, among other
crimes.
To protect the integrity of the e-file Program and protect taxpayers
and the Federal Government against losses from filing fraud, we recommended
that during the application screening process the Commissioner, Wage and
Investment (W&I) Division, ensure that:
(1) the age and citizenship requirements are met, (2) criminal
background information is obtained electronically, (3) individuals who provide
professional certifications are in current standing, and (4) the oversight
responsibility for the screening process is transferred away from the current
function to eliminate any potential conflict of interest. We also recommended that the Commissioner, W&I
Division, subject authorized EROs to periodic updates of criminal
investigations, and require e-file reject
rates to be analyzed and used as an indicator when selecting EROs for
visits/educational efforts. Finally, we
recommended that the Commissioner, Small Business/Self-Employed Division,
establish a system to measure the effectiveness of the ERO monitoring program.
Management’s Response: The IRS agreed completely with five of our
seven recommendations and partially agreed with one other. Management has already initiated a number of
corrective actions. One change the IRS
made recently was to shift the oversight of the screening/monitoring process for
EROs to the Electronic Tax Administration organization that is responsible for
oversight of the e-file
Program.
While the IRS agreed that our outcome measure
represents a reasonable estimate of potential cost savings, management did not
agree that performing periodic criminal background checks for all individuals
authorized to participate in the e-file Program
is feasible. As a result, they did not
agree with the outcome measure. IRS
management believes that enhancements to the monitoring program will outweigh
the cost associated with performing the additional checks.
Management’s complete response to
the draft report is included as Appendix VI.
Office of Audit Comment: We support
the IRS’ primary e-file goal of ensuring that individuals who apply to participate
in the e-file Program have met required screening and verification
checks. The recommendations management
agreed to implement will assist the IRS in meeting this goal. However, management did not agree to
completely implement Recommendation 1 and disagreed with Recommendation 5. Without fully implementing these two
recommendations, the IRS’ ability to protect the integrity of the e-file Program,
and protect taxpayers and the Government against losses from filing fraud, may
be hindered.
Specifically, IRS management
indicated that concerning Recommendation 1, they do not believe researching
existing information currently maintained to ensure applicants meet citizenship
requirements is beneficial. We believe
that this would be beneficial. Considering
the Government’s focus on citizenship issues, the IRS should ensure all EROs
meet the requirements of citizenship.
In addition, at the completion of our prior review and based on our
analysis of IRS data, we referred to the TIGTA’s Office of Investigations 350
authorized EROs identified as having questionable citizenship. To date, the Office of Investigations has
confirmed that 93 of these individuals are not U.S. citizens or legal resident aliens and, therefore, should
not have been authorized to participate in the e-file Program.
Management also disagreed
with Recommendation 5 to perform periodic criminal background checks. Management indicated that this would apply
to only e-file Providers in good standing with initial checks being done
to determine if an individual can be trusted to process electronic tax
returns. We agree that the initial
checks, if performed, assist in identifying individuals who should not be
authorized to participate. In addition,
we agree that periodic checks alone will not correct the problem of e-file filing
fraud. However, we continue to believe
that these periodic checks may complement other monitoring process improvements
the IRS is making. Periodic checks and
other planned monitoring improvements may assist the IRS in ensuring that
authorized e-file Providers continue to comply with e-file rules
and are not involved in unethical practices regarding tax return preparation
and/or disreputable conduct, which are both conditions for non-acceptance in
the Program. While
we still believe our recommendations are worthwhile, we do not intend to
elevate our disagreement concerning them to the Department of Treasury for
resolution.
Finally, management noted that although the outcome
measure presented in our audit report was a reasonable estimate, they could not
agree to the outcome because they disagreed with Recommendation 5. We continue to support our revenue
protection outcome measurement and believe that if the recommendations made in
prior reports had been implemented, the ERO we cited in our audit report as
having filed approximately 9,000 fraudulent tax returns over a 3-year period,
and who received approximately $7 million in fraudulent tax refunds in 1 year,
could have been identified earlier, thus preventing a loss of Government
funds.
Copies
of this report are also being sent to the IRS managers who are affected by the
report recommendations. Please contact
me at (202) 622-6510 if you have questions or Michael R. Phillips, Assistant
Inspector General for Audit (Wage and Investment Income Programs), at (202)
927-0597.
Improvements Are Needed in the Applicant
Screening Process
Improvements Are Needed in the
Electronic Return Originator Monitoring Program
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix IV
– Outcome Measures
Appendix VI – Management’s Response to the Draft Report
The Internal Revenue Service’s (IRS) electronic filing (e-file) Program offers taxpayers an alternative to filing a traditional paper tax return. The e-file Program enables tax returns to be sent to the IRS in an electronic format via an authorized IRS e-file Provider known as an Electronic Return Originator (ERO).
An ERO is the first point of contact for most taxpayers filing a tax return through the IRS’ e-file Program. An ERO originates the electronic submission of a return to the IRS. As of July 2003, 154,468 EROs were authorized by the IRS to participate in the e-file Program, and they had electronically filed (e-filed) over 36 million of the over 52 million e-filed tax returns.
The IRS is responsible for reviewing
applications from individuals applying to participate in the e-file Program,
as well as ensuring that the individuals who have been authorized to
participate maintain a high degree of integrity and adhere to the highest
professional and ethical standards.
To become an ERO, an applicant is
required to prepare and submit to the IRS an Application to Participate in the
IRS e-file Program (Form 8633), along with a fingerprint card. The IRS allows individuals who have a
professional certification to send a copy of the certification in lieu of a
fingerprint card. The requirements and
screening checks outlined in the IRS’ Handbook For Authorized IRS e-file
Providers of Individual Income Tax Returns (Publication 1345) are meant to
ensure the integrity of the individuals authorized to participate in the e-file
Program and include:
·
Applicant must be a United
States (U.S.) citizen or legal resident alien.
·
Applicant must be 21 years of
age as of the date of the application.
·
Applicant must pass a
criminal background check.
·
A determination must be made
as to whether individual and business tax returns were filed and taxes owed
were paid.
The primary means by which the IRS regulates EROs are the
ERO application screening process and the ERO monitoring program. The ERO application screening process is
used to ensure that the individuals applying for entry into the e-file
Program have met required screening and verification checks before they are
authorized to participate in the Program.
The ERO monitoring program is designed to ensure EROs are in compliance
with e-file regulations.
This audit was performed in the Wage and Investment (W&I) Division Headquarters in Atlanta, Georgia. Our assessment included reviewing the results from previously issued Treasury Inspector General for Tax Administration (TIGTA) audit reports, along with information provided in an interview with an ERO convicted of filing fraudulent tax returns. Our review was performed to follow up on the current status of recommendations addressing the concerns published in our two previous audit reports.
Audit work was conducted between February and May 2003 in accordance with Government Auditing Standards. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
The W&I Division has initiated
actions to improve its applicant screening process. Specifically, management consolidated the screening site of all
applicants to one location to ensure consistent and stringent procedures are
used to screen the applicants. In
addition, the IRS encourages individuals who attend its National Tax Forums to
apply onsite to be EROs, including providing fingerprinting.
In an attempt to meet the IRS
Restructuring and Reform Act of 1998 (RRA 98) goal of having 80 percent of all
tax returns filed electronically by 2007, the IRS aggressively marketed
becoming an e-file Provider to private firms and individuals. However, the IRS function responsible for
oversight of the screening and acceptance process for new EROs is also
responsible for marketing the e-file Program to potential EROs. This could result in a separation-of-duties
conflict, as the function is both responsible for creating standards and
controls to ensure integrity of the system, and involved in trying to encourage
practitioners to become EROs.
There continue to be several areas
where the ERO applicant screening process can be improved.
Prior audit report identified that applicant screening checks were not always being completed
A previous TIGTA report assessing the IRS’ process of screening ERO applicants found that the IRS did not have effective screening procedures to adequately determine who should be allowed to participate in the e-file Program. Specifically, we reported that:
· The IRS does not independently validate age and citizenship requirements.
· Screening checks publicized to the taxpaying public as extensive were found to be limited primarily to whether an individual filed tax returns and paid taxes due.
· Screening checks were not performed for individuals who participate as EROs as a service not for profit (such as at Volunteer Income Tax Assistance (VITA) and American Association of Retired Persons (AARP) sites).
· For the limited number of individuals selected for a criminal background check, 60 percent received authorization to participate in the e-file Program before the results from the Federal Bureau of Investigation (FBI) were received and analyzed.
Weaknesses in the applicant screening process resulted from internal IRS guidelines that state the applicant screening site is not responsible for verifying the age, citizenship, or validity of professional certification programs. Also, the Form 8633 does not require IRS volunteers to provide identifying information on the e-file application. IRS management indicated that it relies on voluntary compliance and the fact that the IRS asks for information such as a fingerprint card or professional certification as deterrents to individuals with criminal backgrounds who would attempt to apply to the e-file Program.
In response to the previous recommendations, IRS management acknowledged the risks involved and chose to partially accept one of the four recommendations. The IRS’ response to those recommendations not accepted was that “simply increasing the number of applicants we subject to an existing compliance check does not necessarily equal a more effective screening method.”
Follow-up
audit work identified that EROs continue to be inadequately screened
Our follow-up audit work has identified that the IRS continues to authorize individuals to participate in the e-file Program without adequately screening these individuals. Specifically, individuals continue to be accepted into the e-file Program without assurance that they:
· Met age and citizenship requirements.
· Are in current standing with the organization to which a professional certification relates.
· Successfully passed a criminal background check.
· Are subjected to screening checks if they participate as volunteer EROs.
Individuals continue to be accepted into the e-file Program without assurance that age and citizenship requirements have been met.
Despite having the data to enable independent verification of age and citizenship requirements, the IRS still relies on applicants’ voluntary compliance when providing this information. The IRS receives data from the Social Security Administration that contains an individual’s date of birth and a citizenship code. These data are readily available through the IRS’ computer system.
Individuals continue to be accepted into the e-file Program without assurance that they are in current standing with the organization to which a professional certification relates.
The IRS still permits individuals to provide a professional certification in lieu of a fingerprint card. This means these individuals will not be subjected to a criminal background check. However, during our previous review, we found that individuals submitted certifications that were over 20 years old. In addition, one individual simply stated he or she had a certification but did not submit the documentation. In both examples, the individuals were accepted into the e-file Program.
Individuals continue to be accepted into the e-file
Program without assurance that they successfully passed a criminal background
check.
·
Criminal
background checks are not completed on some individuals who apply to become an
ERO.
The IRS still subjects only one
out of every four applicants, excluding those who provide a professional
certification, to a criminal background check.
The process used by the IRS to perform these criminal background checks
is a time-consuming, manual, paper-based fingerprint process. However, significant technological advances
have created an electronic means to perform criminal background checks,
enabling fingerprints to be electronically scanned and transmitted to the FBI
over a Wide Area Network. This would
reduce the IRS’ current time period to obtain criminal background checks from
up to 14 days to a 24-hour turnaround.
Currently, other Federal Government agencies such as the Office of
Personnel Management and the Census Bureau use this method. Depending upon the volume and other
technical issues, the cost of the system would be approximately $10,000 to
$20,000.
· Criminal background investigations, when performed, were not properly conducted. When criminal background checks were performed and results (criminal activity) were returned, these results were not properly analyzed prior to making the decision to accept the applicant into the e-file Program.
Specifically, we reviewed the data returned from criminal background checks on 90 applicants during December 2002. We found that only 10 of the 90 reports were sent to the Criminal Investigation (CI) function for review despite IRS procedures specifying that when the criminal background information is returned from the FBI showing criminal activity, the information must be forwarded to the Fraud Detection Center in the CI function. The CI function recommended a “fail” on 9 of the 10 reports sent for review.
Our review of the 80 criminal background reports not sent to the CI function for review identified that 5 of the individuals had criminal histories that would warrant review. Specifically:
· One applicant had been convicted of three counts of theft and served time for the crime. On documentation sent in with his or her application, the prospective applicant stated, “The charge was brought about because I had taken funds from an account over which I had power of attorney and used these funds for personal use.”
· One applicant was convicted of Breach of Trust and stated in an attachment to the application that he or she had been “Convicted Breach of Trust, Nov. 1994. Misappropriation of Funds.”
· One applicant was convicted in 1982 of Forgery and served 3 years.
· One applicant was convicted of theft of personal property and battery of a spouse and had other criminal charges.
· One applicant was charged with Fraud Activities. According to documentation sent in with the application, the applicant stated he or she was convicted of “Larceny in a building over $100.00.”
Procedures detailing the process to be followed when criminal background information is returned by the FBI, including the need to refer for review those individuals who have criminal histories, were not always followed. Subsequent to our review, the IRS issued specific procedures to clarify that when the FBI returns a fingerprint card with criminal data, it is to be forwarded to the CI function.
Individuals continue to be accepted into the e-file
Program without assurance that they are subjected to screening checks if they
participate as volunteer EROs.
Individuals
who participate as EROs as a service not for profit (such as at VITA and AARP
sites) are not screened. During 2002,
there were 6,059 EROs in the VITA Program who provided e-filing or tax
preparation as a service not for profit and e-filed in excess of 500,000
tax returns. IRS management stated that
screening of these volunteers is extremely difficult because:
·
Training of volunteers continues up to February
1. Since the training of the
volunteers occurs until the volunteer sites open, it would take until after the
normal tax filing deadline (April 15) to complete all the screening checks on
the volunteers.
· Many trained volunteers do not show up. Approximately one-half of the volunteers who are trained will not appear to help taxpayers at the volunteer sites.
· Perceived burden on the volunteers. Subjecting volunteers to the same screening process required of a paid tax preparer would seem intrusive and a burden to volunteers. As a result, individuals would not volunteer to help low-income taxpayers prepare their returns.
Although there is a risk in not screening these volunteers, the IRS must weigh the risk against the benefits they have to low-income taxpayers. The IRS should continue to monitor the volunteer programs, especially as they grow in the future.
Control weaknesses in the applicant screening process
enable EROs to commit filing fraud
Both the TIGTA and an IRS Task Force have made numerous recommendations to IRS management to address the above concerns with the ERO screening process; however, IRS management has adopted only a few of the recommendations (see Appendix V for a list of the recommendations). As a result, these concerns still exist, and some EROs have used the e-file Program to commit filing fraud and obtain fraudulent refunds. For example:
· One ERO filed approximately 9,000 fraudulent tax returns over a 3-year period and received approximately $7 million in fraudulent tax refunds in 1 year alone. This ERO had a criminal history before being accepted as an ERO. The ERO recently pled guilty to filing false, fictitious, and fraudulent claims against the U.S. (tax returns) for 5 years, conspiracy to file false claims against the U.S., and conspiracy to negotiate forged U.S. Treasury checks of approximately $33,000. In an interview with the ERO, we learned that the person had been arrested for alien smuggling and deported, but then re-entered the U.S. using the passport of another person and became an ERO.
·
One ERO was allowed to
participate in the e-file Program despite being a convicted felon. The ERO never disclosed having been
convicted of a crime on the application to participate in the e-file
Program, and the person’s fingerprints were sent for FBI analysis. This ERO has since pled guilty to mortgage
fraud, bank fraud, and identity theft and is serving an 8-year sentence.
Applicant screening control weaknesses could
impact taxpayers and the Federal Government
As
stated in Publication 1345:
...While all authorized IRS e-file Providers must be on the lookout for fraud and abuse in the IRS e-file Program, EROs must be particularly diligent while acting in their capacity as the first contact with taxpayers filing a return. Neither EROs nor the IRS benefit when the integrity and reputation of the IRS e-file Program is tarnished by fraud or allegations of abuse. EROs with problems involving fraud and abuse may be suspended from the IRS e-file Program, be assessed civil and preparer penalties, or be subject to legal action.
There are currently no national standards that an individual is required to satisfy before presenting himself or herself as a Federal tax preparer and selling tax preparation services to the public. Therefore, it is of the utmost importance that the IRS adequately screen individuals to protect both the taxpaying public and the Federal Government from losses resulting from actions by unscrupulous EROs.
The Commissioner, W&I Division, should enhance the screening procedures for EROs by:
1. Requiring verification of age and citizenship of applicants before acceptance into the e-file Program.
Management’s Response: The deployment of e-Services Release 1.2 will allow the IRS to validate both the Social Security Number (SSN) and date of birth during the e-file application process. Unfortunately, e-Services does not offer a separate systemic citizenship check. The IRS will continue to use current procedures that require principals and responsible officials to possess valid SSNs. If the applicant does not provide a valid SSN, then the applicant is ineligible and the application is rejected.
Office of Audit Comment: Management indicated that they do not believe researching existing information they currently maintain to ensure applicants meet citizenship requirements is beneficial. We do not agree with management’s assertion that this would not be beneficial. Considering the Government’s focus on citizenship issues, the IRS should be participating by ensuring all EROs are legal citizens, as required. In addition, at the completion of our prior review, we referred 350 authorized EROs to TIGTA’s Office of Investigations identified as having questionable citizenship based on our analysis of IRS data. To date, the Office of Investigations has confirmed that 93 of these individuals are, in fact, not U.S. citizens or legal resident aliens and, therefore, should not have been authorized to participate in the e-file Program. Without implementing this recommendation, the IRS’ ability to protect the integrity of the e-file Program, as well as taxpayers and the Government against losses from filing fraud, may be hindered.
2. Sending scanned fingerprints to the FBI electronically. For those fingerprint cards that are unprocessable, a name check should be used as the basis for the criminal background check.
Management’s Response: Based on IRS discussions with the FBI, the IRS would qualify to obtain electronic access to the FBI’s fingerprint system. This process requires that the IRS purchase scanning hardware and software. Fingerprint results will be returned within a 24-hour period. However, completion of this acquisition process will not occur before the 2004 Filing Season.
For those fingerprint cards that are unprocessable, interim procedures were instituted that provide an applicant two opportunities to submit processable fingerprint cards. If the second attempt is unprocessable, the IRS will request the FBI perform a background check using name and other available information.
3. Verifying that individuals who provide professional certifications in lieu of a fingerprint card are in current standing with the organization to which the professional certification relates.
Management’s Response: The deployment of e-Services Release 1.2 will systemically validate that an enrolled agent is in current standing during the application process. While there is no central repository of information that can currently be systemically checked for other categories of professionals, the IRS will pursue the feasibility of developing a method to perform this check for the other categories.
4. Addressing the separation-of-duties conflict by shifting the oversight responsibility for the screening/verification process for EROs to the organization responsible for oversight of the e-file Program and away from the marketing function.
Management’s Response: On August 10, 2003, the IRS transferred the oversight
responsibility for the screening process for EROs to the Electronic Tax
Administration Division, which also has oversight of the e-file Program.
Improvements are needed in the process followed to monitor individuals once they have been authorized to participate in the e-file Program to ensure these individuals continue to maintain a high degree of integrity and adhere to the highest professional and ethical standards. The purpose of monitoring is to verify EROs’ compliance with requirements for participating in the IRS’ e-file Program. The IRS uses two methods to monitor EROs: Program monitoring and Field monitoring.
Program monitoring consists of a computerized analysis of an ERO’s tax filing and tax payment compliance. This analysis is performed on a yearly basis for all EROs participating in the Program, as well as when an individual applies to become an ERO.
Field
monitoring involves IRS employees visiting an ERO’s establishment. These visits are designed to ensure the ERO
is in compliance with e-file regulations. Depending on the
seriousness of the infraction, violations of the IRS’ ERO requirements may
result in a verbal or written warning, written reprimand, suspension, or
expulsion of the ERO from the IRS e-file Program.
The goal to visit 1 percent of all EROs was achieved in both Calendar
Years 2001 and 2002.
ERO
monitoring does not include subsequent criminal background checks and/or the
analysis and use of the percentage of e-file reject rates
In response to a recommendation made by the
TIGTA in 1999, IRS management submitted a request in 2003 for a computer
program that will continuously monitor the tax accounts of EROs for suspect
transactions.
However, the current ERO
monitoring consists only of monitoring for tax compliance and submission of
required e-file forms. We
found that there are no subsequent, nontax-related
screening checks performed. For
example:
· Periodic criminal background checks are not performed once an ERO is accepted into the e-file Program. As we reported in June 2002, once individuals are authorized to participate in the e-file Program, there are no subsequent monitoring checks to ensure they continue to maintain a high degree of integrity and adhere to the highest professional and ethical standards.
In response to our previous
report, IRS management indicated that once an
individual is accepted in the e-file Program, evidence of disreputable
conduct is based solely on referrals from the taxpaying public. The IRS could periodically update criminal
background checks on EROs with electronically scanned fingerprint cards.
·
Reject rate
information is not analyzed and used to identify noncompliance or EROs that may
require educational assistance. Currently there is no requirement to use an
ERO’s reject rate as a possible indicator of ERO noncompliance or education
needs. Using reject rates would focus
Program as well as Field monitoring to specific EROs.
An IRS e-file
task force report, “Electronic
Filing System: Suitability/Security/QRDT,”
issued May 1991, recommended that a reject rate of 15 percent be the maximum
for continued participation in the Program.
A TIGTA report issued in 1999 found that although the national average
reject rate for all EROs is 14 percent, EROs with fraud penalties had an
overall reject rate of 23 percent.
During 2002, there were
47,804 authorized EROs that transmitted at least 100 e-filed
tax returns each. Table 1 shows that
11,921 (25 percent) of the 47,804 authorized EROs had an e-file reject
rate over 15 percent.
Table
1: 2002 Reject Rates for EROs With 100
or More e-filed Returns
|
Reject Rate Percentage |
Number of EROs |
Percentage |
|
Equal
to or less than 15 percent |
35,883 |
75% |
|
Over
15 percent |
11,921 |
25% |
Source: TIGTA Analysis of IRS 2002 data.
Program goals and measurements should be results-oriented and used in ERO monitoring
ERO
monitoring involves IRS employees visiting an ERO’s establishment. These visits are designed to ensure the ERO
is in compliance with e-file regulations. Depending upon
the seriousness of the infraction, violations of the IRS’ ERO requirements may
result in a verbal or written warning, written reprimand, suspension, or
expulsion of the ERO from the IRS e-file Program.
However, in a TIGTA
report issued in January 2003, we reported that there are no meaningful goals
or methods to measure program results.
A recommendation to establish a measurement system to assess the
effectiveness of field monitoring was included in the report. IRS management disagreed, stating it would
be impossible to measure the effect on voluntary compliance. IRS management believed that although they could
establish a goal and measures to track the results of follow-up visits, the
results would not be of significant value in determining the affect on
voluntary compliance. Therefore, goals
and measurements to assess the effectiveness of the ERO monitoring program have
not been established.
Unless
IRS management determines the indicators of potential ERO noncompliance and
uses them for monitoring visit selection and educational efforts, they will not
be able to effectively focus their resources.
Discussions
TIGTA auditors had with an ERO who pled guilty to filing false tax returns
identified that this particular ERO had a high reject rate. Analysis of the ERO’s e-file data showed a reject rate
in excess of 40 percent for tax returns submitted during 2001 and 2002.
Table
2: Reject Rates for ERO Who Committed
Filing Fraud
Table 2 was removed due to its size. To see the table, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The
ERO explained that the high reject rate was the result of a process known as
“washing.” This process involved the
ERO submitting tax returns containing fraudulently obtained SSNs. These SSNs were included as primary or
secondary filers, dependents, or children to be claimed for the Earned Income
Tax Credit. As part of the IRS’
validity checks, SSNs are verified against computer files to determine issues
such as if the SSN is an issued SSN and/or was previously used on another tax
return. If any of these checks identify
problems with the SSN, the tax return is rejected and the ERO is provided with
an explanation as to the problem with one or more of the SSNs contained on the
tax return. The ERO would then keep
track of those SSNs that were rejected to ensure they were not used on
subsequently submitted fraudulent tax returns.
The IRS had no documentation of a monitoring visit for this ERO.
Without a method to
measure the effectiveness of the monitoring program, the IRS will not be able
to determine where resources will have the most impact in identifying and
stopping unscrupulous EROs. If noncompliant EROs are not identified, the
taxpaying public and the Federal Government are at risk of losses due to
fraudulent filings of tax returns.
5. The Commissioner, W&I Division, should perform periodic criminal background checks for all individuals authorized to participate in the e-file Program.
Management’s Response: The IRS did not agree with this recommendation. Changing the periodic suitability rules to include criminal background checks would apply only to e-file Providers in good standing with the IRS. Checks are done initially to attempt to determine if a Provider can be trusted to process electronic returns according to e-file rules.
Expanding the program to Providers who demonstrate compliance with e-file rules will not correct the problem. E-file is an alternative way of sending return data to the IRS, not a method of preparing returns. Revenue Procedure 2000-31, section 6.02(4) states that if data on an electronic return are altered by an e-file Provider, e-file rules no longer have jurisdiction because income tax return preparation rules apply. Only after a determination of penalties and fraud can the screening/verification process take action against an applicant or sanction an accepted e-file Provider.
In addition, IRS management believes that their enhancements to the monitoring program will reduce the need for this recommendation.
Office of Audit Comment: IRS management indicated that changing the periodic suitability rules to include criminal background checks would apply only to e-file Providers in good standing, with initial checks being done to determine if an individual can be trusted to process electronic tax returns. We agree that the initial checks, if performed, assist in identifying individuals who should not be authorized to participate. In addition, we agree that periodic checks alone will not correct the problem of e-file fraud.
However, we continue to believe that periodic checks may complement other monitoring process improvements the IRS is making. Periodic checks may assist the IRS in ensuring that e-file Providers continue to comply with e-file rules and are not involved in unethical practices regarding tax return preparation and/or disreputable conduct, which are both conditions for non-acceptance in the Program.
Finally, IRS management noted that although our outcome
measure was a reasonable estimate, they could not agree with it because they
disagree with this recommendation. We
continue to support our revenue protection outcome measurement and believe that
if the recommendations made in prior reports had been implemented, the ERO we
cited in our audit report as having filed approximately 9,000 fraudulent tax
returns over a 3-year period, and who received approximately $7 million in
fraudulent tax refunds in 1 year, could have been identified earlier, thus
preventing a loss of Government funds.
Without implementing this recommendation, the IRS’ ability to protect the integrity of the e-file Program, as well as taxpayers and the Government against losses from filing fraud, may be hindered.
6. The Commissioner, W&I Division, should include reject rates as selection criteria for ERO visits and/or educational efforts.
Management’s Response: The IRS will establish a baseline on the top three reject rates and develop educational material for subsequent outreach efforts. Additionally, the IRS is preparing guidance for the ERO Coordinators. This guidance will instruct them on the use of the Online Applicants database to determine the proper mix of random visits based on a random sample to provide broad geographic coverage, and targeted visits based on selection criteria indicating that e-file compliance issues may be present in a particular ERO’s e-file practice.
7. The Commissioner, Small Business/Self-Employed Division, should develop a system to measure the effectiveness of the ERO monitoring program.
Management’s Response: The IRS will revise its monitoring reports to reflect the results broken down by referral type. This change in reporting will provide it with more detail and it could measure the results of follow-up and targeted versus random visits.
Appendix I
Detailed Objective, Scope,
and Methodology
The overall objective of this review was to assess the Internal Revenue Service’s (IRS) regulation of Electronic Return Originators (ERO). To accomplish this objective, we conducted the following tests:
I.
Identified prior audit
reports issued by the Treasury Inspector General for Tax Administration (TIGTA)
and other organizations regarding the regulation of EROs.
A. Analyzed the reports to determine the control weaknesses
and whether IRS management’s actions corrected the weaknesses.
B. Discussed the IRS’ responses to previous recommendations
and determined the current position of IRS management.
II.
Determined if there were any
cases of convicted EROs who had evaded detection in screening and monitoring.
A. Interviewed an ERO who pled guilty to preparing and filing
false, fraudulent tax returns.
Determined the control weaknesses that enabled this ERO to participate
in the IRS’ electronic filing Program.
B. Coordinated and communicated with the TIGTA’s Office of
Investigations to determine if there were any other investigations/prosecutions
of EROs who committed filing fraud.
III.
Determined if there was any
information available to aid in the detection of EROs who may commit filing
fraud.
A. Analyzed any information obtained to determine patterns,
thresholds, costs, etc.
B.
Reviewed all available ERO
folders that had had fingerprint cards sent to the Federal Bureau of
Investigation in December 2002 for analysis (687) and returned with information
of a criminal history (90).
Appendix II
Major Contributors to This Report
Michael R. Phillips, Assistant Inspector
General for Audit (Wage and Investment Income Programs)
Kerry Kilpatrick, Director
Russell Martin, Acting Director
Pamela
DeSimone, Senior Auditor
Kristi
Larson, Senior Auditor
Edie
Lemire, Senior Auditor
Appendix III
Commissioner C
Office of the
Commissioner – Attn: Chief of
Staff C
Deputy Commissioner for Services and Enforcement SE
Acting Deputy Commissioner, Small Business/Self-Employed Division SE:S
Deputy Commissioner, Wage and Investment Division SE:W
Director, Communications and Liaison SE:S:M:CL
Director, Compliance SE:S:C
Director, Customer Assistance, Relationships, and Education SE:W:CAR
Director, Electronic Tax Administration OS:CIO:I:ET
Director, Field Operations SE:W:CAR:SPEC:FO
Director, Reporting Compliance SE:S:C:CP:RC
Director, Stakeholder Partnerships, Education, and Communications SE:W:CAR:SPEC
Director, Strategy and Finance SE:W:S
Deputy Director, Compliance Policy SE:S:C:CP
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of
Program Evaluation and Risk Analysis
RAS:O
Office of
Management Controls OS:CFO:AR:M
Audit Liaisons:
Chief, Customer Liaison, Small
Business/Self-Employed Division S:COM
GAO/TIGTA
Liaison, Wage and Investment Division
W:S:PA
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. This benefit will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
· Revenue Protection – Actual; over $7 million in fraudulent tax refunds (see page 2).
Methodology Used to Measure the Reported Benefit:
One Electronic Return Originator (ERO) filed approximately 9,000 fraudulent tax returns over a 3-year period and received approximately $7 million in fraudulent tax refunds in 1 year. The ERO had a criminal history before being accepted as an ERO, and recently pled guilty to filing false, fictitious, and fraudulent claims against the United States (U.S.) (tax returns) for 5 years, conspiracy to file false claims against the U.S., and conspiracy to negotiate forged U. S. Treasury checks of approximately $33,000. In an interview with the ERO, we learned that the person was arrested for alien smuggling and was deported, but then re-entered the U.S. by using the passport of another person and became an ERO.
If the recommendations made in prior reports had been implemented, this ERO could have been identified earlier, preventing a loss of Federal Government funds.
Appendix V
Recommendations Related to the Screening and Monitoring of
Electronic Return Originators
During Fiscal Years 2002 and 2003, the Treasury Inspector General for Tax Administration (TIGTA) issued two audit reports that addressed the Internal Revenue Service’s (IRS) screening and monitoring of Electronic Return Originators (ERO). In 1991, an internal IRS Task Force also made recommendations regarding the screening of EROs. The table below provides details of the 13 audit recommendations and the 1 Task Force recommendation and shows the agreement/disagreement by the IRS. Copies of the TIGTA audit reports can be obtained at www.treas.gov/tigta.
|
Reference |
Title
|
Recommendation and Corrective Actions |
Agree/ Disagree |
|
2002-40-111 |
E-File Providers
Are Not Adequately Screened |
Recommendation: The
Commissioner, Wage and Investment (W&I) Division, should ensure that
screening procedures for new applicants should include an independent
validation of age and citizenship |
Disagreed |
|
Recommendation: The Commissioner, W&I Division, should ensure that should be subjected to a credit and criminal background check, and individuals should not be authorized to participate in the e-file Program until all verifications and checks are completed. |
Disagreed |
||
|
Recommendation: The Commissioner, W&I Division, should ensure that credit and criminal background checks are performed at regular intervals. |
Disagreed |
||
|
Recommendation: The Commissioner, W&I Division, should ensure that internal guidelines be adhered to regarding the handling of fingerprint cards returned as unprocessable from the FBI. Also, those individuals who have been identified to date as having unprocessable fingerprint cards should be contacted, and a new card should be provided so the criminal background check can be completed. Management’s Response: IRS management asserted that they will obtain new cards and submit them in future instances where fingerprint cards are returned as unprocessable. However, they did not believe they needed to contact those who were already identified to date since those individuals are already participants in the Program. |
Agreed in part |
||
|
2003-30-039 |
Improvements
to the ERO Monitoring Program Are Needed |
Recommendation: Establish a goal and method for measuring program effectiveness for improving ERO compliance, such as results of follow-up visits. |
Disagreed |
|
Recommendation: Ensure
that historical case documentation is associated with current year cases and
reinforce that the purpose of follow-up visits is to measure the impact of
the ERO Monitoring Program on compliance. Management’s
Response: The Director, Reporting Compliance Policy, Small
Business/Self-Employed (SB/SE) Division will issue a memorandum providing
additional direction and guidance on documentation. |
Agreed |
||
|
Recommendation: Establish
a planning process that allows sufficient time for training and case
building. Management’s Response: The IRS plans to conduct training prior to the new fiscal year [2004]. Also, the analyst responsible for the program will be responsible for the planning, training, and case building. |
Agreed |
||
|
Recommendation: Ensure that the functionality of the OLA [On-Line Applicants] Database’s replacement meets user requirements and that EMCs [e-file Monitoring Coordinators] and monitors are sufficiently trained on all pertinent e-file systems. Management’s Response: All new EMCs were trained on all pertinent e-file systems in the 2002 train-the-trainer classes. Guidance will be provided to EMCs who did not attend training. |
Agreed in part |
||
|
Recommendation: Develop a
process to determine the proper mix of random and mandatory ERO monitoring
visits that also provides for broad geographic coverage. Management’s
Response: Management will provide written guidance to Coordinators
advising them to consider balance of geographic coverage when selecting
random visits. |
Agreed |
||
|
Recommendation: Develop
uniform risk-based selection criteria that take advantage of available
information and data for selecting EROs for random monitoring visits. Management’s
Response: The Director, Reporting Compliance Policy, SB/SE Division, will
provide guidance to Coordinators on using available information to select
EROs whose filing statistics show potential problems. |
Agreed |
||
|
Recommendation: Provide
clear and unambiguous ERO Monitoring Program infraction and sanction
guidelines for EMCs and monitors. Management’s
Response: Management revised training materials to include additional
examples of infraction and sanction guidelines. |
Agreed |
||
|
Recommendation: Revise e-file
Monitoring Guidelines to consider the Earned Income Tax Credit due diligence
when determining ERO compliance with IRS e-file Program requirements. Management’s
Response: The IRS instructed monitors to pursue due diligence penalties
when appropriate. |
Agreed |
||
|
Recommendation: The
Director, Compliance, SB/SE Division, should issue a memorandum reinforcing
the importance of complete case documentation of ERO monitoring visits. Management’s
Response: Management will issue written guidance to reinforce the
importance of complete case documentation of ERO Monitoring visits. |
Agreed |
||
|
|
Electronic Filing
System Suitability/Security/QRDT [Questionable Refund Detection Team] Final
Report 5/91 |
Recommendation: Establish
error rate standards. An error rate
of 5 percent and a reject rate of 15 percent are the suggested maximums for
continued participation in the EFS [Electronic Filing System]. Remedial action should be left to the
discretion of the Service Center Directors, giving consideration to receipt
volumes, corrective actions, performance history, etc. |
No action taken |
Appendix VI
Management’s Response to the Draft Report
The response was removed due to its size. To see the response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.