The Internal Revenue Service disagreed with the recommendations of a new government report that it freeze more taxpayer refunds to give it time to validate them using information supplied by third parties.

The report, from the Treasury Inspector General for Tax Administration, found that the IRS could make better use of data it receives from employers, government agencies and financial institutions to identify and prevent more than $1 billion of potentially erroneous refunds. In addition, the IRS does not have a centralized control point for the third-party data it requests or receives from outside sources, and it lacks a standardized procedure for validating data. The report found that additional validation of taxpayer information using third-party data is particularly needed to validate claims for the Earned Income Tax Credit and other credits.

“These problems allow a substantial number of erroneous refunds and credits to be granted that are not allowable by law,” said TIGTA Inspector General J. Russell George in a statement. “For example, I am troubled that we found a lack of adequate corrective action by the IRS to address improper claims in the EITC program, which is particularly vulnerable to fraud.”

TIGTA recommended that the IRS freeze refunds for those taxpayers with potentially invalid EITC claims, require valid responses before allowing the EITC claims, and adjust the returns if taxpayers do not respond within a specific time period. In addition, the report recommended that the IRS should maintain a control log that contains all third-party data, ensure all data sources are included, and list the data elements for each source. Procedures should also ensure that all data files received are validated upon receipt, said the report. 

However, the IRS disagreed with TIGTA’s recommendations to freeze potentially invalid refunds and to create a centralized control point for all third-party data. “We employ a sophisticated risk-based scoring model to identify and select the most likely EITC noncompliant returns for review,” wrote IRS Wage and Investment Division Commissioner Richard Byrd Jr. in the heavily redacted public version of his response to the report.

“Because our resources are finite, we carefully weigh all areas of potential EITC noncompliance against burden to the taxpayer, return on investment, and a balanced EITC compliance program. Through these efforts, we protect $2 billion annually.” Byrd added that third-party data is tracked via Central Contractor Registration records and maintained by Modernized Information Technology Services in the IRS computing centers, where it is made available to various business operating divisions as needed.

The IRS did agree, though, to discuss with the Department of the Treasury the merits of an administrative proposal to the Tax Code to obtain limited math error authority to freeze certain refunds while contacting taxpayers, and to institute procedures to ensure that all data is validated upon receipt.

TIGTA said it is concerned with the IRS’s lack of adequate corrective action to address improper EITC claims. The lack of action is not in accordance with Executive Order 13520, which was recently issued to help reduce improper payments in federal programs, the report noted.

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