IRS lags in program to spot tax refund fraud: watchdog

WASHINGTON Mon Aug 26, 2013 6:15pm EDT

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WASHINGTON (Reuters) - The U.S. Internal Revenue Service is lagging in efforts to upgrade a key software program needed to prevent the burgeoning problem of tax refund fraud schemes, the agency's watchdog said on Monday.

Facing an estimated $5 billion a year in tax revenue lost to identity theft refund fraud, the IRS is upgrading its software to make it harder for criminals to cash in bogus tax refunds.

But the upgrade to spot illicit tax filings - one of many tools the IRS is employing to combat the problem - came under renewed pressure from the Treasury Inspector General for Tax Administration, which on Monday identified weaknesses in the program's rollout.

"The IRS must take further action to ensure the successful deployment and implementation of its new fraud detection system," TIGTA said in a report.

Refund fraud has exploded in recent years and typically involves using stolen names and Social Security numbers to file phony electronic tax forms.

The software update, called the "Return Review Program" (RRP), needs to be online by January 2015 to replace the IRS's increasingly outdated refund fraud systems, the IRS has said previously.

"There is limited assurance that RRP systems development activities will achieve expected benefits or meet time-sensitive business and information technology requirements for addressing the IRS's evolving tax refund fraud risks," the inspector general report said.

The IRS agreed with TIGTA's six recommendations for improving the rollout and "has already taken steps to implement most of these recommendations with other actions currently under way," an agency spokesman said on Monday.

The report marked the second time this year that a watchdog has raised concerns about the initiative. In June, the National Taxpayer Advocate said the IRS will miss a 2015 deadline and needs more resources to complete the update by 2016.

The effort is estimated to collect $28.8 million a year when implemented, according to the National Taxpayer Advocate, an independent division within the IRS that represents taxpayers.

"Implementation of the IRS's Return Review Program is at extreme risk," the Taxpayer Advocate said in a June report.

(Reporting By Patrick Temple-West; Editing by Kim Dixon and Ken Wills)

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