IRS Fraud Filters Delay Tax Refunds

The IRS’s Failure to Establish Goals to Reduce High False Positive Rates for Its Fraud Detection Programs Increases Taxpayer Burden and Compromises Taxpayer Rights

Over the past decade, the IRS has been significantly impacted by fraud and identity theft. To detect and prevent identity theft and other tax refund fraud, the IRS has established a complicated screening process. When a return is flagged by one of the multiple IRS systems that scrutinize returns for characteristics of refund fraud or identity theft, the refund is held until the taxpayer can authenticate his or her identity, or until the information on the return can be verified. Although these systems do identify improper returns and prevent improper refunds from being issued, they also have a high degree of inaccuracy — with false positive rates (FPRs) between 38 and 55 percent in its most prevalent fraud detection systems. IRS systems that improperly flag legitimate tax returns and delay refund issuance can create a financial hardship for taxpayers, expend unnecessary IRS resources to resolve the issues, and negatively impact taxpayers’ voluntary compliance.

The IRS’s ability to adjust fraud detection systems in real time is limited, placing them outside the industry standard. These limitations on adjusting system filters and rules result in high FPRs, which occur when a system selects a legitimate return and delays the refund past the prescribed review period. For the calendar year 2016 through September, IRS filters and business rules used for detecting fraudulent returns and identity theft had many FPRs over 50 percent. These incorrect selections delayed approximately 1.2 million tax returns associated with about $9 billion in legitimate refunds for more than an additional 30 days on average.

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The IRS operates several programs that filter tax returns to ferret out improper refund claims, including returns showing bogus wage or withholding amounts and returns suspicious for identity theft.  While these are critical programs, the filters have high “false positive” rates, causing substantial refund delays for hundreds of thousands of legitimate taxpayers.  For example, the false positive rate was about 36 percent during FY 2015 in the Taxpayer Protection Program (TPP), which freezes returns the IRS suspects may reflect identity theft.

What is the Taxpayer Protection Program (TPP)?

The Taxpayer Protection Program (TPP) is responsible for handling potential Identity Theft (IDT) cases that are scored by a set of IDT models in the Dependent Database (DDb) or selected through a query in the Electronic Fraud Detection System (EFDS) or selected by Integrity & Verification Operation (IVO) tax examiners during the daily screening process.

What happens when flagged by the Taxpayer Protection Program (TPP)?

The IRS sends notices to taxpayers whose returns have been flagged by TPP filters and instructs the taxpayers to authenticate their identities online or by phone.  Yet for three consecutive weeks during the filing season, the IRS answered fewer than 10 percent of taxpayer calls on that telephone line, making it extraordinarily difficult for affected taxpayers to get their returns unfrozen and receive their refunds.  For other anti-fraud programs, the IRS currently does not track the false positive rate.  The report recommends that the IRS begin tracking the false positive rate of all screening programs, monitor and adjust filters and rules quickly if they are not effectively zeroing in on fraud, and establish maximum false positive rates for each process and filter.

EITC Compliance and EIC Fraud

Other issues analyzed in the “most serious problems” section of the report include the adequacy of taxpayer service for taxpayers living abroad, the whistleblower program, the IRS’s administration of the Patient Protection and Affordable Care Act, victim assistance in tax-related identity theft cases, and several issues relating to EITC compliance, including the need for better taxpayer education and assistance in the pre-filing environment, more effective use of audits, and greater emphasis on the role tax return preparers can play to promote compliance.

Responses to Letter 4883C, Letter 5071C, or Letter 5447C

Responses to Letter 4883C , Letter 5071C, or Letter 5447C received by mail, fax, Form 4442/e-4442, Inquiry Referral, or Operations Assistance Request (OAR) will be processed by Taxpayer Protection Program (TPP) paper groups. Research will be performed on cases prior to taxpayer contact. Resolve the unpostable (UP) condition using the Integrated Automation Technologies (IAT) Telephone Verification Tool (TVT) located on the aMend Tool screen.