Most Serious Problem: Fraud Detection

The IRS’s Failure to Establish Goals to Reduce High False Positive Rates for Its Fraud Detection Programs Increases Taxpayer Burden and Compromises Taxpayer Rights

Over the past decade, the IRS has been significantly impacted by fraud and identity theft. To detect and prevent identity theft and other tax refund fraud, the IRS has established a complicated screening process. When a return is flagged by one of the multiple IRS systems that scrutinize returns for characteristics of refund fraud or identity theft, the refund is held until the taxpayer can authenticate his or her identity, or until the information on the return can be verified. Although these systems do identify improper returns and prevent improper refunds from being issued, they also have a high degree of inaccuracy — with false positive rates (FPRs) between 38 and 55 percent in its most prevalent fraud detection systems. IRS systems that improperly flag legitimate tax returns and delay refund issuance can create a financial hardship for taxpayers, expend unnecessary IRS resources to resolve the issues, and negatively impact taxpayers’ voluntary compliance.

The IRS’s ability to adjust fraud detection systems in real time is limited, placing them outside the industry standard. These limitations on adjusting system filters and rules result in high FPRs, which occur when a system selects a legitimate return and delays the refund past the prescribed review period. For calendar year 2016 through September, IRS filters and business rules used for detecting fraudulent returns and identity theft had many FPRs over 50 percent. These incorrect selections delayed approximately 1.2 million tax returns associated with about $9 billion in legitimate refunds for more than an additional 30 days on average.

Read the full discussion

Related Content of the Report:

Volume 3: Reducing "False Positive" Determinations in Fraud Detection

Read All Most Serious Problems