The Internal Revenue Service has taken steps to correct problems with its oversight of applications for Individual Taxpayer Identification Numbers, or ITINs, but more improvements in the program are still needed, according to a new government report.
The report, publicly released Thursday by the Treasury Inspector General for Tax Administration, found that the IRS is doing a better job of identifying questionable ITIN applications. TIGTA followed up on an earlier audit last year that found IRS supervisors encouraged employees to ignore potential fraud in the ITIN program, mainly from immigrants and their employers applying for the numbers (see IRS Discouraged Employees from Identifying Fraudulent ITIN Applications).
“I am pleased that the IRS has made significant progress addressing seven of the nine deficiencies that TIGTA previously identified in the ITIN application program,” said TIGTA Inspector General J. Russell George in a statement. “Now, IRS officials need to address the remainder of our concerns.”
The IRS created the Individual Taxpayer Identification Number in 1996 to enable individuals who are not eligible to obtain Social Security Numbers could obtain an identification number for tax purposes. TIGTA conducted its audit in response to a complaint it received that IRS management was not supporting the implementation of revised processes and procedures designed to improve on the identification of questionable ITIN applications.
The prior TIGTA audit found that the ITIN application review and verification process was so deficient that there was no assurance that ITINs were not being assigned to individuals submitting questionable applications. The overall objective of the latest review was to assess the IRS’s progress in identifying questionable ITIN applications, including assessing the IRS’s implementation of corrective actions agreed to in response to TIGTA’s previously issued ITIN report.
TIGTA found that the IRS initiated corrective actions to address the majority of recommendations included in the prior audit report, which are significantly improving the identification of questionable ITIN applications. After the new procedures were put into place, the number of applications rejected as questionable increased from 226,011 for the period July through December 2011 to 340,659 for the same period in 2012.
However, TIGTA found that IRS management still has not developed organizational processes and procedures to work potential fraud schemes. Moreover, actions have not been taken to analyze information from previously processed ITIN applications to identify indicators of questionable applications that could be used to proactively identify similar applications during processing.
In addition, tax examiners remain concerned that management will reverse the current focus of ensuring that only qualified individuals receive an ITIN to again emphasize quickly processing ITIN applications. Finally, although the quality review process was expanded, some changes could inadvertently discourage tax examiners from identifying questionable documents.
TIGTA recommended that the IRS develop computer programming to flag ITIN applications that contain characteristics of previously identified questionable ITIN applications. The IRS should also ensure that the quality review process continues to emphasize the importance of the identification of questionable documents and that weekly team meetings are held with tax examiners to discuss ITIN application processing trends, patterns, and concerns.
The IRS agreed with TIGTA’s recommendations and plans to evaluate implementing the programming changes as part of a risk assessment that will not only determine the scope and associated costs but will also consider other controls and actions that can be implemented if the requested programming changes are not funded. The IRS also plans to ensure that the weekly team meetings continue to be held.
“As the report recognizes, the IRS has made significant improvements to the program over the last year and will continue to make additional changes as necessary,” said Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division, in response to the report. “We continue our dialogue with all stakeholders in this area to determine whether further refinements are necessary going forward.”
The ITIN program is essential to effective tax administration, she noted. “Designed specifically for tax administration purposes, the IRS created ITINs to provide tax identification number to foreign nationals, resident and nonresident aliens, and others who have filing or payment obligations under U.S. law but are not eligible to receive Social Security Numbers,” she wrote. “Similarly, dependents that may be claimed on individual tax returns and are ineligible for SSNs may also be assigned ITINs, to permit the parents or guardians claiming the dependent to comply with reporting requirements. Last year, when issues were raised on the ITIN process, the IRS took immediate steps to make program improvements. In June 2012, we initiated a comprehensive review of the ITIN program and implemented interim changes to tighten the procedures for issuing ITINs. On Nov. 29, 2012, after completing our review, we announced updated procedures to strengthen the ITIN program. The new modifications and document standards further protect the integrity of the ITIN program by substantially improving controls to identify questionable ITIN applications and prevent ITINs from being issued for fraudulent or improper purposes while helping to minimize the burden for applicants. We appreciate that your report acknowledges these actions have significantly improved identification of questionable ITIN applications.”
She noted that the IRS started receiving data extracts on a monthly basis from the ITIN Real-Time System, or RTS, in July 2012. “After resolving initial issues, we began using the extracts in the processing of applications and as the basis for the issuance of ITIN Alerts which share information on questionable or abusive trends with ITIN tax examiners, the Compliance function, and the Criminal Investigation Division,” she said. “We recognize the value in making such information available to the tax examiners at the time ITIN applications are processed and are seeking enhancements to the system to improve the quality and usability of the data. We will also perform a risk assessment to identify other mitigating steps that can be taken.”