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IRS Gives Away Millions Due To Failed Software Upgrade

By Martin H. Bosworth
ConsumerAffairs.com

September 6, 2006

Income Tax • IRS Alerts Public To New Identity Theft Scams • In Search Of Revenue, Feds May Look To Consumers • IRS To Beef Up Ranks After Canceling Private Debt Collection • Taxpayers Filing Earlier This Year • IRS Offers Help to Financially Stressed Taxpayers • IRS Faulted for Lax Identity Theft Protection Efforts • IRS Loses Nearly 500 Computers Over Three Years • GAO: IRS Still Not Doing Enough to Secure Data • Taxpayer Advocate Targets IRS Collection Policies • IRS Scales Back Outsourcing Plans • December is Tax-Prep Time • IRS Has Refunds for 95,746 "Missing" Taxpayers • GAO: IRS Needs More Oversight of Private Debt Collectors • IRS Gives Away Millions Due To Failed Software Upgrade • New IRS Online Payment System Raises Privacy Fears • Taxpayers Can Get an Automatic Six-Month Filing Extension • April 15th Should Be Just Another Day, Taxpayer Groups Argue • "Tax Freedom Day" Three Days Late This Year • Senators Push for Electronic Tax Filing • Paying Taxes With Your Credit Card Can Get Expensive • GAO Finds Tax Preparers Prone to Error • Consumer Group to Taxpayers: Don�t Borrow Your Own Money • States Oppose IRS Plan to Loosen Privacy Rules on Taxpayers' Returns • More ...

The Internal Revenue Service's (IRS) planned upgrade for its fraudulent refund detection system was so badly botched that the agency gave away as much as $318 million in refunds for fake returns last year, according to a recent government report.

The Treasury Department's Office of the Inspector General (OIG) stated that a team of contractors had been paid over $20 million to update the IRS' "Electronic Fraud Detection System" (EFDS) to a Web-based system for easier and faster use.

Though the contractors had been hired in 2001, and the system was scheduled for deployment in January 2005, it was still not operational by January 2006.

The IRS attempted to reverse course and reinstate its old EFDS system for processing 2005's tax returns, but failure to get it operational in time meant that the agency may have given out millions in bogus returns.

The OIG's report, remarkably, failed to identify the contracting agencies responsible for the upgrade, referring to them as "Contractor 1," "Contractor 2," and "Contractor 3." Nevertheless, the report blasted both the contracting agencies and the IRS for not properly documenting the upgrade, paying attention to costs, and ensuring smooth continuity of operations.

The report found that the contractors not only failed to deliver the new system on time, but charged the IRS almost $500,000 to reinstall the old EFDS system after verbally promising it would do so at no cost to the agency. Because of the nature of the contract, the IRS was obligated to pay the invoices in full.

"By using cost-reimbursement contracts, ineffectively monitoring contractor performance, and not questioning contractor invoice charges for updating the old EFDS, the IRS did not ensure the Federal Government's interests were protected and the Web EFDS was implemented timely to identify and stop fraudulent tax returns and refunds, " the report said.

The OIG recommended that the IRS' chief information officer enforce greater accountability for contractors on performance, to seek recovery of the costs charged for the reinstallation of the old EFDS system, and ensuring contractor technicians are better trained and acclimated to the systems they are upgrading.

The IRS has come under fire for a number of controversial decisions involving its use of private contractors and data practices. The agency is moving ahead with plans to outsource much of its debt collection activity to third-party agencies, despite criticism of the increased costs and concerns over lack of privacy safeguards.

Consumer advocates have also challenged the IRS' plans to loosen the regulation of sharing taxpayer information with third parties, fearing it could lead to identity theft.

The proposal has met with vocal opposition from the Attorneys General of 46 states and the District of Columbia, who stated that the new regulations would "erode consumer privacy and the security of sensitive personal information, with a consequent increase in such serious problems as identity theft and intrusive or even abusive marketing practices."

The IRS' new "Online Payment Agreement" system for paying back taxes has security advocates fearing phishers and hackers will take advantage to steal taxpayers' personal information.

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