TIGTA issues reports on IRS payroll filing, fraud detection

The IRS was in compliance with the filing requirement changes in Section 201 of the Protecting Americans from Tax Hikes Act of 2015, which requires returns and statements related to employee wage information and nonemployee compensation to be filed on or before January 31, according to some reports by the Treasury Inspector General for Tax Administration (TIGTA). The IRS used the Systemic Verification tool within the Return Review Program to verify income between Forms W-2 and income tax returns before issuing the Earned Income Tax Credit (EITC) and the additional child tax credit (ACTC) refunds during the 2017 filing season. Further, the IRS did not make programming modifications regarding Form 1099-MISC processing because the Wage and Investment Division management did not request changes be made, TIGTA noted. However, TIGTA found that the Wage and Investment Division management did not request elimination of the automatic extensions to file Form 1099-MISC. TIGTA noted that if the automatic extensions for filing Form 1099-MISC with nonemployee compensation were eliminated, it would have provided a significant benefit by improving the ability to match income reported before refunds are paid.

Recommendations

TIGTA recommended that the Commissioner, Wage and Investment Division, submit a request for programming modifications regarding Form 1099-MISC processing and work with the Department of the Treasury Office of Tax Policy to determine the feasibility of eliminating automatic extensions to file Form 1099-MISC in order to improve the IRS’s ability to verify income and reduce fraud. The IRS agreed to work with the Department of the Treasury to eliminate automatic extensions for Forms 1099-MISC that report nonemployee compensation. However, the IRS disagreed with TIGTA’s recommendation to make programming modifications. (TIGTA Report: System Changes Resulted in Successfully Processed Third-Party Income Documents, but Processes for Using the Information Need Improvement, Reference Number: 2018-20-019 March 26, 2018.)

Fraud detection

The IRS needs to improve its refund fraud identification and selection system because late receipt of wage reporting documents impaired fraud detection capabilities and increased taxpayer burden, according to the Treasury Inspector General for Tax Administration (TIGTA). For Processing Year (PY) 2017, the Service began using the Return Review Program (RRP), which identified more fraudulent tax returns at a lower false detection rate.
TIGTA found that the IRS incorporated fraud detection capabilities, from the now defunct Electronic Fraud Detection System, into the RRP. In addition, the Service implemented processes to use employer submitted wage and withholding documents to detect potentially fraudulent tax returns. However, third-party Forms W-2, Wage and Tax Statement, were not always available at the time the tax return was filed. Further, a review of 1.6 million tax returns selected by the RRP and the Dependent Database during PY 2017 identified 3,253 tax returns for which the required transaction code to delay the processing of the tax return did not post as required due to Master File programing issues.
Moreover, paper-filed tax returns selected for potential fraud were not controlled in the case management system. TIGTA recommended that the IRS develop a process to ensure that all potentially fraudulent tax returns identified are tracked by the case management system for income and withholding verification, and ensure that programming changes are made to require RRP models and rules to complete processing before making fraud selections. The Service agreed with all the recommendations. (TIGTA Report: Late Receipt of Wage Reporting Documents Reduces Fraud Detection Capabilities and Increases Taxpayer Burden, Reference Number: 2018-40-025, March 26, 2018.)

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