An Internal Revenue Service program that is supposed to be able to refer potential tax fraud cases to IRS criminal investigators needs to be improved, according to a new report.

J. Russell George

The report, by the Treasury Inspector General for Tax Administration, examined the effectiveness of the IRS’s Collection Fraud Referral Program, and whether the IRS’s Collection function is adequately considering, identifying and developing fraud cases for referral to the IRS’s Criminal Investigation division.

The program is a joint venture between the IRS’s Fraud and Collection Policy offices. The report acknowledges that the program successfully develops quality criminal fraud referrals. However, TIGTA auditors found there are opportunities to improve the program’s identification and development of fraud referrals.

“Tax fraud is a deliberate and purposeful violation of Internal Revenue laws by those who do not file and properly report their income and expenses,” said TIGTA Inspector General J. Russell George in a statement. “When criminal fraud penalties are not adequately pursued, the IRS’s efforts to reduce the tax gap can be undermined. Those who do not voluntarily pay their share of taxes create an unfair burden on taxpayers who timely and fully pay their taxes and can diminish the public’s respect for the tax system.”

Among the report’s findings, TIGTA found that IRS revenue officers may be deterred from looking for fraud because fraud cases are more complex, require extensive additional work, and often do not result in accepted referrals. In addition, technical assistance was not always available to the revenue officers, and management efforts to support fraud development varied.

TIGTA made three recommendations for improvement. The IRS agreed and plans to implement them.

“There are some opportunities to improve the identification and development of criminal fraud referrals,” wrote Faris R. Fink, the commissioner of the IRS’s Small Business/Self-Employed Division. However, he noted that the Collection Fraud Referral Program has been "continuously successful in developing high-quality criminal fraud referrals," and the Collection function has the highest percentage of fraud referrals accepted by IRS Criminal Investigation among all the IRS functions that submit referrals.

TIGTA recommended that the IRS’s director of collection policy issue guidance to emphasize potential adjustments of the revenue officers’ inventory levels when cases are in fraud development. The IRS should also revise its guidance to require the post-declination meeting (the meeting that is required by IRS operating procedures after a criminal referral is declined) to include a discussion about the potential for a civil fraud referral; and it should emphasize that the possible barriers to a criminal fraud referral need to be discussed and documented during case development, TIGTA suggested.

In response to the report, IRS officials agreed with the recommendations and plan to emphasize inventory control strategies for the development of potential fraud cases and update procedures to include information to be discussed during post-declination and case development meetings.