IRS to Revamp Fraud Detection System for New Identity Theft Techniques

IRS to Revamp Fraud Detection System for New Identity Theft Techniques

The Internal Revenue Service needs to do more work to refine its latest fraud detection system to catch the new schemes that its older system managed to detect, according to a government report.

The report, from the Treasury Inspector General for Tax Administration, found that a pilot program of the IRS’s replacement fraud detection system successfully identified tax returns involving identity theft that other IRS fraud detection systems did not identify. However, the other existing fraud detection systems identified tax returns involving identity theft that the replacement system did not select.

For example, the other IRS fraud detection systems identified 54,175 confirmed identity theft tax returns with refunds totaling more than $313 million not identified by the replacement system.

TIGTA noted that identity theft continues to be a serious and evolving issue which has a significant impact on tax administration. In February 2009, the IRS began developing the Return Review Program, or RRP, to replace its current system, the Electronic Fraud Detection System. The IRS conducted a pilot test of the RRP to assess its effectiveness in identifying potential identity theft tax returns during processing year 2014. Thanks to the positive pilot results, the IRS then expanded the use of the RRP’s identity theft detection for processing year 2015.

With the RRP, the IRS can change or adjust selection models for identity theft during the processing year. For example, the RRP provides the ability to change models to identify new or variations of identity theft schemes as they emerge. This capability is not possible with the detection system that the RRP will eventually replace.

“With identity theft continually evolving, it is important that the IRS advance its detection and prevention efforts into the next generation,” said TIGTA Deputy Inspector General for Audit Mike McKenney in a statement. “The IRS needs to make every effort to ensure that its replacement fraud detection system detects identity theft cases identified by existing systems, as well as improving upon its identity theft detection and prevention efforts.”

In response to TIGTA’s continued identification of large volumes of potentially fraudulent tax returns with tax refunds deposited into the same bank, the IRS implemented a new process to limit the number of deposits (three) to a single bank account. TIGTA’s review of this process identified programming errors that resulted in 5,516 direct deposits totaling almost $13.5 million that were not converted to paper refund checks. The IRS addressed two of the programming errors and plans to correct the remaining error by August 2016. Read more on Accounting Today.