Internal Revenue Service supervisors urged employees to ignore potential fraud in a program that reviews and verifies applications for Individual Taxpayer Identification Numbers, according to a new report.
The report, released Wednesday by the Treasury Inspector General for Tax Administration, substantiated many of the allegations described in complaints from IRS employees.
The IRS disputed the allegations only a month ago after they surfaced in a report by Indianapolis TV station WTHR (see IRS Says It Is Cracking Down on ITIN Fraud). Following referrals from members of Congress, TIGTA reviewed complaints from IRS employees regarding the management of the ITIN Program. The objective of TIGTA’s review was to assess the efficiency and effectiveness of the IRS’s process to identify questionable ITIN applications.
The ITIN program was created in 1996 so that individuals who are not eligible to obtain Social Security numbers could get an identification number for tax purposes. In 2011, the IRS processed a total of more than 2.9 million ITIN tax returns, resulting in tax refunds of $6.8 billion.
TIGTA substantiated many of the allegations outlined in the IRS employees’ complaints. Those complaints alleged that IRS management is not concerned with addressing questionable applications and is interested only in the volume of applications that can be processed, regardless of whether they are potentially fraudulent. In particular, TIGTA found that IRS management created an environment that discourages tax examiners from identifying questionable ITIN applications; eliminated successful processes used to identify questionable ITIN application fraud patterns and schemes; and established processes and procedures that are inadequate to verify each applicant's identity and foreign status.
“TIGTA’s audit found that IRS management has not established adequate internal controls to detect and prevent the assignment of an ITIN to individuals submitting questionable applications,” said TIGTA Inspector General J. Russell George in a statement. “Even more troubling, TIGTA found an environment which discourages employees from detecting fraudulent applications. To their credit, the IRS recently announced a series of improvements that will take effect immediately on an interim basis, in response to our findings. It is to be hoped that significant, systematic change, rather than interim improvements, will take place.”
TIGTA made nine recommendations in its report. The IRS agreed with seven of the recommendations and has announced plans to implement interim changes based on TIGTA’s findings (see IRS Toughens ITIN Application Requirements).
"The IRS recognized issues with the ITIN process, and our leadership moved quickly and aggressively to address issues that were identified,” said IRS spokeswoman Michelle Eldridge in a statement. “We have already taken major steps to strengthen our documentation standards required in order to obtain an ITIN, and we have significantly increased our scrutiny of applications. In addition, the IRS has obtained new tools and equipment to help employees improve their ability to detect fraudulent documents. The IRS has also worked with colleagues at the Department of Homeland Security to obtain specialized training in validating documents and verifying the identity of the applicant. We are in the process of conducting a comprehensive review of the program to make additional changes before the next tax season to provide further safeguards for the ITIN program.”
The report raises concerns about whether IRS management has made preventing and catching fraud a priority for the agency, congressional Republicans noted. Specifically, the report noted that IRS procedures appear to discourage employees from flagging potentially fraudulent ITIN applications, and that IRS management went so far as to disband a review group with proven success at identifying fraudulent activity. The report found that the agency failed to identify problems with after IRS management weakened the agency’s integrity measures. Problems included 154 mailing addresses that were used 1,000 or more times on ITIN applications. Ten individual addresses were used for filing 53,994 tax returns, resulting in the processing of $86.4 million in fraudulent tax refunds. Ten bank accounts received 23,560 tax refunds totaling over $16 million. At one Michigan address where IRS had previously rejected an ITIN application, the agency went on to issue 640 separate refunds to that address totaling $1.5 million.
“This report is shocking,” said Rep. Charles Boustany Jr., R-La., chairman of the House Ways and Means Oversight Subcommittee. “It is clear that not only is the IRS not doing its job in detecting fraud, but agency management has taken steps to actively avoid dealing with fraudulent activities. When nearly $6 million in returns are being sent to one address, it is blatantly clear that the IRS is turning a blind eye to protecting taxpayer dollars. It’s one thing if the IRS tries to catch fraud and fails, but it’s quite another when management apparently takes steps to weaken program integrity. The IRS needs to immediately account for the findings in this report. The American taxpayer deserves answers.”
Boustany sent a letter to IRS Commissioner Doug Shulman on Wednesday demanding answers about the report’s findings.
IRS management is considering additional recommendations from TIGTA while it conducts its own review.
“It is important to recognize that the ITIN program is essential to the processing of tax returns that report tens of billions of dollars in taxable income, and billions of dollars of tax,” said Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division, in response to the report. “At the same time, tax returns filed using ITINs may also claim certain tax benefits, and your report indicated several areas where our program needed to be improved to address potential compliance risk. Earlier this year, the IRS implemented a number of changes to strengthen the program. These included heightened scrutiny and additional review of questionable applications.
“The IRS is also undertaking a comprehensive review of the ITIN program,” Bogadi added. “While this review is underway, the IRS is instituting interim procedures, which will require applicants seeking ITINs in order to file U.S. income tax returns to include original documentation or certified copies of these documents from the issuing agency. As part of the review, the IRS will solicit stakeholder feedback on what permanent changes are appropriate.
“Because most taxpayers have already filed their tax returns for this year, and ITIN applications must generally be filed with the tax return, any permanent changes will be decided and communicated before next filing season,” she added. “When presented with weaknesses in the program, IRS senior management has moved quickly to address them. We are in the process of reinforcing to our employees and managers the critical importance of the integrity of this program to ensure that our recent improvements to the program are sustained. At the same time, we are taking care to ensure that the program remains accessible so that taxpayers who are earning income and paying taxes continue to apply for ITINs and report their income on 1040 tax returns.”
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