The Internal Revenue Service could do more to strengthen its tax enforcement efforts by further leveraging the Return Review Program to catch fraudulent tax returns, according to a new report.
The report, from the Government Accountability Office, noted that the IRS’s Return Review Program, or RRP, detects and selects potentially fraudulent returns to stop invalid refunds from being issued. According to the IRS, the program uses advanced analytic techniques and various data sources, including prior-year tax returns, to assign multiple scores to individual returns based on characteristics of identity theft and other types of tax refund fraud.
Tax noncompliance, including tax refund fraud, threatens the integrity of the tax system and costs the federal government hundreds of billions of dollars annually, the report pointed out. The RRP is the IRS’s main pre-refund system for detecting and preventing the issuance of invalid refunds. The IRS reported that between January 2015 and November 2017 the program prevented the issuance of more than $6.51 billion in invalid tax refunds.
The GAO found that the IRS routinely monitors the RRP’s performance and adapts the program to improve its ability to detect and address evolving fraud threats. Each year the IRS updates the RRP’s detection tools to improve their accuracy for the coming tax filing season.
The IRS already has plans to continue developing RRP to further prevent invalid refunds, the report acknowledged, including using the program to analyze and detect fraudulent business returns. However, the GAO pointed to other opportunities for the IRS to improve the RRP’s fraud detection and to use program for other kinds of enforcement activities.
For example, the RRP’s ability to accurately detect and select suspicious returns could benefit from having information on Forms W-2, Wage and Tax Statements, available for analysis more frequently, the report pointed out. As of April 2018, IRS officials said they were still drafting but hadn’t yet approved a work request to load W-2s into the RRP system daily instead of weekly for the 2019 filing season.
The GAO also suggested the IRS could collect more information electronically from paper filers. One approach the IRS evaluated back in 2012 was to digitize some of the paper tax returns it receives using bar-coding technology, but it hasn’t updated that analysis yet or expanded it to consider other types of digitizing technologies. The IRS has requested that Congress require that tax returns prepared electronically but filed on paper include a scannable code printed on the return, but Congress still hasn’t done so.
The IRS also could apply the RRP to improve other tax enforcement activities, such as audit selection or underreporting detection, the GAO report noted. Individual taxpayers’ underreporting of tax liabilities accounts for hundreds of billions in lost tax revenue, but until the IRS evaluates the costs and benefits of expanding RRP to analyze returns not claiming refunds, the agency won’t have the information it needs to make decisions that could help streamline processes for detecting and treating additional types of noncompliance and fraud.
The GAO recommended that Congress consider legislation to require that returns prepared electronically but filed on paper include a scannable code. The GAO also made five recommendations to the IRS, including that the agency take action to make incoming W-2s available to the RRP more frequently, update and expand a 2012 analysis of the costs and benefits of digitizing paper returns, evaluate the costs and benefits of expanding the RRP to analyze tax returns that don’t claim refunds, and take any appropriate action based on those evaluations. The IRS agreed with the recommendations in the GAO report.
“The IRS is in various stages of analysis relative to GAO’s recommendations, including evaluating the frequency with which W-2 data is made available to RRP and digitizing returns filed on paper and other associated information provided,” wrote IRS Acting Commissioner David Kautter in response to the report. “With regard to the recommendation to evaluate the cost and benefits of expanding RRP to returns not claiming refunds and to support other enforcement activities, IRS sees the need for legislative change to require all information returns to be electronically filed, to achieve the maximum benefit from RRP. We will collaborate with GAO and other organizations to determine those changes when we assess the results of our analyses.”
