IRS: Lack of fraud detection system cost nearly $300M

18.07.2006
The lack of an automated refund fraud detection system that would have allowed the U.S. Internal Revenue System (IRS) to screen 2006 tax returns could cost the agency between US$200 million and $300 million, the IRS told the U.S. Senate Finance Committee last week.

Computer Sciences Corp. (CSC) was supposed to deliver the Electronic Fraud Detection System (EFDS), in January 2005. However in October 2004, the IRS expressed concern that the new $21 million system would not be ready on time, and decided to used its existing system for the 2005 filing system, according to background information supplied to Computerworld by the IRS.

The IRS said CSC promised a new system would be in place by January 2006, so in October 2005, the IRS decided it would use the new system for the 2006 filing season. But CSC did not deliver a functional system and the company was unable to put the old system in place as a contingency. As a result, neither system was used during the last filing season, according to the IRS. Then, on April 17, the IRS ordered CSC to stop work on the new system and bring the old one back on line.

That older system has so far stopped just 34 percent of the fraudulent claims for refunds it caught during the same period last year, the IRS said.

"The management efforts of both the IRS and its contractor to improve our automated refund fraud detection system were insufficient and are unacceptable," IRS Commissioner Mark Everson said in a statement. "Over the last several years, we've made a number of improvements to our automated systems, helping to bring in billions to the Treasury. Given this progress, I'm particularly disappointed that our efforts here have been so ineffectual."

Everson said the agency has taken the appropriate action against IRS employees who failed to act responsibly, up to and including dismissal. "We have brought in experts to help us correct the way we manage contracts as we move forward. And now that we have received third-party reports on what happened, we are reviewing our options with the contractor," he said.